County Seat Bakery, LLC v. Sakura KJ Japanese Restaurant, LLC (mem. dec.) ( 2020 )

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.
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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.
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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
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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
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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
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“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
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[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.”).
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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.
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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
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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.
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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.
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