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noting that the Rooker-Feldman doctrine "generally provides that lower federal courts may not engage in appellate review of state-court decisions"
Summary of this case from In re MaloneOpinion
Case No. 19-56778 Adv. Pro. No. 20-2013
2021-03-08
IN RE: Emery J. MILLER, Debtor. Emery J. Miller, Plaintiff, v. Gordon E. Johnson, et al., Defendants.
Gerald L Roderick, Columbus, OH, for Debtor.
Gerald L Roderick, Columbus, OH, for Debtor.
MEMORANDUM OPINION AND ORDER ON MOTION TO DISMISS (Doc. # 15)
C. Kathryn Preston, United States Bankruptcy Judge
This cause came on for consideration of the Defendants Gordon E. Johnson's and Clydena Karen Johnson's Motion to Dismiss Amended Complaint of Debtor and Plaintiff (Doc. #15) ("Motion"), and the Plaintiff's Memorandum Contra to Defendants' Motion to Dismiss (Doc. #16) ("Response") filed by Plaintiff Emery J. Miller ("Debtor") in the above captioned adversary proceeding.
Gordon E. Johnson and Clydena Karen Johnson ("Defendants") seek dismissal of the Amended Complaint in this adversary proceeding (Doc. # 10) on the basis that Debtor's causes of action are barred by res judicata, having already been litigated through a final appealable order in the Court of Common Pleas of Madison County, Ohio.
By Notice entered on October 15, 2020 (Doc. # 17), the Court alerted the parties that pursuant to Federal Rules of Bankruptcy Procedure (Fed. R. Bankr. P.) 7012 and 7056, which make applicable Federal Rules of Civil Procedure (Fed. R. Civ. P.) 12(d) and 56(f), the Court intended to treat the Motion as a motion for summary judgment. The parties were directed to file all such additional materials pertinent to the Motion as they wished the Court to consider (subject to the requirements of Fed. R. Civ. P. 56 ). Defendants and Debtor filed supplements to their previous filings on November 5, 2020 (Doc. #19 and Doc. # 20, respectively).
The Court, having considered the record and the arguments of the parties, makes the following findings and conclusions.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Background
Upon the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, the undisputed facts may be summarized as follows: In 2007, Debtor and one William Todd Drown executed and delivered to Defendants a Promissory Note in the amount of $95,000.00. At about the same time, Debtor executed and delivered to Defendants a Statutory Mortgage (the "Mortgage"), granting Defendants a mortgage on certain real property of Debtor located on State Route 29 in Madison County, Ohio.
In December 2013, Defendants filed a complaint in the Court of Common Pleas of Madison County, Ohio (the "State Court") seeking judgment for the outstanding balance of the Promissory Note and for foreclosure of the Mortgage. Debtor defended the action, alleging that he was coerced into executing the Promissory Note and was under duress during the transaction, rendering the Promissory Note and the Mortgage invalid. See Decision & Entry, Johnson v. Miller, No. CVE 20130262 (Ct. Com. Pl. Madison Co., OH Nov. 13, 2017) (Doc. #11, Exhibit C). After a trial on the merits, the State Court issued its Decision & Entry on November 13, 2017, finding that Debtor had "failed to establish duress or coercion," and entering judgment in favor of Defendants on the Promissory Note and the Mortgage. See id. at 7-8. On September 17, 2018, the State Court Judgment was affirmed by the Court of Appeals, Twelfth Appellate District of Ohio, Madison County, Ohio. Opinion, Johnson v. Miller, No. CA2017-12-021, 2018 WL 4440562 (Ct. App. Madison Co., OH Sept. 17, 2018) (Doc. #11, Exhibit D).
The Court will hereafter refer to this document as "Decision & Entry" or "State Court Judgment." The Court may refer to the case as the "State Court Case."
Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code in October 2019. On February 11, 2020, Debtor filed a complaint in this Court, followed by an amended complaint (the "Amended Complaint") (Doc. # 10), objecting to Defendants' claims on the same Mortgage and Promissory Note, and seeking a determination of validity of Defendants' lien. Additionally, the Amended Complaint requests that the Court avoid Defendants' lien pursuant to 11 U.S.C. § 544 for defects in the notary's acknowledgment of Debtor's signature on the Mortgage. Defendants filed an answer to the Amended Complaint asserting that the "promissory note and mortgage executed by [Debtor] in favor of Defendants have been authoritatively determined to be valid and subsisting" in State Court, and that Debtor's causes of action before this Court are barred.
On August 13, 2020, Defendants filed the Motion. Defendants assert that Debtor's claims, as set forth in Amended Complaint, are barred under the principles of res judicata, issue preclusion, and claim preclusion, having already been litigated through a final appealable order in the State Court. Additionally, Defendants argue that, under the facts of this case, § 544 does not avail Debtor under current law. Debtor filed a Response to the Motion. Debtor theorizes that issue preclusion and claim preclusion should not be applied to dismiss his claims, asserting equitable powers of this Court, and that current Ohio law does not apply to Debtor's avoidance action.
