A chapter 7 trustee sought to avoid a transfer of the debtor’s real property using his “strong arm” powers based on an argument that the deed conveying the property did not provide constructive notice since it was not properly indexed in the real estate records.
The debtor owned property in Boston that he transferred in July 2003 by a deed that correctly identified the grantor as “William O. Hultin.” However, when the deed was recorded, it was listed in the grantor index under “William Hiltin.” The original deed from the debtor was followed by a deed from his purchaser in 2005, a foreclosure deed in 2008, another deed in 2008, and a mortgage in 2011.
A trustee’s strong arm powers include the ability to avoid transfers that could be avoided under state law by a bona fide purchaser of real estate as of the petition date. Typically under state law (1) a purchaser can take free of an interest unless it has notice of the interest, and (2) a properly recorded deed provides constructive notice of the grantee’s interest.
As of the date that the debtor filed bankruptcy in 2013, the deed was indexed under William Hiltin. (This is significant because someone examining the grantor index to determine the status of the property would conclude that it was still owned by William Hultin.) Thus, the trustee’s argument was that the 2003 deed was not properly recorded, with the result that it did not provide constructive notice that the debtor transferred the property and a bona fide purchaser in 2013 could acquire the property free of the interests of the subsequent owners and lender.
The analysis turned on a state statute that provided (emphasis added):
No instrument shall be deemed recorded in due course unless so recorded in the registry of deeds for the county or district in which the real estate affected lies as to be indexed in the grantor index under the name of the owner of record of the real estate affected at the time of the recording.
The defendant lender contended that this meant only that a document must be presented for recording that could be properly indexed, and did not require the recording party to confirm that proper indexing occurred. The lender argued that the deed complied with the statute so that the question of whether it provided constructive notice was a question of common law. Under common law, there were a number of cases holding that an indexing error did not prevent an otherwise properly recorded document from providing constructive notice.
In contrast, the trustee argued that the requirement that the deed be “so recorded… as to be indexed in the grantor index” meant that it must be properly indexed in order to be deemed recorded. The trustee countered the lender’s position by arguing that (1) the purpose was to insure parties had constructive notice by requiring the interest to be in the grantor index, (2) enactment of this section abrogated many of the earlier cases relied on by the lender, and (3) in many of the cases the document was accessible notwithstanding the error, which was not the case here since a party searching the grantor index to determine whether the debtor owned property would not have found the deed transferring his interest.
The court concluded that the statute was not precise so that it should turn to common law. The court reviewed several cases holding that a mistake made by a clerk in indexing does not invalidate constructive notice. The court predicted that the state supreme court “would uphold the common law rule concerning mistakes by a registry and ‘[hold] in favor of a person who has done all he could to have a transaction recorded, as against a subsequent creditor or purchaser who has relied on an erroneous record.’”
The court specifically rejected the view that the decision should turn on whether the document would be found in a search of the real estate records. According to case law:
Instances are not rare in which the constructive notice provided for by statutes requiring the registration of instruments proves insufficient to protect the interests of those for whose benefit they are intended, but who do not, for that reason, have a right to priority.
As for legislative intent, the court concluded that the requirement for indexing was intended to eliminate “indefinite references” in recorded instruments. In particular, it did not place the burden on a recording party to assure that a document was in fact indexed properly.
Since the deed correctly identified the grantor and the registry was the source of the indexing error, the court determined that the deed provided constructive notice of the transfer of the debtor’s interests in the property, and accordingly dismissed the trustee’s claims.
Note that the issue in this case arose ten years after the deed was recorded. It can be difficult to predict whether a court will find that an improperly indexed real estate document provides constructive notice so that the interests of subsequent purchasers and lenders are protected. Although there are periodic discussions among real estate lawyers about whether it is necessary to verify proper indexing of recorded real estate documents, as a practical matter, the usual approach is to rely on title insurance.