Mortgage Recording Requirements: Tiny Technical Defect Strikes Again

Good to know.

Bankruptcy-RealEstate-Insights

Rogan v. U.S. Bank, N.A. (In re Partin), 517 B.R. 770 (Bankr. E.D. Ky. 2014) –

A chapter 7 trustee sought to avoid mortgages on three properties using his “strong arm” powers, arguing that they were improperly recorded and thus did not provide constructive notice to a purchaser or lien creditor.

View original post 865 more words

One thought on “Mortgage Recording Requirements: Tiny Technical Defect Strikes Again

  1. There was a somewhat similar case in February 2012, in the 4th Circuit, which covers West Virginia, Virginia, Maryland, North Carolina & South Carolina: SunTrust v. Macky (In re McCormick), No. 10-2027, 2012 U.S. App. LEXIS 2658. From the published Summary:

    In bankruptcy proceedings in which a bank sought repayment of a loan that it claimed was secured by a deed of trust on two contiguous parcels of the debtor’s property, the lower courts’ order that the bank’s lien on one of the parcels was avoided is affirmed, where:
    1) the deed was unrecorded as to that parcel; the bankruptcy trustee was only imputed with the notice of the deed that would be imputed to a bona fide purchaser of the tract under state law; and
    2) North Carolina law allowed a purchaser to rely exclusively on the official recordation index of the county to discover liens, regardless of what other independent knowledge that purchaser might have.
    ____________________

    The beginning of the 4th Circuit’s opinion explains the situation:

    In this bankruptcy case, in which John McCormick is the debtor, SunTrust Bank, N.A., filed a proof of claim for repayment of a loan that it claimed was secured by a deed of trust on two contiguous parcels of McCormick’s real property in Orange County, North Carolina, known as “Tract I” and “Tract II.” The Trustee commenced this action under 11 U.S.C. § 544(a)(3) to avoid the lien on Tract I because the deed of trust, while recorded on the official recordation index of Orange County as to Tract II, was not so recorded as to Tract I.

    SunTrust contended that even though the recordation was deficient, the Trustee was imputed with constructive knowledge of the lien on Tract I because either (1) he had constructive knowledge of the deed of trust that was properly recorded as to Tract II, which by its terms also created a lien on Tract I; or (2) the deed of trust was recorded in an unofficial index in Orange County and a careful and prudent title examiner would have found the lien on Tract I in that index.

    The bankruptcy court rejected SunTrust’s arguments and ordered SunTrust’s lien on Tract I avoided under § 544(a)(3), and the district court affirmed. We too affirm. Because the Trustee’s status vis-a-vis the title of Tract I is, under § 544(a)(3), that of a bona fide purchaser under North Carolina law, the Trustee is only imputed with the notice that would be imputed to a bona fide purchaser of Tract I under North Carolina law. And North Carolina law allows a purchaser to rely exclusively on the official recordation index of the county to discover liens, regardless of what other independent knowledge that purchaser might have.
    _____________________

    When there is no particular federal statute applicable to a given situation the federal courts look to State law, and of course, that’s what happened here. The decision applies to any N.C. case in which the proper recording of a lien, by deed of trust or otherwise, is an issue, and this part of the decision, quoting a N.C. supreme court decision, stands out:

    North Carolina law has established a precise recording system on which purchasers of real property can rely when searching for the existence of prior liens. If a prior lien is not properly recorded in accordance with the system, then the purchaser can count on taking property as if no lien exists, even though the purchaser may have knowledge that an earlier lien had been created. See Hill v. Pinelawn Mem’l Park, Inc., 304 N.C. 159, 282 S.E.2d 779, 782 (N.C.1981). Manifesting this understanding, North Carolina law provides categorically that “instruments registered in the office of the register of deeds shall have priority based on the order of registration as determined by the time of registration.” N.C. Gen. Stat. § 47–20(a). The North Carolina Supreme Court has articulated the full implication of the rule, as well as its rationale, as follows:

    The purpose of [the recording statute] is to enable intending purchasers and encumbrancers to rely with safety on the public record concerning the status of land titles. It serves to provide constructive notice of claims to real property. It has been characterized as a pure race statute. Where a grantor conveys the same property to two different purchasers, the first purchaser to record his deed wins the race to the Register of Deeds’ office and thereby defeats the other’s claim to the property, even if he has actual notice of the conveyance to the other purchaser. Thus, in order to protect himself against the possibility that his grantor has conveyed the same property to another, a purchaser must examine the public registry. If he finds no record of such, even if he knows there has been a prior conveyance, he may record his deed with the assurance that his title will prevail.

    Hill, 282 S.E.2d at 782 (citations and internal quotation marks omitted). In short, the recordation of real property instruments in North Carolina on the appropriate recording index is a “cook-book” process that, when followed, gives the only enforceable notice to subsequent purchasers of the instrument, thereby assuring such purchasers that the status of title is as appears on the index, regardless of that purchasers’ knowledge about matters not appearing on the index.
    ____________________

    And I would say that opinion could also be applied in any State where the recording laws are to North Carolina’s.
    ~ ~ ~

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s