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Equal Rights

Saturday, January 7th, 2012

Fraud victims compete for priority.

SOUTH GATE, CA–On Thursday, August 28, 2008, Ms. Kyung Ha Chung gave a deed of trust against her property on Roosevelt Avenue. It all went so smoothly she repeated the process that day, eventually signing six deeds of trust against the same property, in favor of six different lenders and witnessed by six different notaries.

The property in question, or 'modus operandi'

The next day, August 29, Ms. Chung signed a seventh deed of trust. Each lender believed it had a first mortgage. All told, the seven deeds of trust secured loans totalling $1,827,500. The property was worth maybe $300,000.

Of the seven deeds of trust, the first three submitted for recording were received by the Los Angeles County Recorder’s office in batches from different title companies around 6:00 a.m. on September 4, 2008. One was in favor of First Bank, another in favor of East West Bank, and another in favor of Flagstar Bank.

The L.A. County Recorder’s office processes thousands of documents each business day. Once received, each document is referred to an examiner to make sure it’s suitable for recording, and then to a cashier to collect applicable fees. If accepted the document is stamped with a recording date and time, and an instrument number. It is later indexed and becomes part of the official land records.

All three deeds of trust were accepted and stamped as recorded on September 4, 2008. As is done in most California counties, the Recorder gave the documents an 8:00 a.m. time stamp because they were deposited before office hours. The East West deed of trust was indexed before the others, at 11:26 a.m. that day.

Los Angeles County Registrar-Recorder/County Clerk's building at Norwalk, California. This is the Recorder's main office; there are five branch offices

It should come as no surprise that all seven loans defaulted, and the lenders discovered they’d been scammed. Some commenced foreclosure, and a dispute arose as to which lender had priority.

Eventually, First Bank filed suit for a court order that the three deeds of trust should have equal priority because they share the earliest recording date and time. But East West opposed the suit, claiming it alone should have priority because its deed of trust was indexed before the others.

The trial court ruled in favor of First Bank, and East West appealed.

The Court of Appeals affirmed the trial court, based on California’s “law of priorities.”

The Court explained that, under state recording laws, priority of interests in land depends on a combination of factors. One gains priority by (a) acquiring an interest as a bona fide purchaser, for valuable consideration, without actual or constructive notice of (b) a previously created competing interest of another party, and (c) being first to record his interest in the land records. This is commonly known as a “race-notice” system, to be distinguished from “pure race” rule giving priority to the first to record.

In this case the Court deferred to the Recorder’s administrative system of assigning recording dates and times, and said the First Bank and East West deeds of trust were recorded “simultaneously” at 8:00 a.m. on September 4. Indexing, the Court said, is a separate function done not to affect recording times but instead to impart constructive notice. Since “both trust deeds were executed on the same day and are deemed recorded simultaneously,” and neither lender had notice of a competing interest, the Court concluded the deeds of trust have “equal priority.”

Moral: This decision gives a good explanation of California’s race-notice recording laws, and is a case study of how the rules apply. Flagstar Bank did not participate in the appeal, due to some procedural issue, but it should benefit by this decision.

What’s curious is how the scammer was able to pull this off. Most lenders and title companies now have systems to detect redundant loan applications and open title orders involving a single property. This plot should have been foiled before the loans funded.

And what do we know of Kyung Ha Chung? It’s possible she was an impostor, using an alias or stolen identity–although the Court seems to believe otherwise.

The case is First Bank v. East West Bank, 199 Cal.App.4th 1309 (Cal. App. 2011).

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Hiding in Plain Sight

Friday, October 7th, 2011

Enduring rights of parties in possession.

SPOKANE, WA–Clare House is a senior living community on the south side of Spokane. It has a 124-unit apartment complex, flanked by 28 “bungalow” units built in clusters much like attached homes.

Entrance to the Clare House community

The bungalows have been offered under a “Resident Agreement,” by which the buyer pays a lump sum at move-in for the right to occupy their bungalow and use common areas until they die or become unable to care for themselves. When occupancy ends, the resident or their heirs are entitled to repayment of 80 or 85% of the initial lump sum or, in some cases, 80 or 85% of the price received from resale of the bungalow. Each resident is also a member of the Clare House Bungalow Homes Residents Association, an association formed to represent their common interests.

