Mortgage Lien Invalidated Due to Incorrect Description of Property
Mortgage Lien Invalidated Due to Incorrect Description of Property
A debtor purchased a home from a developer. The property was located in a lot which had not yet been segregated from the main property. As a result, at the time of purchase, the property did not yet exist (individually) at the property registry and there was no number assigned to it.
To finance the purchase, the debtor obtained a loan. In exchange, the purchaser executed a mortgage note and deed in favor of the bank. However, the mortgage deed included a description of the property that was different from the property owned by the debtor and different from the one described in the purchase and sale deed.
According to the bank, the description that was included in the mortgage deed was that of the original property, prior to its segregation.
In bankruptcy, the chapter 7 trustee filed an adversary proceeding seeking to invalidate the mortgage lien that the bank claimed over the debtor’s property. According to the trustee, the fact that the mortgage deed referenced a property other than the debtor’s property meant that a lien was never constituted in accordance with Puerto Rico law.
In opposition, the bank argued that the property registrar correctly recorded the mortgage over the debtor’s property. According to the bank, the property registrar took notice of the information at the property registry (i.e., the segregation of the main property) to record the mortgage where it was supposed to, despite the error in the mortgage deed. Since the property registry correctly reflected the reality outside the registry as well as the parties’ intentions, the bank argued that the mortgage lien was properly recorded and thus valid.
The bankruptcy court disagreed with the bank and invalidated the mortgage lien. Chief Judge Cabán Flores noted that the mortgage was recorded pursuant to Act No. 216-2010, which meant that it could be challenged for failure to comply with the legal requirements for recordation.
The Chief Judge concluded that, notwithstanding the parties’ intention, recordation should have been denied because of the defective mortgage deed and its failure to comply with the principle of legality. According to the court, a rectification deed that complied with Puerto Rico’s notarial law (i.e., signed by all of the parties to the original mortgage deed) was necessary to address the mortgage deed’s deficiencies.