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Sixth Circuit Declines to Allow Trustee to Avoid Mortgage That Was Erroneously Discharged - In re Emerson

October 31, 2011

Our Claremont personal bankruptcy lawyers were interested to see an appeals court decision that attempted to take advantage of a bank's own mistakes. In In re Emerson, the Bankruptcy Appellate Panel of the Sixth U.S. Circuit Court of Appeals declined to allow the trustee for Kimberly C. Emerson's bankruptcy to avoid her mortgage. Citimortgage Inc., which held Emerson's mortgage, had properly filed a certificate of discharge with her county, then realized it was a mistake and filed a document rescinding the discharge. When Emerson later filed for Chapter 7 bankruptcy, the trustee filed an adversary proceeding seeking to avoid the mortgage on the grounds that it was improperly re-perfected. The bankruptcy court and the BAP both ruled for Citimortgage.

Emerson granted a mortgage to a predecessor in interest in 2007, and Citimortgage acquired it the next month. In late 2007, Citimortgage filed the certificate of discharge even though Emerson had not paid off the mortgage; it realized its mistake in February of 2008 and filed the rescission. Emerson continued to make monthly payments during this time and up to July of 2009, the month before she filed for bankruptcy. Her bankruptcy trustee filed an adversary action to avoid the mortgage. He said the rescission was legally inadequate because Emerson did not sign the document. Thus, as a hypothetical purchaser, he argued, he should have priority. After cross-motions for summary judgment, the Michigan bankruptcy court found for Citimortgage. The trustee appealed.

The BAP upheld the decision, finding no legal problems with the rescission document. Michigan law allows mortgages to be reperfected, it noted, though it gives less deference to mortgagees whose own negligence causes the problem. Nonetheless, it found that in this case, Citimortgage had solved the problem it caused well before the bankruptcy was filed. It concedes that the mortgage may have been avoidable before the rescission was filed, but the bankruptcy came more than a year later The discharge never changed the obligation between Emerson and Citimortgage. Any potential purchaser who cared to look at the record would be able to see this and have fair warning about the chain of ownership. This is enough to satisfy Michigan law, the court said. Thus, it agreed that the trustee could not avoid the mortgage.

We don't frequently see mistaken discharges of mortgages. But as Yorba Linda consumer bankruptcy attorneys, we very frequently see mistakes by mortgage lenders. Most often, these mistakes benefit the lender, so they are not well investigated or quickly corrected. However, the economic downturn and bursting of the housing bubble have raised the stakes for everyone, so these mistakes are more and more often making their way to court. In cases of extreme negligence or outright law-breaking, such as with robo-signing, some courts have been willing to sanction lenders that flagrantly decline to correct or investigate mistakes in their favor. Less often, lenders may be forced to suffer the consequences of their own mistakes, by having a foreclosure cancelled or losing property interest in a home. These circumstances aren't present in every bankruptcy case, however, so it's vital that you talk to an experienced Los Angeles County bankruptcy lawyer about the specifics of your case.

If you're considering bankruptcy as a way to deal with overwhelming debt or mortgage problems, Howard Law, P.C., can help. For a case evaluation, send us an email or call 1-800-872-5925.

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