The bungalows occupy a 2.68 acre parcel of land, which continues to be owned by the developer. Beginning in 2004, the developer took a series of loans from “hard money” lenders, secured by deeds of trust against the 2.68 acre parcel. The first of these loans was arranged by the Caudill Group, in the amount of $400,000, secured by a deed of trust in favor of the Caudill Living Trust. There were four subsequent loans, secured by deeds of trust totalling $565,000.

One of the Clare House bungalows

All of these deeds of trust were recorded in Spokane County land records. Prior to the first deed of trust, two of the Resident Agreements had been recorded, even though the bungalow residents did not have proper deeds conveying ownership of the real property.

All was well at Clare House until the developer filed bankruptcy. Then things got dicey. The lenders, headed by the Caudill Group, made known their wishes to foreclose against the 2.68 acre parcel, and oust the residents.

The Residents Association stepped in, and filed an adversary proceeding in the developer’s bankruptcy. The Association asked for a court order that the residents’ rights are superior to rights of the lenders.

The bankruptcy court ruled for the residents, in part. The court ordered that all members of the Residents Association (i.e., all those having a Resident Agreement with the developer) may continue to occupy their bungalows undisturbed by the lenders, even if the lenders foreclose and acquire the land. However, the court also held the residents’ rights to repayment upon termination of occupancy are contractual rights against the developer only, and are not enforceable against any lender.

Aerial view of the Clare House community, with apartment complex, lower left, and 2.68 acre parcel, highlighted

Citing “longstanding common law,” the court explained that one who acquires an interest in real property with actual or constructive notice of the rights of another takes subject to the other’s rights. In modern times, this rule has been refined by statute and case decisions so as to impose a duty on a subsequent purchaser (or encumbrancer) to inquire as to rights of parties in possession of land, “and a failure to inquire results in the new title holder taking title subject to whatever rights of occupancy existed.”

In this case, the court said a “casual observer” could see the bungalows were occupied as “single family residential units,” and inquiry would have disclosed the Resident Agreements. Likewise, these lenders who received financial information from the developer should have been aware of his “basic business model.” The court noted that two Residents Agreements were recorded in the land records, but this does not appear to have been decisive in the court’s reasoning.

So the residents win what amounts to a life estate in their bungalows, but must stand in line as unsecured creditors in the bankruptcy to recover what they can of promised repayments. For their part, the lenders can foreclose, but their security interests are subject to all Resident Agreements made with the developer–even those signed after deeds of trust were recorded.

Moral: Lessons here for everyone, since both residents and lenders now have much, much less than they bargained for.

The case is In re Clare House Bungalow Homes, L.L.C. (Clare House Bungalow Homes Residents Association v. Clare House Bungalow Homes, L.L.C.), 447 B.R. 617 (Bankr.E.D.Wash. 2011).

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False Security

Monday, September 12th, 2011

An unattested mortgage, even when recorded, fails its purpose.

ALPHARETTA, GA–On October 12, 2005, Bertha Hagler refinanced her home.

The property in question, center

She signed two security deeds (akin to a mortgage): A “first” securing repayment of $240,000, and a “second” for a lesser amount. But at closing somehow things got confused, and only the “second” got signed by the notary and witness who were there.

Weeks later when the security deeds were recorded no one noticed that the “first” was not properly attested to.

In April 2007 Bertha filed Chapter 7 bankruptcy, and a trustee in bankruptcy was appointed. The trustee noticed the defective security deed, and filed an adversary proceeding to avoid it as against Bertha’s home.

The trustee relied on Bankruptcy Code section 544(a)(3), the so-called “trustee avoiding power” or “strong arm” power. This code provision allows a trustee (or a debtor-in-possession) to avoid an interest in debtor real property that is not perfected as of the commencement of bankruptcy. (See our posting for 5/22/10, “Bankruptcy 101.”)

Fulton County Courthouse, where the questioned security deed was recorded and indexed in the land records

In this case, the trustee claimed the “first” was not entitled to be recorded in the land records, and thus “perfected,” because it did not comply with Georgia statutes requiring that a mortgage affecting real property be signed and acknowledged before a notary, attested to by the notary, and attested to by one additional witness, in order to be accepted for recording.

The bankruptcy court ruled in favor of the trustee, avoiding the mortgage and relegating the lender to status of an unsecured creditor for the $240,000 debt. The lender would stand in line for cents on the dollar.