III. Discussion
A. Standard of Review for Motions for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Fed. R. Bankr. P. 7056, provides that a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The party seeking summary judgment bears the initial burden of "informing the ... court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
If the movant satisfies this burden, the nonmoving party must then assert that a fact is genuinely disputed and must support the assertion by citing to particular parts of the record. See Fed. R. Civ. P. 56(c)(1). The mere allegation of a factual dispute is not sufficient to defeat a motion for summary judgment; to prevail, the non-moving party must show that there exists some genuine issue of material fact. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When deciding a motion for summary judgment, all justifiable inferences must be viewed in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Anderson , 477 U.S. at 255, 106 S.Ct. 2505.
The Sixth Circuit Court of Appeals has articulated the following standard to apply when evaluating a motion for summary judgment:
[T]he moving [party] may discharge its burden by "pointing out to the ... court... that there is an absence of evidence to support the nonmoving party's case." The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its [position]. "The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could
reasonably find for the [nonmoving party]."
Hall v. Tollett, 128 F.3d 418, 422 (6th Cir. 1997) (citations omitted). A material fact is one whose resolution will affect the determination of the underlying action. See Tenn. Dep't of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. See Schaffer v. A.O. Smith Harvestore Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996). "The substantive law determines which facts are ‘material’ for summary judgment purposes." Hanover Ins. Co. v. Am. Eng'g Co., 33 F.3d 727, 730 (6th Cir.1994). In determining whether each party has met its burden, the court must keep in mind that "[o]ne of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses ...." Celotex , 477 U.S. at 323 24, 106 S.Ct. 2548.
B. The Rooker-Feldman Doctrine
Defendants did not raise the Rooker-Feldman doctrine in the Motion. However, every federal court has an obligation to confirm that it has subject matter jurisdiction over the case before it, irrespective of whether raised by the parties. Singleton v. Fifth Third Bank (In re Singleton) , 230 B.R. 533, 536 (6th Cir. BAP 1999) (citations omitted). The Rooker-Feldman doctrine is jurisdictional in nature. The doctrine generally provides that lower federal courts may not engage in appellate review of state-court decisions. Isaacs v. DBIASG Coinvestor Fund, III, LLC (In re Isaacs), 895 F.3d 904, 912 (6th Cir. 2018).
The doctrine takes its name from Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983).
Count One of Debtor's Amended Complaint falls squarely within the Rooker-Feldman doctrine. Count One seeks to avoid the Mortgage, that this Court declare the Mortgage "void, unenforceable and subject to rescission and avoidance" due to alleged duress, undue influence, collusion, and/or fraud. Amended Complaint at 6. As discussed in more detail below, Debtor raised or could have raised these issues before the State Court. The State Court's Decision & Entry found the Mortgage valid and enforceable and ordered that it be foreclosed. Count One of the Amended Complaint is barred by Rooker-Feldman because Count One demands this Court's reconsideration of the issues tried before and decided by the State Court, essentially an appellate review of the State Court Judgment. The Rooker-Feldman doctrine prohibits this Court's review of the State Court Decision & Entry. Therefore, Count One must be dismissed.
C. Claim Preclusion and Issue Preclusion
In the Motion, Defendants referred fleetingly to "res judicata, claim preclusion and issue preclusion[,]" asserting that they bar Debtor's causes of action articulated in this adversary proceeding. Defendants failed to provide the Court any analysis or discussion, so the Court is unclear whether Defendants rely on one or both theories.
1. Requirements for Application of Claim Preclusion and Issue Preclusion
Res judicata is also known as claim preclusion. Litigation of an issue is barred by the principle of claim preclusion if: (1) there has been a final decision on the merits by a court of competent jurisdiction; (2) the subsequent action is between the same parties or their privies; (3) the issue in the subsequent action was or should have been litigated in the prior action; and (4) there is identity between the causes of action. See Bittinger v. Tecumseh Prods. Co., 123 F.3d 877, 880 (6th Cir. 1997) (citations omitted).
The Court may use both of these terms interchangeably in this decision, meaning the same thing.
In Ohio, collateral estoppel, also known as issue preclusion, "applies when the fact or issue: (1) was actually and directly litigated in the prior action, (2) was passed upon and determined by a court of competent jurisdiction, and (3) when the party against whom collateral estoppel is asserted was a party in privity with a party to the prior action." Scherer v. JP Morgan Chase & Co., 508 F. App'x 429, 435 (6th Cir. 2012) (citation omitted).
The Court may use both of these terms interchangeably in this decision, meaning the same thing.
"Generally, ‘[f]ederal courts must give the same preclusive effect to a state-court judgment as that judgment receives in the rendering state.’ Abbott v. Michigan, 474 F.3d 324, 330 (6th Cir. 2007) (citing 28 U.S.C. § 1738 )." Id.
The primary difference between res judicata and collateral estoppel, as developed in Cromwell v. County of Sac, [94 U.S. 351, 24 L. Ed. 195 (1877)] is that res judicata bars a second action on the same claim or cause of action including all matters that were raised or could have been raised in the first action, while collateral estoppel precludes relitigation of only such issues as were actually raised, litigated and determined in the first action and the decision of which were necessary to the judgment rendered.
