United States Court of Appeals, Eleventh Circuit
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15 Collier Bankr.Cas.2d 1243
In re Fred Daniel HAGENDORFER and Brenda Blanchard
Hagendorfer, Debtor.
UNITED STATES of America, Plaintiff-Appellee,
v.
Charles Michael SMITH, Trustee of the Estate of Fred Daniel
Hagendorfer and Brenda Blanchard Hagendorfer,
Defendant-Appellant.
No. 86-7070.
United States Court of Appeals,
Eleventh Circuit.
Nov. 3, 1986.
1
C. Michael Smith, Paul & Smith, Mobile, Ala., for defendant-appellant.
Cheryl L.P. Crisona, Sp. Atty., U.S. Atty's. Office, Mobile, Ala., for plaintiffappellee.
Appeal from the United States District Court for the Southern District of
Alabama.
Before HILL and HATCHETT, Circuit Judges, and THOMAS* , Senior District
Judge.
DANIEL HOLCOMBE THOMAS, Senior District Judge:
The Trustee brings this appeal following a reversal of a favorable Bankruptcy
Court ruling by the District Court. The debtors in this case are Frederick Daniel
Hagendorfer and Brenda Faye Hagendorfer; the creditor is the United States
Small Business Administration (SBA). The issue before this court is: Where it
is uncontested by the parties that a mutual mistake was made in describing the
real estate which was the security for a mortgage, may the creditor reform the
mortgage to conform to the original intent of both parties even though the
debtor has filed for bankruptcy? In other words, did the recording of a mortgage
with a misdescription of the security, the same misdescription of the real estate
as was found in the debtor's deed, constitute either actual or constructive notice
of the mortgage to an unsecured creditor of the debtor. This Court in
AFFIRMING the District Court agrees that the Bankruptcy Court erred in
concluding that the debtor-in-possession acting as the trustee had no notice,
actual or constructive, of the error in the properly recorded, albeit misdescribed,
mortgage conveyance.
UNCONTESTED FACTS:
6
On April 7, 1978, the debtors executed a promissory note in favor of the SBA
in the principal amount of $122,900.00 at 3% interest per annum. As security
for the promissory note, the debtors executed a mortgage covering the real
property in question as follows:
Parcel I:
7 west half of the southwest quarter of the southeast quarter of Section 29,
The
Township 9 south, range 6 east, Baldwin County, Alabama.
Parcel II:
8 northeast quarter of the northwest quarter of Section 32, Township 7 South,
The
Range 6 East, Baldwin County, Alabama.
9
The April 7, 1978, mortgage was filed for record on April 19, 1978, in Book 13
at Page 838 in the Office of the Judge of Probate, Baldwin County, Alabama.
The description of the real property as set forth on the April 7, 1978, mortgage1
is the same as and was taken directly from the warranty deed to the property
which was filed on January 27, 1977, in the Office of the Probate Judge,
Baldwin County, Alabama. Both the mortgage and the deed misdescribe the
property in Parcel I as being in Township 9, instead of properly describing it as
being in Township 7 where the debtors resided. A bankruptcy hearing was held
on January 4, 1985, to determine the right of the parties to reform the
misdescription of the real estate in the mortgage. Frederick D. Hagendorfer,
who was called as a witness, testified that the first parcel listed on the April 7,
1978, mortgage was incorrect. Hagendorfer told the Bankruptcy Court that the
property should have been described as follows:
Parcel I:
The west half of the southwest quarter of the southeast quarter of Section 29,
10
Township 7 south, range 6, east, Baldwin County, Alabama.
11
(Hagendorfer's correction inserted "7" after township and before south, instead
of "9" as it appeared in the mortgage.) He further testified that it was his intent
to give a mortgage to SBA on the property as correctly described above and not
a mortgage on the property as described in the mortgage. Scott Humphrey, a
SBA employee, testified at the hearing that it was SBA's intent to take a
mortgage on the property in township 7, where the debtors resided, not the
property which was misdescribed as being in township 9 in the mortgage.
Further evidence at the trial showed that the parcel, as described in the
mortgage, would be found in the bottom of the Gulf of Mexico.
Discussion:
12
This is a bankruptcy case, however, Alabama law should be applied to
determine whether a mortgage may be reformed where a mutual mistake
existed at the outset.
Ala.Code Sec. 35-4-153 (1975) provides:
13
[w]hen,
through ... a mutual mistake of the parties ... a ... mortgage ... does not truly
express the intention of the parties, it may be revised by a court on the application of
the party aggrieved so as this can be done without prejudice to rights acquired by
third persons in good faith and for value.