The lender appealed, arguing that despite its flaws the mortgage was in fact recorded and correctly indexed in the land records. Anyone who searched the records should find the mortgage and readily understand it was intended to encumber the property. The lender relied on case law holding that a defective instrument once recorded may impart constructive notice of its contents.

The federal district court entertaining the appeal said the issue involved “an unclear question of Georgia law,” and asked the Georgia Supreme Court to decide whether, in Georgia, a recorded security deed with a “facially defective attestation” can provide constructive notice.

The Georgia Supreme Court building

The Supreme Court sided with the bankruptcy court. The Court allowed that a “duly recorded” albeit defective instrument can provide constructive notice, but said this security deed was not duly recorded because a lack of required attestations was apparent “on the face” of the instrument. Instead, the Court cited “longstanding law” that a mortgage recorded with “facial defects as to attestation” may not impart constructive notice.

The Court concluded saying the lender’s position would relieve it and other lenders “of any obligation to present properly attested security deeds.” It would “risk an increase in fraud,” and “shift to the subsequent bona fide purchaser and everyone else the burden of determining (possibly decades after the fact) the genuineness of the grantor’s signature.”

Moral: Another example of section 544(a)(3) at work, and a reminder (if we need one) that legal formalities matter.

The case is U.S. Bank National Association v. Gordon, ___ S.E.2d ___, 2011 WL 1102995 (Ga. 2011).

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The Inheritance

Tuesday, May 31st, 2011

Where there’s a will, there’s a way.

The former home of Amanda Jones

ATLANTA, GA–For many years until her death in 2005, this was the home of Amanda Jones.

Among her close relations, Ms. Jones had a niece named Lillie Mae Walker. In 1976, Ms. Walker came to live with Ms. Jones. Later, in 1994, Ms. Walker’s daughter, Laurlene Riggins, also moved in. Ms. Riggins provided care for Ms. Jones, who was then 90, and Ms. Walker, then 72.

In 1995, Ms. Jones signed a Last Will and Testament giving a life estate in the property to Ms. Walker, with the remainder interest going to Ms. Riggins.

Ms. Jones had a stepson, named Eugene. In June 2003, she signed a different Last Will and Testament in which she bequeathed the property to Eugene. But then, in October 2003, Ms. Jones signed yet another Last Will and Testament, revoking all previous wills and again bequeathing the property to Ms. Walker as to a life estate, with the remainder going to Ms. Riggins.

Ms. Jones died in April 2005. After her death, Ms. Walker and Ms. Riggins continued to live in the home–but they neglected to file the October 2003 will for probate.

Enter Ellene Jones, Eugene’s wife. In May 2005, Ellene filed the June 2003 will for probate. Without notice to Ms. Walker or Ms. Riggins, the Probate Court named Ellene executrix of Ms. Jones’ estate and, in July 2005, Ellene executed a deed transferring the ‘free and clear’ property to Eugene.

Eugene promptly mortgaged the property, giving a security deed (akin to a deed of trust) to Ameriquest, for $95,500, in August 2005. Ameriquest got a drive-by inspection, never speaking to residents Walker and Riggins.

Ms. Riggins learned of the mortgage in mid-2006, after getting a mortgage-related notice in the mail followed by telephone calls, but Eugene denied any knowledge of it.

So Ms. Riggins got a lawyer, and filed the October 2003 will for probate. The Probate Court revoked Ellene’s appointment, and approved the October 2003 will as Ms. Jones’ true Last Will and Testament. Ms. Riggins was made the new personal representative of the estate, whereupon she deeded property to herself and Ms. Walker.

The Supreme Court of Georgia building

The stage was set for a legal battle between the heirs and the lender (now Deutsche Bank). The lender sued to quiet title, and the trial court ruled for the lender. The heirs appealed.

The Supreme Court of Georgia affirmed the trial court decision. The high court explained that, under Georgia statutes, an innocent purchaser of property from an ‘apparent’ heir of a deceased person is protected “as against unrecorded liens or conveyances.”

The Court reasoned that the lender did not have “actual notice” of the true heirs’ interests because Walker and Riggins had not opened a probate at the time the loan was made. And, the Court said, the lender would not be charged with knowledge it could have gained from parties in possession, but instead acted reasonably in relying on what Eugene told them–which was, “momma…made the will to me” but Ms. Walker “is supposed to live there until she dies.”

