Second mortgage legalese glitch

[Vandervecken]

In my Chapter 7, I have a rental house I’m planning to redeem. I’ve discussed the “why” in another thread, but keeping this property is important for a number of reasons. The rental house has two mortgages on it:
1) A regular mortgage through a mortgage servicer.
2) A second mortgage to my mother. She loaned me money for an emergency; since she didn’t trust my ex-wife, my mother wanted a lien to guarantee I would make the payments.

As far as the second mortgage: my mother got a simple form from an attorney she indirectly knew (friend of a friend of a friend) and we signed, notarized it and she recorded it with the county. I’ve made the payments all along (cleared checks for proof, she declared the interest on her 1040 tax form.) But now, the trustee has found a technical fault with the second mortgage.

Here’s the legalese: the mortgage bears a Jurat but not an acknowledgement. It was recorded on 12/7/2012. Arkansas law allows a Jurat in place of an acknowledgement on mortgages recorded after 4/8/2013. The trustee contends the county clerk should not have allowed the document to be recorded and is therefore defective. I assume he wants to void it in order to get as much money as possible to the estate.

I haven’t told my mother about this yet; the person who provided the form we signed has passed away. The form does not have a clause allowing us to fix any defective clause and re-record it, and I’m not sure if my state’s law allows it by default. I'm not an attorney, so I don't know the ramifications: is this a slam dunk for the trustee? Or is the trustee just shaking the trees to see what falls out?

Any thoughts or suggestions? Thanks!

[justbroke]

If there's a defect in the "perfection" of a lien or title, and a Trustee finds it, you can't go back and fix it. The Trustee assumes all transfer powers immediately upon filing. This type of defect, in ownership of property, is exactly the thing a keen Trustee will almost always discover. The section of the bankruptcy code that allows the Trustee to wage war is 11 USC 544. The Trustee can wiggle his/her way in as a hypothetical lien creditor.

Since your parent's lien appears to be defective, this Trustee's lien would be superior to that lien. I think that despritfreya informed you in the prior thread that it's a slam dunk for the Trustee because they are no longer in the position of getting a feel for this. The Trustee has an actual controversy and you even concede that the title is defective. (What did your attorney say about the defective title? There's a lot of caselaw around defective titles and bankruptcy and this is a big area where Trustee's earn their keep.)

Your question is really answers the same as what Des wrote last time:

1. You settle with the Chapter 7 Trustee for a sum certain and the Trustee files and notices out a Rule 9019 Compromise Settlement Motion or

2. You are unable to agree on a dollar amount you can afford and discuss with your attorney if you can convert to a Chapter 13. this potential option is not really desirable.

There's probably a third option and that is to let the Trustee "administer" the asset and see where the cards fall. Your parent would need to file a claim in the bankruptcy and hopefully is the largest creditor (so would receive more from any sale).

Is the Trustee shaking trees? No, the Trustee now believes they have a lien on the tree. They don't want the tree as they'd rather have cash, but it doesn't matter to them how they get the cash.

Has the Trustee filed an Adversary Proceeding (AP/complaint)? Or, is it just your attorney and the Trustee (trustee's attorney) still talking?

[Vandervecken]

You're right, Des had already given me the answer to this...it's been a few weeks and I'm brain dead today for some reason. Des, my apologies to you!

At this point, it's been a month and nothing has really changed. Docket shows nothing has been filed. My attorney had a family emergency a couple of weeks ago Since all the deadlines on my case have been moved out to May, I suspect my attorney is working her cases with immediate needs first.

It's just frustrating.

[LadyInTheRed]

I think your mother should consult with an attorney about fighting the theory that the use of a jurat invalidates the lien. In my opinion as a notary, a jurat is stronger than an acknowledgement because it means that the notary saw the document being signed and the signer swore to the accuracy of the contents. An acknowledgement does not require the document be signed in front of a notary or an oath. Just because the law was not clear that a jurat is okay at the time the document was recorded does not mean a court wouldn't find that the lien is valid.

I believe despritfreya assumed the lien was invalid when he answered this question. You didn't say what the defect was in that thread. I would be interested to hear what he thinks. I suspect there is no clear answer unless the law in the state specifically said a jurat is unacceptable or there is on point case law in your state.

[despritfreya]

To all,

I will review this over the weekend and respond accordingly.

Des.

[Vandervecken]

To all,
I will review this over the weekend and respond accordingly.
Des.

Des, thank you VERY much!

[despritfreya]

I own a rental house that has positive, non-exempt equity. . . My mother (holds) a second mortgage on the house. . . It is recorded with the county clerk and I have made payments on it for years. . . The trustee found a technical glitch in the legal language of the mortgage and he believes it was not perfected correctly. The mortgage bears a Jurat but not an Acknowledgment. (Prior to April, 2013 both were required. The mortgage is date prior to the change in the law). . The form does not have a clause allowing us to fix any defective clause and re-record it. . .

　
Mortgages recorded prior to April, 2013 had to use a form containing both a Jurat and an Acknowledgment. Mortgages recorded after April, 2013 were ok with just the Jurat. What you have is a scrivener’s error because the wrong form was used. The question becomes whether or not a bk court will allow that type of argument defeat the Trustee’s rights as a hypothetical judgment creditor. .

I believe the following case gives you the answer:

In re Beene, 354 B.R. 856 (Bankr. W.D. Ark., 2006) which you can read at:

https://casetext.com/case/in-re-beene-1

Have your attny Shepardize the case to see if there have been any decisions contrary to it.

In addition, there is another issue that screams that you settle this. If your mom is relegated to an unsecured status all payments made to her within the one year prior to filing could be recoverable by the Trustee as a preference. You need to get this matter settled and settled quickly.

Des.

[Vandervecken]

Des, thank you VERY much for this fantastic analysis and research! You're right, it's time to settle this.

Thank you again!