An issue that estate and trust lawyers have to confront is the "pocket deed" which is a non-delivered deed conveying title to property.1 The grantor signs the deed but instructs that it not be recorded until after the grantor's death.2 This procedure has led to problems with the effectiveness of the conveyance because without delivery nothing passes to the grantee.3
Bankers face a similar problem when they extend a loan to a borrower and secure that loan in part with a "pocket" deed of trust. The deed of trust serves as collateral for the loan but remains unrecorded until some trigger event, at which point it may be too late because other liens have been recorded or because the recordation is deemed ineffective. As can be seen below, courts have held that the consequence of holding a "pocket" deed of trust and failing to record can be quite significant and detrimental.
When a financial institution or any other lender extends a secured loan, the collateral for that loan can take various forms. For example, the collateral might be a guaranty, accounts receivable, furniture, fixtures and equipment or real estate. If real estate secures the loan, typically a deed of trust, an indemnity deed of trust or a mortgage is signed by the property owner and then the instrument is recorded upon execution of the loan documents and delivery of the funds to the borrower. However, some lenders take a deed of trust as collateral but agree not to record the deed of trust unless some trigger event occurs. This instrument is known colloquially as a "pocket deed of trust."
Reasons for not recording a deed of trust might include a lender's level of comfort with other collateral securing the loan. In other instances, the property owner (borrower or guarantor) might convince the lender that recordation is not necessary and could affect the borrower or guarantor's credit worthiness. In any event, failing to record the deed of trust and holding a "pocket deed of trust" can have dire consequences, including rendering a lender an unsecured creditor in or outside of a bankruptcy proceeding.
UNRECORDED DEED OF TRUST ISSUES OUTSIDE OF BANKRUPTCY
Failure to record a deed of trust outside bankruptcy may cause a loss of priority, and thus difficulty or inability for a lender to be repaid. For example, in a non-bankruptcy setting, the first lender's deed of trust was recorded six months after a second lender acquired a lien on the disputed property.4 Because the second lender was the only party to have both a security interest in the property, and properly recorded that interest, the court concluded that it was entitled to protection of Tex. Prop. Code Ann. § 13.001(a), which rendered the bank's unrecorded deed of trust void.5 In Texas, "[a] conveyance of—an interest in real property or a mortgage or deed of trust is void as to a creditor or to a subsequent purchaser for valuable consideration without notice unless the instrument has been acknowledged, sworn to, or proved and filed for record as required by law."6
Although the statute by its terms renders an unrecorded deed void against creditors, courts interpret this to mean specifically creditors who have acquired liens without notice of the competing deed.7 Also, a creditor's lien takes precedence over a prior unrecorded deed, unless the creditor has notice of the deed at or before the time his lien is fixed upon the land.8 "[I]t is undisputed that Grencorp, by filing the deeds of trust in August 2007, perfected its liens on the property and did so two months before Liberty Bankers filed a corrected deed of trust in an attempt to fix the allegedly faulty description." Because the first lender failed to record its claimed conveyance, the court held that under Texas law, the second lender's recorded lien took priority.9
New York has a similar recording statute. In Washington Mutual Bank, F.A. v. Peak Health Club, Inc., the initial lender appealed order granting summary judgment against its favor regarding lien priority.10 After lending the borrower $3,250,000 secured by real estate, the deed of trust was not recorded.11 The borrower borrowed additional funds from a different lender, also secured by a deed of trust on the same property but this deed of trust was recorded.12 The first lender then recorded its deed of trust and sought a determination that its deed of trust had priority.13
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1. Failure To Deliver: The Problem With "Pocket Deeds" And A Review Of Alternatives, Vol. 93, No. 2, March/April 2019, Pg. 28, Kara L. Stachel, Real Property, Probate and Trust Law.
4. Liberty Bankers Life Ins. Co. v. Grencorp Mgmt., 557 F. App'x 331, 332 (5th Cir. 2014).
5. Id. at 333.
10. 48 A.D.3d 793, 853 N.Y.S2d 112, 113 (2008).
11. Id. at 115.
12. Id. at 116.
Originally Published by The Banking Law Journal
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