Court To Lenders: Strict Compliance With Local Recording Requirements Necessary


A decision out of the District Court for the Middle District of North Carolina (the “District Court”), now being appealed to the Fourth Circuit Court of Appeals, highlights just how critical it is for lenders to strictly comply with local recording requirements when recording their liens. In SunTrust Bank N.A. v. Northen, 433 B.R. 532 (M.D.N.C. Aug. 6, 2010), the District Court affirmed the Bankruptcy Court’s decision to grant summary judgment in favor of the chapter 7 trustee (the "Trustee") seeking to avoid the deed of trust of lender SunTrust Bank N.A. (“SunTrust”), which had been properly recorded pre-petition by SunTrust’s predecessor-in-interest in one indexing system, but improperly in another. In finding that the Trustee’s actual or constructive knowledge of the lien was irrelevant to its avoiding power and that only the official real property index was relevant in determining whether a deed is properly recorded, the District Court has sent a telling message to lenders – strictly comply with local recording requirements or face avoidance of your security interest in your borrower's property in bankruptcy.

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