A chapter 7 trustee sought to avoid a deed of trust lien on the grounds that it did not comply with statutory requirements. Specifically, the deed of trust did not identify the correct face amount of the loan. The bank responded that the stated amount was sufficient, and in any event the deed of trust could not be avoided because it was valid and perfected and the trustee has constructive notice of the lien.
Under applicable state law, if a deed of trust (1) includes a valid legal description, (2) identifies the secured obligation, and (3) is properly recorded, then generally the lien will be perfected as of the time of recording.
In addition, if a deed of trust securing future advances complies with certain statutory requirements, the priority of future advances will relate back to the date of recording and there will be no difference between optional and obligatory future advances for priority purposes. Among other things, the future advance statute requires the deed of trust to state the “face amount,” which establishes the maximum amount secured by the deed of trust. However, there is a “savings” clause: if a document fails to comply with the future advance requirements, it will be evaluated as a normal deed of trust without regard to the additional requirements.
In this case the debtors borrowed money from a bank to pay off various debts and granted a lien against their home to secure the loan. For reasons “unknown and unexplained,” the bank used a future advance form of deed of trust even though this was a single advance loan.
The deed of trust correctly described the property and was properly recorded. However, the document stated that it secured a total principal amount not to exceed ~$21.1 trillion. The bank had hired a third-party to prepare loan documents. The theory was that third-party erroneously entered the loan reference number as the principal amount of the loan, and the document preparation software converted that number into a dollar and cents figure. The debtors did not notice this mistake when they executed the deed of trust. (Hmm.)
The chapter 7 trustee conceded that the deed of trust accurately described the real estate, was properly recorded and was in the property’s chain of title. However, he argued that he could avoid the bank’s lien using his strong arm powers under section 544(a) of the Bankruptcy Code because (1) the deed of trust did not state the correct face amount, (2) so it could not qualify as a “security instrument” under the future advance statute, and (3) thus was invalid.
The bank responded that the face amount was sufficient since the loans did not exceed the amount listed. Alternatively, the deed of trust could not be avoided because it was otherwise valid and perfected and the trustee has constructive notice of the lien.
Since the bank did not make any future advances, the court declined to consider compliance with the future advance statute, choosing instead to use the savings clause to consider the deed of trust under general state law. As noted above, everyone agreed the deed of trust included an accurate description of the property and was properly recorded.
So, the only question was whether it adequately identified the obligations secured. Although the face amount was incorrect, the deed of trust referenced the promissory note executed in favor of the bank, identifying both the date of execution and the maturity date. The court determined that this was sufficient to identify the obligations secured by the deed of trust.
In addition, the court held that the trustee had constructive notice of the deed of trust, which meant that it could not use its strong arm powers as a hypothetical judicial lien creditor or bona fide purchaser of real property to avoid an unperfected lien.
In particular, under state law there were two types of constructive notice: record notice and inquiry notice. Since the deed of trust was properly recorded in the chain of title for the property, it provided record notice and the trustee was charged with constructive notice of the lien. The deed of trust generally identified the promissory note. And since the mistake did not cause any actual prejudice and there was no fraud, the scrivener’s error did not negate the constructive notice.
Accordingly, the trustee could not avoid the deed of trust lien. So, the court granted the bank’s motion for summary judgment and denied the trustee’s motion for summary judgment.
The deed of trust identified the face amount of the note as $20,131,301,052,430.00. (The loan reference number was 201313052430.) Not only did the debtors initial and sign the deed of trust when the loan was made, they also reaffirmed the debt when they filed bankruptcy. Granted, residential borrowers rarely review their loan documents in detail. Even so, it seems surprising that they overlooked a statement in their deed of trust that it secured a maximum principal amount not to exceed $20.1 trillion.
Vicki R Harding, Esq.