Wells Fargo Home Mortgage, Inc. v Richardson (In re Brandt), 434 B.R. 493 (W.D. Mich. 2010)
A chapter 7 bankruptcy trustee avoided a recorded residential mortgage utilizing the strong-arm powers of section 544 of the Bankruptcy Code. The recorded mortgage described the subject property (a platted property) only by street address and tax identification number. On its face, the mortgage complied with the Michigan recording act. The Michigan land division act, however, required that, to be recordable, a mortgage for platted property must contain the property’s plat and lot number. The District Court held that the mortgage was therefore deficient, and this non-compliance caused the recorded mortgage to be a nullity. Thus, the court concluded that the trustee could avoid the recorded mortgage because, under applicable state law, the recorded mortgage had the legal status of an unrecorded mortgage of which the chapter 7 trustee was deemed to have no actual or constructive notice.
The home buyer, Brandt, granted Wells Fargo a mortgage on the subject property. The mortgage was recorded in the county Register of Deeds office, listed the street address, and referred to the “attached legal description.” No legal description was attached, however. Several years later, Brandt filed for bankruptcy, and the trustee sought to avoid the mortgage under section 544 of the Bankruptcy Code.
Section 544 sets forth the so-called “strong arm” powers of the trustee. This section allows the trustee to avoid a property lien, for example, of which a hypothetical purchaser would not have notice. Under Michigan law, a mortgage is not effective against a bona fide purchaser of real property who does not have actual or constructive notice of the mortgage. The recording of the mortgage provides constructive notice; thus, an unrecorded mortgage is not effective against a bona fide purchaser.
Section 544 empowers a trustee to avoid any mortgage that is not effective against a bona fide purchaser under applicable state law. The trustee here argued that the mortgage was improperly recorded under the land division act, so that a hypothetical purchaser would not have notice of the Wells Fargo security interest.
Wells Fargo argued that the land division act was designed to govern the relationship between property holders and public regulatory bodies, and not to determine the recording requirements for mortgages – those requirements were governed by the recording act. Thus, non-compliance with the land division act did not prevent an otherwise properly recorded mortgage from being effective or cause it to be a nullity.
The District Court disagreed with Wells Fargo, noting that one clear purpose of the land division act was to regulate conveyances of platted property between private parties, including conveyances under mortgages. “The LDA as a whole is focused on the use of plats as a means of describing and regulating rights in real property. It does not merely eliminate the use of metes and bounds descriptions of property. . . . Thus, reference in a conveyance [of platted property] to a street address or tax identification number is invalid for the same reason that reference to a metes and bounds description is invalid: it is not the ‘accurate legal description’ intended by the LDA. . . . Thus, while the mortgage statute sets forth requirements for mortgages, generally, the LDA can be read to make an additional requirement with respect to platted property. . . . The recording act itself states that its requirements are ‘cumulative to the requirements imposed by any other act relating to the recording of instruments.’” (Emphasis in the opinion.)
The District Court cited several sections of the land division act in support of its position, including the provision that platted property “shall be described by the caption of the plat and lot number for all purposes,” and the provision that an instrument “purporting to convey or mortgage” platted real property “may not be recorded by the register of deeds” unless it references the plat and lot number. (Emphasis in the opinion.)
The District Court concluded that, if the land division act states that a particular instrument conveying platted property “may not be recorded by the register of deeds” unless it references the plat and lot number, as required by the act, and an instrument lacking such a reference is nevertheless recorded, then “the result is the same as if the instrument was not properly recorded [under the recording act]: the recording is void, and it does not serve to provide constructive notice to a subsequent purchaser.”
The lesson from the case is clear: all pertinent state laws and requirements regarding mortgage instruments must be carefully considered when recording mortgages and when evaluating whether recorded mortgages have created valid and perfected liens on real property. The case also highlights the importance of obtaining title insurance for mortgages. Of course, when a lender does have a problem, the question becomes what can it do before a bankruptcy filing to prevent the result in the case? One possible answer may be a 90-day forbearance agreement with the borrower; a small price to pay in many instances if it means curing the defects.