Daily Development for Thursday, September 2, 1999

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

Thanks to Jack Murray at First American for putting DIRT on to this case. The report is the editor's.

BANKRUPTCY; AVOIDANCE; MORTGAGES; ASSIGNMENTS: Mortgagor/debtor's trustee cannot avoid the lien of a mortgage on Debtor's property on the basis that the mortgage has been assigned and the assignment not recorded, even where state law requires recordation of the assignment in order for it to be valid against competing interests, as transfer of the mortgage is not a "transfer of the property" within the meaning of the "strong arm" provisions, Section 544 of the Bankruptcy Code.

In re Halabi, 1999 WL 635513 (11th Cir. 8/20/99)

The mortgage itself was properly recorded according to Florida law. Later, mortgagee transferred the mortgage and note to Assignee One, which promptly recorded the assignment. Soon thereafter, Assignee One assigned note and mortgage to Assignee Two. Then mortgagor filed for bankruptcy. Then Assignee Two recorded the assignment. Later Assignee Two transferred the note and mortgage to Assignee Three, as to which there is no recorded assignment document.

Florida law (relatively unusual in this regard) provides that:

 "No assignment of a mortgage upon reala property or of any interest therein, shall be good or effectual in law or equity against creditors or subsequent purchasers, for a valuable consideration and without notice, unless the assignment is contained in a documents whihch, in its title, indicates an assignment of a mortgage and is recorded according to law."

Another provision of Florida law, however, provides:

 "If a secured party assigns a perfected security interest, no filing under this chapter is required in order to continue the perfected status of the security interest against creditors of and transferres from the original debtor."

The Debtor's trustee argued that the mortgage assignment was not perfected as required by Florida law, and therefore could be avoided. The District Court held, and the Eleventh Circuit affirmed, that indeed the perfection of the mortgage itself was the only relevant issue as pertaining to the bankruptcy of the mortgage debtor. The transfer of the mortgage was not a "transfer of the Debtor's property" and therefore was not subject to avoidance if unperfected.

Comment 1: Not only is the case correct, but it is correct even if the second Florida statute, cited above, had not been in effect. Although the statute appears to have been drafted precisely to address the question of whether an unrecorded assignment gives the mortgage debtor an opportunity to use the strong arm power, the fact is that even without the statute the court's analysis still holds. The mortgage is not the property of the Debtor. Only the security affected by the mortgage is the Debtor's property, and the transfer of that property into the mortgage was perfected by recording of the mortgage.

Comment 2: This case ties nicely into a discussion of a few weeks ago in which Dale Whitman and I responded to a question from a DIRTer on this very point. Fortunately for us, the case is consistent with our advice.

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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