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Warranty deed does not bar claim in equity

Execution of a warranty deed does not extinguish a co-tenant’s ability to seek equitable reimbursement for improvements made prior to the deed, the Wisconsin Court of Appeals held on Feb. 1.

From 1951 to 1994, brothers Gerald and Emmett O’Connell, and their respective wives, Maxine and Annette, owned land on Spider Lake as co-tenants in common. Each couple had an undivided half-interest in the property. Gerald and Maxine claim that they made substantial improvements to the property at their expense during these years.

In 1994, Gerald, Maxine, Em-mett, and Annette signed a warranty deed that conveyed one-half interest in that property to Gerald and Maxine, and a one-quarter interest each to Emmett O’Connell, Jr. and David O’Connell, Emmett and Annette’s sons.

Five years after the conveyance, in 1999, Emmett, Jr. and David filed a complaint requesting an accounting from Gerald for profits derived from cutting trees on the property and a temporary injunction. Gerald and Maxine counterclaimed, seeking partition and reimbursement for unfairly borne expenses.

The parties agreed to partition, stipulating that the property was not suitable for division. Bayfield County Circuit Court Judge Norman L. Yackel accepted that stipulation and the Spider Lake property was sold at a sheriff’s sale to Emmett, Jr., David, and Robert Neimon for $351,000.

Gerald then filed an affidavit for reimbursement of approximately $48,500 in disproportionately borne expenses and attorney fees. The court denied Gerald reimbursement for any expenses or improvements undertaken before the 1994 warranty deed, allowing reimbursement only for expenditures made after the deed.

The court also awarded both parties the attorney fees they requested, deducting them from the proceeds of the sale prior to any division of money.

Gerald and Maxine appealed both the denial of the pre-warranty deed improvements, and the attorney fees, and the court of appeals reversed on both issues, in a decision by Judge Thomas Cane.

The court noted that, although the common law of partition is codified in sec. 842.02, partition remains an equitable action. Therefore, the court concluded, no remedies were extinguished by the guaranty deed under sec. 706.10(5).

Under sec. 706.10(5), the grantor warrants that the land or title is "free from all encumbrance." The 1994 deed echoed the statute, warranting that the title "is good, indefensible in fee simple and free and clear of all encumbrances except municipal and zoning ordinances, recorded easements for public utilities, recorded building and use restrictions, general and special taxes levied in the year of closing."

What the court held

Case: O’Connell v. O’Connell, No. 04-0895.

Issues: Can a co-tenant seek reimbursement for disproportionately borne expenses, even though those expenses were made prior to the other co-tenant’s purchase of the property?

Holding: Yes. Reimbursement is a claim in equity, rather than law, and thus does not constitute an encumbrance under sec. 706.10(5) that would be barred by a warranty deed.

Counsel: Janet L. Marvin, Park Falls, for appellant; Jack A. Carlson, Washburn, for respondent.

The court concluded, "Neither the statute nor the deed can cut off Gerald’s equitable claim, therefore, unless an inchoate, potential cause of action in equity constitutes an encumbrance."

"Encumbrance" is defined as a "claim or liability that is attached to property or some other right and that may lessen its value, such as a lien or mortgage; any property right that is not an ownership interest." Black’s Law Dictionary 568 (8th ed. 2004).

Noting that Wisconsin recognizes a distinction between an interest that attaches to property and a right recognized in courts to assert an equitable claim, the court held, "That right to assert an equitable claim in a partition action is nothing more than the opportunity to invoke the court’s discretion."

Because the right to assert a claim in equity is "only recognized under the broadest of equity powers and for the purpose of promoting equity in excess of legal rights, [and] courts will not enforce it to the extent of doing inequity to others," the court found that the right codified in sec. 842.02 does not attach to the property or automatically diminish its value.

The court also found that partition did not constitute an "equitable lien," which is an "encumbrance," because the right of Gerald and Maxine to bring a partition action is not a "debt, duty or obligation owing by one person to another."

The court reasoned, "Gerald could have brought an equitable claim for reimbursement for the improvements he made to the Spider Lake property if partition had occurred prior to the 1994 warranty deed. That right would have existed even if Gerald had made those improvements without the other co-tenants’ consent or promise of contribution. Wisconsin does not require that other tenants approve of the improvements or expenditures. Any improvements Gerald undertook before 1994 were presumably ‘ratified’ by the other co-tenants. To the extent that co-tenancy involves enjoyment of the whole by all tenants, those improvements presumably benefited all parties equally and were equally enjoyed by all parties (cites omitted)."

Therefore, Gerald could not have sought reimbursement for disproportionately borne expenses until unity of possession was dissolved and the property or proceeds from it were divided. The court found, "Even if a right to bring a claim in equity did constitute a debt or obligation, that right did not come into existence until after the warranty deed was executed. In 1994, there was thus no equitable lien or other encumbrance on the Spider Lake property."

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The court added, "When Emmett, Jr. and David became co-tenants of the Spider Lake property, they too enjoyed the benefit of any improvements Gerald had made. When that property was sold, the value of those improvements was added to the sale price and they equally enjoyed that benefit as well. Wisconsin’s law of partition expressly authorizes circuit courts in equity to order compensation by one party to another when a partition does not equalize the positions of the parties."

The court found it irrelevant that Emmett, Jr. or David were unaware of any disproportionately borne expenses, and rejected their argument that Gerald should have pursued the issue before. The court reasoned, "While we agree this view is intuitively appealing, whether a co-tenant knows about expenditures for the common good is not a bar to bringing a claim in equity. And although it is undoubtedly true that Gerald could have discussed the issue with his brother sometime between 1951 and 1994, he could not have raised the issue in the legal sense before an action for partition. There is no question of inequity in a partition action until after a judgment of division or an order to sell the property and divide the proceeds. We conclude that, under Wis. Stat. sec. 842.02, Gerald has the right to seek equitable reimbursement for disproportionately borne expenses."

After rejecting the contention of Emmett, Jr. and David that, even if the warranty deed does not cut off Gerald’s claim, the doctrine of laches does, the court turned to the issue of attorney’s fees, reversing the award, because it was not clear from the record that the fees were reasonable.

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David Ziemer can be reached by email.

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