Vogel v. Kalita (In re Kalita), 202 B.R. 889, 893 (Bankr. W.D. MI 1996), quoting 1B JAMES WM. MOORE, ET AL., MOORE'S FEDERAL PRACTICE ¶ 0.443[3] (sic) (2d ed. 1995). The Supreme Court has observed that "[w]hereas res judicata forecloses all that which might have been litigated previously, collateral estoppel treats as final only those questions actually and necessarily decided in a prior suit." Brown v. Felsen, 442 U.S. 127, 139, n. 10, 99 S. Ct. 2205, 2213, 60 L.Ed.2d 767 (1979) (citations omitted) (superseded by statute on other grounds).
2. Application of Claim Preclusion and Issue Preclusion
Defendants obtained a final decision on the merits of the State Court Case against Debtor from the Court of Common Pleas of Madison County, Ohio. See Decision & Entry. The court of common pleas is the proper forum in Ohio for an action seeking a money judgment or foreclosure of a mortgage, and Debtor has not suggested that the Madison County Court of Common Pleas is not a court of competent jurisdiction. The State Court Judgment was later affirmed by the Court of Appeals, Twelfth Appellate District of Ohio, Madison County. Thus, one requirement of both claim preclusion and issue preclusion is met.
These exhibits satisfy the authentication requirements of Fed. R. Evid. 902(4)(A), made applicable in bankruptcy proceedings by Fed. R. Bankr. P. 9017.
This adversary proceeding is between the same parties as were litigating the State Court Case, and thus, a second requirement of both principles is met.
To determine whether the last requirements are met, the Court must compare the causes of action and issues at stake in the previous litigation with the causes of action and issues currently before this Court. The causes of action at issue in front of the State Court were:
First claim: for a money judgment on the Promissory Note.
Second claim: for foreclosure of Defendants' Mortgage on Debtor's Property. The causes of action before this Court are:
Count One: seeking a determination that Defendants' claim is invalid and unenforceable, and to rescind and avoid Defendants' Mortgage on the basis of duress, undue influence, collusion, and fraud.
Count Two: seeking to avoid the Mortgage pursuant to 11 U.S.C. § 544(a)(3) for failure to be properly notarized.
Count Three: seeking to avoid the Mortgage pursuant to 11 U.S.C. § 544(a)(1) for failure to be properly notarized.
On comparison, it appears that the claims at issue in the State Court Case and in Count One of this adversary proceeding are the same, all hinging on the central issue of whether the Promissory Note and Mortgage are valid enforceable instruments.
a. Count One of the Amended Complaint
Although the Court finds that Count One is barred by the Rooker-Feldman doctrine, in case there is any doubt, the Court will review the impact of claim preclusion and issue preclusion on Count One.
The issues in Debtor's first cause of action in this adversary proceeding, whether duress, undue influence, collusion, and/or fraud should render the instruments invalid, were litigated and decided in the State Court, or should have been. As can be plainly seen in the Decision & Entry, validity of the Mortgage was squarely placed at issue before the State Court. That court meticulously recited Debtor's defenses and theories, the evidence, and its conclusions. After analyzing in detail the facts alleged and the evidence presented, the State Court stated:
In this case, the Court finds that there is insufficient evidence that one side involuntarily accepted the terms of another.
...
It is the judgment of the Court that the [Debtor] has failed to establish duress or coercion ....
Decision & Entry at 7. In this adversary proceeding, Debtor bases his claims related to "duress/undue influence/collusion/fraud" on allegations that Defendants' actions resulted in "deprivation of free will" upon Debtor, such that the "free will essential to the making of a valid contract was absent." Amended Complaint at ¶ 18. The validity of a mortgage is the issue at the very heart of a foreclosure action. Debtor's allegations of duress and coercion were litigated and decided in the State Court Judgment; the State Court rejected the various factual allegations and theories interposed by Debtor, expressly discussing duress and coercion. The State Court observed that Debtor could have declined to enter into the transaction or execute the instruments, and held:
The Court finds that the documents ... on their face reflect a meeting of the minds of the parties as to the terms of the agreements, that is, the mutual assent between the parties.
...
[T]he Court does not find that the promissory note and statutory mortgage were invalid contracts as the defendant asserts.
Decision & Entry at 5-6. The State Court's findings and conclusions were affirmed on appeal. Debtor's theory that duress or coercion invalidated the Mortgage is barred by issue preclusion.
