Borges v. AG New Mexico (In re Borges)

Summarized by William Wallo , Bakke Norman, S.C.
11 years 10 months ago

Citation:

Borges v. AG New Mexico (In re Borges), BAP No. NM-13005 (BAP 10th Cir. 2014)

Tag(s):

Ruling:

Creditor's lien on certain real estate could be avoided under 11 U.S.C. Section 544(a)(3) because under New Mexico law, the recording of a corrected mortgage which added property omitted from the legal description in prior mortgage but was not signed by the parties or notarized did not provide constructive notice to a hypothetical bona fide purchaser. Creditor's alleged security interest in water rights was also avoidable, because its interest was not properly perfected. However, ruling that the creditor acted reasonably in its demand to receive all of the proceeds of the sale of collateral was not clearly erroneous, and the bankruptcy court's denial of the debtors' counterclaims for breach of the obligation of good faith and fair dealing, interference with contracts, violation of New Mexico's Unfair Practices Act, and prima facie tort, were all affirmed.

Procedural context:

Cross appeals from bankruptcy court ruling that: (i) the chapter 11 debtors could avoid a creditor's lien because its corrected mortgage was ineligible for recording and did not provide constructive notice to a hypothetical bona fide purchaser; (ii) creditor did not have interest in water rights and its security interest in water rights could be avoided under Sec. 544(a); (iii) creditor acted reasonably in transactions with debtors and that its demand to receive all of proceeds from the sale of collateral was justified. The Bankruptcy Appellate Panel affirmed the bankruptcy court in all respects.

Facts:

The debtors operated a dairy farm and owned approximately 557 acres of land used in the dairy operation. They executed security agreements to collateralize a series of promissory notes; the loans were secured by cattle, milk, crops, farm equipment, and accounts receivable, as well as a mortgage. The mortgage indicated that it covered 337 acres of land and "all riparian and water rights." When the debtors' operation struggled financially, they attempted to negotiate various sales of assets, most notably their dairy herd. Given the lender's insistence on collecting the entire proceeds of such a sale, however, the deals fell through. The lender also recorded a "corrected" mortgage which included an additional 220 acres of land, but did not attempt to get signatures from the debtors. After a foreclosure action was filed, the debtors filed chapter 11 and removed the foreclosure to the bankruptcy court. They also filed adversary proceedings to avoid the liens on the additional 220 acres and the water rights. The bankruptcy court allowed the lender's proofs of claim and then determined that while the lender had a valid lien under the original mortgage, the corrected mortgage was subject to avoidance because it was not properly recorded under New Mexico law. It also held that the lender did not have a perfected interest in water rights, and then dismissed the debtor's various counterclaims, finding that the creditor had acted reasonably. On appeal, the Bankruptcy Appellate Panel concluded that the corrected mortgage was in fact not validly recorded because it lacked signatures and notarization; as such, it did not provide constructive notice to a hypothetical bona fide purchaser and could be avoided. Likewise, any interest in water rights was not properly perfected and could be avoided. Finally, the bankruptcy court's determinations as to the reasonableness of the lender's actions were not clearly erroneous, and its denial of the debtors' counterclaims would not be overturned. The bankruptcy court was affirmed in all respects.

Judge(s):

Michael, Nugent, and Somers

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