## Facts

- Clare House Bungalow Homes, LLC (Clare House) owned and operated a senior-living facility consisting of bungalow units and common areas in Washington.
- Each resident signed a “Resident Agreement” and paid a substantial up-front lump sum in exchange for the right to occupy a particular bungalow and use common areas for life or until permanent physical disability.
- When a resident’s occupancy ended (typically due to death or disability), Clare House would remarket the bungalow and was obligated to return a set percentage of the lump sum (often 80%) to the resident or the resident’s estate, generally after the unit was reoccupied.
- Only two residents recorded their Resident Agreements in the county real-property records; twenty-four resident plaintiffs did not.
- Three groups of creditors loaned money to Clare House and recorded deeds of trust against the facility’s real property.
- The lenders’ pre-loan investigations varied, but each extended credit under circumstances that would have put a reasonable person on notice that the bungalows were rented and occupied by residents.
- After Clare House filed Chapter 11, the Clare House Bungalow Homes Residents Association and individual residents brought an adversary proceeding seeking a declaration that their rights under the unrecorded Resident Agreements had priority over the lenders’ deeds of trust.

## Issues

1. Whether the residents’ unrecorded Resident Agreements created enforceable occupancy interests in specific bungalows that could take priority over later recorded deeds of trust under Washington law.
2. Whether the residents’ open and obvious possession of the bungalows gave the lenders inquiry notice sufficient to defeat the lenders’ claim to bona fide encumbrancer status.
3. Whether the residents’ contractual right to receive a partial refund of the lump-sum payment upon termination of occupancy had priority in the real property comparable to the residents’ occupancy rights.

## Decision

- The court held that the Resident Agreements granted residents enforceable rights to occupy specific bungalows for life (or until disability), and those possessory rights were not merely revocable permissions.
- The court held that the residents’ visible, ongoing occupancy of the bungalows placed the lenders on inquiry notice of the residents’ interests; reasonable inquiry would have disclosed the Resident Agreements.
- Because the lenders were on inquiry notice, the court determined the lenders were not entitled to priority as bona fide encumbrancers without notice as against the residents’ unrecorded occupancy interests.
- The court ruled that the lenders’ deeds of trust were subject to the residents’ occupancy rights and could not be enforced in a manner that extinguished those rights as to residents in possession under their agreements.
- The court treated the refund obligation tied to the lump-sum payment as a contractual repayment right against the debtor rather than a property interest in the real estate that would outrank the deeds of trust.

## Legal Principles

- Washington’s recording system protects a later purchaser or encumbrancer who takes and records without notice of a prior unrecorded interest; notice can be actual or arise from facts that require inquiry.
- Open, notorious, and continuous possession by someone other than the record owner places a prospective lender on inquiry notice and imposes a duty to investigate the possessor’s rights.
- A lender who proceeds despite circumstances indicating third-party occupancy cannot rely solely on the absence of a recorded instrument to claim priority over the occupants’ unrecorded possessory rights.
- Long-term, unit-specific occupancy rights—especially those tied to life occupancy—may be treated as enforceable interests in land for priority purposes when later lienholders had notice.
- A repayment promise associated with an occupancy arrangement does not automatically become a lien or real-property interest; absent creation of a recognized security interest or lien, it remains a claim against the debtor.

## Conclusion

In re Clare House Bungalow Homes, LLC held that residents’ unrecorded, life-based occupancy rights in specific bungalows took priority over later recorded deeds of trust because the lenders had inquiry notice from the residents’ obvious possession, while the residents’ refund rights were treated as contractual claims rather than superior interests in the real property.


In re Clare House Bungalow Homes, LLC, 447 B.R. 617 (2011)