District Judge Eric Vitaliano
JPMorgan Chase’s $280,000 first mortgage financing purchase of debtors’ home was improperly recorded in 2004. Chase’s 2006 $200,000 home equity credit line was secured by a second mortgage on the home. When debtors sought bankruptcy in April 2010, only the second mortgage was properly recorded as encumbering the home. Debtors’ loan repayment obligations under the first mortgage were outstanding. The first mortgage was later corrected, and O’Connell was appointed trustee. O’Connell appealed bankruptcy court’s denial of his motion to avoid the first mortgage as an impermissible post-petition transfer of a bankruptcy estate asset. O’Connell had claimed status, under New York law, as a bona fide purchaser of real property without knowledge of the first mortgage. District court affirmed bankruptcy court, agreeing that trustee O’Connell had constructive notice of the first mortgage given the second mortgage’s reference to the precise amount of its encumbrance. The facts disclosed about the first mortgage in the language of the second mortgage triggered a duty of inquiry in a reasonably prudent person and thus created constructive notice defeating trustee O’Connell’s claim of bona fide purchaser status.
