Mis-Indexed Mortgage Is Valid Lien
A Federal District Court in New York explains how a bankruptcy trustee can be bound by a mis-indexed mortgage in O’Connell, as Trustee v. JPMorgan Chase Bank National Association, No. 12-CV-1951 (ENV) (E.D.N.Y. December 11, 2012).
The Bank had been given a First Mortgage that correctly described the encumbered property. The mortgage was recorded but improperly indexed under the New York City block and lot indexing system. A subsequent mortgage to the same Bank on the same parcel was properly recorded containing “multiple and unmistakable references to the existence of a prior lien” and “specifically acknowledges an 'existing obligation [having] a current principal balance of approximately $275,374.’” Based on the improper indexing, the Bankruptcy Trustee instituted an adversary proceeding to avoid the First Mortgage pursuant to 11 U.S.C. 544(a).
The Court affirmed the Bankruptcy Court’s determination that “the Second Mortgage's reference to the existing First Mortgage encumbrance and of its precise amount. .. would ‘excite’ the suspicion of an ordinarily prudent person and trigger an inquiry into possible adverse interests. .... [T]o the extent a purchaser ignores those facts he would be guilty of a degree of negligence that is fatal to an assertion of bona fide purchaser status."
The Trustee had argued that RPL §291-e precludes a duty to inquire about a mis-indexed recited conveyance. The Court swept this aside, pointing out that the Trustee cannot meet the “good faith” standard required by §291-e by “closing his eyes as to what the Second Mortgage revealed.”
COMMENT:
Constructive Notice takes issue with the Court’s analysis of the §291-e argument. By its terms, §291-e applies to a recital that “fails to identify the premises previously conveyed ... in any other manner than by indicating that a conveyance or contract has previously been made....” In O’Connell, the recitals in the Second Mortgage clearly identified the property and the First Mortgage in specific terms, rendering §291-e inapposite to the case. “Good faith” shouldn’t even enter the discussion.