The U.S. Court of Appeals for the Seventh Circuit has concluded that, under Wisconsin law, a mortgage on real property can properly attach a lien to a vendor’s interest in a land contract, which may then be perfected when the mortgage is recorded in the county land records. As a result, there was no additional requirement that the lienholder perfect its lien in the debtors’ vendor interest by filing with the Department of Financial Institutions under Article 9 of the Wisconsin Uniform Commercial Code (In re Blanchard, April 14, 2016, Hamilton, D.).
Land contract. In 2010, the debtors, the Blanchards, agreed to sell a residential property to the Hoffmans. The Hoffmans paid $30,000 up front to the Blanchards, and the Blanchards agreed to obtain a mortgage loan in their own name with the property as collateral. The rest of the purchase price for the land contract was due in 2015, but the Hoffmans had the option of completing the land contract sale early by paying off the balance of the Blanchards’ mortgage. Under the land contract, the Blanchards received money immediately from the down payment and the mortgage loan, and the Hoffmans would eventually pay off the Blanchards’ mortgage.
The Blanchards then obtained a mortgage on the property from Intercity State Bank. In exchange for the loan, the Blanchards agreed to mortgage the property to the bank. The bank also obtained an Assignment of Leases and Rents as collateral for the mortgage loan but mistakenly neglected to obtain an Assignment of Land Contract. The bank recorded its mortgage and the Assignment of Leases and Rents in the county land records in 2011.
Trustee’s arguments. The Blanchards subsequently filed for bankruptcy protection, and the court appointed trustee sought to use his strong-arm powers under Section 544 of the Bankruptcy Code, which grants him the position of a bona fide purchaser of property as of the date of the bankruptcy, to step in line ahead of the bank’s mortgage so he could use the Blanchards’ vendor interest in the land contract for the benefit of unsecured creditors.
The trustee argued that the bank did not have a valid lien on the payments to the Blanchards under the land contract. The trustee contended that a mortgage can attach a lien only to real property, and that the Blanchards’ interest as vendors in the land contract was personal property that was not subject to the bank’s mortgage lien. The trustee concluded that the bank never attached a lien to that personal property, so the unencumbered interest should be available to unsecured creditors.
Mortgage attached to land contract. The court determined that the Blanchards’ interest as vendors under a land contract both could secure the bank’s mortgage loan as a matter of law. In addition, when the bank recorded its mortgage in the county land records, the bank perfected its lien in the debtors’ vendor interest in the land contract.
Because Wisconsin’s land recording statute applies to “every transaction by which any interest in land is created, aliened, mortgaged, assigned or may be otherwise affected in law or in equity,” the court concluded the statute was broad enough to include creation of a lien on a vendor’s interest in a land contract.
No Article 9 restrictions. Moreover, the court found nothing in Revised Article 9 that restricts the scope of Wisconsin’s land recording statute. Section 9-308 of the Wisconsin UCC specifies, “Perfection of a security interest in a right to payment or performance also perfects a security interest in a security interest, mortgage, or other lien on personal or real property securing the right.”
This provision, noted the court, is analogous to the concept that the mortgage follows the note: if the lender perfects a security interest in a right to payments, then it has also perfected a security interest on the lien on real property securing that right to payment. The court then extended the reasoning to converse situation, finding that if the lender perfected the mortgage, that action would also perfect a lien on the mortgage collateral—the land contract vendor’s interest.
As a result, the trustee could not use the strong arm powers in the Bankruptcy Code to avoid the bank’s valid and prior-recorded mortgage lien on the Blanchards’ interest as vendors in the land contract.
The case is No. 15-1970.
Attorneys: Michael F. Dubis (Michael F. Dubis SC) for Larry H. Liebzeit. Sarah Lynn Ruffi (Ruffi Law Offices, SC) for Intercity State Bank FSB.
Companies: Intercity State Bank, FSB
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