Opinion
Case No. 99-13168, Chapter 7, Adv. No. 99-1112.
February 14, 2001
ORDER RE: MOTIONS FOR SUMMARY JUDGMENT
This matter is before the Court on Fifth Third Mortgage Company's first motion for summary judgment (Doc. 40), Fifth Third's second motion for summary judgment (Doc. 42), the Trustee's motion for summary judgment (Doc. 50), and the various responses of Huntington National Bank (Doc. 49), Fifth Third Bank (Docs. 51, 57, 58), and Richard J. Godar (Doc. 60). A hearing was held on January 24, 2001.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the general order of reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(K).
At issue are the parties' competing interests in a parcel of land in Clermont County stemming from Fifth Third's failure to record its mortgage on all of the subject property.
The following facts are not in dispute. The subject property once owned by the Debtor is unique in that a portion of the property (65%) is registered land and a portion (34%) is not registered. Most of the residential structure (81%) occupies the registered land portion.
For ease of reference, we will refer to this portion as the traditional portion.
In 1993, in connection with a $189,000 loan to the Debtor, Fifth Third properly recorded a mortgage on the traditional portion of the Debtor's property. Fifth Third failed to record its lien on the certificate of title regarding the registered portion of the property.
The original lender was Citfed Mortgage Company of America. Fifth Third is a successor by merger.
In 1994, in connection with a $62,000 loan to the Debtor, Huntington properly recorded a mortgage on the traditional portion of the property and duly recorded its mortgage on the certificate of title relative to the registered land portion of the property. Similarly, in 1995, in connection with a $30,000 loan to the Debtor, Godar properly recorded a mortgage on both the traditional and registered portions of the property.
In 1998, Clermont County withdrew from the registered land recording system.
The Debtor filed bankruptcy in 1999. The property has been administered by the Trustee, netting proceeds of approximately $208,000. The Trustee initiated the instant adversary proceeding to avoid Fifth Third's unperfected mortgage on the registered portion of the property under § 544. The parties' priorities on the traditional portion are not in dispute.
The parties have raised numerous issues. Fifth Third generally asserts that it should have a priority position over that of the Trustee, Huntington, and Godar. Because of the very unusual nature of the subject property, there is no caselaw directly on point. After consideration of the parties' briefs and arguments of counsel at the hearing, the Court makes the following conclusions of law.
Summary judgment is appropriate if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Bankruptcy Rule 7056.
Fifth Third's first motion for summary judgment addresses the Trustee's initial mistaken contention that Fifth Third's mortgage was avoidable under § 545. This drafting error was corrected by the Trustee in his second amended complaint.
Accordingly, Fifth Third's first motion for summary judgment (Doc. 40) is hereby DENIED as MOOT.
We now turn to the balance of the motions for summary judgment.
Fifth Third first contends that the Trustee had constructive knowledge of Fifth Third's lien on the registered land portion because a bona fide purchaser would be required to conduct a search of both recording systems. Thus, Fifth Third contends that notice of the properly recorded mortgage on the traditional land portion would provide constructive notice to the Trustee of Fifth Third's intended mortgage on the registered land portion. Fifth Third contends that this theory of constructive notice extends to Huntington and Godar.
We acknowledge that § 544(a)(3) does not override provisions of state law which impute notice through constructive notice. See In re Brown Family Farms, 80 B.R. 404, 408 (Bankr.N.D.Ohio 1987). But it has long been understood that the "primary" purpose of registered land is to eliminate "secret liens and hidden equities." Curry v. Lybarger, 11 N.E.2d 873 (Ohio 1937). Thus, because the subject property involves registered land, we find that the state law theory of constructive notice is not available as a defense to the Trustee's avoiding powers as a bona fide purchaser under § 544(a)(3).
Fifth Third also contends that because Clermont County abolished registered land prior to the filing of the Debtor's bankruptcy petition that the Trustee is not entitled to the "protections" of the registered land system. The Trustee counters that the registered land certificate of title remains applicable until there had been a conveyance of the entire fee.
Upon abolishment, registered land in Clermont County did not simply vanish. Ohio Revised Code § 5310.41 states that "[u]ntil there has been a conveyance of the entire fee of such land . . . the certificate of title that pertains to the land shall be identified as the prior instrument." There is no Ohio caselaw interpreting this statue. In view of the language of the statute, we believe the Trustee's position is sound.
Furthermore, the abolishment of registered land was not retroactive. Since Huntington's and Godar's mortgages were noted on the certificate of title before registered land was abolished, their mortgages must be considered "protected" under the registered land system, even under Fifth Third's theory. Accordingly, Fifth Third's constructive notice argument, as it applies to Huntington and Godar, also fails for this reason.
