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May 20, 2008

1st Circuit BAP Rules on Avoidance of Unrecorded Mortgage

I'm not sure why the 1st Circuit BAP published this as it seems pretty clear cut. 

Riley v. Sullivan (In re Sullivan)  ---- B.R. ----, 2008 WL ------------ (1st Cir. BAP,  May, 2008)

Issue:   May the chapter 7 trustee avoid an unrecorded lien, preserve the lien for the benefit of the estate and at the same time, subordinate the homestead exemption to the rights of the estate even though the time to object to the exemption has expired?             

Holding:      Yes

Judge Votolato

The debtor purchased a home in 2000 and refinanced it with Ameriquest in 2004.  Ameriquest failed to record the mortgage.  The chapter 7 trustee filed a complaint to avoid the lien, preserve the lien for the benefit of the estate and subordinate the homestead exemption to the “estate’s interest in the property.”  The trustee then settled with Ameriquest with Ameriquest conceding it was unsecured.  The trustee then moved for summary judgment which the debtor opposed arguing that the “pleadings amounted to an untimely attempt to object to the homestead exemption.”    He also argued that the estate could not preserve the lien because the settlement made the claim unsecured. 

The court granted summary judgment to the trustee.  The court said that the debtor was trying to undo the settlement to which he had not objected.  It also said “that the Trustee was not objecting to the Debtor’s homestead claim, but was merely seeking to enforce the same rights against the Debtor that the mortgagee had, including the priority provisions of the Massachusetts homestead exemption statute with respect to a lien that predates the homestead declaration.”

The BAP affirmed.  Section 544(a)(3) gives the trustee the rights of a bona fide purchaser “and allows the trustee to invalidate unperfected security interests.”  “under § 551 of the Bankruptcy Code, ‘[a]ny transfer avoided. . . under section 544 . . . is preserved for the benefit of the estate.’”  Under Massachusetts law, the unrecorded lien is enforceable against the debtor.  Also under Massachusetts law, a homestead declaration recorded after a mortgage attaches to property is subordinate to the mortgage.  “As the Trustee correctly noted during oral argument, if the Debtor’s homestead exemption were given priority over the estate’s interest in the property, general creditors would receive nothing.  This would be an illogical result, considering that outside of bankruptcy, as between the mortgagee and mortgagor, American’s unrecorded mortgage would have been satisfied before the Debtor could have received any funds.”

May 20, 2008 in Other Circuit Briefs | Permalink

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