Update: Bankruptcy Court Challenges to Errors in Deeds of Trust and Mortgages


As real estate-related bankruptcy filings remain steady, courts continue to see debtors challenging the validity of deeds of trust and mortgages due to minor scriveners’ errors.  The United States Bankruptcy Court for the Eastern District of North Carolina is viewed by debtors as a favorable venue in which to bring such challenges due to a string of prior rulings starting with In re Head Grading in 2006, which invalidated a North Carolina deed of trust that incorrectly cited the date of the related note by one day.  The latest chapter in this saga involves an effort by a debtor in North Carolina to expand such challenges to South Carolina mortgages. 

In the summer of 2010, a North Carolina limited liability company with its sole asset, real property, located in South Carolina chose to file its bankruptcy petition in the Eastern District of North Carolina, rather than in the District of South Carolina.  During the bankruptcy case, the debtor filed a lawsuit seeking to avoid a multi-million dollar South Carolina mortgage based upon facts paralleling those in Head Grading.  Similar to Head Grading, the facts in South Bay Properties, LLC v. Bayside Property, Inc. et al. involved a mortgage dated September 11, 2007, which purported to secure a promissory note of even date.  However, the only promissory note in existence between the parties was dated September 12, 2007.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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