To the extent that any of Debtor's theories underlying Count One of the Amended Complaint were not raised in the State Court, they were waived: it is well settled that one must bring all of his defenses to the court when subjected to litigation. As stated above, at the very heart of foreclosure is the validity of the subject mortgage. Failure to raise any defense results in loss of that defense. Covington & Cincinnati Bridge Co. v. Sargent, 27 Ohio St. 233, 233 (1875) ("In a judicial proceeding in a court of record, where a party is called upon to make good his cause of action or establish his defense, he must do so by all the proper means within his control, and if he fails in that respect, purposely or negligently, he will not afterward be permitted to deny the correctness of the determination, nor to relitigate the same matters between the same parties."). This is central to the principle of claim preclusion. "The purpose of res judicata is to promote the finality of judgments and thereby increase certainty, discourage multiple litigation, and conserve judicial resources." Westwood Chem. Co. v. Kulick, 656 F.2d 1224, 1227 (6th Cir. 1981) (citing Federated Department Stores, Inc. v. Moitie, 452 U.S. 394, 101 S. Ct. 2424, 2427-2431, 69 L.Ed.2d 103 (1981) ). Res judicata "bars relitigation on every issue actually litigated or which could have been raised with respect to that claim." Id. (emphasis added). Debtor could, and indeed was required to, have brought all defenses to bear when facing foreclosure of the Mortgage. The third and fourth criteria for application of claim preclusion are met. Defendants are entitled to summary judgment on Count One of the Amended Complaint.
b. Counts Two and Three of the Amended Complaint
The same cannot be said as to Count Two and Count Three of the Amended Complaint. In Counts Two and Three, Debtor alleges that a notary was not present and administering the oath when Debtor executed the document, and posits that the Mortgage is avoidable by virtue of this omission pursuant to 11 U.S.C. § 544(a)(1) and (3). He also points out that the notary's acknowledgment clause fails to specify the evidence of identification produced by Debtor. There is no indication in the record that these issues were raised by Debtor in the State Court Case.
If Defendants are advancing a theory that the Decision & Entry operates as res judicata as to this defense, they have not clearly articulated that or developed that argument. Nor have they suggested whether Debtor's failure to raise that defense waives it. It may be that such a defense was not available to Debtor in the State Court litigation. But the Court need not decide that question today because the causes of action plied by Debtor in Count Two and Count Three are vastly different than a foreclosure action in State Court. Debtor brings Counts Two and Three pursuant to § 544 of the Bankruptcy Code. This statute provides, in short, that the bankruptcy trustee has the rights and powers of, and may avoid any transfer of property of, the debtor that is voidable by a judicial lien creditor or a bona fide purchaser. This cause of action is unique to the Bankruptcy Code, and its application is limited to bankruptcy cases. Debtor brings these causes on behalf of the bankruptcy estate, standing in the shoes of the bankruptcy trustee. Defendants have not illustrated that claim preclusion or issue preclusion apply in this instance.
See Citizens Nat'l Bank v. Denison, 165 Ohio St. 89, 95, 133 N.E.2d 329 (1956) (stating that a "defectively executed conveyance of an interest in land is valid as between the parties thereto, in the absence of fraud") (citations omitted).
3. Bankruptcy Court's Power of Equity in Application of Res Judicata
Debtor does not argue that the elements of res judicata are not met, nor does Debtor offer any genuine issue of fact for the Court's consideration. Instead, Debtor asks the Court not to apply res judicata based on an alleged equity power of the bankruptcy court to disregard the principle of res judicata. In advancing this request, Debtor cites several sources for his proposition that the bankruptcy court is not bound by, and in this instance should not apply, the principle of res judicata.
Debtor cites Vanston Bondholders Protective Comm. v . Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946) (" Green ") for the proposition that bankruptcy law "takes precedence over all state laws and proceedings." Green is unpersuasive. First, it is not on point. Debtor has offered the Supreme Court's comment in a vacuum, from a case that bears no resemblance to this case. Second, many components of the Green decision have been questioned and/or superseded by statute, including the "balancing of equities espoused by the Supreme Court" articulated in the decision. See Sundale, Ltd., 410 B.R. 101, 103 (Bankr. S.D. Fla. 2009). Third, to the extent any statement in Green relating to the precedence of bankruptcy law over applicable state law has survived, there is no provision of the Bankruptcy Code that would authorize or require ignoring the long-standing principle of res judicata. Therefore, notwithstanding the Court's skepticism that this is valid authority, there is no conflict between bankruptcy law and state law here that would dictate that state law is superseded. The federal courts, including the bankruptcy court, are not a forum for relitigating the decisions or findings of fact of a state court. See, e.g., Singleton v. Fifth Third Bank (In re Singleton), 230 B.R. 533, 536 (B.A.P. 6th Cir. 1999) (reciting the Rooker-Feldman doctrine that "federal trial courts have only original subject matter, and not appellate, jurisdiction [and]... may not entertain appellate review of [or collateral attack on] a state court judgment." (citations omitted)). The courts have repeatedly confirmed that collateral estoppel and res judicata apply in bankruptcy cases.
Debtor also cites Heiser v. Woodruff, 327 U.S. 726, 740, 66 S.Ct. 853, 90 L.Ed. 970 (1946) and quotes from the concurring opinion of Justice Rutledge: "[i]t necessarily comprehends that the bankruptcy court in the allowance or rejection and ordering of claims shall not be bound by any broad or rigid rule of res judicata ." The Court finds this authority unpersuasive as well. This language is not reflective of the Supreme Court's ruling in Heiser, it appears only in the concurring opinion. In fact, the relevant language from the decision contradicts Debtor's position: the Supreme Court states, "we are aware of no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata, which is founded upon the generally recognized public policy that there must be some end to litigation and that when one appears in court to present his case, is fully heard, and the contested issue is decided against him, he may not later renew the litigation in another court." Id. at 733, 66 S.Ct. 853. Therefore, this Court concludes that Heiser does not stand for the proposition for which Debtor cites it.
