Opinion
Bankruptcy Case No. 302-42486-elp13, Adversary No. 02-3587-elp
May 7, 2003.
MEMORANDUM OPINION
The issues in this adversary proceeding, which were tried on stipulated facts, are whether a trust deed that was released by mistake prepetition may be reinstated and, if so, whether the security interest is avoidable under §§ 544 or 547. The court concludes that the trust deed may be reinstated and that the security interest is not avoidable.
The court concludes that Oregon law follows the general rule that, in the absence of prejudice to any party acting in reliance on the release, a mortgage released by mistake may be reinstated to its original priority.
The court then explains that the security interest was not avoidable under § 544, because the plaintiff had constructive notice of the security interest by virtue of the defendant's prepetition filing of a notice of lis pendens. The court rejects the plaintiff's argument that §§ 544 and 547 work interactively, so that if the filing of the lis pendens is avoidable under § 547, it cannot provide notice under § 544. The court states that a party seeking avoidance under § 544 must prove the elements of that claim independently of the operation of § 547.
Finally, the court concludes that the security interest is not avoidable as a preference under § 547, because once the trust deed is reinstated with its original priority, the relevant transfer is that which occurred when the trust deed was originally recorded, a date that was well outside of the 90 day preference period.
The issues in this adversary proceeding are whether a trust deed that has been released by mistake may be reinstated and, if so, whether the security interest is avoidable under §§ 544 or 547. These issues were tried on stipulated facts. For the reasons discussed below, I conclude that the trust deed may be reinstated, and that the security interest is not avoidable.
Unless otherwise indicated, all section references are to the Bankruptcy Code, 11 U.S.C. § 101-1330.
FACTS
On April 5, 2001, Christopher E. Gray ("plaintiff") executed a note payable to Household Finance Corp. II ("HFC"). The note was secured by a deed of trust of the same date. The deed of trust encumbered real property located at 13189 Southwest 154th Ave, Tigard, Oregon 97223 ("the property"). There is no dispute that the deed of trust was properly recorded in the real property records for Washington County.
These facts concerning the note and deed of trust are taken from the parties' stipulated facts. The parties state in their stipulated facts that exhibits A and B are copies of the note and trust deed, respectively. Exhibits A and B appear to be documents relating to an earlier loan, not the transaction at issue here.
On February 21, 2002, HFC mistakenly recorded an Appointment of Successor Trustee and Deed of Full Reconveyance ("the reconveyance"). According to HFC's proof of claim in this case, plaintiff still owed HFC approximately $223,626.98 on the note as of the petition date.
On September 21, 2002, HFC recorded a Notice of Lis Pendens in the Washington County real property records. The notice stated that HFC had filed an action against plaintiff in state court and that "[t]he object of the action is: Complaint to set aside Reconveyance, for Declaratory Relief regarding Reconveyance and for Recovery of Funds or Damages[.]" Notice of Lis Pendens, ¶ 3. HFC, in its state court complaint, requested that the reconveyance be rescinded, cancelled or declared void ab initio and that the deed of trust be reinstated with its original validity and priority.
After plaintiff filed his chapter 13 petition, he instituted this adversary proceeding against HFC. In his first claim for relief, plaintiff seeks a determination that HFC has no security interest in the property. In his second claim for relief, plaintiff alleges that, if HFC does have a security interest in the property, that interest is avoidable under § 544(a)(3) as an unperfected security interest. Finally, in his third claim for relief, plaintiff alleges that, "if HFC has a perfected security interest in the Property by virtue of the recording of the Lis Pendens," that interest is avoidable as a preferential transfer under § 547(b). Adversary Complaint, ¶ 25.
The chapter 13 trustee has assigned the avoidance claims to plaintiff.
ISSUES
1. Whether HFC has a security interest in the property.
2. Whether HFC's security interest may be avoided under § 544(a)(3).
3. Whether HFC's security interest may be avoided under § 547(b).
DISCUSSION
1. HFC has a security interest in the property. State law governs whether and to what extent a creditor holds security interests in a debtor's property. In re Bakersfield Westar Ambulance, Inc., 123 F.3d 1243, 1246 (9th Cir. 1997). Generally, where a mortgage has been released by mistake, the release may be vacated and the mortgage reinstated.