The Court concluded, “Ameriquest’s failure to inquire further regarding Walker’s status in the house does not show a lack of good faith.”

Moral: In light of this harsh result, seems the Georgia legislature should do some work on its statutes.

But the real moral here is that anyone with an interest in property under a will should see that the will is promptly probated. Failing to act is risky business.

The case is Riggins v. Deutsche Bank, 708 S.E.2d 266, 288 Ga. 850 (Ga. 2011).

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Electronic Recording / To Err is Human

Monday, May 16th, 2011

eRecording is here to stay; so is human error.

SEYMOUR, TN–Here’s a failure of title, 21st century style.

The Greene home

Richard and Deana Greene were owners of this newer home in the Smoky Mountains of Tennessee.

In February 2009 the couple borrowed $204,517 from Homeowners Mortgage, giving a deed of trust against the property.

The title agent was Network Closing Services, a company offering regional services through affiliates in 21 states. Network Closing got the deed of trust signed and notarized, and delivered it to Simplifile, an electronic recording agent. Simplifile provides electronic recording services, converting paper documents into digitized images for transmittal via the Internet to local recording offices.

Sevier County Courthouse, home to the Register of Deeds. The statue on the courthouse lawn honors Dolly Parton

The Greene property is located in Sevier County, TN. The Sevier County Register of Deeds has a vendor relationship with Business Information Systems (B.I.S.), so the Register’s office only accepts imaged documents that are formatted and transmitted through B.I.S.

So it happened that this deed of trust went from Network Closing to Simplifile, then from Simplifile to B.I.S., and then from B.I.S. to the Register of Deeds.

The imaged deed of trust was received by the Register’s office on March 11, 2009. It was reviewed by Deputy Register Lois McMurry, who with a keystroke accepted the document and assigned it Instrument Number 09015404, recorded March 11, 2009, at Book 3300, Page 584.

But perhaps she had been too hasty. Before moving on, Ms. McMurry noticed the document had been mislabeled in a data field affixed by B.I.S. for the Register’s use, as “Miscellaneous” instead of “Deed of Trust,” and the Tennessee mortgage tax had not been paid. So she deleted the recording and returned the deed of trust to B.I.S. with advice it was rejected, but it still showed the recording information (Instrument Number, recorded date, and Book and Page numbers).

Moving on, Ms. McMurry re-assigned this identical recording information to the next document in her queue.

B.I.S. got the deed of trust and forwarded it to Simplifile, but failed to report it was unrecorded. Had Simplifile known, they would have advanced the mortgage tax payment and backcharged Network Closing.

The Greenes filed a Chapter 7 bankruptcy in June 2009, and their court-appointed Trustee in bankruptcy filed an adversary proceeding to avoid the unrecorded deed of trust as an interest in the Greene property. Mainly, the Trustee based his action on Bankruptcy Code section 544(a)(3), which allows a trustee to avoid an interest in debtor real property that is not perfected as of commencement of bankruptcy. This is the so-called “trustee avoiding power,” or “strong arm power.” (See our posting for May 22, 2010, “Bankruptcy 101.”)

The Trustee argued the deed of trust was not “perfected,” because there’s no record of it in county land records. The lender (Bank of America, as current holder of the loan) replied the deed of trust was duly recorded, and therefore perfected, because Tennessee law states that a document once accepted for recording cannot later be removed from land records for failure to pay a fee or tax.

The bankruptcy court ruled in favor of the Trustee, allowing that even though Ms. McMurry’s actions were “improper and contrary to statute,” the result was the deed of trust disappeared from Sevier County land records. And, the court concluded, intervening rights of the trustee in bankruptcy prevail over expectations of the lender.

So the lender loses its security, and becomes just another unsecured creditor.

Moral: We’ve said it before, “There’s no crying in bankruptcy.”

The risk that a mortgage or deed of trust is invalid or unenforceable against security property is typically covered by title insurance.

The case is In re Greene (Newton v. Bank of America), 2011 WL 864971 (Bkrtcy,E.D.Tenn. 2011).

