“The bank made two mistakes. First, it did not attach the legal descriptions for the two parcels to the mortgage when it was presented to the Register of Deeds. Second, it opted to file an affidavit of correction even after the Wisconsin Court of Appeals indicated that doing so was not an appropriate method to correct a conveyance. The affidavit of correction was invalid and the original mortgage did not satisfy the recording requirements. The result is that a subsequent purchaser would not have had constructive notice of the bank’s interest in the two parcels.”
Message delivered loud and clear. The bank’s claim is to be treated as unsecured.
Mortgage Errors: How Not to Correct a “Boo-Boo”
“Whether one is baking a cake, building a house, or recording a mortgage, sometimes even the slightest deviation from the directions can lead to catastrophe. Cakes don’t rise, buildings fall down, and … mortgages aren’t perfected.” So starts the opinion in Couillard.
The Coulillards refinanced a purchase money mortgage. The legal description attached to the refinancing mortgage included an easement parcel, but omitted the two principal parcels. A couple of months after the mortgage was recorded, an “affidavit of correction” to correct an “error” in the mortgage legal description was recorded that attached the missing parcel descriptions. A few years later the Couillards filed bankruptcy.
The bankruptcy trustee brought an adversary proceeding to avoid the mortgage using the “strong arm” powers under Section 544(a) of the Bankruptcy Code. Specifically, this section allows a trustee to assert the rights of a hypothetical bona fide purchaser of real estate that has perfected the property transfer (i.e. recorded a conveyance document) as of the commencement of the bankruptcy case.
Under applicable state law, a conveyance that is not recorded is generally void as against a subsequent purchaser who records first. Outside of bankruptcy, there is generally an exception if the purchaser has either actual or constructive notice of unrecorded claims. However, in exercising a purchaser’s rights in bankruptcy, a trustee is subject to only constructive notice, not actual notice. Under applicable state law regarding constructive notice, purchasers are deemed to have notice of claims that are revealed by use or occupancy of the property or by a review of the “chain of title (i.e., the records in the office of the register of deeds and other public records)” for the property.
So, this case turned on whether the Section 544(a) hypothetical purchaser would have had constructive notice of the refinancing mortgage based on a combination of the defective mortgage and the corrective affidavit. As an initial point, the court noted that a document must be (1) properly filed and (2) within the chain of title in order to provide constructive notice.
Copy of the opinion below…