A chapter 13 debtor sought disallowance of a mortgage claim based on an error in the mortgage legal description. The lender moved to dismiss, and after that was denied, moved for summary judgment on the issue of whether it had a valid lien on and enforceable claim against the mortgaged property.
The debtor and his father owned property as joint tenants with rights of survivorship. The father obtained financing and executed a promissory note. The debtor did not sign and had no liability on the note.
However, both the debtor and his father executed a document purporting to be a mortgage on their jointly owned property which was recorded. The legal description contained what the lender characterized as a scrivener’s error: “Range 6 West” instead of “Range 6 East.”
After the father passed away the debtor continued to make payments on the assumption that the note and mortgage were enforceable. There was a dispute about application of payments to property taxes. So, after the lender tried to initiate foreclosure by advertisement, the debtor requested a full payment history and other information. The servicer declined on the basis that the debtor was not a borrower, and thus was not entitled to information.
The debtor filed bankruptcy. As soon as the servicer filed a proof of claim on behalf of the lender the debtor filed an adversary proceeding seeking, among other things, to avoid the mortgage based on the incorrect legal description and to disallow the mortgage claim as a result.
In response, the defendants submitted an affidavit of a person who had worked in the real estate title insurance agency industry for a number of years. Her affidavit described how she conducted searches of real property records maintained by the county register of deeds, including both a grantor/grantee index and a tract index (used to index recorded real estate documents). She searched the debtor’s name in the grantor/grantee index and searched both the correct legal description and the tax parcel identification number in the tract index. She reported that the searches disclosed the mortgage given by the debtor and his father.
The debtor’s attempt to avoid the mortgage was based on exercise of the trustee “strong arm” power to avoid a transfer or obligation that is voidable by a bona fide purchaser of real property pursuant to section 544(a)(3) of the Bankruptcy Code. Thus, the court noted that the issue was whether a hypothetical bona fide purchaser would be able to avoid the mortgage – which was a question of state law.
Under state law, a recorded mortgage would give the purchaser constructive notice of a prior interest. However, the court reviewed two cases where a recorded mortgage did not provide constructive notice. In the first case a review of the chain of title would not have revealed the mortgage because it had a different legal description. Similarly, in the second case the mortgage referred to “Lot 6” while the debtor owned “Lot 5.” So again, the mortgage did not provide constructive notice because it was not in the chain of title.
The defendants attempted to draw a distinction between platted and metes and bounds legal descriptions. But the court did not view this as determinative. Under state law there is constructive notice when a person “has knowledge of such facts as would lead any honest man, using ordinary caution, to make further inquiries and does not make, but studiously avoids making, the obvious inquiries.” (In other words, deliberate ignorance is not bliss.)
The court concluded that despite the minor error in the legal description both a grantor/grantee search using the debtor’s name and a tract index search using the tax parcel identification number (which had remained constant) would disclose the mortgage. So, the debtor would not be a bona fide purchaser without notice of the mortgage, and the debtor could not avoid the mortgage. Since the mortgage was valid, the mortgage obligation also remained in place.
Accordingly, the court granted summary judgment as to the validity of the mortgage and the claim.
In addition, the debtor sought to recover for violations of the Fair Debt Collection Practices Act (FDCPA) and the Real Estate Settlement Procedures Act (RESPA). The court concluded that it had “related to” jurisdiction over these issues so it would submit proposed findings of fact and conclusions of law to the district court.
This is not a case where state law provides that a recorded document is not valid if it is not perfect, nor was there any doubt about which property was being described. The nature of the typo meant that the legal description would not properly close, not that it would describe a totally different property (as was the case when a platted lot 5 was described as lot 6). So, this was an appropriate result given the circumstances.
Vicki R Harding, Esq.