It is a generally accepted rule that where a mortgage . . . has been released or satisfied through mistake, it may be restored in equity and given its original priority as a lien[,] provided no injury is inflicted on one who has innocently relied on the release and either purchased the property or made a loan thereon on the strength of such cancellation. . . . "The principle which underlies all the reported decisions . . . is, when the legal rights of the parties have been changed by mistake, equity restores them to their former condition, when it can be done without interfering with any new rights acquired on the faith and strength of the altered condition of the legal rights, and without doing injustice to other parties."
United States v. 168.8 Acres of Land, 35 F. Supp. 724, 726-27 (M.D.N.C. 1940) (quoting Lumber Exch. Bank v. Miller, 40 N.Y.S. 1073 (N.Y.App.Div. 1896)) (citations omitted). See also 55 AM.JUR.2D MORTGAGES § 474 (1996); 59 C.J.S. MORTGAGES § 260 (2002).
Oregon law is in accord. In Holzmeyer v. Van Doren, 172 Or. 176 (1943), a first priority deed of trust was released based on the mistaken belief that certain real property was not encumbered by junior liens. The Oregon Supreme Court affirmed the trial court's decree cancelling the reconveyance of the deed. In so doing, the court rejected the argument that relief was only appropriate where the mistake was not attributable to the plaintiff's own negligence. The court concluded that, in the absence of prejudice, a "considerable degree of carelessness" would not bar relief. Id. at 189.
HFC also relies on Oregon Bank v. Hildenbrand, 81 Or. App. 171 (1986). This case does not support HFC's position. The court in Oregon Bank allowed reinstatement of the mortgage "[w]ithout considering [the] plaintiff's claim of inadvertence and mistake." Id. at 176.
The parties have stipulated that HFC "executed and filed the Reconveyance by mistake, since Plaintiff has not paid the underlying obligation." Stipulated Facts, ¶ 4. There is no indication that reinstating HFC's deed of trust will prejudice any third party who acted in reliance on that release.
While plaintiff does argue that the trustee's rights will be prejudiced by reinstatement of the deed of trust, the validity of that claim depends on whether the requirements for avoidance under § 544 are met. I will address that issue in the next section of this memorandum.
Plaintiff cites Oregon statutes governing the creation, perfection and release of security interests in real property. To the extent plaintiff is arguing that HFC cannot have a security interest in the property without again complying with those statutory requirements, I reject that argument. Where a lien is discharged by mistake, equity merely reinstates the lien, it does not create a new one. See French v. DeBow, 1878 WL 3406, *2 (Mich. 1878).
2. Plaintiff may not avoid HFC's security interest under § 544(a)(3).
§ 544(a) provides, in relevant part, that
[t]he trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —
. . .
(3) a bona fide purchaser of real property . . . from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
This provision allows the trustee to avoid an interest in real property that would be voidable under state law by a bona fide purchaser. In re Michael, 49 F.3d 499, 501 (9th Cir. 1995).
"To qualify as a bona fide purchaser" under Oregon law, a purchaser must have acquired its interest "without any knowledge or notice of the" prior claim. Akins v. Vermast, 150 Or. App. 236, 241 (1997). "The notice that will deprive the mortgagee of priority can be either actual or constructive." High v. Davis, 283 Or. 315, 333 (1978) (en banc). "Constructive notice may be `record notice' (a recorded document) or `inquiry notice' (a duty to inquire)." Akins, 150 Or. App. at 242 (citations omitted). The filing of a notice of lis pendens "is notice . . . of the rights and equities in the premises of the party filing the notice." ORS 93.740(1).
Plaintiff may not avoid HFC's security interest, because he had constructive notice of HFC's interest in the property by virtue of HFC's prepetition filing of a notice of lis pendens. See In re Gurs, 27 B.R. 163, 165 (9th Cir. BAP 1983) (§ 544(a)(3) claim defeated by filing of notice lis pendens).
Plaintiff concedes in his trial memo that the filing of a notice of lis pendens will normally defeat a § 544 avoidance action. However, plaintiff argues that,
in the case at hand, the recording of the Lis Pendens against [plaintiff's] Property is a transfer avoidable under 11 U.S.C. § 547(b) as a preference. Due to the avoidance of the Lis Pendens, no other document satisfying the requirements of ORS 93.643 was filed in the county records, therefore, [HFC's] unperfected security interest is avoidable pursuant to 11 U.S.C. § 544(a)(3).
With certain exceptions not relevant here, ORS 93.643(1) provides that
[t]o give constructive notice of an interest in real property, a person must have documentation of the interest recorded in the indices maintained under ORS 205.130 in the county where the property is located. Such recordation, and no other record, constitutes constructive notice to any person of the existence of the interest[.]
