On December 7, 2022, the Alaska Supreme Court (“the Court”) issued an opinion in the matter of Jae Chang v. Jungmok Rhee, LEXIS 135 (Dec. 7, 2022, No. S-17827), holding that an improperly-recorded lien could still be held effective under the “equitable mortgage” doctrine, but could not confer adequate notice to defeat a bona fide purchaser for value claim put forth in opposition to its enforcement.

Between 2014 and 2016, Plaintiff Jae Chang (“Plaintiff”) issued three personal loans to Hyeran and George Hunziker (“the Hunzikers”) which cumulatively totaled $115,000.  Each of these loans was secured by a promissory note stating that the loan had been collateralized by the Hunzikers’ personal residence.  In connection with the first loan, which was issued in February 2014, a “Claim of Lien” was recorded in the county recording office using a form intended for the recordation of mechanics’ liens.  This form nevertheless identified Plaintiff as “Lienholder,” the Hunzikers as “Property Owner,” and contained an accurate street address and description of the Hunzikers’ residence.  The form was signed by the parties and notarized, but contained no timeframe indicating how long the lien was to be in effect or at what point it would be deemed expired or satisfied.  No additional forms were filed in connection with the subsequent two loans.

In April 2018, the Hunzikers sold their residence to Defendants Jungmok Rhee and Ukyung Lee (collectively “Defendants”).  An unnamed title insurance company conducted a title search before the sale, but the resulting title insurance policy did not mention the recorded February 2014 lien.  In November 2018, Plaintiff filed suit, alleging a breach of contract claim against the Hunzikers and a foreclosure claim against Defendants.  During discovery the Hunzikers admitted that they had never informed Defendants of the lien, explaining they failed to do as they “thought that because [they] [were] making the payments [] there was not a lien” and because the title company had “told [them] that there [were] no liens on the property.”

Defendants moved for summary judgment on the foreclosure claim, asserting they were never informed the lien existed when they purchased the property, lacked any knowledge of its existence, and thus were bona fide purchasers for value.  Plaintiff opposed, contending that the recording of the lien provided “at the very least [] inquiry notice” of its existence, thus defeating the bona fide purchaser claim.  The trial court ultimately held that Defendants were in fact bona fide purchasers and granted their summary judgment claim.

Plaintiff appealed to the Court–which heard the appeal because in Alaska all appeals of civil superior court matters go directly to the Supreme Court–which ultimately affirmed, agreeing that Defendants were “bona fide purchasers” as they lacked notice of the lien at the time they purchased the property.

First, the Court addressed the issue of the lien having been incorrectly recorded on a mechanic’s lien form–an issue which the lower court had bypassed–holding that the lien should be construed as an “equitable mortgage,” which it explained is any instrument that had the “intent but not the form of a mortgage,” and thus treated as if effectively recorded.  The “determinative question” therefore became whether Defendants “lacked the requisite notice of the equitable mortgage and were therefore bona fide purchasers.”

The Court discussed the three potential categories of notice–actual, constructive, and inquiry.  Actual notice did not exist as the Hunzikers admitted they never provided Defendants with notice the lien existed, it was undisputed that the title company never identified its existence, and Plaintiff made no showing to rebut these claims.

The Court further found that Defendants lacked constructive notice of the instrument because the document failed to include any specific timeframe or duration.  Specifically, the Court explained that the “contents of the document” failed to give constructive notice because it was “at most, evidence of an equitable mortgage, the existence, duration, and other terms of which had to be determined [] by reference to extrinsic evidence of [Plaintiff]’s and the Hunzikers’ intent”–thus, without containing all specific terms necessary to understanding the full scope of the lien, it could not provide effective constructive notice.

Finally,  the Court found Defendants did not possess awareness of any “facts that would lead a reasonably prudent person” to investigate the potential existence of a lien, as they lacked any direct knowledge of the lien’s existence, and none of the various documents executed during the property sale indicated or referenced the lien itself.  Therefore, the Defendants were considered bona fide purchasers for value and Plaintiff’s claims dismissed.

Takeaways

This Opinion makes clear that in jurisdictions utilizing the “equitable mortgage” doctrine or an analogous facsimile, even if improperly recorded, a lien can still be effective and enforceable provided it contains all terms necessary to understanding its full scope, is executed by the parties to the instrument, and appears to further the signing parties’ original intent.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Kevin Hakansson at khakansson@riker.com, James Mazewski at jmazewski@riker.com or Kori Pruett at kpruett@riker.com.