512 B.R. 727
1st Cir. BAP2014Background
- In 2005 the Blaises executed a $245,000 note and mortgage in favor of Impac (later assigned to U.S. Bank) to secure their home at 351 West Street, but the recorded mortgage’s legal description mistakenly described only a seven-foot strip the Blaises no longer owned.
- The lender obtained a state-court consent judgment in a foreclosure action that attached the same erroneous seven-foot legal description; the Blaises failed to redeem and a foreclosure sale was postponed when the bank discovered the description error.
- The bank filed a reformation action in state court (and recorded an affidavit and clerk’s certificate describing the Remaining Property — the house lot — as the subject of the reformation), asserting mutual mistake and seeking to reform the mortgage to cover the house lot.
- While the reformation action was pending, the Blaises filed Chapter 13 bankruptcy, treated the bank’s claim as unsecured, and the trustee did not object to the bank’s proof of claim; the Blaises objected to the claim arguing the mortgage was a nullity as to the Remaining Property.
- The bankruptcy court sustained the Blaises’ objection, holding the bank had no interest in the Remaining Property as of the petition date because reformation had not been completed and state-law interests must be fixed at filing.
- The BAP vacated and remanded: it held the bankruptcy court erred by not applying Maine law doctrines (including reformation for mutual mistake and the mortgagor/mortgagee rights) and directed further proceedings to determine whether reformation (by clear and convincing evidence) or other state-law remedies created an interest before the petition date.
Issues
| Issue | Bank's Argument | Blaises' Argument | Held |
|---|---|---|---|
| Whether bank held an equitable lien or other interest in the Remaining Property as of petition date | Mortgage should be reformed retroactively for mutual mistake so bank’s equitable lien existed from mortgage inception | Mortgage description covered only the seven-foot strip; thus Remaining Property was unencumbered at filing | Court: vacated bankruptcy ruling and remanded to apply Maine law; reformation may be available but requires state-law proof (clear and convincing) and factual determination |
| Whether the recorded affidavit/clerk’s certificate prevented trustee from avoiding the lien under § 544 | Recording of affidavit and clerk’s certificate gave constructive notice defeating trustee’s § 544(b)/(a)(3) status | Even if recorded, reformation was not complete pre-petition, so trustee could take free of any unperfected claim; recordings might be avoidable preference if within 90 days | Court: secondary to core issue; resolution depends on whether an interest existed pre-petition under Maine law — remand to decide factual/legal effect of recordings |
| Whether the state-court consent judgment merged the note and mortgage, leaving nothing to reform | Judgment did not eliminate mortgage reformability; merger requires foreclosure sale/deed and equitable considerations | Consent judgment merged note and mortgage, barring reformation | Court: merger doctrine does not bar reformation here; merger limited by equity and Maine case law permits reformation despite merger in appropriate cases |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (Bankruptcy property interests are defined by state law)
- Baillargeon v. Estate of Daigle, 8 A.3d 709 (Me. 2010) (reformation of deed/mortgage allowed for mutual mistake; clear-and-convincing standard)
- Bryan v. Breyer, 665 A.2d 1020 (Me. 1995) (standards for reformation and proof of mutual mistake)
- Colorado v. New Mexico, 467 U.S. 310 (U.S. 1984) (discussed standard for clear-and-convincing proof)