Bad Legal Description Results in Mortgage Being Avoidable

House for saleThe following is a summary of a Minnesota bankruptcy case or a case relevant to Minnesota bankruptcy law.

Minnesota Bankruptcy Case:

Iannacone v. Household Indus. Fin. Co., (In re Stepka), 425 B.R. 820 (Bankr. D. Minn. 3/15/10) (O’Brien, J.).

Case Summary:

Bad Legal Description Results in Mortgage Being Avoidable

The trustee sued the debtors and Household Industrial Finance Co. to avoid a transfer of property pursuant to 11 U.S.C. §§ 550, 551, and 554(a)(3). In 2005, the debtors had refinanced their home with HIFC. The mortgage contained an incorrect legal description for the property. In 2006, the debtors borrowed more money from HIFC, granting them another mortgage that contained the same incorrect legal description. The debtors argued that because the mortgage contained an incorrect legal description, no avoidable transfer occurred, and they should be able to claim $300,000 in value as exempt homestead. The debtors moved for summary judgment, and the court granted summary judgment in favor of the trustee.

The court followed Vondall v. Household Indus. Fin. Co. (In re Vondall), 364 B.R. 668 (B.A.P. 8th Cir. 2007), which found that under Minnesota law, an erroneous description of the property to be mortgaged rendered the mortgage ineffective to give notice to a bona fide purchaser. Because the debtors’ mortgage contained an erroneous description of the property, the bankruptcy court found that the trustee was entitled to avoid the transfer. However, because the debtors had intentionally and voluntarily transferred their interest in the property for the refinancing, they were not entitled to exempt the transferred interest.

Credit: The preceding was a summary of a case relevant to Minnesota bankruptcy law. The case summary was prepared by the U.S. Bankruptcy Court through Judge Robert J. Kressel & attorney Faye Knowles.