The Shelter Rule in Action
A distressingly common set of facts has given a New York appellate court reason to invoke the “shelter rule,” whereby a grantee whose seller was a bona fide purchaser will also be protected as a bona fide purchaser, even if the grantee would not otherwise qualify as a BFP. Wachovia Bank, N.A. v Swenton, 2015 NY Slip Op 08728 (Second Dept., Nov. 25, 2015).
Swenton executed a mortgage in 2004. The mortgage wasn’t recorded until September 1, 2006. In the interim, Swenton conveyed the property to Rosati by deed recorded on February 24, 2006. Rosati then conveyed to Island Properties by deed recorded on May 26, 2006. Island Properties then conveyed to Sotomayor by deed recorded on January 31, 2007 (five months after the mortgage). The Lender foreclosed in May 2007 without joining Sotomayor as a defendant. Sotomayor then moved to vacate the judgment, intervene and interpose a meritorious defense. The trial court denied the motion.
Relying on a 73-year-old precedent, the Second Department reversed. It held that Sotomayor has a meritorious defense to the action “if she can establish that Rosati and/or Island Properties were bona fide purchasers for value who did not have notice of the … mortgage when the property was conveyed to them. […] To not allow the bona fide purchaser for value who acquires title without notice of an unrecorded and unsatisfied mortgage to convey good title would be to prevent him or her from being able to sell the property.”
The appellate panel seems to have assumed Sotomayor would not have qualified for BFP status since her deed was recorded after the mortgage. The recited facts however, make clear the mortgage was not recorded until long after the mortgagor (and the mortgagor’s transferee) had conveyed the property. Under the grantor/grantee indexing used in the jurisdiction, Sotomayor would not have been on constructive notice of the mortgage. Hence, unless she had actual notice of the mortgage or failed to give consideration for her deed, she may be able to argue for BFP status in her own right.