20/01/2023
A real estate lesson learned. Get a lawyer!
Chang v. Rhee, 2022 WL 17484301 (Alaska Dec. 7, 2022) (unreported) is a recording act case. The Changs made three loans between 2014-2016 to the Hunzikers totaling $115,000. Each loan was represented by a promissory note, but no mortgage or deed of trust was recorded for any of these. The notes stated, however, that they were “collateralized” by the Hunzikers’ home.
When the first loan was made, the Changs recorded a “Claim of Lien” in a form normally used for recording claims of mechanics liens. The court describes the filled-in form as follows:
"The document identifies Jae Chang and Suh Chang as 'Lienholder', identifies George and Hyeran Hunziker as 'Property Owner', and provides the street address and legal description of the Hunzikers’ residence. The document, with the italicized words handwritten in, explains: '[I]n accordance with a contract with George - Hyeran Hunziker (Debtor) lienor furnished labor[,] services[,] or [m]aterials consisting of ... [l]oan of $40,000 to be paid in full by 2-12-15 made payable to Jae Chang - Suh Chang on the following described real property' — followed by the Hunzikers’ address. The document appears to be signed by the Hunzikers on the line for the lienor's signature and is notarized."
No documents were recorded in connection with the other two loans.
The Hunzikers subsequently sold their home to Rhee and Lee in 2018. The title company did not list the “Claim of Lien” as an exception to the title policy’s coverage, and Rhee and Lee had no other notice of it. The Hunzikers failed to repay the loans, the Changs sought to foreclose the lien as an “equitable mortgage,” and Rhee and Lee asserted that their home could not be foreclosed on, as they purchased it as Bona fide Purchasers for value under the recording act.
The court assumed that an equitable mortgage existed. An equitable mortgage is “[a] transaction that has the intent but not the form of a mortgage, and that a court of equity will treat as a mortgage.” The court thought that the references inserted in the promissory notes to the home collateralizing the loans would probably be sufficient; this would be a genuine issue of material fact to be determined at trial.
The issue that occupied the court’s attention was whether Rhee and Lee were bona fide purchasers. They obviously had no actual notice of the equitable mortgage; the title company had not reported it to them, and the Hunzikers had not told them about it.
Did they have inquiry notice of the equitable mortgage? Of course, all buyers of real estate are deemed to read the documents in their chain of title. Would the “Claim of Lien” recorded in 2014 reasonably have led them (or their title company) to inquire further, and thus to discover the equitable mortgage? The court concluded that it would not.
The problemfor the Court was the form of the “Claim of Lien.” It was designed for mechanics liens. And in Alaska, a notice of mechanics lien is only good for six months unless a suit is filed to enforce it. Here, an inquiry would have revealed no enforcement lawsuit was filed. The house was in 2018, and a reasonable searcher would have made no further inquiry beyond this, the court felt. Hence, Rhee and Lee were bona fide purchasers, and Chang’s equitable mortgage became unenforceable under the recording act.
The winner was the title insurance underwriter, which was saved from having to pay off Chang’s loans. The losers were the Changs who lost $75,000 plus interest.
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