Consumer Finance Insights
February 13, 2017

Mass. Bankruptcy Court: Mortgage with Incorrect Legal Description Is Avoidable by Chapter 7 Trustee

On January 4, 2017, the United States Bankruptcy Court for the District of Massachusetts found that a Chapter 7 Trustee could avoid the debtor’s mortgage and preserve it for the benefit of the bankruptcy estate.  The opinion, Eastern Bank v. Benton (In re Thomas H and Nancy C. Benton), Adv. P. No. 16-1101, 2017 Bankr. LEXIS 11, 2016 WL 53581 (Bankr. D. Mass. Jan. 4, 2017), concerned debtors who owned a home in Marstons Mills, Massachusetts and a condominium in Hyannis, Massachusetts.  Prior to filing their Chapter 7 bankruptcy petition, the debtors had obtained a home equity loan from Eastern Bank.  While the loan agreement identified the collateral as the debtors’ home at Marstons Mills, the mortgage description identified the collateral as the Hyannis property.

Upon filing of the bankruptcy petition, the bank filed an adversary proceeding seeking to reform the mortgage.  The Chapter 7 Trustee filed a counterclaim seeking to avoid the mortgage and preserve it for the benefit of the bankruptcy estate.  The bank argued that the counterclaim lacked merit because the Chapter 7 Trustee is charged with constructive notice of the mortgage because it was properly recorded as a matter of law.  The bank conceded, however, that the granting clause in the body of the mortgage described the debtor’s home by street address but contained the property description of the Hyannis property.  The Bankruptcy Court granted summary judgment to the Trustee, relying on the ruling in Bank of N.Y. v. Sheeley, No. 3:13-cv-136, 2014 WL 1233094 (S.D. Ohio March 25, 2014).  In Sheeley, the District Court reaffirmed the bankruptcy court’s finding “that the street address on the mortgage, when it conflicts with a more specific legal description incorporated by reference in the mortgage, fails to provide constructive notice of a bona fide purchaser of the encumbrance.”  Accordingly, the Chapter 7 Trustee was allowed to avoid the mortgage.

The decision in Eastern Bank is a useful reminder that lenders must make certain that the street address referenced in the mortgage matches the metes and bounds description (legal description), as the legal description is what courts will rely upon in providing constructive notice of the mortgage to a bona fide purchaser of the property.