In re Thulis
474 B.R. 668
Bankr. W.D. Wis.2012Background
- Debtors owned Lot 1 and Lot 2 in Merrill, Wisconsin, as co-owners; construction and refinancing mortgages were recorded against Lot 2 due to a mistake in the legal description.
- The bank’s mortgage initially covered Lot 2 but its instruments erroneously described collateral as Lot 2 for both the 2004 construction loan and the 2005 refinancing loan, despite intent to secure Lot 1’s homestead.
- The chapter 7 trustee sold Lot 1 for $170,000 and seeks to classify the bank’s claim as unsecured to the proceeds of Lot 1, arguing the mortgage does not encumber Lot 1.
- Wisconsin recording statutes render unrecorded conveyances void against subsequent good-faith purchasers, unless affirmative notice arises from use or occupancy or other limited circumstances.
- The trustee relies on Wisconsin law to determine whether the bank’s mortgage can be considered outside Lot 1’s chain of title and therefore avoidable under §544(a)(3) as a bona fide purchaser.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bank’s Lot 2 mortgage is enforceable against Lot 1. | Trustee: mortgage is outside Lot 1’s chain and unenforceable against Lot 1. | Bank: intent shows loan was to secure Lot 1; misdescription should be treated as error in recording. | Bank’s mortgage is void against Lot 1; truste e avoids bank’s security interest in Lot 1. |
| Whether the trustee, as a bona fide purchaser under §544(a)(3), may avoid the bank’s interest in Lot 1. | Trustee uses strong-arm powers to reach interests comparable to a BFP. | Affirmative notice not established for Lot 1; mortgage outside the chain of title. | Trustee may avoid the bank’s interest in Lot 1; proceeds treated as unsecured for Lot 1. |
| Whether the bank had constructive notice under Wisconsin law that would defeat the recording statute’s protection. | Bank argues constructive notice via property facts and possession. | No affirmative constructive notice applicable to Lot 1; discovery would require improper inquiry. | Constructive notice not established for Lot 1; mortgage outside chain of title remains void for Lot 1. |
| What is the proper allocation of the bank’s secured claim between Lot 1 and Lot 2 | Claim should be reclassified as unsecured for Lot 1, secured for Lot 2. | Bank seeks protection as to Lot 2; Lot 1 should be unsecured. | Bank’s claim reclassified: secured by Lot 2 and unsecured as to Lot 1. |
Key Cases Cited
- Kordecki v. Rizzo, 317 N.W.2d 482 (Wis. 1982) (recording statute protects purchasers relying on the public record; constructive notice limited)
- Brown v. Job (In re Polo Builders, Inc.), 433 B.R. 700 (Bankr.N.D.Ill.2010) (constructive notice limitations under recording statutes)
- Bump v. Dahl, 133 N.W.2d 295 (Wis. 1965) (possession as constructive notice when visible and adverse)
- Horicon State Bank v. Kant Lumber Co., 478 N.W.2d 26 (Wis.App.1991) (public policy favoring recording; open and visible rights noticed)
- SunTrust Bank, N.A. v. Macky (In re McCormick), 669 F.3d 177 (4th Cir.2012) (bona fide purchaser limits imputation of knowledge across parcels)
- In re Sandy Ridge Oil Co., 807 F.2d 1332 (7th Cir.1986) (actual knowledge irrelevant to §544; constructive notice framework)
- Kordecki v. Rizzo, 317 N.W.2d 482 (Wis. 1982) (recording statute protects purchaser reliance on record)
- The Horicon line of cases (Horicon; Fitzpatrick; Fibison), various Wisconsin Appellate/Bankruptcy citations (early 1990s–2011) (constructive notice and non-recorded interests limited exceptions)