## Facts

- Frank H. Bridge obtained a $260,000 construction loan from Midlantic National Bank secured by a mortgage on property in Ocean Grove, New Jersey; the mortgage was recorded in 1987.
- In 1988, Bridge refinanced with Midlantic for $260,000 and executed a new mortgage on the same property.
- The refinance proceeds were used to satisfy and discharge the 1987 recorded mortgage.
- Although Midlantic required the settlement attorney to record the 1988 mortgage and received assurances it had been filed, the 1988 mortgage was not recorded before Bridge filed Chapter 7.
- After the bankruptcy filing, Midlantic attempted to record the 1988 mortgage.
- The Chapter 7 trustee asserted avoidance rights as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3).
- Midlantic argued it held an enforceable equitable lien, via equitable subrogation to the discharged 1987 mortgage, that should defeat the trustee.

## Issues

1. Whether, under New Jersey law, equitable subrogation permits a refinancing lender with an unrecorded replacement mortgage to retain the priority of the discharged recorded mortgage against a Chapter 7 trustee exercising 11 U.S.C. § 544(a)(3).
2. Whether New Jersey’s race-notice recording law allows a trustee, as a hypothetical bona fide purchaser without notice, to take free of an unrecorded equitable lien arising from an unrecorded refinanced mortgage.

## Decision

- The Third Circuit affirmed summary judgment for the trustee.
- The court held that § 544(a)(3) confers on the trustee the status of a hypothetical bona fide purchaser as of the petition date, without regard to actual knowledge.
- Because the 1988 mortgage was unrecorded and the 1987 mortgage had been discharged, the record did not provide notice of Midlantic’s claimed interest.
- Under New Jersey law, a bona fide purchaser could take free of Midlantic’s unrecorded equitable lien; therefore, the trustee could avoid it.
- Equitable subrogation did not apply where it would prejudice a bona fide purchaser (and thus the trustee standing in that position).

## Legal Principles

- 11 U.S.C. § 544(a)(3) gives a bankruptcy trustee the rights and powers of a hypothetical bona fide purchaser of the debtor’s real property as of the petition date; avoidability is determined by applicable state law.
- Under New Jersey’s race-notice recording regime, an unrecorded mortgage interest is ineffective against a subsequent bona fide purchaser for value without notice who may rely on the public record.
- Equitable subrogation under New Jersey law may preserve a refinancing lender’s priority in appropriate circumstances, but it will not be applied to defeat the rights of bona fide purchasers or others protected by the recording system.
- When the public record shows a prior mortgage satisfied and no replacement mortgage recorded, a bona fide purchaser is not charged with notice of an unrecorded refinancing mortgage or a purely equitable subrogation claim.

## Conclusion

The court held that the trustee’s § 544(a)(3) status as a hypothetical bona fide purchaser, applying New Jersey recording law, prevailed over Midlantic’s unrecorded refinanced mortgage and any equitable lien theory based on subrogation, rendering Midlantic’s interest avoidable in the Chapter 7 case.


Midlantic Nat'l Bank v. Bridge (In re Bridge), 18 F.3d 195 (3d Cir. 1994)