Bankruptcy trustee may avoid mortgages not in recordable form

In the case of In re Partin, the Bankruptcy Court of the Eastern District of Kentucky determined in a Chapter 7 case the bankruptcy trustee could avoid three bank mortgages that were not in recordable form when they were accepted for recording and improperly recorded by the County Clerk.

Background and procedural history

The mortgages were signed in 2005 and 2006. They were recorded in Jessamine County, Kentucky, and covered three separate properties owned by the debtor in Nicholasville, Kentucky. The mortgages were prepared using identical form documents except for modifications to insert information specific to each loan, such as the relevant dates, numbers and legal descriptions for each of the encumbered properties.

The mortgage form contained a section for the bank to insert detailed information describing the terms of the promissory note or other underlying debt obligation, such as the borrower's name, the note amount, interest rate, maturity date and other terms. The bank inserted handwritten information that only provided the maturity date to identify the notes that were secured by each mortgage.

The trustee filed proceedings with the bankruptcy court to "avoid" the mortgages, arguing that they were not properly recorded under the applicable Kentucky recording statute.

Federal bankruptcy law provides bankruptcy trustees with certain avoidance powers that allow them to undo certain prepetition and postpetition transactions. The purpose behind these avoidance powers is to permit the trustee to recover property or interests transferred by the debtor as a means of maximizing the value of the bankruptcy estate for the benefit of the creditors and to obtain a more equitable distribution for creditors.

The bankruptcy court's ruling

The bankruptcy court agreed that the mortgages were improperly recorded under Kentucky law. The plain language of the Kentucky recording statute states that a mortgage must include both the date and maturity of the underlying debt obligation in order to make the mortgage properly recordable. In this case, the three mortgages did not include the date of their underlying notes. The mortgages not only failed to provide this information, but also omitted any information that could be used to calculate the date of the notes. The county clerk should not have recorded the mortgages and should have refused to accept them for recording.

As a result the court determined that the trustee had priority over the mortgages and could avoid them under federal bankruptcy law.

Contact an attorney

Individuals struggling with debts and possible bankruptcy are urged to seek the advice of a competent attorney, experienced in such matters, in order ensure that their legal rights are protected.