Opinion
Case No. 03-54076, ADV. No. 04-5569.
January 5, 2005
MEMORANDUM OPINION
Introduction
Anna C. Johnson (the "Trustee"), the trustee for the estate of Keith D. Carnes and Vivian L. Carnes (the "Debtors"), is before the court on the Motion for Judgment on the Pleadings that she filed in the above-styled adversary proceeding on November 30, 2004. Having considered the motion, the response filed by HomeAmerican Credit, Inc., d/b/a Upland Mortgage ("HomeAmerican"), on December 13, 2004, and the briefs and arguments of counsel, the court will sustain the motion.
Factual and Procedural Background
On December 15, 1997 Sadie M. Carter, the mother of Debtor Vivian Carnes, executed a Deed of Conveyance transferring the real property located at 273 St. Margaret Drive, Lexington, Kentucky (the "Property") jointly to Ms. Carter and Ms. Carnes "to be held in fee simple title by [Ms. Carter] for and during her life and with the rights of survivorship (after the death of [Ms. Carter]) in fee simple title in [Ms. Carnes], her heirs and assigns, forever." Similarly, the habendum clause reads: "TO HAVE AN[D] TO HOLD the above described property unto SADIE M. CARTER, for and during her natural life in fee simple title with the survivorship interests in fee simple absolute title to VIVIAN CARNES, her heirs and assigns forever." On June 22, 2001 Ms. Carter executed a Mortgage on the Property in favor of Fifth Third Bank, Kentucky-Lexington. The Mortgage was not recorded. On June 26, 2001 the original mortgagee assigned the Mortgage to HomeAmerican. Ms. Carter is still living and apparently resides in the subject residence with the debtors.
On November 26, 2003 the Debtors (daughter and her spouse) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On October 22, 2004 the Trustee filed the Complaint initiating this adversary proceeding, seeking to avoid the Mortgage and preserve it for the benefit of the Debtors' bankruptcy estate. The Complaint also seeks authority to sell the Property. On November 24, 2004 HomeAmerican filed an answer admitting that the Mortgage was never recorded. On November 30, 2004 the Trustee filed the motion now before the court. On December 1, 2004 Default Judgments were entered against the other defendants and, on December 7, 2004 an Agreed Order was entered vacating the Default Judgment against American Business Credit Corp. but stipulating that it holds no interest in the Property. On December 13, 2004 HomeAmerican filed a response to the Motion for Judgment on the Pleadings and, on December 15, 2004, the Trustee filed a reply. The court conducted a hearing on the motion on December 16, 2004, at which time the Trustee clarified that she is seeking to avoid the Mortgage only with respect to the Debtors' bankruptcy estate's interest in the Property.
Because the Trustee is not seeking a recovery of the Property or its value under 11 U.S.C. § 550(a), no lien is available to HomeAmerican under § 550(e). Suhar v. Burns (In re Burns), 322 F.3d 421, 427-29 (6th Cir. 2003).
Legal Discussion
Section 382.270 of the Kentucky Revised Statutes prescribes the effect of an unrecorded mortgage:
No deed or deed of trust or mortgage conveying a legal or equitable title to real property shall be valid against a purchaser for a valuable consideration, without notice thereof, or against creditors, until such deed or mortgage is acknowledged or proved according to law and lodged for record.
A bankruptcy trustee is by statute a bona fide purchaser "without regard to any knowledge." 11 U.S.C. § 544(a)(3). Accordingly, an unrecorded Kentucky mortgage is avoidable under § 544(a) of the Bankruptcy Code. See Rogan v. America's Wholesale Lender (In re Vance), 99 Fed. Appx. 25, 27-28 (6th Cir. 2004) (trustee may avoid mortgage not acknowledged in accordance with KRS 382.270); see also Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1027-28 (6th Cir. 2001) (trustee may avoid mortgage that was improperly recorded under Ohio law). Accordingly, it is clear that the Trustee may avoid HomeAmerican's Mortgage to the extent that it encumbers the bankruptcy estate's interest in the Property. It is also clear that the Trustee may sell the estate's interest free and clear of the Mortgage. 11 U.S.C. § 363(f)(4).
The question that remains is the extent of the interest held by the Debtors' bankruptcy estate. The Trustee contends that the deed conveyed a fee simple estate to Ms. Carnes subject to a life estate retained by Ms. Carter. HomeAmerican argues that the deed conveyed a fee simple estate to Ms. Carter and a contingent remainder interest to Ms. Carnes.
As a general rule, a trustee may only sell the bankruptcy estate's interest in property. 11 U.S.C. § 363(b)(1). Property of the estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." Id. § 541(a)(1). "In the absence of any controlling federal law, `property' and `interests in property' are creatures of state law." Barnhill v. Johnson, 503 U.S. 393, 398, 112 S. Ct. 1386, 1389 (1992) (citing, inter alia, Butner v. United States, 440 U.S. 48, 54, 99 S. Ct. 914, 918 (1979)).
Under certain circumstances, a trustee may sell both the estate's interest and the interest of a co-owner of property, 11 U.S.C. § 363(h), but the Trustee in this case has not joined Ms. Carter in this proceeding and sought such relief.
