Daily Development for Thursday, October 25, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BANKRUPTCY; LIENS; AVOIDANCE: Bankruptcy trustee, as hypothetical BFP, may avoid a mortgage containing a faulty legal description even if detective work in the information available from the grantor/grantee index might have disclosed the existence of the mortgage.

In re Colon (Hamilton v. Washington Mutual Sav. Bank, 2007 WESTLAW 2726857 (Bankr.  D. Ka. 1/26/07)

Debtor had, some years before, refinanced a home mortgage.  The recorded refinancing mortgage contained an error in the legal description.  Instead of designating the property as Lot 79 in a certain subdivision, it described it as Lot 29 in the same subdivision. The mortgage, however, contained a three part description.  There was also a street address and a tax locator ID.  Both of the latter descriptions were consistent with the property located on lot 79, not lot 29.

When  Debtor filed a Chapter 13 bankruptcy, the Trustee sought to avoid the mortgage from its position as hypothetical BFPs under sec. 544(a) of the Bankruptcy Code. 

The issue was whether the trustee was put on constructive notice of the defective legal description contained in the mortgage. The court stated that it must decide what steps a "reasonably cautious person" would take to obtain good title, and held that the trustee was not required to search beyond the grantor/grantee index and examine the text of the mortgage in an attempt to determine if the legal description was correct (and that even if such a duty existed such review of the mortgage would have not have put the trustee on constructive notice of the mortgage). The court stated, that the trustee's duty is not that of a title insurer:

The court is unaware of any legal precedent that would require a BFP to conduct a search equivalent in scope to that a title insurance company would conduct when issuing a title insurance policy, and holds that no such legal duty exists. The Trustee, as a BFP, is only required to take the steps a reasonable person would undertake in an attempt to discover a cloud on the title of property he or she is purchasing, not that of a title insurance company, which has much greater expertise and resources at its disposal than an ordinary BFP, and which, as an insurer, has greater exposure for failing to expose title issues. The Court also finds that a BFP is not required to hire a title insurance company to conduct the title search.

The court noted that, that under Kansas law, "constructive notice" is implied "when it consists of knowledge of facts so informing that a reasonably cautious person would be prompted to inquire further" The court concluded that, from its reading of all applicable Kansas statutes, "a description of the property conveyed should be considered sufficient if it identifies the property or affords the means of identification within the instrument itself or by specific reference to other instruments recorded in the office of the register of deeds. Such a specific description of the property conveyed is required in order to impart constructive notice to a subsequent purchaser."

The court concluded that if a BFP had examined the index kept under the legal description of the lot in the mortgage, it would not have found the defendant's (Washington Mutual Bank's) mortgage, as it was  recorded under another lot of the same subdivision.

The court rejected Washington Mutual's argument that even though there was an error in the lot number, the correct street address and tax id number were contained in the mortgage, noting at  that "the Register of Deeds does not index or maintain records by street address or tax/Parcel ID number." The Court further noted that even the owners themselves likely would not know this information (regarding the incorrect lot description) without consulting other records, and that "even if there was evidence of such actual notice, sec. 544(a) immunizes the trustee from such actual notice."

The court stated that "there is nothing within the mortgage itself  that would give a BFP constructive notice of those facts, or that would put a reasonable purchaser on notice that something was awry, requiring further investigation." Finally, the Court ruled  that, "under the facts of this case, there is nothing within the four corners of the instrument that would put an innocent purchaser researching the title to this property on notice that he needed to check further outside the four corners of the instrument, again assuming a BFP would even have to review the instrument, itself."

Comment 1: There are a number of interesting questions here.  The first is the suggestion that a title company has a greater duty to become aware of information concerning title than that measured by constructive notice.  Of course, for most purposes, the duties become coextensive because if the title company fails to identify a problem, but there is no constructive notice of that problem, the insured would not be affected by it, and the title company would have no liability.  But there may be circumstances where a title company provides some service other than insurance for which a negligence claim may be made.  Does it have a broader duty of care?  The issue is clearly dicta in this case.  It's simply food for thought.

Comment 2: The next question is whether a party has a duty to read all documents recorded against a grantor's title in the record and to identify questionable title descriptions that might, on inquiry, turn out to be the property for which the party is searching.  The court says that there is no such duty.  Apparently, in its view, title searchers are permitted to look to the index legal description, which would have indicated a different lot than the one being searched in this case, and stop there. 

Comment 3: The county maintaining a property records also maintained a tract index.  Typically such indeces are maintained for assessing property taxes only.  In the editor's home county, however, he understands that the information in these tract indeces is deemed to be within the search burden of a title searcher.  So sometimes the search burden goes beyond the grantor grantee index.  But, although the mortgage in the instant case (not in the editor's county) was in fact recorded in a tract index, it was indexed only under for lot 29, and not the correct lot 79. 

The only way anyone could have identified the problem in this case, as the court suggests, would have been to note that the borrower, as grantor, had given a mortgage on lot 79, which was identified with street address, and that later the borrower had given another mortgage on lot 29, with the same street address.  The court held that, given the uncertainty of street address in general, and the somewhat strained comparison necessary to pick up the ambiguity here, there was no constructive notice from this sort of record information sufficient to generate a duty of inquiry.  The editor agrees, and he wouldn't hold a title company responsible for identifying such an issue, either.  (Note that a title company might have picked the issue up through its own title plant). 

Jack Murray, of the First American Title Office, picked off this case for the editor, and a bit of the report comes from Jack, but the comments are those of the editor, as is a good portion of the report itself. 

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