• October 28, 2010

[UPDATE:  In a lien priority dispute of importance to lenders and builders, the Minnesota Supreme Court issued an opinion today holding that “of record” means when received by the registrar, when date and time stamped and assigned a document number.]

[Original June 5, 2010 Post:]  In the current economic downturn, particularly by virtue of the fact that it has been heavily intertwined with if not caused by boom and bust real property values, the priority of creditors’ interests in real estate has been the subject of a few Minnesota Supreme Court cases recently.

In April, Minnesota Litigator covered Minnesota Supreme Court argument in this general area.  This week, the Minnesota Supreme Court took up another issue  in this area of law.  

BankFirst lent money secured by a mortgage.  BankFirst filed the mortgage with the county recorder.  Builders then began construction, which automatically created their liens (secured interests) in the property.  Sometime thereafter, BankFirst’s interest was memorialized by the county clerk on the certificate of title.  Was BankFirst’s interest “of record” when it was filed or when it was memorialized? The answer to the question decides which creditor has priority over which (i.e., who’s going to get stiffed.  This is the question pending before the Minnesota Supreme Court.

Appellant BankFirst’s argument is that once it has filed its mortgage interest, it is “of record.”  The appellee mechanics’ lien holders (and the Court of Appeals) argue, however, that “of record” means “memorialized on the certificate of title” (which was more than a month after BankFirst filed its interest with the county).

To be “of record” for Torrens property, respondent argued, must mean “registered on the certificate of title.”   Minnesota statutory law provides, “The act of registration shall be the operative act to convey or affect the land” (emphasis added).  Otherwise, respondents argue, the whole point of Torrens registration is defeated.

The problem: “date of filing” and “date of memorialization on the certificate of title” are supposed to be the same.  The statutory scheme fails to take into account that, in the real world, there can be gaps between the two, sometimes weeks, sometimes months, and the obvious question is who should bear the risk of the gap.

Both sides strenuously argue that, if their clients are to bear the risk, there will be chaos.  Lenders won’t release funds until they have confirmed registration.  Builders and materials suppliers will be forced to paw through documents at the county clerk and won’t be able to rely on certificates of title.

It was not clear from oral argument how the Court will decide the case but it seemed that BankFirst had a slight advantage.  A key problem with the respondents’ argument:  there is no formal or established means to determine “date of memorialization.”  The “date of filing” is very clearly and carefully marked but there does not appear to be any “memorialization of the memorialization…”

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