County Seat Bakery, LLC v. Sakura KJ Japanese Restaurant, LLC (mem. dec.)

• Court: Indiana Court of Appeals
• Decided: May 27, 2020
• Docket: 19A-CT-2806
• Status: Published

Opinion

MEMORANDUM DECISION Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision shall not be FILED regarded as precedent or cited before any May 27 2020, 9:37 am court except for the purpose of establishing CLERK the defense of res judicata, collateral Indiana Supreme Court Court of Appeals and Tax Court estoppel, or the law of the case.

ATTORNEYS FOR APPELLANT ATTORNEY FOR APPELLEE Libby Yin Goodknight Carri N. Crider Krieg DeVault LLP Law Offices of Carri N. Crider Indianapolis, Indiana Crown Point, Indiana Nancy J. Townsend Krieg DeVault LLP Merrillville, Indiana

IN THE COURT OF APPEALS OF INDIANA

County Seat Bakery, LLC, May 27, 2020 Appellant-Plaintiff, Court of Appeals Case No. 19A-CT-2806 v. Appeal from the Lake Superior Court Sakura KJ Japanese Restaurant, The Honorable Stephen E. Scheele, LLC Judge Appellee-Defendant. Trial Court Cause No. 45D05-1909-CT-918

Bailey, Judge.

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 1 of 11 Case Summary [1] County Seat Bakery, LLC (“County Seat”) appeals the declaratory judgment

that its unrecorded written lease is void against Sakura KJ Japanese Restaurant,

LLC (“Sakura”), which purchased the leased property (the “Premises”). The

trial court determined that the lease was void against Sakura because it acquired

the Premises in good faith—lacking actual and constructive knowledge of the

lease. County Seat now appeals, alleging that the trial court clearly erred in

finding good faith because Sakura had constructive knowledge of the lease.1

[2] We affirm.

Facts and Procedural History [3] In 2014, Chris Lozanovski (“Lozanovski”) leased the Premises to County Seat.2

The written lease was not recorded. The lease had an initial term of five years,

expiring on April 30, 2019, and gave County Seat options to renew for

additional five-year terms. County Seat operated a bakery on the Premises.

[4] In December 2018, Lozanovski and Sakura negotiated a sale of the Premises.

Lozanovski represented that the lease would expire on April 30, 2019—a

representation which, at that point, was true. Sakura toured the Premises with

1 Our disposition of this issue renders moot County Seat’s contention that Sakura breached the lease. 2 There is no dispute that Lozanovski had an ownership interest—at times, through an entity. We use the term Lozanovski to refer to his personal actions as well as his actions on behalf of any entity or co-owner.

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 2 of 11 Lozanovski while County Seat operated its bakery. Sakura did not ask

Lozanovski for a copy of the lease, and it did not contact County Seat to

inquire about the lease. Lozanovski and Sakura entered a purchase agreement

in December 2018, with a closing scheduled on May 31, 2019. After the

execution of the purchase agreement—and prior to the closing—County Seat

notified Lozanovski that it was exercising its option to renew. The renewal was

not recorded, and there is no indication that Sakura was aware of the renewal.

[5] Sakura pursued a title search, which did not reveal the unrecorded lease rights.

At the closing of the transaction on May 31, 2019, Lozanovski executed an

affidavit that contained the following representation: “That the Affiant is in sole

possession of the [Premises] and that no other party has possession, or has right

of possession under any tenancy, lease or other agreement, written or oral.”

Ex. at 33. At that time, County Seat continued to openly operate a bakery on

the Premises. The transaction closed, leading to a dispute between County Seat

and Sakura. County Seat wanted to remain on the Premises under the terms of

the renewed lease whereas Sakura wanted County Seat to vacate the Premises.

[6] County Seat initiated the instant action, seeking—in pertinent part—a

declaratory judgment that the renewed lease was enforceable against Sakura.

