Vincent Howard and our team of Redlands foreclosure defense lawyers were pleased to see another appeals court ruling penalizing the mortgage industry for sloppy paperwork. In McCormick v. Northen, the Fourth U.S. Circuit Court of Appeals upheld a ruling allowing a trustee to avoid a lien on a North Carolina property whose deed of trust was never properly recorded. Debtor John McCormick owned two tracts of land in Orange County, N.C., called Tract I and Tract II, and borrowed against them from SunTrust Bank. When the deed of trust for that loan was submitted, it included the county's Parcel Identification Number only for Tract II, effectively leaving the other tract out of the loan. SunTrust argued that the trustee had constructive knowledge of the lien, but the bankruptcy court, district court and Fourth Circuit all ruled that this was insufficient.
The original deed for both tracts was properly recorded, with a separate PIN for each tract. Orange County also maintains an unofficial registry that does not use PINs. In 1999, when McCormick borrowed from SunTrust, the deed was officially recorded only as to Tract II. In 2004, McCormick borrowed money from Marc and Maryann Macky, using parts of Tract I as collateral, and this was properly recorded with the county. When McCormick was placed under involuntary bankruptcy in 2006, the trustee sold all lots within Tract I and made the proceeds available for repayment of liens. He then moved to avoid SunTrust's lien as improperly recorded, which would benefit the Mackys. All parties agreed that a searcher of the Orange County PIN index would have found no SunTrust lien on Tract I, but SunTrust argued that the deed of trust for Tract II and the unofficial index would have led such a person to Tract I. The bankruptcy court rejected this, finding that North Carolina law gives priority to the first person to record an interest. The district court affirmed.
The Fourth Circuit affirmed that judgment again. It started by noting that the trustee stands in the shoes of a bona fide purchaser, who would not have found SunTrust's lien on Tract I in a search made at the time of the bankruptcy. The trustee further argued that his actual knowledge of the lien is irrelevant under bankruptcy law, because the code gives him the rights of a bona fide purchaser. And under North Carolina law, he said, a bona fide purchaser would not have taken Tract I subject to the lien. The Fourth agreed. State law does not permit lienholders who did not properly record their liens to jump ahead of those who did, even when they had the earlier liens. Actual or constructive knowledge of the unrecorded lien is irrelevant, the court said. Furthermore, the court said, a bona fide purchaser would have no reason to review the paperwork for Tract II and thus discover that the loan should have included Tract I. Thus, it upheld the lower courts.
Vincent Howard and our Santa Ana foreclosure defense attorneys frequently handle cases in which sloppy paperwork by banks works against borrowers, including cases involving lost paperwork, bureaucratic mix-ups and many other factors that can lead to incorrect denial of a loan modification. Very often, nobody but the borrower notices or cares until the borrower wises up and files some kind of action in court, allowing a judge to examine the evidence. That's why it's refreshing to see SunTrust penalized in this case. Since the 1990s, large mortgage lenders have increasingly ignored county land recording systems in favor of a system of their own devising called MERS, which is a proprietary database held by a private company and is not open to the public. MERS has been convenient to banks that wish to freely trade mortgages, but Vincent Howard and our San Diego foreclosure defense lawyers are starting to see more and more cases in which over-reliance comes back to haunt banks.
Howard Law, P.C., represents clients across California who are fighting to hold on to their homes despite indifference or active obstruction by their loan servicers. To learn more or set up a consultation, call us today at 1800-872-5925 or send us a message through our website.