With certain exceptions not relevant here, ORS 93.643(1) provides that
[t]o give constructive notice of an interest in real property, a person must have documentation of the interest recorded in the indices maintained under ORS 205.130 in the county where the property is located. Such recordation, and no other record, constitutes constructive notice to any person of the existence of the interest[.]
Plaintiff's Trial Memo, 9:4-8.
The problem with plaintiff's argument is that it assumes that §§ 544 and 547 operate interactively, which they do not. A party seeking avoidance under § 544 must prove the elements of that claim independently of the operation of § 547. In re Gurs, 34 B.R. 755, 757 (9th Cir. BAP 1983). Assuming HFC's filing of the notice of lis pendens effected a transfer that may be avoided in bankruptcy under § 547(b), it does not follow that the notice can be treated as if it never existed for purposes of a § 554(a)(3) analysis. There is a difference, which plaintiff seeks to ignore, between avoidance and declaring something void from its inception. In appropriate circumstances, § 547(b) allows the former, not the latter.
Citing In re Professional Investment Properties of Am., 955 F.2d 623 (9th Cir. 1992), HFC also argues that certain portions of the chapter 13 bankruptcy schedules and proposed plan filed in this case put plaintiff on inquiry notice of HFC's claim to the property. Plaintiff disagrees, citing In re Clearwater, 1997 WL 101975 (Bankr.D.Or. 1997). Because I have decided that plaintiff had constructive notice of HFC's claim to the property by virtue of the filing of the notice of lis pendens, I need not decide whether plaintiff's bankruptcy schedules and proposed plan also imparted notice of HFC's interest in the property.
3. Plaintiff may not avoid HFC's security interest under § 547(b).
With certain exceptions not relevant here, § 547(b) states that
the trustee may avoid any transfer of an interest of the debtor in property —
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The issue in this case is whether there was a transfer within the 90 day preference period. HFC does not dispute that the other requirements are met. Plaintiff's argument is that HFC's filing of the notice of lis pendens was an avoidable transfer of an interest of debtor in property under 547(b), and that the avoidance of that transfer results in the avoidance of HFC's security interest in the property. I disagree.
There is no indication that the longer preference period for insiders provided for under § 547(b)(4)(B) is applicable in this case.
Plaintiff relies solely on In re Lane, 980 F.2d 601 (9th Cir. 1992), but the facts of Lane are distinguishable from those of this case. In Lane, a creditor initiated a prepetition California state court action against the debtor. Shortly thereafter, the creditor filed a notice of lis pendens. The state court entered a judgment in favor of the creditor. Lane filed a bankruptcy petition and, within 90 days preceding the filing of the petition, the creditor recorded the state court judgment. The Ninth Circuit affirmed the bankruptcy court's determination that the creditor's security interest was not avoidable under § 547. The court in Lane held that under California law, the filing of the notice of lis pendens was a transfer within the meaning of § 547, and that the creditor's interest in Lane's property created pursuant to the recordation of the judgment related back to the date the lis pendens was filed, a date that was outside of the preference period.
In this case, the facts and applicable state law differ from those presented in Lane. The court in Lane acknowledged that the operation of a notice of lis pendens is determined "by the terms and effective scope of the" ultimate decision concerning the property in dispute. 980 F.2d at 604. As I have discussed above, Oregon law requires that the reconveyance be set aside and HFC's lien restored to its original priority. Plaintiff's argument misses the point that once the reconveyance is cancelled, and HFC's deed is reinstated to its original priority, the relevant transfer is that which occurred in April 2001 when the trust deed was originally recorded, a date that is well outside of the preference period.
Thus, assuming that HFC's filing of a notice of lis pendens effected a transfer within the meaning of § 547, avoidance of that transfer does not equate to avoidance of HFC's security interest in the property. The creation and validity of HFC's security interest is not dependent on the filing of the notice of lis pendens. Under Oregon law, HFC's interest in the property was created in April of 2001. Absent a bona fide purchaser or other transferee with greater rights under Oregon law, the reinstatement of HFC's lien by vacating the mistakenly filed reconveyance is continuously effective from the original date of the trust deed.
CONCLUSION
For the reasons set forth above, I conclude that HFC has a security interest in the property and that the security interest is not avoidable under §§ 544 or 547. Counsel for HFC shall lodge a judgment within ten (10) days of entry of this memorandum opinion.