The litigation focused on provisions of the Indiana Code specifying that a lease

for a period in excess of three years, if unrecorded, is void against a good-faith

purchaser for value. See Ind. Code § 32-31-2-2. County Seat argued that

Sakura did not acquire the Premises in good faith because—even if Sakura did

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 3 of 11 not have actual knowledge of the lease—Sakura failed to conduct due diligence,

unreasonably relying on Lozanovski’s representations regarding the lease.

[7] The matter progressed to a fact-finding hearing, after which the trial court

entered a written order accompanied by findings and conclusions. The court

found that “Sakura acquired the Premises from Lozanovski in good faith.”

Appellant App. Vol. II at 9. As to good faith, the trial court found that “Sakura

purchased the Premises without notice of any extended leasehold rights that

County Seat . . . may have had in the Premises, and such notice cannot be

inferred or otherwise imputed to Sakura.” Id. The court determined that,“[a]t

the time of closing on May 31, 2019, Sakura had no reason to believe that a

leasehold interest in the Premises existed that could or would extend beyond

the May 31, 2019 closing/purchase/conveyance of the Premises.” Id. at 8. It

also determined that Sakura “had no reason to disbelieve the title search

undertaken on the Premises”—which did not reveal a tenancy interest—or “to

disbelieve . . . the representations” made by Lozanovski. Id. Ultimately, the

trial court concluded that County Seat’s renewed lease was void against Sakura.

[8] County Seat now appeals.

Discussion and Decision [9] Here, the trial court entered sua sponte findings and conclusions. Those findings

and conclusions control the issues they cover, with a general-judgment standard

controlling “other issues . . . not covered by such findings.” Ind. Trial Rule

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 4 of 11 52(D). On appeal, we look to whether the evidence supports the findings and

the findings support the judgment. Masters v. Masters, 43 N.E.3d 570, 575 (Ind.

2015). In accordance with Trial Rule 52(A), we “shall not set aside the findings

or judgment unless clearly erroneous” and shall give “due regard . . . to the

opportunity of the trial court to judge the credibility of the witnesses.” Clear

error is “that which leaves us with a definite and firm conviction that a mistake

has been made.” Masters, 43 N.E.3d at 575 (quoting Egly v. Blackford Cty. Dep’t

of Pub. Welfare, 592 N.E.2d 1232, 1235 (Ind. 1992)). Findings are clearly

erroneous if “the record contains no facts supporting them either directly or

inferentially.” Town of Brownsburg v. Fight Against Brownsburg Annexation, 124

N.E.3d 597, 601 (Ind. 2019). Moreover, the judgment “must follow from the

conclusions of law and is clearly erroneous if the court applied the ‘wrong legal

standard to properly found facts.’” Id. (quoting Town of Fortville v. Certain

Fortville Annexation Territory Landowners, 51 N.E.3d 1195, 1198 (Ind. 2016)).

[10] In its written order, the trial court looked to our recording statutes. Indiana

Code Section 32-31-2-1 provides as follows: “Not more than forty-five (45) days

after its execution, a lease of real estate for a period longer than three (3) years

shall be recorded . . . in the recorder’s office of the county in which the real

estate is located.” Moreover, Indiana Code Section 32-31-2-2 specifies that “[i]f

a lease for a period longer than three (3) years is not recorded within forty-five

(45) days after its execution, the lease is void against any subsequent purchaser,

lessee, or mortgagee who acquires the real estate in good faith and for valuable

consideration.” These recording statutes reflect the legislature’s decision to

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 5 of 11 “provide protection to subsequent purchasers, lessees, and mortgagees.” Crown

Coin Meter Co. v. Park P, LLC, 934 N.E.2d 142, 147 (Ind. Ct. App. 2010).

[11] As an initial matter, County Seat argues that even if the foregoing statutes

render the lease void against Sakura, the provisions of the lease are enforceable

as covenants that run with the land. We disagree. This case involves a lease—

and the plain recording statutes supersede any such common-law analysis. See

S. Ry. Co. v. Howerton, 105 N.E. 1025, 1029 (Ind. 1914) (“[T]he common law is

not continued in force where the same subject is covered by a statute.”).

