Daily Development for
Friday, November 20, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

The Reporter for today’s cases is Jim Stillman of Murphy, Sheneman, Julian & Rogers of Los Angeles.

BANKRUPTCY; AVOIDANCE POWERS; LIENS: A debtor is not entitled under the strongarm provision of Bankruptcy Code § 544(a)(3) to avoid a mortgage with a legal description that omitted all of the collateral, where expert witness testimony shows that a professional search of title would have charged the debtor with notice that the mortgage contained an incorrect description.

In re Shutt, 1998 U.S.Dist. LEXIS 7222 (S.D.Ala. 1998).

In upholding the Bankruptcy Court, the District Court noted that "Section 544...does not set aside the trustee's duty, as a hypothetical judicial lien creditor, to examine the record of title." The chain of title as a whole (i.e., the deed to the debtor and the subsequent mortgage) "would have revealed the error in legal description."

Reporter's Comment: The full legal description, covering about 2 acres of land, contained a paragraph at the end reading "less and except" which described a 65 foot strip of unimproved land. The legal description attached to Lender's mortgage contained only the "less and except" paragraph, i.e., a useless strip of land that the mortgagor didn't even own. Would a professional title abstractor correctly infer that a scrivener's error had occurred? Probably so. Should this be the standard under section 544(a)(3)? Apparently so, in a case like this where no significant body of unsecured creditors stood to benefit from avoidance.

Editor's Comment 1: If the title description in the mortgage commenced with the phrase "less and except," then presumable anyone reading the record would recognize that the description had a flaw. But the court doesn't exactly say that the "less and except" language was actually in the description. If, rather, the problem arises simply from the examiner's awareness of the names and their relationship to other transfers in the record, or from the examiner's ability to recognize from the description that the mortgaged parcel was relatively small as compared to the mortgage amount, then the case is much closer.

Editor's Comment 2: It is interesting to note that the standard of what constitutes constructive notice seems to have jumped, in any event, from "reasonable person" to "reasonable professional title examiner." As professional title examiners necessarily are very diligent in chasing down clues, this tends to expand the scope of constructive notice. The editor doesn't necessarily see this as a bad thing, but it certainly is worth remarking.

BANKRUPTCY; AVOIDANCE POWER; LIENS; "STRIPPING OFF" LIENS: A mortgage supported by no collateral value at all, because senior encumbrances are worth more than the property, can be "stripped off" the property, under Bankruptcy Code section 506.

In re Yi, 219 B.R. 394 (E.D.Va 1998).

The Bankruptcy Court erred in analogizing the unsecured third deed of trust in this case to the undersecured mortgage having some collateral value, in Dewsnup v. Timm, 502 U.S. 410 (1992). The Supreme Court's holding that an undersecured mortgage cannot be "stripped down" should not be extended to frustrate the clear application of section 506(a) and (d). Several leading texts support this view, the District Court wrote, including 8 Collier ¶ 1322.06[1][a].

Reporter's Comment: All future appreciation does not belong to the debtor, the Dewsnup court reasoned; a lien that is undersecured today may be fully secured tomorrow. If this argument is applied to wholly unsecured claims, however, then "it would mean that no claim could ever be deemed unsecured under the second part of § 506(a), given that there is always some theoretical potential for the value of the collateral to increase." The whole discussion begs the by now famous question: why should such profoundly different treatment be accorded a mortgage secured by a dollar versus one secured by nothing?

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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