The rejected deed of trust, as returned to Simplifile and Network Closing. Note entries in the data field, upper right, as "Miscellaneous" and "zero" mortgage tax (yellow). Note also recording information (red arrow). (Click to enlarge)

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Mortgages and Deeds / A Contested Deed

Saturday, April 2nd, 2011

It comes to this: Is the deed void, or merely voidable?

LOS ANGELES, CA–Back in the day this two unit income property in South Los Angeles was owned by David and Florence Sims. The couple lived next door.

Back in the day: The Simses' income property

David and Florence did some estate planning and, in September 1991, they created the Sims Family Trust to hold title to their residence and income property. With the trust agreement, the Simses directed that upon their deaths the residence would be gifted to Florence’s daughter, Shirley, and the income property would go to David’s daughter, Yvonne.

David died and, as alleged in court filings, shortly after his death Florence began to show signs of dementia. She was then 86. As her condition deteriorated, Florence came to rely on her granddaughter, Sheron, to help her with medical decisions.

By December 2001, Florence was diagnosed with paranoia, hallucinations, and dementia. She signed a Power of Attorney giving Sheron authority over her health care decisions.

Florence died April 7, 2003.

Later, in November 2003, there were recorded two grant deeds purportedly signed by Florence conveying the residence and income property to Sheron. The deeds were dated and notarized as of January 2, 2002.

Sheron proceeded to refinance the properties, taking subsantial cash “out.” The income property was last refinanced in 2006, when Sheron gave Washington Mutual a deed of trust for $440,000.

By early 2008 Sheron was in default on her loans, and in April 2008 foreclosure notices were posted on both properties.

By this time David’s daughter, Yvonne, and her husband James had opened separate probates for the estates of David and Florence. They were in possession of the properties, and were surprised by the foreclosure notices. Apparently, Sheron had made payments without anyone knowing, until she ran out of money.

Yvonne and James filed complaints to invalidate the newly-discovered deeds of trust. As to the income property, they claimed the Washington Mutual deed of trust is invalid because (a) Sheron may have forged Florence’s signature on the deed giving the property to Sheron, (b) if Florence did in fact sign the deed, she lacked mental capacity to understand what she was doing, and/or (c) if Florence did sign, she lacked capacity to understand the nature and effect of the deed.

Washington Mutual (now known as J.P. Morgan) defended the deed of trust arguing the lender relied on the Florence-to-Sheron deed in good faith and, therefore, it is entitled to favored status as a bona fide encumbrancer.

The trial court ruled in favor of the lender, and dismissed the complaint. The court reasoned the deed may be voidable, but it could not be void because, at the time its loan was made, the deed appeared in county land records and the lender had no reason to question it. Plaintiffs Yvonne and James appealed.

The Ronald Reagan State Building at Los Angeles, home to the Court of Appeal

The Court of Appeal reversed, holding the deed would be void if any of the three grounds alleged by plaintiffs can be proven. “Generally,” the Court explained, “a deed is void if the grantor’s signature is forged or if the grantor is unaware of the nature of what he or she is signing. A voidable deed, on the other hand, is one where the grantor is aware of what he or she is executing, but has been induced to do so through fraudulent misrepresentations.”

And, said the Court, a deed which is “wholly void” cannot ordinarily provide a foundation for good title even in the hands of a bona fide purchaser or encumbrancer.

With that, the case was remanded for trial of plaintiffs’ allegations.

Moral: This decision will not be published in the official reports, because it’s based on established law, but it shows how land records are viewed (void vs. voidable) in a deed contest.

The outcome here will likely turn on medical opinion and testimony of those around Florence in her final years.

The risk of forgery or a void instrument in the chain of title is commonly covered by title insurance.

The (unpublished) case is reported as Casonhua v. Washington Mutual Bank, 2010 WL 4193214 (Cal. App. 2 Dist.).

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Mortgages and Deeds / Larceny, Inc.

Saturday, March 19th, 2011

Can a phony deed pass good title?

BALTIMORE, MD–When she bought this row house in December 2005, Cateania Matthews stepped into legal Adventureland.

The Matthews house, right

The seller was Scotch Bonnett Realty Corporation. Scotch Bonnett was formed in 2003 by Emora Horton and Sandra Denton, then husband and wife, to buy and sell real estate. The business was to be financed with Denton’s earnings as a recording artist. Articles of incorporation were filed, naming Denton as initial sole director.

