Even minor errors can potentially lead to avoiding a mortgage in a bankruptcy. In this case the debtors tried several avenues of attack to avoid a mortgage based on deficiencies in the legal description and execution of the documents. Although they were not successful in obtaining summary judgment, the mortgagee also was not successful in having the matter resolved based on the pleadings, and a variety of issues were reserved for trial.
As background, the debtors intended to purchase 65 acres consisting of a 45-acre tract and a 20-acre tract. They built a home on the 20-acre tract. At some point they granted a mortgage on their property that was refinanced and then assigned to Citimortgage, Inc. (Citi).
Unfortunately, the original deed to the debtors conveyed only the 45-acre tract. The mortgages and mortgage assignment also only covered the 45-acre tract, and in fact specifically excluded the 20-acre tract. Subsequently, the 20-acre tract was conveyed to the debtors, and about a year later they filed a Chapter 13 bankruptcy case (for individuals who develop a payment plan).
The debtors filed an adversary proceeding in their bankruptcy seeking to avoid Citi’s lien and objecting to its proof of claim. They raised several defects in the mortgage documentation:
- They contended that the signature on the allonge transferring the note to Citi was a forgery, so that the note was not effectively transferred to Citi and it did not have a valid claim.
- The mortgage legal description specifically excluded the 20-acre tract where the home was located.
- The mortgage and assignment stated that the mortgaged property was located in White County, when in fact it was located in Independence County.
With respect to the signature, a comparison of signatures purportedly by the same person on the allonge transferring the note and on the assignment transferring the mortgage to Citi so clearly showed that they were not signed by the same person that the court agreed that at least one of the signatures had to be a forgery. However, the court also found that there was genuine issue as to which signature was the forgery. Thus, this issue was reserved for trial.
As for the errors in the mortgage legal description, the debtors asserted that the mortgage could be avoided based on these errors by asserting the rights of a bona fide purchaser under the strong arm powers set forth in Section 544 of the Bankruptcy Code. (See Bankruptcy “Strong Arm” Powers: Bye Bye Mortgage.)
However, the court narrowly construed Section 544 as authorizing only a trustee to exercise strong arm powers, not chapter 13 debtors – although it acknowledged that other courts have reached a different conclusion. (Note that this is not an issue in a Chapter 11 reorganization because Section 1107(a) of the Bankruptcy Code generally gives a debtor in possession the powers of a trustee.)
In the alternative, the debtors claimed that the errors caused the property description to be so defective that the mortgage was invalid. The court acknowledged that a deed with an indefinite property description would be void under state law (and that the same principles would apply to a mortgage), but noted that the document would not be void if “by any reasonable construction [the legal description] can be made available.” It is sufficient if the words “furnish a key for identifying the land conveyed.” In this case, the court concluded it could not make a determination because only a part of the legal description was included in the pleadings. Thus, this issue was reserved for trial.
In addition, when there is a deficiency, a mortgagee may be able to correct the problem through reformation. Reformation is an equitable remedy available when the parties reached agreement but through mutual mistake did not correctly reflect their agreement in the written documents. With respect to exclusion of the 20-acre tract, the debtor’s only argument was that reformation was unavailable due to the ability to assert the position of a bona fide purchaser. However the court did not agree that they could assert those rights, so that the determination of reformation also was reserved for trial.
Even very minor defects can result in voiding a mortgage in a bankruptcy. In this case, although the lender at least survived summary disposition, its troubles are far from over. Once again we have an illustration of the importance of paying attention to detail.
Vicki R. Harding, Esq.