[12] As to the recording statutes, County Seat does not dispute that Sakura paid

valuable consideration in an arm’s-length transaction. Instead, County Seat

challenges the finding that Sakura acquired the Premises in good faith. There is

no statutory definition for good faith in this context. Looking to the common

law, a good-faith purchaser—also known as a “bona fide” purchaser—is one

who lacks notice of the outstanding rights of others. Crown, 934 N.E.2d at 147

n.3. A purchaser has notice if it knew or should have known of the rights. See

id. at 147. Put differently, a good-faith purchaser lacks actual and constructive

knowledge of the outstanding rights of a third party. See id. The knowledge of

a purchaser in a given case is a question of fact reserved for the fact-finder. Id.3

3 Cases involving recording statutes often use terminology drawn from English courts of equity, including the somewhat confusing phrase “implied actual notice.” See Mishawaka-St. Joseph Loan & Tr. Co. v. Neu, 196 N.E. 85, 89-90 (Ind. 1935). Synthesizing the concepts pertinent to this case, we refer to types of knowledge instead of types of notice. See generally Joseph R. Long, Notice in Equity, 34 Harv. L. Rev. 137, 140 (1920) (“Except

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 6 of 11 [13] There is no dispute that Sakura—having been told that the lease expired on

April 30, 2019, and that there was no tenancy as of May 31, 2019—lacked

actual knowledge that there was a lease when it acquired the Premises. Thus,

this case turns on whether Sakura had constructive knowledge of the lease. A

purchaser has constructive knowledge of all information that a reasonably

prudent purchaser would have discovered when conducting due diligence. See

id. at 148. No knowledge will be imputed to the purchaser if it conducted an

objectively reasonable inquiry under the totality of the circumstances. See id.

[14] County Seat briefly argues that the trial court applied the wrong legal standard

for constructive knowledge, looking to “Sakura’s subjective beliefs and

subjective reliance on the representations” instead of objective reasonableness.

Br. of Appellant at 24. Having reviewed the findings and conclusions—wherein

the court properly considers what Sakura “knew or should have known” and

whether it had reason to disbelieve information before it—we are not persuaded

that the trial court applied the wrong standard. Appellant’s App. Vol. II at 8.

[15] Turning to the findings and conclusions, the trial court determined that Sakura

purchased the Premises in good faith—without notice of ongoing lease rights.

In considering the matter of due diligence, the trial court found that Sakura had

(1) toured the Premises; (2) obtained a representation that the lease with County

Seat would expire on April 30, 2019; (3) pursued a title search; and (4) obtained

for a few cases of so-called constructive notice, the term ‘knowledge’ might be substituted for ‘notice’ as being precisely synonymous therewith, and judges in fact frequently use the two terms interchangeably.”).

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 7 of 11 a representation that there was no possessory interest or tenancy interest as of

the closing of the transaction.4 The trial court determined that Sakura had no

reason to disbelieve Lozanovski’s representations regarding the Premises.

[16] County Seat asserts that “[a]ll Sakura had to do” was request a copy of the

lease, which would have alerted Sakura to the possibility that County Seat had

an option to renew. Br. of Appellant at 13. According to County Seat, failing

to obtain the lease was objectively unreasonable. However, it is not as though

Sakura wholly failed to inquire about lease rights. Rather, as the court found,

“Sakura inquired . . . and was told by . . . Lozanovski that [the] commercial

lease of the Premises would expire on April 30, 2019.” Appellant’s App. Vol. II

at 7. Moreover, we disagree with any suggestion that reasonableness strictly

turns on how easily a purchaser could have obtained information. See Reply

Br. at 11. The question is whether, under the totality of the circumstances, a

reasonably prudent purchaser would have undertaken the inquiry. Here, the

court found that Sakura conducted due diligence without obtaining the lease.

[17] County Seat mainly focuses on evidence that it possessed the Premises at the

time of closing. Directing our attention to caselaw, County Seats asserts that—

as a matter of law—Sakura had constructive knowledge of County Seat’s

4 County Seat briefly challenges the propriety of mentioning the title search, alleging that the trial court must have misunderstood the law by believing that Sakura could “become a good faith purchaser just by conducting a title search prior to the sale.” Br. of Appellant at 24. We disagree that mentioning the title search reflects a misunderstanding of the law. The trial court was tasked with determining whether Sakura conducted due diligence, and the title search—regardless of its significance—formed part of Sakura’s inquiry.