14
The primary requirement of this statute is proving a mutual mistake occurred
between the parties and that the mortgage does not express the true intent of the
parties. Touchstone v. Peterson, 443 So.2d 1219, 1222 (Ala.1983). The
uncontested facts clearly reveal a mutual mistake occurred between the
Hagendorfers and the SBA concerning the legal description of the property on
the mortgage.
15
In Touchstone, the court further held that reformation is generally granted as
against those in privity with an original party if the lien or title was obtained
"with notice of the existing equitable right to reformation." Touchstone, 443
So.2d at 1222. See also, Gilmore v. Sexton, 254 Ala. 560, 49 So.2d 157, 159
(1950). According to Scott v. Thomas, 211 Ala. 420, 100 So. 778, 779 (1924),
reformation will ordinarily be granted where the description is "merely
ambiguous and incomplete, yet sufficient to put on inquiry a person dealing
with the property in question." The court in Touchstone recognized the rule of
law in Alabama, a mortgage will not be reformed where this will result in
prejudicing the rights of a bona fide purchaser, without notice and for value.
Touchstone, 443 So.2d at 1222. The Alabama Supreme Court in Lightsey v.
Stone, 255 Ala. 541, 52 So.2d 376, 381 (1951) gave the following definition of
what constitutes a bona fide purchaser for value and without notice:
16 order to constitute one a bona fide purchaser and entitle him to the protection of
"In
the rule, as against a prior equity or conveyance, it is essential: * * * (1) that he is
the purchaser of the legal as distinguished from an equitable title: (2) that he
purchased the same in good faith; (3) that he parted with value as a consideration
therefore by paying money or other thing of value, assuming a liability or incurring
an injury; (4) that he had no notice, and knew no fact sufficient to put him on inquiry
as to complainant's equity, either at the time of his purchase, or at, or before the time
he paid the purchase-money, or otherwise parted with value * * *."
(Citations omitted and emphasis added)
17
18
The issue which now emerges is did the mortgage containing the erroneous
township description which was properly recorded prior to the existence of the
Trustee's rights as a potential bona fide purchaser or hypothetical judicial lien
creditor, serve as action or constructive notice of said mortgage and/or thrust
upon the Trustee the duty to inquire. Courts in Alabama have long recognized
the duty to inquire beyond the record in certain situations, as was explained in
Stickney v. Dunaway & Lambert, 169 Ala. 464, 53 So. 770, 771 (1911):
19 record of an instrument entitled to registration imparts to such persons as are
The
bound thereby constructive notice of all facts which they could have ascertained by
an actual examination of such record, not only of those recited in the record, but also
of those as to which it reasonably suggests an inquiry, and which would be disclosed
by such inquiry.
***
20
***
21
22
Where
the property conveyed is not described sufficiently to identify it with
reasonable certainty, and there is nothing to put the searcher on inquiry, the record
will not give constructive notice of the conveyance. But the record, although
defective as regards the description of the property, will nevertheless operate as
notice, if sufficient to put a reasonable man on inquiry as to what property was
actually conveyed.
(Emphasis added)
23
24
Section 544 of the Bankruptcy Code, the "strong arm" clause, does not set aside
the Trustee's duty, as a hypothetical judicial lien creditor, to examine the record
of title. Since the Trustee has the duty in Alabama to examine the record, he
may be bound by erroneous, defective or incomplete matters of record, the
discovery of which would lead to further inquiry.
25
In the case at hand, further investigation by any judicial lien creditor or
purchaser of the Hagendorfers' property would have revealed in the chain of
title that the Hagendorfers' deed to the property on which they resided
contained exactly the same error in the township description which appeared in
the SBA's misdescribed mortgage. A thorough examination of the
Hagendorfers' chain of title would have revealed the error in the legal
description of the property and would have put a bona fide purchaser or judicial
lien creditor on notice prior to the time when the debtors filed for bankruptcy.
Conclusion:
26
In conclusion, since constructive notice clearly existed to hypothetical judicial
lien holders and potential bona fide purchasers in this case concerning the error
in the SBA's mortgage, the law in Alabama will permit a reformation of the
mortgage. Under the circumstances of this case, such a reformation would not
prejudice these hypothetical third party's rights. Ala.Code, Sec. 35-4-135
(1975), supra.
27
It is the Court's opinion, the Trustee in this case is seeking rights greater than
those possessed by the debtors and unsecured creditors of the debtors. In view
of this and in light of the prior stated analysis, this Court cannot grant the
Trustee's request.
28
The District Court's Order of December 30, 1985, is hereby AFFIRMED.
Honorable Daniel H. Thomas, Senior U.S. District Judge for the Southern
District of Alabama, sitting by designation
There are more mortgages which have been subsequently filed on the real
estate in question
