Subsequent Mortgagees Get No Satisfaction From Forged Satisfaction Statement

Wilmington and Philadelphia partner Andy Kassner and associate Joe Argentina co-wrote an article for The Legal Intelligencer titled, “Subsequent Mortgagees Get No Satisfaction From Forged Satisfaction Statement.”

The article discusses the recent ruling in In re Rag East, LP, in which the United States Bankruptcy Court for the Western District of Pennsylvania had to decide which lien had priority: a lender whose properly recorded liens were fraudulently released or subsequent lenders who relied on forged satisfaction documents and believed they were getting first priority liens.

After concluding that, on the facts, all the lenders in the case were innocent victims of a forged satisfaction piece and unauthorized termination statement, the court turned to the lien priority issues to determine who was the “most innocent.”

Ultimately, it found the lien of the initial mortgagee maintained priority over the liens of the subsequent lenders, as the first lender had properly recorded its mortgage, thereby giving notice of its interest to the public, and the dispute was not a result of the first lender’s negligence.  The Court ruled that the forged satisfaction piece and termination statement were legally void, despite the subsequent lenders’ good faith reliance on the state and local recording systems.

Andy and Joe discuss the case in detail and conclude that while, as in this case, secured lenders routinely rely on the state and county recording systems to learn about the properties they desire to be pledged as collateral, “all systems can fail when fraud is involved.”

They suggest that lenders consider a contingency plan for such situations, because “as the economy strengthens and lending credit standards weaken, unusual situations involving competing claims for limited collateral will occur.”