Failure To Note Lien On Title Certificate On Mobile Home & Land Refinancing Transaction Sinks Lender In Homeowners' Bankruptcy Proceeding

The following facts have been taken from a recent ruling by a U.S Bankruptcy Court in London, Kentucky:

• Debtors borrowed $67,500.00 from a mortgage lender, pledging their real estate and a 1998 Southern 28' x 52' double-wide mobile home. This transaction was to refinance the Debtors' mobile home and land.

• The lender duly recorded its mortgage on the land, but failed to note its lien on the mobile home on a certificate of title.

• Bankruptcy Trustee sought to avoid the lien on the 1998 Southern 28' × 52' double-wide mobile home under rules that allow the Trustee to avoid an unperfected lien.

The judge ruled that, because the sole means to perfect the lien on a mobile home in Kentucky is by a certificate of title as stated in the state statute (KRS 186A.190), the lien on the mobile home is unperfected and, accordingly, allowed the Trustee to avoid the lender's lien on the double-wide.(1)(2)

For the ruling, see In re Owens, Case No. 09-62087, Adv. No. 10-6014 (Bankr. E.D. Kentucky, London Div. June 2, 2010).

(1) The court dealt with the creditors' objections as follows (bold text is my emphasis, not in the original text):

• Defendants American Home Mortgage Servicing, Inc. and Deutsche Bank National Trust Company object to the Trustee's Motion for Summary Judgment because there are factual issues as to where the mobile home is now and how the mobile home got there. However, that is immaterial to the motion because the Trustee is seeking solely to avoid the lien on the mobile home.

• Also, these Defendants oppose the motion because they seek to establish an equitable lien on the mobile home. However, no equitable lien was established before the bankruptcy filing. Moreover, even assuming that an equitable lien arose in favor of the creditor on account of its improperly executed lien, any such lien is ineffective against the Trustee. See In re Anderson, 266 B.R. 128 (Bankr. N.D. Ohio 2001).

(2) Owners of mobile homes who are having trouble making their house payments may want to check their title documents and their local public records to see if their lender committed a similar screw-up in failing to record its lien on the title certificate. If so, that fact may provide some ammunition for squeezing a loan modification on favorable terms from the lender (under threat of the homeowner filing for bankruptcy, potentially leading to the lender being left holding the bag on an unsecured loan due to the unperfected lien).