By the end of 2003 Horton and Denton were divorced, and the incorporation of Scotch Bonnett stalled. There were no by-laws, no minute book, and no officers. The only contact person of record was Richard Hackerman, an attorney who signed the articles of incorporation and was named as “resident agent.”

Following the divorce, Horton and Denton continued to do business as “Scotch Bonnett.”

Through Horton, Denton was introduced to Corey Johnson. Later, in September 2005, there was filed with the state an amendment of Scotch Bonnett’s articles of incorporation. The amendment stated “Corey Johnson is to be added as an officer of the Company.” The amendment was purportedly signed by “Richard Hackerman, President,” but Hackerman would later say this was a forgery and he had never been president of Scotch Bonnett.

Now back to Ms. Matthews. When she bought the house (December 2005) she got a deed from Scotch Bonnett signed by “Corey Johnson (Officer).” But none of the sale proceeds found their way into a Scotch Bonnett bank account, and Denton later denied Johnson’s authority to sell the property.

Scotch Bonnett filed suit against Matthews and her purchase money mortgage lender, to quiet title. When Matthews filed a Chapter 13 bankruptcy, the quiet title suit was re-filed in the bankruptcy court.

The settlement officer who handled the Matthews purchase testified in bankruptcy court. She said she relied on state filings to confirm Johnson’s authority to act on behalf of the corporation, and had no reason to suspect the amendment to articles of incorporation was a forgery. There was no suggestion that Matthews or her lender were anything other than innocent victims.

The bankruptcy court framed the question as follows: “Does the use of a deed that is neither a forged document, nor signed with a forged signature, but which derives its transactional validity from forged corporate articles of amendment, render a conveyance of land void ab initio, or, is good title transferred to bona fide purchasers for value without notice (of the fraud)?”

The bankruptcy court certified the question to the Maryland Court of Appeals (the state’s highest court), for an advisory opinion.

The Robert C. Murphy Courts of Appeal Building, home to Maryland's high court, at Annapolis

The Court of Appeals answered that the fraudulent deed could convey good title to a bona fide purchaser, because the deed itself was not a forgery.

The Court explained that a deed bearing a false signature is a forgery, and under the common law “forgery rule” a forged deed is null and void, at inception. On the other hand, a deed with a genuine signature but based on false authority is merely voidable, by court action. Just as any deed tainted by fraud, duress or undue influence may be voidable, but not void.

In declining to follow the forgery rule here, the Court cited “strong public policy favoring bona fide purchasers.” An expansion of the rule, the Court said, “would turn into a jury question whether fraud in the inducement voided a deed ab initio and destabilize predictability of result for bona fide purchasers for value.”

Moral: The distinction between a deed that is void, as opposed to one that’s voidable, is crucial to maintaining the legal protection for a bona fide purchaser. This protection promotes predictable outcomes for real estate transactions, and certainty in land records.

Still, the result here is stunning. A stranger to title (signing as Corey Johnson), without authority to act on behalf of Scotch Bonnett, has deeded away its property.

Title insurance typically covers many types of fraud risk, other than fraud by the insured.

The case is reported as Scotch Bonnett Realty Corporation v. Matthews, 417 Md. 570, 11 A.3d 801 (2011).

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You Be the Judge

Sunday, July 11th, 2010

The case of the misfit mortgage.

BESSEMER, AL–Davis & Associates, LLC,  was the owner of two lots in Jefferson County, Alabama.

Davis & Associates borrowed $43,000 from Frank Bynum, giving Bynum a mortgage against the lots.  The mortgage identified the borrower as “Davis Associates, LLC.”  The mortgage was recorded in the land records maintained by the Jefferson County Probate Office.

Later, Davis & Associates conveyed the lots to TMS Properties and, a few months after that, TMS Properties conveyed the lots to Angel Barker.  Ms. Barker purchased the lots with a loan secured by a mortgage held by GMAC Mortgage.

Meanwhile, Davis & Associates failed to repay the loan from Bynum, and Bynum threatened foreclosure.

But Barker and GMAC said they didn’t know about the Bynum mortgage.  So Barker and GMAC filed suit for a judicial declaration that they were bona fide purchasers of the lots, without notice of the Bynum mortgage, and not subject to it.

