In a recent opinion, the U.S. Bankruptcy Court for the District of Oregon says that recording an “assignment” of a deed of trust is not always sufficient to perfect an interest in the real property.
Back in the heady days just before the Great Recession, a real estate speculator (“Speculator”) engaged in a series of transactions related to residential property in Oregon (the “Property”). Speculator sold the Property to Buyer 1 who, pursuant to a seller financing arrangement, executed a promissory note and deed of trust in Speculator’s favor. The deed of trust was recorded (“DOT1”).
Speculator then borrowed money from an investor (“Lender”) and executed a promissory note in Lender’s favor and an assignment of DOT1 (together with the note it secured) in favor of both Speculator and Lender.
Buyer 1 defaulted, and Speculator took back ownership of the Property in connection with the default. He then negotiated to sell the Property to Buyer 2 and, again, to take back a promissory note and deed of trust pursuant to a seller financing arrangement. Lender agreed to release his interest in DOT1 to facilitate the sale, taking a similar interest in the new transaction with Buyer 2.
The sale closed in early 2010, and Buyer 2 executed a promissory note (the “Note”) and deed of trust in Speculator’s favor (“DOT2”). Shortly afterward, an assignment of DOT2 (which also assigned the Note) was recorded in favor of Speculator and Lender. Buyer 2, like Buyer 1, did not perform, but quit claimed the Property back to Speculator (as a sort of deed in lieu of foreclosure). Speculator (who was himself by then in default under his own obligation to Lender) did not tell Lender about the quitclaim. In 2015, Speculator commenced a Chapter 7 bankruptcy.
Speculator’s Chapter 7 trustee filed suit against the Lender. The theory? Under Section 544 of the U.S. Bankruptcy Code, the Trustee acts as a “bona fide purchaser of real property” and was entitled to a determination that Lender, notwithstanding the assignment of DOT2, was unsecured.