## Facts

- Maurice F. Schwalm and Ann Schwalm owned a rental house and agreed to sell it to Michael Eddins, acting as trustee for the G.E. Trust No. PV 16-40 Trust.
- The Schwalms financed the sale and took back a mortgage; they delivered a quitclaim deed to the trust, and Eddins (as trustee) executed a mortgage to the Schwalms.
- Eddins recorded the deed but did not record the Schwalm mortgage at that time.
- Eddins then contacted Gary Deanhardt about “investing” in the property and stated that he owned the property free and clear and that Deanhardt would receive a first mortgage.
- Eddins offered Deanhardt a 20% rate of return.
- Deanhardt agreed and advanced funds without investigating Eddins or the property: he did not conduct a title search and did not go to the property to determine who was in possession.
- At Eddins’s request, Deanhardt paid by personal check to Eddins individually, even though the mortgage paperwork was in the trust’s name.
- Eddins delivered a note and mortgage to Deanhardt and then recorded both the Deanhardt mortgage and the Schwalm mortgage; Deanhardt’s mortgage was recorded less than one second (about 0.7 seconds) before the Schwalm mortgage.
- The Schwalms sued Eddins and obtained a judgment requiring a conveyance of the property back to them.
- The Schwalms then filed this quiet-title action against Deanhardt, disputing his claimed first-priority mortgage.
- In a bench trial, after the Schwalms rested, the district court granted Deanhardt’s motion for involuntary dismissal, reasoning that a reasonable investigation would not have uncovered the Schwalms’ interest.
- On appeal, the Schwalms stipulated to the trial court’s factual findings and challenged only the legal conclusion that Deanhardt lacked notice.

## Issues

1. On an undisputed factual record, whether Deanhardt was a bona fide mortgagee without notice of the Schwalms’ earlier-created but later-recorded mortgage.
2. Whether the surrounding circumstances imposed a duty of inquiry on Deanhardt such that he was charged with constructive (inquiry) notice, defeating his claim of priority even though his mortgage was recorded first by a fraction of a second.

## Decision

- The Kansas Court of Appeals reversed the involuntary dismissal and remanded.
- Because the facts were undisputed, whether Deanhardt had notice was a question of law.
- The court held that the transaction’s warning signs were sufficient to require inquiry; had Deanhardt made reasonable inquiry, he would have discovered the Schwalms’ interest.
- Deanhardt therefore was not a bona fide mortgagee without notice and could not obtain priority based solely on recording 0.7 seconds earlier.

## Legal Principles

- Kansas recording law protects subsequent purchasers and encumbrancers only if they take in good faith, for value, and without actual or constructive notice of prior interests.
- Constructive notice includes inquiry notice: when known facts would cause a reasonably prudent person to investigate further, the party is charged with notice of what a reasonable investigation would reveal.
- A subsequent mortgagee’s failure to perform basic steps (such as a title search and checking possession) may support a finding of inquiry notice when circumstances would alert a reasonable person to possible prior interests.
- When the underlying facts are not disputed, the existence of notice (and thus bona fide status) is a legal question for the court.
- Being time-stamped first in the recording office does not confer priority on a party who is charged with inquiry notice of a prior unrecorded interest.

## Conclusion

The court held that Deanhardt’s high-return “investment” deal, personal payment to Eddins despite trust documents, and total lack of ordinary checks created a duty to investigate; because reasonable inquiry would have revealed the Schwalms’ mortgage, Deanhardt had inquiry notice and could not claim first priority based on recording a fraction of a second earlier.


Schwalm v. Deanhardt, 906 P.2d 167 (1995)