Finally, Debtor points to Margolis v. Nazareth Fair Grounds & Farmers Market, Inc., 249 F.2d. 221, 224 (2nd Cir. 1957) in which the court stated, "[t]o the extent that equitable principles require re-examination by the bankruptcy court of the bases for the judgment where these bases have been or could have been previously adjudicated the doctrine of res judicata is inapplicable in bankruptcy proceedings." The Court also finds this authority unpersuasive. As Debtor acknowledged, the relevant language is dicta only and not reflective of the court's ruling. Furthermore, Margolis is very distinguishable from this case, as the alleged fraud at issue in Margolis was fraud preventing the debtor from raising a defense in prior litigation. Debtor's situation in this case is actually much more analogous to the fact pattern in Heiser, cited in the Margolis opinion, where res judicata operated to bar relitigation of a fraud defense that had twice been litigated previous to bringing the cause of action before the bankruptcy court. Margolis is not persuasive. Debtor's equity argument does not avail him.
The Court need not, and does not, decide whether the bankruptcy court has discretion to set aside res judicata on certain facts, as the Court has decided that res judicata does, on the facts presented, bar Debtor's cause of action in Count One.
C. 11 U.S.C. § 544 and Ohio Rev. Code §§ 1301.401 and 5301.07
Defendants next posit that Debtor is foreclosed from the relief he seeks in Counts Two and Three of the Amended Complaint by operation of § 1301.401 and § 5301.07 of the Ohio Revised Code ("Ohio Rev. Code").
Debtor brings Count Two and Count Three, seeking to avoid the Mortgage pursuant to 11 U.S.C. § 544(a)(1) and (3). This statute provides, in short, that the bankruptcy trustee has the rights and powers of, and may avoid any transfer of property, of the debtor that is voidable by a judicial lien creditor or a bona fide purchaser. Armed with these rights and powers (nicknamed the "strong arm powers"), a bankruptcy trustee may avoid a prepetition transfer of property that would be avoidable under Ohio state law by one of these entities. In a Chapter 13 case, the debtor may exercise the avoidance powers of a Chapter 13 bankruptcy trustee.
Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399 (B.A.P. 6th Cir. 2010), aff'd on other grounds, 655 F.3d 585 (6th Cir. 2011) ; U.S. Bank N.A. v. Barbee (In re Barbee), 461 B.R. 711 (B.A.P. 6th Cir. 2011). See also Halm v. Ohio Valley Bank (In re Halm), 2013 Bankr. LEXIS 1101, at *17 (Bankr. S.D. Ohio Mar. 11, 2013) ("If a Chapter 13 debtor has authority to prosecute avoidance actions on behalf of the bankruptcy estate, it logically follows that a debtor is clothed with authority to seek, on behalf of the estate, a determination of the extent of a mortgage purportedly encumbering property of the bankruptcy estate."). But see Keith M. Lundin, Lundin on Chapter 13, § 50.3, at ¶ 16, LundinOnChapter13.com (last visited Mar. 2, 2021).
Prior to 2013, this statute engendered robust mortgage avoidance litigation in this district based on various defects in mortgages (primarily in the execution of the document or in the jurat of the document). In 2012, the Ohio legislature enacted Ohio Rev. Code § 1301.401. Section 1301.401 became effective in 2013 and provides in pertinent part:
Prior to the amendments to the Ohio Revised Code discussed below, a defectively executed mortgage was not properly recordable and, even if recorded, did not constitute constructive notice of the mortgage holder's interest, and was, therefore, avoidable by a bankruptcy trustee. See, e.g., Stubbins v. Espenschied (In re Espenschied), 2010 WL 9034909, 2010 Bankr. LEXIS 2471 (Bankr. S.D. Ohio Mar. 16, 2010).
(B) The recording with any county recorder of any document described in division (A)(1) of this section ... shall
Division (A)(1) refers to documents described in Ohio Rev. Code § 317.08 ; § 317.08 lists numerous types of documents, including mortgages.
be constructive notice to the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record, including, but not limited to, any transfer, conveyance, or assignment reflected in that record.
(C) Any person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that the record was first... tendered to a county recorder for recording.
The Ohio legislature followed with amendments to Ohio Rev. Code § 5301.07, which rewrote the entire section effective in April 2017. Section 5301.07 now provides in pertinent part:
(B) (1) When a real property instrument is delivered to and accepted by the county recorder of the county in which the real property is situated, and is signed and acknowledged by a person with an interest in the real property that is described in the instrument, the instrument raises both of the following:
(a) A rebuttable presumption that the instrument conveys, encumbers, or is enforceable against the interest of the person who signed the instrument;
(b) A rebuttable presumption that the instrument is valid, enforceable, and effective as if in all respects the instrument was legally made, executed, acknowledged, and recorded.
