Business Law Bulletin: The devil is in the details
In the last column, we talked about a man whose attempt to sue Satan failed, in part because of the difficulty of finding the defendant in Pennsylvania so he could be served with process.
We all know where the devil really is: not in Pennsylvania, but in the details. Three recent court decisions show how small mistakes, or failure to pay attention to details, can cause devastating economic consequences.
First case: The “B” that looked like a “13”.
In one case, a mortgage lender paid a high price for the fact that a handwritten capital “B” looks a lot like the number “13”.
Here’s what happened: A finance company made a loan to Raymond and Charlotte Vondall, secured by a mortgage against the Vondalls’ residence. However, the mortgage incorrectly described the property as “Lot B, Block 3, West River Estates” rather than the correct description of “Lot 13, Block 3, West River Estates”.
The Vondalls filed a Chapter 7 bankruptcy petition, which resulted (as it always does) in the appointment of a bankruptcy trustee. A bankruptcy trustee has the power to “step into the shoes” of a hypothetical bona fide purchaser of property and set aside mortgage liens and other security interests that do not comply with legal requirements.
In the Vondall case, the trustee successfully used that power to obtain a court judgment voiding the mortgage, on the ground that the legal description of the property was erroneous.
To the bankruptcy court, it did not matter that a person seeking to purchase or lend against the property could have figured out the real legal description. (Among other things, parcels like the one in question were apparently always identified by letters, not numbers.) Because the bankruptcy trustee has the power of a hypothetical bona fide purchaser, the fact that someone could have discovered the error was irrelevant. The bankruptcy court’s order has been affirmed on appeal by the Bankruptcy Appellate Panel of the 8th Circuit U.S. Court of Appeals.
The result is that the lender’s claim has been converted from a secured claim Ð under which the lender would have had priority over unsecured creditors and a chance to recover any equity in the property Ð to an unsecured claim, on which the lender will be lucky to recover anything at all.
Second case: A notice that was technically sent to the wrong address.
Then there is the case of In re Greenhaw Energy, Inc. Greenhaw Energy had purchased oil and gas interests, paying for them with a note secured by two trust deeds (mortgages). Greenhaw went bankrupt in Texas. The note beneficiary obtained bankruptcy court permission to foreclose on the trust deeds.
In its order authorizing the foreclosure, the bankruptcy court specified the address for giving notice of the sale to Greenhaw. However, the beneficiary instead sent its notice to the address of one of Greenhaw’s directors. The director signed the certified mail receipt signifying that the sale notice had been received. The sale went forward.
The bankruptcy trustee sought to invalidate the sale, contending that the notice was sent to the wrong address, and also that the purchaser at the sale was an “insider” controlled by the note beneficiary and paid an inadequate price. The trustee sued the beneficiary for damages for, among other things, “wrongful foreclosure”.
The Texas court has allowed the suit to proceed, in part because of the technically erroneous address for the sale notice Ð even though the notice was clearly received by a Greenhaw director. While there are other issues besides the wrong address, it would have been much harder for the trustee to sue if the foreclosure sale notice had not gone to the wrong address.
Third case: The purchase thwarted by heavy traffic.
Finally, in a recent California Court of Appeal case titled Amalgamated Bank vs. Superior Court, a lender had obtained a judgment authorizing a sheriff’s foreclosure sale of a 57-acre parcel of land securing a loan. The lender intended to bid about $6 million for the property, apparently a little less than its market value. There was also a third party who apparently had $10 million available to bid at the sale.
The lender’s representatives showed up a little late for the sale, claiming that they had been stuck in traffic. However, the sale had already taken place. The third party, facing no competing bids, bought the multi-million-dollar property not for the $10 million it had been ready to pay, but for the ridiculous sum of $2,000!
The court ruled that once the sale was final, it could not be set aside. So the third party got a parcel worth more than $6 million for a mere $2,000. The appellate court found it worth noting that the lender’s representatives could have simply phoned the sheriff and asked for a postponement of the sale, but inexplicably never called.
All three of these cases remind me of another case, in which my law firm represented the largest creditor of an entrepreneur whose business empire had collapsed, resulting in his bankruptcy. One of his holdings was a fancy beach house in Southern California.
The mortgage lender on the beach house (not my client, I hasten to say) had recorded its deed of trust against not the beach house but, mistakenly, the house next door! The bankruptcy trustee argued that the deed of trust should be voided. The lender had to settle for a greatly reduced claim in order to avoid the risk of losing its mortgage claim altogether.
The common theme of all these tales is: Pay attention to detail, supervise your employees carefully, and use common sense! Creditors have absorbed catastrophic losses by making seemingly trivial or technical errors: mistaking a “B” for a “13”, sending a notice to a legitimate address but not the one specified by the court, failing to make a phone call from the road, and recording a trust deed against the wrong parcel.
Also keep in mind that, if I may say so, some transactions are important enough to have your lawyer review the details and paperwork before it is too late to fix any mistakes.
Peter C. Bronson, of Nevada County, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency, commercial litigation and mediation. Write him at firstname.lastname@example.org. This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.
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