In Kentucky, there is a presumption that the estate conveyed is a fee simple:
Unless a different purpose appears by express words or necessary inference, every estate in land created by deed or will, without words of inheritance, shall be deemed a fee simple or such other estate as the grantor or testator had power to dispose of.
The phrase "without words of inheritance" was included in the statute to make clear that words of inheritance are not necessary to create a fee simple; the inclusion of the phrase does not mean that including words of inheritance prevents the creation of a fee simple estate. Hall v. Wright, 87 S.W. 1129, 1130 (Ky. 1905).
K.R.S. § 381.060(1). On the other hand, another Kentucky statute provides:
If any estate is given by deed or will to any person for his life, and after his death to his heirs, or the heirs of his body, or his issue or descendants, such estate shall be construed to be an estate for life only in such person, and a remainder in fee simple in his heirs, or the heirs of his body, or his issue or descendants.
K.R.S. § 381.090. The court concludes that the latter statute applies and, therefore, that a "different purpose [than fee simple] appears by express words or necessary inference."
Very similar to this case is East Kentucky Energy Corp. v. Niece, 774 S.W.2d 458, 459 (Ky.Ct.App. 1989), in which the deed conveyed the property to Drucilla King, then added:
The conditions of this conveyance is [ sic] such that at the death of said Drucilla King that the above lands is [ sic] to descend to the heirs of her body belonging to the said Grantor James King, and that the said James King is to use and control the said land during his natural life.
The court held that Drucilla King received a life estate:
A life estate is a freehold interest in land where the term continues during the life of the owner or some other person. The most obvious way to create a life estate would be to state "to A for his lifetime." or "for and during her life.". . .
But under the definition of a life estate, it appears to us that life estate arises whenever the deed as a whole expresses the intent of the grantor that the term of the estate conveyed would be measured by the lives of one or more persons. Thus, when A, owner in fee simple, conveys "to B until he dies" or "to B and at his death to B's children" a life estate for B is created.
Because the deed states that at the death of Drucilla the property would "descend" to certain heirs, we conclude that the estate conveyed to Drucilla was to continue for her life. KRS 381.090 provides that "if any estate shall be given by deed or will to any person for his life, and after his death to his heirs, or the heirs of his body, or his issue or descendants, the same shall be construed to be an estate for life only in such person, and a remainder in fee simple in his heirs or the heirs of his body, or his issue or descendants." Therefore, Drucilla received a life estate and remainder interests existed in the heirs of her body belonging to James.
Id. at 460 (citations omitted); accord, Combs v. Combs, 166 S.W.2d 969, 970 (Ky. 1942). Likewise, it is clear in this case that "the deed as a whole expresses the intent of the grantor that the term of the estate conveyed would be measured by the li[fe] of [Ms. Carter]," so the deed gave rise to a life estate in Ms. Carter.
The only difference between Niece and this case is that the deed's granting clause purports to convey the Property to Ms. Carter " in fee simple title . . . for and during her life" (emphasis added). However, the highest court of Kentucky has made clear that such language is not dispositive:
The rule is that where by a deed a fee is granted, and the deed as a whole shows an intention to vest the grantee with a fee, an attempted limitation upon the fee will be disregarded. But in all cases the effect of the deed turns upon its proper construction when read as a whole; and if upon the whole instrument it appears that the grantor's intention was to vest a less estate than a fee in the grantee, that intention will be carried into effect; for deeds like other instruments must be construed according to the intention of the parties where that intention is sufficiently expressed in the instrument.
In the case at bar, while by the first clause of the deed, the grantor conveys the property to Mary Schafer, her-heirs and assigns forever, this is immediately followed by a statement that this conveyance is to be for her natural lifetime, and that the property after her death shall revert to the children of the grantor. The two clauses of the deed are to be read together in ascertaining the grantor's intention; and upon the whole instrument, the estate granted was only intended to be a life estate. To give the instrument a greater application would be to defeat the plainly expressed intention of the grantor. This cannot be done.
Dinger v. Lucken, 137 S.W. 776, 776 (Ky. 1911) (citations omitted); accord, e.g., Woodward v. Thissell, 218 F. 810 (6th Cir. 1914). Likewise, here, the deed purported to convey the Property to Ms. Carter in fee simple, with that language followed immediately by a statement that the conveyance was to be for and during her life and that the property after her death would revert to Ms. Carnes. Accordingly, "upon the whole instrument, the estate granted was only intended to be a life estate" and "[t]o give the instrument a greater application would be to defeat the plainly expressed intention of the grantor." Thus, KRS 381.090 and the common law of Kentucky dictate the conclusion that Ms. Carter holds a life estate and Ms. Carnes holds a remainder.
KRS Section 381.110 provides: "The alienation of a particular estate on which a remainder depends . . . shall not operate . . . to defeat, impair or affect such remainder." Accordingly, Ms. Carnes's remainder would have come into the bankruptcy estate free and clear of the Mortgage conveyed by Ms. Carter even if the Mortgage had been duly recorded.
Conclusion
For the foregoing reasons, the court will enter a separate order sustaining the Trustee's motion and a judgment authorizing the Trustee to sell the Debtors' bankruptcy estate's interest in the Property free and clear of HomeAmerican's interest.
J.D. Kermode, Esq., Thomas D. Murphy, II, Esq., Mark D. Dietz, Esq.