In court, Barker and GMAC said the incorrect name on the Bynum mortgage (“Davis Associates” rather than “Davis & Associates”) caused the mortgage to be mis-indexed in county land records.

As provided by Alabama statutes, the land records consist of a grantor-grantee index, containing names listed alphabetically, maintained by the county probate office.  In 1984, the Jefferson County Probate Office converted its paper index books to a computer database.  Expert witnesses testified that a search of the computer database for “Davis & Associates” does not turn out the Bynum mortgage, because of the missing ampersand.

Bynum argued that all duly recorded documents become part of the land records, and impart constructive notice whether or not they are properly indexed in the computer database.  It follows, said Bynum, that Barker and GMAC had constructive notice of the mortgage and are subject to its enforcement.

You’re the Judge:  How do you rule?

Jefferson County courthouse, Bessemer Division: Home to the land records and trial court

The Alabama Supreme Court ruled in favor of Barker and GMAC.

The Court reasoned that the county land records were set up and maintained in full compliance with state statutes.  Persons relying on this index should not be charged with notice of recordings that can’t be found by searching a correct name.

Since the missing ampersand caused the Bynum mortgage to go undetected, the Court held the mortgage was outside the chain of title for Davis & Associates.  So the mortgage did not impart constructive notice, and it cannot be enforced against Barker or GMAC.

The case is Bynum v. Barker, 39 So.3d 1013 (Ala. 2009).

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Bankruptcy 101

Saturday, May 22nd, 2010
There’s no crying in bankuptcy.

SANTEE, CA–Here’s a tale that starkly illustrates the avoiding power in bankruptcy.

Will and Jill Deuel were owners of a unit in the Lakeview Carlton Hills condominiums.

The Lakeview Carlton Hills condominiums

The Deuels purchased the condo in October 1999, giving a purchase money deed of trust for $106,700 to North American Mortgage Company.  At the same time, the couple borrowed an additional $3,300 giving a second deed of trust.  In June 2001, the Deuels refinanced giving a deed of trust for $122,400 to American Mortgage Express Financial.

In September 2002, the Deuels refinanced again giving a deed of trust for $136,000 to Chase Manhattan Bank.  Problem was, the Chase deed of trust did not get recorded in the San Diego County recorders office.  All that got recorded was a release of the $122,400 deed of trust paid off by the Chase loan.

So, as a matter of record, it appeared the Deuels owned the condo “free and clear.”

In 2004, Jill Deuel filed chapter 7 bankruptcy.  Her schedules filed in bankruptcy court showed the $136,000 debt to Chase as “secured,” but Chase now realized their deed of trust was unrecorded.  So Chase filed a motion in the bankruptcy for an order confirming the debt as a security interest in the condo, effective retroactively to September 4, 2002.

Jacob Weinberger United States Courthouse, San Diego, CA

The bankruptcy court ruled in favor of Chase, but the federal court of appeals disagreed and held the deed of trust “avoided.”

The court based its decision on section 544(a)(3) of the Bankruptcy Code.  Section 544(a)(3) allows a trustee in bankruptcy (or a debtor-in-possession) to avoid an interest in debtor real property that has not been perfected as of the commencement of bankruptcy.

The purpose of section 544(a)(3) is to treat all of a debtor’s unsecured creditors equally, and prevent someone bound for bankruptcy from giving preferred (i.e., secured) status to a favored creditor.  It also discourages the debtor who might try to protect assets by slipping a deed to a relative or friend.

Section 544(a)(3) achieves its purpose by giving a trustee the legal status of a bona fide purchaser of debtor real property as of commencement of bankruptcy.  A BFP, without actual or constructive notice of off-record interests, can acquire property free of such interests.

In this case, the court reasoned a BFP would not be charged with constructive notice of the unrecorded deed of trust and, thus, would acquire the property free of the obligation to Chase.

Chase tried to argue that its deed of trust was as good as recorded, since Jill listed the debt as “secured” in her bankruptcy schedules, but the court disagreed saying “if schedules could defeat the trustee’s status as a bona fide purchaser…, a debtor could use simultaneous filing of (the) petition and the schedules to favor one creditor over others.”

Chase also argued it should at least have a security interest in the property to the extent of the loan it paid off (the $122,400 deed of trust), but again the court disagreed citing the overriding purpose of section 544 to treat creditors equally.

