4th Circuit: Sun Trust v. Northen- Neither Actual Knowledge nor Constructive Knowledge based on the Stand of a "Competent Title Examiner" is relevant in Avoidance of Mortgage under 11 U.S.C. § 544(a)(3)

Summary: The Debtors pledged two properties to Sun Trust as collateral for a Deed of Trust.  The Deed of Trust when recorded, however, was only indexed with the Orange Register of Deeds under the Parcel Identifier Number ("PIN")  for Parcel II and not Parcel I.  (Orange County, unlike the other 99 counties in North Carolina, which index under a grantor/grantee system based on Deed Book and Page, give every parcel of real property a unique PIN.  This PIN is used as the basis for indexing all recorded documents related to that property.) After the Debtors were involuntarily filed in a Chapter 7 bankruptcy, the Trustee avoided the Deed of Trust held by as to Parcel I. Both before the bankruptcy court and also on appeal,  Sun Trust argued that "a competent title searcher, upon examining the deed of trust for Tract II, would have discovered Tract I as a result of such examination," because the text of the deed of trust created liens on both Tracts I and II. SunTrust also argued that a search of the unofficial grantor/grantee index would have "revealed the existence of the SunTrust Deed of Trust as a lien against both Tracts I and II." Affirming both te bankruptcy and district courts, the 4^th Circuit rejected this argument because for the Trustee, acting under 11 U.S.C. § 544(a)(3), actual knowledge of the mortgage was irrelevant and only "determined by whether, under state law, a bona fide purchaser of the property would have taken the property subject to the lien." Since North Carolina is a "pure race" state when it comes to the recordation of real estate documents and "[i]f a prior lien is not properly recorded in accordance with the system, then the[bona fide] purchaser can count on taking property as if no lien exists, even though the purchaser may have knowledge that an earlier lien had been created." The Court of Appeals also held the argument that either actual notice of the Deed of Trust or that "a competent  title searcher" would have found the Deed of Trust was irrelevant.  Under North Carolina law "compliance with North Carolina’s real property recording system is the only way to provide constructive notice of a lien to subsequent purchasers."  (Emphasis in the original.) Commentary: The 4^th Circuit, citing to Turner v. Glenn, 18 S.E.2d 197, 201 (N.C. 1942), states that   "[i]t is necessary in the progress of society, under modern conditions, that there be one place where purchasers may look and find the status of title to land."  This statement should serve as an opening salvo in any attack on MERS in North Carolina, likely the rest of the Circuit and hopefully the country. For a copy of the opinion, please see: Sun Trust v. Northen- Neither Actual Knowledge nor Constructive Knowledge based on the Stand of a “Competent Title Examiner” is relevant in Avoidance of Mortgage under 11 U.S.C. § 544(a)(3).PDF