Poorly-Baked Cakes, Collapsing Buildings, ... & Unperfected Mortgages Challenged By Bankruptcy Trustees

From the blog Bankruptcy-RealEstate-Insights.com:

• “Whether one is baking a cake, building a house, or recording a mortgage, sometimes even the slightest deviation from the directions can lead to catastrophe. Cakes don’t rise, buildings fall down, and … mortgages aren’t perfected.”(1)  So starts the opinion in Couillard.
  
  The Coulillards refinanced a purchase money mortgage. The legal description attached to the refinancing mortgage included an easement parcel, but omitted the two principal parcels. A couple of months after the mortgage was recorded, an “affidavit of correction” to correct an “error” in the mortgage legal description was recorded that attached the missing parcel descriptions. A few years later the Couillards filed bankruptcy.
  
  The bankruptcy trustee brought an adversary proceeding to avoid the mortgage using the “strong arm” powers under Section 544(a) of the Bankruptcy Code. Specifically, this section allows a trustee to assert the rights of a hypothetical bona fide purchaser of real estate that has perfected the property transfer (i.e. recorded a conveyance document) as of the commencement of the bankruptcy case.
  
  Under applicable state law, a conveyance that is not recorded is generally void as against a subsequent purchaser who records first.
  
  Outside of bankruptcy, there is generally an exception if the purchaser has either actual or constructive notice of unrecorded claims.
  
  However, in exercising a purchaser’s rights in bankruptcy, a trustee is subject to only constructive notice, not actual notice. Under applicable state law regarding constructive notice, purchasers are deemed to have notice of claims that are revealed by use or occupancy of the property or by a review of the “chain of title (i.e., the records in the office of the register of deeds and other public records)” for the property.
  
  So, this case turned on whether the Section 544(a) hypothetical purchaser would have had constructive notice of the refinancing mortgage based on a combination of the defective mortgage and the corrective affidavit.

For more, see Mortgage Errors - How Not to Correct a “Boo-Boo."

For the court ruling, see Seelen v. Couillard (In re Couillard), 486 B.R. 466 (Bankr. W.D. Wis. 2012).

(1) The court continued by noting that, outside the bankruptcy context, the bankster's error may not have been a big deal, but within a bankruptcy proceeding, it's a completely different story:

• In this case, a lender made a mistake in recording its mortgage and then attempted to fix the problem. But for the debtors’ bankruptcy, the error might have been considered inconsequential.
  
  However, the bankruptcy trustee believes that the mistake invalidates the lender’s mortgage as against a subsequent purchaser under state law and brought this adversary proceeding to avoid the mortgage pursuant to 11 U.S.C. § 544(a).

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By the way, the court's use of hyperbole associating a mortgage screw-up with the catastrophe of a fallen building or an uncooperative cake is addressed in footnote 1 of the opinion:

• Yes, in the grand scheme of things, not quite as dramatic as a collapsing building, but nonetheless upsetting for the creditor who suffers such a fate. The trauma associated with poorly baked cakes, meanwhile, is proportionally related to the importance of the event involved.