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Technical Errors In Mortgage Language May Not Be Fatal

On August 2, 2007, Judge Philip Simon of the Northern District of Indiana, Hammond Division, issued an opinion about the impact of a mortgage that incorrectly defined the borrowers.  See, In Re:  Camp, 2007 U.S. Dist. LEXIS 57292 (N.D. Ind. 2007) (CampOpinion.pdf).  Judge Simon’s opinion discusses some of the general rules applicable to Indiana mortgage instruments, and there are lessons to be learned from the case.

Background.  Only husband signed the note.  But, both husband and wife executed the mortgage as “borrowers.”  Husband subsequently filed a Chapter 13 petition for bankruptcy, and the assignee of the note and mortgage filed a secured claim in the bankruptcy proceeding.  Husband-debtor argued that the secured claim should be avoided because the mortgage was invalid.  He wanted the property to be free and clear of all liens.  The legal basis of his argument was that the mortgage did not sufficiently describe the debt it purported to secure. 

Bankruptcy context.  11 U.S.C. § 544(a)(3) governed the ruling.  The two specific issues were (1) whether the debt was adequately described in the mortgage and (2) whether the mortgage provided constructive notice to a bona fide purchaser as required by federal bankruptcy law.  (11 U.S.C. § 544 (a)(3) is known as the “strong-arm statute”.)  Generally, an encumbrance can be avoided if a bona fide purchaser would not have constructive notice of it.

Indiana mortgage laws.  Here are some of the relevant Indiana statutes and common law rules:

1.  Ind. Code § 32-21-4-1 provides that constructive notice is given by a properly-recorded instrument.

2.  I.C. § 32-21-2-3 states that a mortgage must be acknowledged by the grantor to be recorded.

3.  I.C. § 32-29-1-5 sets forth the requirement for a form mortgage.  Among other things, the mortgage must describe the debt sought to be secured, and it must be dated and signed, sealed and acknowledged by the grantor. 

4.  The mortgage must be properly acknowledged and recorded to provide constructive notice to subsequent purchasers.  The mortgage must be recorded in the proper county and must contain an accurate legal description of the property. 

5.  The mortgage must be in the chain of title.

6.  In Indiana, the recording of a document not entitled to be recorded (due to statutory violations) does not afford constructive notice.  Exceptions to this general rule could include, for instance, a mortgage that omits the preparer’s name.  Although technically in violation of I.C. § 36-2-11-15(b) , constructive notice is still afforded because the defect “was not one which would have been fatal to a conveyance or encumbrance.  Thus, a title searcher wishing to verify the legal title of the property would have found all the formalities necessary to prepare a valid conveyance or [encumbrance].”  Camp at 8.

Camp technicality.  The mortgage indicated that husband and wife collectively were the “borrower.”  Actually, only husband executed the note.  This error breached the statute requiring a proper description of the debt.  I.C. § 32-29-1-5.  The question for the Court in Camp was whether this statutory violation defeated constructive notice or whether it was, in the final analysis, immaterial.  Here is what a prior Indiana opinion stated:

  The description in the mortgage of the indebtedness secured
  need not be literally accurate, but must be correct so far as it
  goes, and full enough to direct attention to the sources of correct
  information in regard to it, and be such as not to mislead or
  deceive, as to the nature or amount of it, by the language used.

Pioneer v. First Merchants, 349 N.E.2d 219, 222 (Ind. Ct. App. 1976). 

The mortgage in question “complied with almost all of Indiana’s statutory requirements.”  Camp at 9.  It expressly stated that an encumbrance (by virtue of the note) existed on the property.  The Court found that “any bona fide purchaser would have constructive notice of the existence of the Note and its amount - - the most important aspects of the debt - - even if the defined executor of the Note was incorrect.”  Id.  The Court further concluded that a bona fide purchaser then would have a duty to inquire into the substance of the note and, ultimately, would find that the note and the mortgage were signed on the same day, stated the same amount, described the same lender and included the same repayment date.  Accordingly, the mortgage passed the operative test:  a proper examination of the record would have led a reasonable man to conclude that the property to be mortgaged was subject to a prior encumbrance.  As such, the husband-debtor’s objection to the mortgage lender’s secured claim was overruled.

Be careful.  Sometimes technical errors will be fatal.  Sometimes they won’t.  Fortunately for the lender in Camp, other accuracies in the loan documents trumped the isolated inaccuracy.  Despite the ultimate victory, however, it appears much time and effort went into litigating the issue.  Aside from the obvious lesson that not all language errors will be fatal to a mortgage lien, perhaps a more important lesson is that the loan documents on the front end of a deal should be perfect.  Time and legal fees would have been saved had the borrower been described properly.  A simple, innocent oversight I’m sure, but a costly one nonetheless.