...
(C) When a real property instrument is of record for more than four years from the date of recording of the instrument, and the record shows that there is a defect in the making, execution, or acknowledgment of the instrument, the instrument and the record thereof shall be cured of the defect and be effective in all respects as if the instrument had been legally made, executed, acknowledged, and recorded. The defects may include but are not limited to the following:
(1) The instrument was not properly witnessed.
(2) The instrument contained no certificate of acknowledgment.
(3) The certificate of acknowledgment is defective in any respect.
(4) The name of the person with an interest in the real property does not appear in the granting clause of the instrument, but the person signed the instrument without limitation.
(D) A real property instrument when delivered to the county recorder of the county in which the real property is situated and filed in the chain of title to the real property provides constructive notice to all third parties of the instrument notwithstanding any defect in the making, execution, or acknowledgment of the real property instrument.
This Court has dispelled any doubt that Ohio Rev. Code § 1301.401 does exactly what it says: it imposes constructive notice of a document filed in the public records upon "the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record... " regardless of any defect in execution of the instrument. Messer v. JPMorgan Chase Bank (In re Messer), 555 B.R. 656 (Bankr. S.D. Ohio 2016). See also Harker v. PNC Mortg. Co. (In re Oakes), 917 F.3d 523 (6th Cir. 2019). Thus, the trustee's power to avoid putative liens imposed by defective instruments is diminished from pre-2017 law. Neither of these cases cited above addresses the effect of Ohio Rev. Code § 5307.01, and the Court has not found one in its own research. But one need only read the statute to discern that the effect is the same. Debtor has not made any argument to the contrary.
Debtor does not contest the Court's interpretation of these statutes but points out that the Promissory Note and Mortgage were executed in 2007 and asserts that the statutes should not be applied retroactively. He highlights paragraph G of § 5301.07, which states "[t]his section shall not be given retroactive effect if to do so would affect any accrued substantive right or vested rights in any person ...." He opines that retroactive application will adversely affect his substantive rights "in his own real estate." See Response at 2. He cites no other authority in support for his position and offers no other defense to application of the statutes to this case.
Debtor misconstrues his role in this case. Section 544 of the Bankruptcy Code grants to the bankruptcy trustee the rights and powers of a judicial lien creditor or a bona fide purchaser. Debtor has no independent personal right to avoid a mortgage or lien under § 544. As plaintiff in this adversary proceeding, Debtor is standing in the shoes of the bankruptcy trustee; he can press this avoidance action only on behalf of the bankruptcy estate. Moreover, § 544 grants the strong arm powers to the bankruptcy trustee "as of the commencement of the case." Thus, the bankruptcy trustee's rights under § 544 arose on the date that Debtor filed his petition for relief, that is, October 23, 2019, long after the statutes were enacted. Therefore, the trustee's avoidance rights are subject to Ohio Rev. Code §§ 1301.401 and 5301.07. Obviously, "a Chapter 13 debtor's exercise of avoidance powers is subject to the normal defenses and restrictions on a trustee's powers to avoid transfers and conveyances." Keith M. Lundin, LUNDIN ON CHAPTER 13, § 50.3, at ¶ 16, LundinOnChapter13.com (last visited Mar. 2, 2021). The only question is whether these Ohio Revised Code provisions eviscerate the trustee's strong arm powers.
1. Count Two of the Amended Complaint
In Count Two, Debtor seeks to avoid the Mortgage pursuant to the trustee's powers of a bona fide purchaser under 11 U.S.C. § 544(a)(3). Debtor asserts that execution of the Mortgage was not properly acknowledged before a notary public and the notary's jurat was inadequate under applicable Ohio law, rendering the Mortgage defective and avoidable.
A bona fide purchaser is one who acquires property for fair consideration, in good faith, and without knowledge of prior conveyances or encumbrances. Harker v. PNC Mortg. Co. (In re Oakes), 565 B.R. 616, 623 (Bankr. S.D. Ohio 2017). Although § 544 applies regardless of a trustee's actual knowledge, the provision does not protect a trustee from constructive notice or other state law limitations on his status as a bona fide purchaser. Simon v Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1024, 1026-27 (6th Cir. 2001) ; Drown v. Wells Fargo Bank, N.A. (In re Scott), 424 B.R. 315, 328-29 (Bankr. S.D. Ohio 2010) (citations omitted), aff'd 2011 WL 1188434, 2011 U.S. Dist. LEXIS 38090 (S.D. Ohio 2011).
Ohio Rev. Code §§ 1301.401 and 5301.07 having imposed constructive knowledge upon the world of a mortgage filed in the public records regardless of defects in execution of the instrument, it is now well settled that avoidance of a mortgage, defectively executed but filed in the public records, is no longer available to bankruptcy trustees, or derivatively to a chapter 13 debtor, to the extent that they rely on the powers of a bona fide purchaser. See Oakes, 917 F.3d at 530 ; Messer v. JPMorgan Chase Bank (In re Messer), 555 B.R. 656 (Bankr. S.D. Ohio 2016) (regarding application of Ohio Rev. Code § 1301.401 ). See also In re Messer, 145 Ohio St. 3d 441, 50 N.E.3d 495 (Ohio 2015) (regarding application of Ohio Rev. Code § 1301.401 ).
