Sunday, July 17, 2011

FYI: 6th Cir BAP Confirms Incorporating Legal Description by Reference Into Mortgage Document

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Sixth
Circuit recently confirmed the validity of a mortgage where the property
description is attached as an exhibit to the mortgage, rather than
providing a full property description within the mortgage document.

A copy of the opinion is available at:

The debtor granted a mortgage in favor of American General Home Equity,
Inc. ("American General") to secure indebtedness of $132,897.86. In the
space provided for property description, the mortgage read "see EXHIBIT
'A.'" The page following page containing the debtor's signature was
marked "EXHIBIT A LEGAL DESCRIPTION," and contained a full legal
description of the property. That page was attached and recorded with the
mortgage. The debtor subsequently filed a Chapter 7 bankruptcy.

The Trustee then filed an adversary complaint under 11 U.S.C. § 544. As
you may recall, under section 544, a Trustee is considered a bona fide
purchaser of the debtor's property. The Trustee's complaint sought to
avoid the mortgage granted in favor of American General, arguing that the
mortgage was avoidable because the property encumbered was not described
prior to the signature page of the mortgage. Moreover, the Trustee argued
that the language "see EXHIBIT A" does not satisfy the statutory
requirements under Kentucky law. After filing cross-motions for summary
judgment, the bankruptcy court ruled in favor of American General.

On appeal, the Trustee again argued that the legal description was
insufficient because it appeared after the page of the mortgage containing
the debtor's signature, and that because the mortgage lacked the words
"attached hereto" or "made part hereof" after the words "EXHIBIT A," the
incorporation by reference doctrine did not apply.

The Trustees argument was based on Kentucky Revised Statute § 446.060(1),
which provides that: "[w]hen the law requires any writing to be signed by
a party hereto, it shall not be deemed to be signed unless the signature
is subscribed at the end or close of the writing."

However, the appellate court found that "Kentucky courts have consistently
held that Ky. Rev. Stat. Ann. § 446.060(1) does not abolish the doctrine
of incorporation by reference." Further, the court found that "the
attachment of 'EXHIBIT A' and reference thereof in the mortgage is a
sufficient description of the encumbered property under Kentucky law."

The Court explained that "the description of property intended to be
encumbered by the subject mortgage is made certain by reference to
'EXHIBIT A' which was attached to and recorded with the mortgage." The
Court further noted that "[t]he incorporating language, 'see EXHIBIT A,'
appears before the Debtor's signature making it valid and enforceable
pursuant to the doctrine of incorporation by reference."

The Court then concluded that "[t]he parties' intention to encumber the
property described in Exhibit A is easily ascertainable by a potential
purchaser under reasonable rules of construction."

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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