Failure To Record Earlier-Created Mortgage No Bar To Priority Over Later-Created, Recorded Mortgage, Says Brooklyn Trial Court

The following facts are taken from a recent ruling of a Brooklyn, New York trial court denying a defendant's motion for dismissal by one bankster in litigation against another bankster:

1. On or about August 10, 2005, a property owner, one Hemant, and a co-owner obtained a $302,250 mortgage loan from Fremont Investment and Loan.



2. Inexplicably, Fremont failed to record the mortgage (further, at the time of the litigation in this matter, Fremont admitted that it was not in possession of the mortgage documents).



3. Thereafter on March 30, 2007, Hemant executed a deed purportedly conveying all of his right title and interest to the premises to defendants Seema and Sushma, his daughters.



4. The deed was recorded on March 30, 2007. On March 30, 2007 Seema and Sushma executed a note and mortgage for $423,750 secured by the Premises, said note and mortgage ultimately winding up in the hands of HSBC.



5. In the process of carrying out the March 30, 2007 transaction, Hemant delivered two affidavits at the closing in which he states that he has received zero consideration for the transfer of the premises, that the transfer was between family members and two transfer tax documents which state that the consideration for the transfer was $0.



6. In contrast to those documents, the HUD-1 form states that Hemant received $296,000 in consideration for the transfer.



7. Also, the checks issued at the closing were endorsed to parties other than Hemant and his daughters (an attorney's affirmation authenticating copies of checks issued in connection with this closing, which involved Delta Finding (now held by HSBC) and the parties was submitted to the court affirming that the checks were issued to persons and entities including Sushma Rambaran, HKR Construction, Varsha Construction, and 81-83-85 Blake Avenue LLC).

In this case, the court was asked to address, as between Fremont (holder of the earlier-created mortgage that recklessly went unrecorded) and HSBC (holder of the later-created, but earlier recorded mortgage), whose mortgage has priority on the property in question. Specifically, Defendant HSBC moved to be dismissed from what apparently was a foreclosure action brought by Fremont (actually, by MERS, as Fremont's nominee), HSBC claiming that its mortgage had priority over Fremont's mortgage.

Question: Which has priority over the other, Fremont's earlier-created, unrecorded mortgage or HSBC's later-created, earlier-recorded mortgage.

Answer: If you said HSBC's mortgage has priority, you may well be wrong. Based on the foregoing facts (which have been assumed to be true in deciding a motion to dismiss), Kings County Supreme Court Justice Herbert Kramer denied HSBC's motion to dismiss, "hold[ing] that a genuine issue of material fact exists as to whether the mortgagee was a bona fide purchaser due to the discrepancies in the closing documents."(1)

For the ruling, see Mortgage Elec. Registration Sys., Inc. v Rambaran, 2011 NY Slip Op 50966(U) (NY Sup. Ct. Kings County, May 23, 2011).

Observations:

1. Inasmuch as attorneys from The Law Division of Fidelity National Title Group., Inc., New York City, represented HSBC in this case, one can reasonably surmise that Fidelity was the insurance company that issued HSBC its mortgagee's title insurance policy (which means Fidelity, along with the agent who ostensibly butchered the closing of the March 30, 2007 transaction, may ultimately be the ones left holding the bag on this apparent screw-up).
2. While apparently not central to Justice Kramer's ruling, Mortgage Electronic Registration Systems played a role in the origination/servicing of both mortgages involved in this controversy. Yet another fine mess MERS finds itself in the middle of.

(1) Justice Kramer begins his analysis by stating that New York follows the (seemingly) universally well-known general rule that, as a 'race-notice' state, an earlier-recorded instrument (ie. HSBC) has priority over a later-recorded or unrecorded instrument (ie. Fremont).

He then refers to what is seemingly a universally unknown (or, at least, not understood) exception to the general rule, in this excerpt:

• However, there are several exceptions carved out of this general rule. For example, a prior recorded mortgage would lose priority to an unrecorded mortgage if the mortgagee had notice, actual or constructive of such a conveyance.
  
  If a purchaser has knowledge of any fact, sufficient to put him on inquiry as to the existence of some right or title in conflict with that he is about to purchase, he is presumed either to have made the inquiry, and ascertained the extent of such prior right, or to have been guilty if a degree of negligence equally fatal to his claim, to be considered a bona fide purchaser. Maiorano v. Garson, 886 N.Y.S.2d 190 [2d Dep't 2009] citing Williamson v. Brown, 15 NY 354, 362 (internal citations omitted).

In the following brief discussion, Justice Kramer sets forth his reasons for denying HSBC's motion to dismiss:

• The defendant, HSBC moves for dismissal on the grounds that the defendant's purported lien was not recorded at the time that HSBC took a mortgage on the subject property. HSBC asserts that it had no knowledge, actual or constructive of the purported lien and therefore a bona fide good faith purchasers/encumbrancers and that the mortgage which they hold has priority.[2]
  
  Plaintiff, in opposition to the motion contends that HSBC is not a bona fide purchaser in good faith because, as discussed above, the closing documents associated with the transfer of the property between Hemant and his daughters conflict. Plaintiff further asserts that the contradiction between the documents raised HSBC's duty to inquire as to whether the transfer was a fraudulent transfer designed to evade Hemant's creditors.
  
  This Court holds that the discrepancies in the closing documents were sufficient to put HSBC on notice to further inquire as to the bona fides of the transaction. No evidence has submitted that HSBC engaged in any additional investigation in light of the discrepancies. Rather, it seems that HSBC simply pushed the documents through without the critical eye which is required in these transactions.
  
  Gone are the days in which closing documents are merely meant to be shuffled and stacked. A lending institution has an affirmative duty to inquire into the bona fides of the documents, prior to taking mortgage on a property. If they fail in that duty their status as a bona fide purchaser is threatened. See, Southwell v. Middleton, 17 Misc 3d 1129(A) [Sup. Kings. 2007].[3] [Where the court held that discrepancies between the closing checks gave rise to a duty to further investigate the transactions].
  
  Accordingly, the motion is denied.