Monday, April 29, 2013

NC Bankruptcy Court: Wrong Date On Loan Paperwork Not Necessarily Enough To Invalidate Mortgage; Sloppy Bankster Dodges Debt-Fatal Bullet Over Screw-Up, Breathes Sigh Of Relief

From the blog

  • A deed of trust defined the secured indebtedness as a note and related documents, together with future advances. “Note” was defined as “the promissory note dated September 7, 2005, in the original principal amount of $675,000 from Grantor to Lender.” The note was actually dated September 8 (vs. 7).

    After filing a chapter 11 bankruptcy proceeding, the debtor brought an adversary proceeding against the lender claiming that the deed of trust was invalid and unenforceable because it referenced a note dated September 7, 2005, when no note of that date existed. Mortgages have been avoided for less.
  • In pursuing a fact specific approach to this case, the court considered (1) whether the mortgage was sufficient to put subsequent purchasers on notice, (2) whether the obligations were intended to be secured by the parties, and (3) whether there was any concern about a “fraudulent substitution” of “fictitious debts.”

    Since the description included a number of facts regarding the note (the borrower, the lender, the loan number, the commitment letter associated with the loan, the collateral, future advances of up to $675,000, etc.), the court concluded that no one would have been misled as to the identity of the secured obligations. While acknowledging that an incorrect date could be fatal, the court found that this was not such a case.(1)

    As discussed in prior blog posts (see, for example, Mortgage Legal Descriptions: When Is a “Boo-Boo” Fatal (Round 1)? and Bankruptcy “Strong Arm” Powers: Bye Bye Mortgage), even minor errors in a mortgage can result in avoiding the mortgage in a bankruptcy.

    In this case the lender prevailed. However, the minor error of identifying a September 8 note as a September 7 note was enough to result in litigation that took eight months to resolve. I expect all will agree that it is better not to make mistakes in the first place.
For more, see The Continuing Saga of Mortgage Errors- Not All “Boo-Boos” Are Fatal.

For the bankruptcy court ruling, see The Willows II, LLC v. Branch Banking & Trust Co. (In re The Willows II, LLC), 485 B.R. 528 (Bankr. E.D.N.C. January 10, 2013).

(1) On this point, the court stated:
  • [A] discrepancy of even one day in date, such as the case in Head Gradingmay render the deed of trust invalid if it does not contain enough information specifically identifying the underlying note.

    However, the amount and specificity of information contained within this Deed of Trust that accurately references the Note provides the court with a sufficient basis to conclude that the Note is the obligation intended to be secured by the parties, even though it incorrectly references a note executed one day prior to the date of the Note.

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