Membrane PTK7 pseudo-kinase plays an essential role in planar cell polarity and the non-canonical Wnt pathway in vertebrates. Recently, a new N-ethyl-N-nitrosourea-induced mutant named chuzhoi (chz) was isolated in mice. chz embryos have severe birth defects, including a defective neural tube, defective heart and lung development, and a shortened anterior-posterior body axis. The chz mutation was mapped to the Ala-Asn-Pro tripeptide insertion into the junction region between the fifth and the sixth Ig-like domains of PTK7. Unexpectedly, chz reduced membrane localization of the PTK7 protein. We hypothesized and then proved that the chz mutation caused an insertion of an additional membrane type 1 matrix metalloproteinase cleavage site in PTK7 and that the resulting aberrant proteolysis of chz affected the migratory parameters of the cells. It is likely that aberrations in the membrane type 1 matrix metalloproteinase/PTK7 axis are detrimental to cell movements that shape the body plan and that chz represents a novel model system for increasing our understanding of the role of proteolysis in developmental pathologies, including congenital defects.