Bankruptcy/Debtor-Creditor Rights Blog

CAVEAT CREDITOR: RECORD YOUR MORTGAGES IMMEDIATELY

Posted March 24, 2010

Author: Alex T. Gray

The Eighth Circuit Court of Appeals recently upheld a bankruptcy court’s decision to avoid the transfer of a mortgage from a debtor to a mortgage company because the company failed to record the mortgage before the debtor filed for bankruptcy.  The debtor, Dwight, granted the mortgagee a mortgage on his home on May 16, 2003.  On October 14, 2005, the debtor filed a petition for Chapter 7 bankruptcy relief, and even though the mortgagee never recorded the mortgage, he erroneously listed the mortgagee as a secured creditor.  After the debtor was granted a discharge, the mortgagee’s assignee recorded the mortgage thereby alerting the trustee that the mortgagee failed to record the mortgage before the bankruptcy filing.  At the trustee’s request, the bankruptcy court reopened the case and subsequently held that the transfer of the mortgage occurred immediately before the bankruptcy filing by operation of §547(e)(2)(C).  The court therefore avoided the transfer of the mortgage to the mortgagee as a preferential transfer under §547(b) and ordered the mortgagee to pay the debtor’s bankruptcy estate the amount of the unpaid principal balance on the note as of the bankruptcy filing date, or $190,808.71.  The bankruptcy court’s holding was upheld by both the district court and the Eighth Circuit Court of Appeals.

            The Eighth Circuit noted that because the mortgagee failed to perfect the mortgage before the debtor filed his bankruptcy petition, the date of perfection is irrelevant for the purposes of the §547(b) preferential transfer inquiry.  Furthermore, due to the debtor’s erroneous listing of the mortgagee as a secured creditor, the mortgagee was allowed to receive more than it would have in a hypothetical liquidation, see 11 U.S.C. §547(b), and therefore deprived the bankruptcy estate of an interest in the house equal to the value of the mortgage.

            The mortgagee’s mistake should be a lesson to all creditors:  record a mortgage as soon as possible or face the threat of losing it if the mortgagor files bankruptcy before the mortgage is recorded.

            The case can be found at 592 F.3d 838.

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