The Bankruptcy Appellate Panel of the Sixth Circuit recently held in an unpublished decision that in Kentucky, the description of the property encumbered by a mortgage is sufficient if language used in the body of the mortgage prior to signature incorporates an attached exhibit containing the legal description of the property. Brockman v. American General Home Equity, 2011 WL 2420239 (6th Cir. BAP June 17, 2011). Because the practice of attaching property descriptions to mortgages and incorporating them by reference is common in Kentucky, this opinion approving this practice may be of some value to lenders.
In Brockman, a Chapter 7 Trustee brought an adversary complaint seeking to avoid a prepetition mortgage – pursuant to his powers as a hypothetical bona fide purchaser under 11 U.S.C. § 544 –granted by the debtor on the grounds that that mortgage did not properly describe the property encumbered by the mortgage. In the space provided for a property description, the mortgage read: “see EXHIBIT A.” The page following the debtor’s signature was marked “EXHIBIT A LEGAL DESCRIPTION” and set forth the legal description of the mortgage. Exhibit A was included with the mortgage when it was recorded.
The Trustee argued that the application of KRS 446.060(1), which provides “[w]hen the law requires any writing to be signed by a party thereto, it shall not be deemed to be signed unless the signature is subscribed at the end or close of the writing,” kept the property from being encumbered because it was not described prior to the signature page. The Trustee argued that the mortgage did not provide constructive notice to a subsequent bona fide purchaser because the legal description was insufficient under Kentucky law – he claimed that “see EXHIBIT A” was insufficient to invoke the incorporation by reference doctrine, making the Exhibit part of the contract, and that the property description therefore inappropriately came after the signature page.
The BAP disagreed, noting that Kentucky courts have consistently held that § 446.060(1) does not abolish the doctrine of incorporation by reference. See Childers & Venters, Inc. v. Sowards, 460 S.W.2d 343, 345 (Ky. 1970) (“We do not, however, construe [KRS 446.060(1)] to abolish the doctrine of incorporation by reference.”). To be valid and enforceable, incorporating language must appear above the signature line, which is where “see EXHIBIT A” appeared. Further, while Kentucky law requires some description of the property, the description is sufficient if it enables any interested party to locate the land, and extrinsic evidence may be used to do so. See Louisville Joint Stock Land Bank v. McNeely, 102 S.W.2d 389, 391 (Ky.1937); Am. Nat'l Bank v. John Van Range Co., 278 S.W. 133 (Ky.1925) (description of property may be sufficient with the aid of extrinsic evidence).
Finally, the BAP noted that the use of the language “see EXHIBIT A,” appearing before the signature and thus valid and enforceable pursuant to the doctrine of incorporation by reference, was sufficient even without accompanying language such as “attached hereto,” because an exhibit is by definition attached, making any other descriptive language unnecessary. The use of the language in the space provided for the description of the encumbered property, with Exhibit A attached thereto and recorded with the mortgage, would put a bona fide purchaser of the property on constructive notice of the lender’s interest in the property. Accordingly, the mortgage could not be set aside.