Debtor lacks the remedy he seeks in Count Two.
2. Count Three of the Amended Complaint
In Count Three, Debtor seeks to avoid the Mortgage pursuant to the trustee's powers of a judicial lien creditor under 11 U.S.C. § 544(a)(1), again on the basis that execution of the Mortgage was not properly acknowledged before a notary public and the notary's jurat was inadequate under applicable Ohio law. In support of dismissal, Defendants cite Ohio Rev. Code §§ 1301.401 and 5301.07 but fail to illustrate how either section behooves them.
In Ohio, a judicial lien creditor can take priority over or avoid security interests that are unperfected under applicable state law. Oakes, 917 F.3d at 529. Notice, constructive or otherwise, is irrelevant. See id. This Court cannot say it better than the Sixth Circuit Court of Appeals did in Oakes. Interpreting and applying Ohio Rev. Code § 1301.401, that court stated:
Notice, however, is not relevant to the status of a judicial lien creditor. "Neither the Bankruptcy Code nor Ohio law requires that a judgment creditor have the same attributes of a bona fide purchaser as it pertains to notice of a prior interest; neither requires a judgment creditor to lack notice of an unrecorded or defective lien in order to obtain a superior lien on a judgment debtor's property." Stubbins v. Wells Fargo Bank, N.A. (Gibson), 395 B.R. 49, 57 (Bankr. S.D. Ohio 2008). In Ohio, a defectively executed mortgage is invalid to a subsequent lienholder "even if the subsequent mortgagee-lienholder had actual knowledge of the prior defectively executed mortgage."
...
Ohio's recently revised laws and the state supreme court's decision interpreting them make it clear that a defectively executed mortgage still provides notice to other potential subsequent bona fide purchasers and judicial lien creditors.
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Under Ohio law, notice whether constructive or actual does not affect the priority of recordings. That is, regardless of notice, a defectively executed mortgage is not "perfected" so it does not trump a subsequently perfected lien.
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Though § 1301.401 provides that a recorded mortgage, even if defectively executed, gives notice to the world, it does not make a defectively executed mortgage properly executed. Such notice is irrelevant in considering whether the Trustee may avoid PNC's mortgage as a judicial lien creditor, as Ohio law makes clear that a judicial lien creditor may still avoid a defectively executed mortgage, even if he has notice of such mortgage.
Oakes, 917 F.3d at 530-31 (citations omitted). Noting this, the Sixth Circuit Court of Appeals held that Ohio Rev. Code § 1301.401 did not alter a bankruptcy trustee's strong arm powers as a judicial lien creditor.
Then the Ohio legislature passed Ohio Rev. Code § 5301.07, again altering the lien priority landscape. Perhaps recognizing that § 1301.401 did not inure to the benefit of mortgage holders as envisioned when passed, the legislature broadly expanded the protections granted mortgage holders. See Oakes, 917 F.3d at 531, n. 2. Ohio Rev. Code § 5301.07(B) now creates a presumption, albeit rebuttable, that a recorded mortgage is valid, enforceable, and effective in all respects as if the instrument was legally made, executed, acknowledged, and recorded. The scope of the presumption and what exactly a party in interest may rebut is unclear to this Court, but it appears that the statute further dilutes a trustee's (and derivatively a chapter 13 debtor's) opportunity to avoid a defectively executed mortgage as a judicial lien creditor: § 5301.07(C) provides:
When a real property instrument is of record for more than four years from the date of recording of the instrument, and the record shows that there is a defect in the making, execution, or acknowledgment of the instrument, the instrument and the record thereof shall be cured of the defect and be effective in all respects as if the instrument had been legally made, executed, acknowledged, and recorded.
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Ohio Rev. Code § 5301.07(C). Recall that the Mortgage at issue in this case was executed and recorded in 2007, approximately twelve years prior to Debtor's chapter 13 petition for relief. If § 5301.07(C) applies, it may have cured execution defects in the Mortgage and defeat Debtor's effort to avoid the Mortgage pursuant to § 544(a)(1). Admittedly, the statute creates some questions in its application, but the Court need not resolve those issues, because the Court is convinced that Debtor's remedies are obviated due to the operation of lis pendens.
D. Lis Pendens
Even in the absence of the cited provisions of the Ohio Revised Code, Debtor is without a remedy under 11 U.S.C. § 544(a)(1) and (3).
As discussed above, § 544(a) bestows upon the bankruptcy trustee the rights and powers of a hypothetical judicial lien creditor and a hypothetical bona fide purchaser. Armed with these rights and powers, the trustee may avoid any transfer of property of the debtor that is avoidable by such an entity. Those rights and powers spring to life at the time of commencement of the bankruptcy case. Thus, they are subject to the legal environment extant at that time. At the time Debtor filed his petition for relief, Defendants had commenced foreclosure litigation in State Court. That litigation had proceeded to final judgment.