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 8 of 11 ongoing possession of the Premises. We need not address the caselaw and will

proceed assuming arguendo that Sakura had knowledge of such possession.

[18] County Seat argues that Sakura—charged with knowledge of County Seat’s

ongoing possession of the Premises—unreasonably relied on Lozanovski’s

representation that no third party had a possessory interest or a tenancy interest.

According to County Seat, relying on the representation “was akin to ignoring

the scattered feathers and trusting the fox’s report on the henhouse.” Br. of

Appellant at 20. County Seat contends that Sakura should have made “further

inquiry in the full month that passed” between April 30, 2019—on which date

the lease purportedly expired—and the closing on May 31, 2019. Id. at 22.

[19] Critically, the trial court determined that County Seat’s ongoing possession was

not inconsistent with a lessee wrongfully holding over past its lease term: “[N]o

evidence exists to suggest that Sakura knew or should have known that County

Seat . . . was anything more than a holdover tenant . . . .” Appellant’s App.

Vol. II at 8. Thus, the trial court implicitly found that, under the totality of the

circumstances, a reasonably prudent purchaser would not have conducted

further inquiry—i.e., a reasonably prudent purchaser would have, at most, held

a belief that it needed to evict a tenant holding over, not explore possible fraud.

[20] Ultimately, the court found that Sakura—even with constructive knowledge of

County Seat’s ongoing possession—conducted due diligence under the totality

of the circumstances. County Seat asks us to disturb this factual finding and

rely on caselaw to conclude that Sakura’s actions were unreasonable as a matter

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 9 of 11 of law. However, the law provides a totality-of-the-circumstances test, a fact-

intensive undertaking. The law entrusts this test to the fact-finder. We have

discerned “no facts . . . found which are sufficient as a matter of law to impute

knowledge . . . .” Mishawaka-St. Joseph Loan & Tr. Co. v. Neu, 196 N.E. 85, 91

(Ind. 1935) (reiterating that constructive knowledge “is a question of fact”).

[21] Moreover, we hasten to note that the recording statutes are neutral, favoring

neither a purchaser nor a lessee. Indeed, although not the case here, we can

think of instances where a lessee could conceivably use a recording statute as a

shield in an attempt to avoid an ongoing obligation under the terms of an

unrecorded lease. Nevertheless, these types of cases will naturally turn on

evidence involving the nature and extent of the inquiry about the interests and

characteristics of a given property. Of course, as is the case here, the party

challenging good faith will contend that further inquiry should have been

conducted—i.e., the purchaser should have turned over one more proverbial

stone before the fact-finder could find that the due diligence exercised by the

purchaser was reasonable. Ultimately, however, it is the fact-finder who

determines under the totality of the circumstances whether the purchaser acted

reasonably in any particular case. Certainly, the easiest way to avoid this type

of fact-sensitive litigation is to do what the law requires, which is to timely

record the lease. See I.C. § 32-31-2-1.

[22] Here, the trial court, as fact-finder, considered the totality of the circumstances.

It found that Sakura undertook the inquiry of a reasonably prudent purchaser,

acquiring the Premises in good faith. The evidence supports this finding.

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 10 of 11 Indeed, we cannot say it was clear error for the court to find that Sakura’s

efforts—touring the Premises, conducting a title search, and obtaining

representations about lease rights—were sufficient under the circumstances to

qualify as a good-faith purchaser.

[23] All in all, the evidence supports the challenged finding, and the findings support

the judgment. We are not left with a definite and firm conviction that the court

made a mistake. Adhering to our well-settled standard of review, we affirm.

[24] Affirmed.

Crone, J., and Altice, J., concur.

Court of Appeals of Indiana | Memorandum Decision 19A-CT-2806 | May 27, 2020 Page 11 of 11