Moral:  This is a classic example of section 544(a)(3) in operation.  It is sometimes called the “avoiding” or “strong arm” power.

Seems harsh when you consider the Chase loan was, in a sense, purchase money; but there’s no crying in bankruptcy.

The result here benefits Jill’s unsecured creditors (a group that now includes Chase), and also benefits Jill to the extent her “homestead” may be exempt from claims in bankruptcy.  Since he is not a co-debtor in the bankruptcy, this decision does not affect Will’s interest in the condo (whatever that may be).

The case is In re Deuel (Chase Manhattan Bank v. Taxel), 594 F.3d 1073 (9th Cir. 2010).

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Typo

Sunday, April 11th, 2010

A short course on “notice,” and rights of a “bona fide purchaser.”

TOPEKA, KS–When they gave a mortgage against their home Jorge and Toni Colon could not have imagined what was to follow.

The trouble began with a typo. The Colons owned Lot 79 in the Arrowhead Heights Subdivision, but a typist made it “Lot 29” in the mortgage that got recorded.

The house on Lot 79

No one noticed the typo until the Colons filed Chapter 13 bankruptcy, and the bankruptcy court appointed a trustee for the debtors’ estate. Seeing opportunity, the trustee filed pleadings to avoid the mortgage as an interest in the debtors’ real property. If successful the trustee’s action would make the mortgage lender an unsecured creditor, perhaps getting cents on the dollar instead of full repayment.

The trustee’s action was based on section 544(a)(3) of the Bankruptcy Code. This statute operates to ensure that unsecured creditors are treated fairly and equally, by making it difficult for a favored creditor to gain a security interest in debtor real property on the eve of a bankruptcy filing.  It does this by allowing a trustee in bankruptcy (or a debtor-in-possession) to avoid any interest in debtor real property that is not perfected as of the date of commencement of bankruptcy.

To achieve its purpose section 544(a)(3) entitles a trustee to claim the legal status of a bona fide purchaser (or “BFP”) of debtor real property as of the bankruptcy filing.  A BFP, as we know, is one who pays value for property without notice of claims of others to the same property.  Thus, a BFP acquires property free of such claims and has legal protections against them.

But what constitutes “notice?” There are two types: Actual notice (what one knows) and constructive notice (including, among other things, what is shown by public records).

In this case, the trustee argued a BFP would not be charged with constructive notice of the mortgage referring to Lot 29 because it would not be found by a title search.

The bankruptcy court agreed with the trustee, and ordered the mortgage avoided for the benefit of the debtors’ estate (controlled by the trustee). The mortgage lender could not foreclose, and would have to get in line as an unsecured creditor.

The court explained that the Shawnee County recorder’s office maintains two indices for land records:  A grantor-grantee index (an alphabetical listing by names of parties) and a geographical index (a listing by property legal description). The court said a purchaser (or a title searcher) might rely on the geographical index, solely, and in searching Lot 79 would not find the mortgage against Lot 29. It made no difference, in the court’s opinion, that the mortgage shows a correct property address and assessor’s parcel number.

The mortgage lender appealed, and a federal court of appeals reversed the bankruptcy court decision.

The appeals court focused on the Kansas recording statutes, which state that each recorded document imparts notice of its contents, and that each county must maintain a grantor-grantee index. The geographical index is optional.

The court reasoned that Kansas statutes charge a purchaser with constructive notice of an owner’s entire “chain of title,” which is the record of ownership to be found by searching names in the county grantor-grantee index. In this case, there were at least four documents in the chain of title linking the Colons with the correct lot number, and by comparing the documents a person with “common sense” should know the disputed mortgage was intended to encumber the Colon home.

So the mortgage lender won, and the mortgage is enforceable.

Moral: Forget the bankruptcy stuff, this is an important case for understanding the legal notion of constructive notice, which is the reason for land records and key to our system of property rights.

Most state recording statutes are similar to those in Kansas, and this well-written decision offers clarity for courts elsewhere. It should have nation-wide implications.

Today’s title companies rely heavily on geographical databases to search land records.  The geographical search is faster and cheaper than a grantor-grantee search, but is also prone to error and may miss the recording with a bad legal description.  Look for title insurance to cover the risk.

The case is reported as In re Colon, 563 F.3d 1171 (10th Cir. 2009).

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