State law determines the extent of the trustee's rights under § 544(a). Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 655 (B.A.P. 6th Cir. 2001) (citing Simon v. Chase Manhattan Bank (In re Zaptocky) , 232 B.R. 76,79 (B.A.P. 6th Cir. 1999) ). A trustee "can prevail only if, under Ohio law, a person with the status described in [ § 544(a) ] as of the commencement of the [bankruptcy] case could avoid [the mortgagee's] interest in the [d]ebtor's property under the mortgage." Periandri, 266 B.R. at 655 (citation omitted). Ohio's lis pendens statute provides:
When a complaint is filed, the action is pending so as to charge a third persons with notice of its pendency. While pending, no interest can be acquired by third persons in the subject of the action, as against the plaintiff's title.
Ohio Rev. Code § 2703.26. "[L]is pendens operates upon the filing of a judicial foreclosure suit in Ohio, if the subject property is specifically described, and... it provides constructive notice to all of the mortgagee's interest, whatever that may be." Periandri, 266 B.R. at 654 (citations omitted). By virtue of the lis pendens statute, "during the pendency of the litigation no third person can acquire an interest in the property that disregards the plaintiff's interest." Id. at 656 ; see also Ransier v. Standard Fed. Bank, FSG (In re Collins), 292 B.R. 842, 849 (Bankr. S.D. Ohio 2003) (explaining that "[a]fter the foreclosure action was commenced, no party, including the Trustee acting pursuant to 11 U.S.C. § 544(a)(3), could attain a bona fide purchaser status against the interest of [the mortgagee].") (citing Periandri, 266 B.R. at 658 ).
Further, "the provision of Bankruptcy Code § 544(a)(3) that the trustee takes the powers of a bona fide purchaser of real property, ‘without regard to any knowledge of the trustee or any creditor,’ does not over-ride provisions of state law which impute notice of claims to real estate, such as a lis pendens, to all the world."
Periandri, 266 B.R. at 656 (citation omitted).
Although Periandri spoke to the status of a bona fide purchaser, the effect of the lis pendens statute applies to judicial lien creditors as well. Kellner v. Fifth Third Bank (In re Durham), 493 B.R. 506 (Bankr. S.D. Ohio 2013). The rule of lis pendens "was established to prevent the alienation of property which was the subject-matter of litigation." Meck v. Clabaugh, 16 Ohio App. 367, 369 (Ohio Ct. App. 1922) (citation omitted). The lis pendens statute is founded on public policy: to keep the subject property within the power of the court, and to give full effect to the proceedings of a court of justice. Id. To conclude that the rule does not apply to judicial lien holders would do violence to the express language of the statute, as well as render hollow judgments of the court endeavoring to adjudicate interests in the property before the adjudicating court.
Although the statute uses the term "notice," one should not misconstrue the effect of the statute in light of the discussion above in which the court stated that notice is irrelevant to a judicial lien creditor's rights. The court in Meck clarified that the efficacy of the rule "does not rest on the theory of notice." Meck, 16 Ohio App. at 367 (syllabus).
In this case, Defendants filed the foreclosure action against Debtor in the State Court in December 2013. Presumably, Debtor was served with summons and a copy of the foreclosure complaint shortly thereafter because Debtor answered the complaint and the matter proceeded to trial and final judgment in 2017. Debtor filed his voluntary petition for relief in October 2019. At the time that the bankruptcy commenced, Ohio's lis pendens statute operated to prevent everyone, including a bankruptcy trustee acting as a hypothetical buyer or hypothetical judgment creditor, from acquiring an interest in the property superior to that of Defendants. Accordingly, neither the trustee nor Debtor may avoid Defendants' Mortgage utilizing the strong arm powers of 11 U.S.C. § 544(a)(3) or (a)(1).
IV. Conclusion
The Court finds that there exist no genuine issues of material fact, and for the foregoing reasons, the Court concludes that (1) the Rooker Feldman doctrine and res judicata bar Count One of the Amended Complaint, (2) by virtue of Ohio Rev. Code § 1301.07 and Ohio Rev. Code § 2703.26 (the lis pendens statute), Debtor lacks bona fide purchaser status under 11 U.S.C. § 544(a) and so cannot prevail on Count Two of the Amended Complaint, and (3) by virtue Ohio Rev. Code § 2703.26, Debtor lacks the rights to avoid Defendants' Mortgage under 11 U.S.C. § 544(a) as a judicial lien creditor, and so cannot prevail on Count Three of the Amended Complaint. Thus, Defendants are entitled to summary judgment as a matter of law. Accordingly, it is
ORDERED AND ADJUDGED that the Motion to Dismiss (Doc. # 10), treated by the Court as a motion for summary judgment, filed by Defendants Gordon E. Johnson and Clydena Karen Johnson, is GRANTED , and all causes of action set forth in the Amended Complaint are dismissed. The Court will enter a separate final judgment consistent with the foregoing.