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In Re Day

443 B.R. 338 (D. N.J. 2011)

RECORDATION — Legal principles favor a bona fide purchaser over an unrecorded equitable interest holder in real property based on the fundamental point that absent notice, a purchaser of real property has a right to rely on the record, and doing so cannot be defeated or prejudiced by a latent equity.

A Bankruptcy Code Chapter 7 trustee filed an adversary proceeding complaint to determine chiefly the validity, priority, and extent of a bank’s liens on a particular parcel. In doing so, the trustee moved, as a bona fide purchaser of the parcel under the Bankruptcy Code, to assert a priority of its interest as to the bank who asserted priority in the parcel on an equitable lien or equitable subrogation theory.

The parcel had been conveyed to the debtor by a duly recorded deed. The lender had a recorded mortgage securing a debt of $637,500. Subsequently, the bank extended a loan to a former business partner of the debtor and took an instrument purporting to be a mortgage on the parcel from the partner. The funds advanced by the bank were used to pay off the original mortgage loan. The former partner offered proof of an oral agreement wherein title to the parcel was to be placed in the name of the debtor to hold for a business concern, at the concern’s expense, and for its sole benefit. Additionally, the former partner asserted that title would then be transferred to his own wife, again solely for the benefit of that business concern. However, a title report commissioned by the trustee revealed the debtor was the record owner of the subject property as of the petition date.

The Court held that the trustee, as an asserted bona fide purchaser of the parcel, held a superior interest to the bank’s claim of priority for its equitable lien or interest. Therefore, the bank’s lien or interest was voidable by the trustee. The Court reaffirmed the legal principles that favor a bona fide purchaser over an unrecorded equitable interest holder in real property based on the fundamental point that absent notice, a purchaser of real property has a right to rely on the record, and doing so cannot be defeated or prejudiced by a latent equity. The court also viewed any allegation of an oral constructive trust to be inadmissible parol evidence under New Jersey’s Statute of Frauds.


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