Security Interests in Real Estate Flashcards
What are recording acts, and why do they exist?
A recording statute governs who wins in the case of multiple interests on a piece of real property. It exists to protect only bona fide purchasers and mortgages (creditors).
Recording statutes do not protect heirs, devisees or donees, unless the shelter rule applies. In a recording statute question, these individuals lose.
Who is a bona fide purchaser?
A bona fide purchaser (BFP) is a person who purchases land for value AND does so without notice that someone else had gotten there first.
When recording a deed or a mortgage, what is the difference between a notice jurisdiction and a race-notice jurisdiction?
Remember two brightline rules:
1) If B is a BFP, and we are in a notice jurisdiction, B wins, regardless of whether or not she records before A does.
2) If B is a BFP, and we are in a race-notice jurisdiction, B wins if she records properly before A does.
**Note: **NY is a race-notice jurisdiction.
How do you know the difference between a notice and a race-notice statute?
Notice statute: “A conveyance of an interest in land shall not be valid against any subsequent purchaser for value, without notice thereof, unless the conveyance is recorded.”
Translation: If, at the time B takes, he is a BFP, he wins. It won’t matter that A may ultimately record first, before B does. It won’t matter, in the A vs. B contest, that B never records. The last BFP to enter, wins!
Race-notice statute: “Any conveyance of an interest in land shall not be valid against any subsequent purchaser for value, without notice thereof, whose conveyance is first recorded.
Translation: To prevail, B must 1) be a BFP and 2) B must win the race to record.
What is the shelter rule?
One who takes from a BFP will prevail against any entity that the transferor or BFP would have prevailed against. In other words, the transferee “takes shelter” in the status of her transferor, and thereby “steps into the shoes” of the BFP even though she otherwise fails to meet the requirements of BFP status.
What is the problem of the wild deed?
Hypo: O sells Blackacre to A, who does not record. Then, A sells to B. B records the A-to-B deed. The A to B deed, although recorded, is NOT connected to the chain of title, because it contains a missing grantor. Therefore, the deed is a wild deed.
If a deed, entered on the records (A to B), has a grantor unconnected to the chain of title (O to A), the deed is a wild deed. It is incapable of giving record notice of its existence.
What is the rule of estoppel by deed?
One who conveys realty inwhich he has no interest is estopped from denying the validity of that conveyance if he later acquires the interest that he previously conveyed.
What is a mortgage? How does one create a mortgage?
A mortgage is the conveyance of a security interest in land, intend by the parties to be collateral for the repayment of a debt.
A mortgage is the union of a debt and a voluntary transfer of security interest in a debtor’s land to secure the debt.
A mortgage must be in writing to satisfy the statute of frauds - this is a legal mortgage (which is called mortgage deed, note, security interest in land, deed of trust, or sale leaseback).
What is an equitable mortgage?
The scenario is: O owns Blackacre. Creditor lends O a sum of money. The parties understand that Blackacre is the collateral for the debt. However, instead of executing a note or mortgage deed, O hands the creditor a deed to Blackacre that is absolute on its face. This is called an equitable mortgage.
As between O and creditor: parole evidence is freely admissible to show parties intent.
Once a mortgage has been created, what are the parties’ rights?
Unless and until foreclosure, debtor-mortgagor has title and right to possession. Creditor-mortgagee has a lien.
All parties can transfer their interests. The mortgage automatically follows a properly transfered note.
How can a creditor-mortgagee can transfer his interest? What is the transferee called?
- Endorsing the note and delivers it to transferee; OR
- By executing a separate document of assignment.
If the note is endorsed and delivered, the transferee is eligible to become a holder in due course.
What does it mean to be a holder in due course?
This means that he takes the note free of any personal defenses that could have been raised against the original creditor.
Personal defenses include lack of consideration, fraud in the inducement, unconscionablity, waiver, estoppel. (basically breach of contract defenses/remedy)
However, the holder in due course is still subject to “real” defenses that the maker might raise:
Material
Alteration
Duration
Fraud in the factum (a lie about the instrument)
Incapacity
Illegality
Infancy
Insolvency.
What criteria must be met in order to become a holder in due course of the note?
- The note must be negotiable, made payable to the named mortgagee;
- The original note must be indorsed, signed by the named mortgagee;
- The original note must be delivered to the transferee - a photocopy is unacceptable;
- The transferee must take the note in good faith, without notice of any illegality;
AND
- The transferee must pay value for the note, meaning some amount that is more than nominal.
What is the effect of foreclosure on various interests on the property?
Foreclosure will terminate interest junior to the mortgage being foreclosed, but will not affect senior interests. This means that junior lienholders will be paid in descending order with the proceeds from the sale, assuming funds are leftover after “full satisfaction of superior claims. Junior lienholders should be able to proceed for a deficiency judgment. But once foreclosure of a superior claim has occured, with the proceeds distributed appropriately, junior lienholders can no longer look to Blackacre for satisfaction.
Those with interests subordinate to those of the foreclosing party are necessary party to foreclosure action. If not joined, his mortgage remains on the land.
Foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to such interest. This means that buyer is NOT personally liable on senior debt, but, as a practical matter, if the senior mortgage is not paid, sooner or later, the senior creditor will close on the land.
What is redemption in equity and what is statutory redemption?
Redemption in equity: Equitable redemption is universally recongized up to the date of sale. At any time prior to the foreclosure sale, the debtor has the right to redeem the land and free it of the mortgage. Once a valid foreclosure has taken place, the right to equitable redemption is gone. It is exercised by paying off missed payment(s) plus interest plus costs. If there is an acceleration clause, it permits the mortgagee to declare the full balance due plus accrued interest plus costs in the event of default.
Statutory Redemption: gives the debtor-mortgagor a statutory right to redeem for some fixed period AFTER the foreclosure sale has occured (typically six months to one year. Where recognized, the amount paid is usually the foreclosure sale price, rather than the original debt. The mortgagor will have the right to possess the property during the statutory period. When a mortgagor redeems, the effect is to undo the foreclosure sale - the redeeming owner is restored to title.
New York does not have a statutory right to redemption.