In the alternative, Fifth Third contends that it should be granted a lien on the registered land portion for improvements made under either the doctrine of equitable subrogation or under § 550(e). This contention hinges on the uncontested allegation that Fifth Third paid off certain prior mortgages totaling approximately $186,000 at the time of its 1993 transaction with the Debtor.
Because of the Trustee's status as a bona fide purchaser without notice under § 544(a)(3), equitable subrogation is not available as a remedy to Fifth Third. See In re Zaptocky, 232 B.R. 76, 84 (B.A.P. 6th Cir. 1999) (citations omitted). Similarly, because it is registered land that is at issue, the junior lienholders, Huntington and Godar, should be able to rely on the fact that Fifth Third's mortgage was never noted on the certificate of title. Stated otherwise, the Trustee's avoidance of Fifth Third's unperfected mortgage does not create an unjust enrichment for Huntington and Godar. Thus, equitable subrogation is also not available as a remedy to Fifth Third as against Huntington and Godar.
Because § 550(e) is expressly limited to good faith transferees, we find that this code section fails to protect Fifth Third from its own recording error. See In re Lepelley, 233 B.R. 802, 808 (Bankr.N.D.Ohio 1999) (lienholder claimed good faith transferee status because it was unaware that closing company had improperly executed mortgage). Of course, § 550(e) is inapplicable with regard to the competing priorities between Fifth Third and the other perfected lienholders, Huntington and Godar.
Although not a determining factor in this analysis, we take note of one decision holding that § 550 is not applicable relative to an avoidance action by the Trustee under § 544. In re Priest, 2000 WL 821379 (Bankr.N.D.Ohio May 25, 2000). But see In re Lepelley, 233 B.R. 802 ; In re Krueger, 2000 WL 895601 (Bankr.N.D.Ohio June 30, 2000). The surprising number of cases from the Northern District of Ohio on this issue stems from an apparent practice of one or more chapter 7 trustees to challenge the validity of facially valid mortgages on traditional property.
Lastly, Fifth Third contends that the Trustee is prohibited from subdividing or partitioning the subject property. The Trustee is attempting to do neither. The property has been sold free and clear of liens and the Trustee is seeking only to apportion a secured value to the parties' respective valid mortgages, including the valid mortgage of Fifth Third on the traditional portion of the property.
Because Fifth Third's lien on the registered portion is unperfected, and because we have found that Fifth Third's defenses have no merit, we conclude that pursuant to § 544(a)(3), the Trustee may avoid Fifth Third's lien on the registered portion of the property. See In re Zaptocky, 232 B.R. at 83. Although initially a disputed issue, the Trustee conceded at the hearing that he assumes Fifth Third's position subject to the perfected liens of Huntington and Godar. See e.g., In re Lynum, 246 B.R. 537 (Bankr.E.D.Ky. 2000).
Accordingly, the Court does not need to address the contention that the Trustee, as a judicial lien creditor under § 544(a)(1), can not avoid Fifth Third's lien.
The sale of the property resulted in net proceeds of $208,469.78. Since the registered land portion contains 64% of the total property and 81% of the total improvements, we believe it appropriate to "value" the registered land and improvements thereon at the average of 64% and 81%, or at 72.5%. Thus, we assign a value to the registered land portion of $151,540.59 and a value to the traditional land portion of $57,329.19. Therefore, Fifth Third's first mortgage position on the traditional portion affords it a secured position in the maximum amount of $57,329.19. Huntington's first mortgage position on the registered portion affords it a secured position in the maximum amount of its allowed secured claim. Following Huntington, Godar's second mortgage position on the registered portion affords it a secured position on the remaining equity in the maximum amount of its allowed secured claim. Following Huntington and Godar, the Trustee will receive the remaining equity, if any, for the benefit of the estate.
Because the record does not indicate the defendants' payoff amounts, the Court leaves it to the Trustee to make the appropriate distributions in the course of his administration of the estate. Of course, this order does not preclude a claims objection process.
Accordingly, Fifth Third's second motion for summary judgment is hereby DENIED and the Trustee's motion for summary judgment is GRANTED as against Fifth Third and DENIED as against Huntington and Godar.
The Trustee has also moved for summary judgment against answering defendants M.D. Realty Co. II and Reading Rock Inc. on the ground that these judgment lienholders failed to record their liens on the certificate of title. These defendants did not file responsive pleadings to the Trustee's motion for summary judgment. We find that these liens may be avoided by the Trustee pursuant to § 544(a)(3).
Accordingly, the trustee's motion for summary judgment is GRANTED as against M.D. Realty Co. II and Reading Rock Inc.
IT IS SO ORDERED.