This case caught my attention. Given the re-finance frenzy of mortgages in California and the surging real estate values here before the subprime meltdown, it's not a surprising fact pattern:
Borrower refinances her California condo three times, and on the 3rd one, Chase Manhattan bank neglects to record its deed of trust. Now all Chase has is an unsecured loan based on the promissory note. This is bad for Chase (bad for any bank or lender!).
In the meantime, Borrower files a petition for Chapter 13 bankruptcy, and lists the unsecured lien to Chase in her bankruptcy schedules- theoretically good for Chase.
The borrower's bankruptcy gets dismissed and she files again, this time a Chapter 7 (or what we fondly refer to as a Chapter "20"), and again lists her loan to Chase on her bankruptcy schedules. Chase sues to quiet title and wins on the theory of equitable subrogation and that the previous bankruptcy gave constructive notice. The Chapter 7 trustee takes it up on appeal and wins at the Bankruptcy Appellate Panel level.
Chase then appeals that BAP decision and the Ninth Circuit concludes: Bankruptcy Trustee wins, the strong arm powers to avoid any transfer characterize the trustee as if the trustee is a bona fide purchaser for value which trumps Chase's unrecorded security interest. [11 U.S.C. Section 544]
The 9th Circuit did not give the "equitable subrogation" theory any weight because it reasoned that you cannot do equity and defeat a bona fide purchaser with legal title.
[9th Cir. Opinion - In the matter of Jill c. Deuel, Debtor, Chase Manhattan Bank v. Harold S. Taxel, Trustee] 2010 DJDAR 1531, January 29, 2010.]