Opinion
Case No. 11-52952 Adv. Pro. No. 11-2375
08-30-2012
In re: Mark W. White, Tammy M. White, Debtors. Brent A. Stubbins, Trustee, Plaintiff, v. Conseco Finance Servicing Corp., Defendant.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
______________
C. Kathryn Preston
United States Bankruptcy Judge
Chapter 7
Judge Preston
MEMORANDUM OPINION GRANTING PLAINTIFFS MOTION FOR
SUMMARY JUDGMENT IN PART AND DENYING DEFENDANT'S
CROSS-MOTION FOR SUMMARY JUDGMENT
(Related Docs. 13, 14 and 15)
This cause came on for consideration of the Trustee Brent A. Stubbins's ("Plaintiff") Motion for Summary Judgment (Doc. 13) ("Motion"), Conseco Finance Servicing Corporation's ("Defendant") Response and Cross-Motion for Summary Judgment (Doc. 14) and Plaintiff's Reply ("Reply Brief") in Support of Motion for Summary Judgment (Doc. 15), filed in the above-captioned adversary proceeding. Plaintiff filed the Complaint under 11 U.S.C. § 544 seeking to avoid the mortgage held by Defendant due to a faulty legal description, and under § 551 to preserve the mortgage for the benefit of the Debtors' estate (Counts One and Three). Plaintiff also seeks to avoid mortgage payments made by Debtors, pursuant to §§ 547 and 549 as a preferential transfer or as an unauthorized postpetition transfer of property of the bankruptcy estate (Counts Two and Four). In Count Four, Plaintiff also seeks entry of a judgment under § 550. The Court having considered the record and the arguments of the parties makes the following findings and conclusions.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and General Order No. 05-02 entered in this District referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (F) and (K). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
Before commencing their bankruptcy case on March 24, 2011, Mark W. White and Tammy M. White formerly known as Tammy M. Smith ("Debtors"), granted to Defendant a mortgage ("Mortgage," as further defined herein). The parties intended the Mortgage to grant a lien on their real property located at 3680 Church Hill Road, Zanesville, Ohio (the "Property"), but the Mortgage references two parcels of real estate not owned by Debtors. Thus, Plaintiff contends that the Mortgage does not constitute a lien on the Property and that the Mortgage is avoidable. In response, Defendant argues that based on the facts of this case and the chain of title on the Property, a reasonably prudent buyer would be put on inquiry notice of the possible existence of an encumbrance on the Property and therefore the Mortgage is not avoidable.
For the reasons stated below, the Court concludes that the Mortgage does not encumber Debtors' interest in the Property. Accordingly, summary judgment on Counts One and Three must be granted in favor of Plaintiff and against Defendant.
I. Standard of Review for Motions for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Bankruptcy Rule 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, 2553, 91 L. Ed. 2d 265, 274 (1986). See also Fed. R. Civ. P. 56(c)(1)(A).
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 nonmoving 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, 2510, 91 L. Ed. 2d 202, 211 12 (1986). "On a motion for summary judgment, facts must be viewed in the light most favorable to the nonmoving party only if there is a genuine dispute as to those facts." Ricci v. DeStefano, 557 U.S. 557, 586, 129 S. Ct. 2658, 2677, 174 L. Ed. 2d 490, 511 (2009) (internal quotation marks omitted). 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 [bankruptcy] 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 complaint. '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 dispute is genuine only if it is "based on evidence upon which a reasonable [finder of fact] could return a [judgment] in favor of the non-moving party." Gallagher v. C.H. Robinson Worldwide, Inc., 567 F.3d 263, 270 (6th Cir. 2009). A "factual dispute concerns a 'material' fact only if its resolution might affect the outcome of the suit under the governing substantive law." Id. 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 Corp., 477 U.S. at 323 24.
In this adversary proceeding, both Plaintiff and Defendant filed motions for summary judgment. The filing of cross-motions does not alter the "standards upon which the court evaluates the motions for summary judgment[.]" Taft Broad. Co. v. U. S., 929 F.2d 240, 248 (6th Cir. 1991); Ransier v. Standard Fed. Bank (In re Collins), 292 B.R. 842, 845 (Bankr. S.D. Ohio 2003). Moreover, "the fact that both parties move for summary judgment does not require the court to find that no issue of fact exists[.]" Taft Broad Co., 929 F.2d at 248 (citing Begnaud v. White, 170 F.2d 323, 327 (6th Cir. 1948)).
II. Findings of Fact
The facts which appear undisputed in the record may be summarized as follows: Debtors acquired the Property by virtue of a General Warranty Deed dated February 21, 2000 (the "Deed"), which was recorded on June 6, 2001, in the official records of the Muskingum County, Ohio Recorder's Office (the "Muskingum County Official Record"). The Deed contains a legal description of the Property as follows:
[T]he following described real property, lying and being situate [sic] in the Township of Washington, County of Muskingum, State of Ohio, to-wit:
A parcel of land containing 10.214 acres, being known as Lot #14 of Church Hill Farms, of record in Vol. 17 Page 102 of the Muskingum County Plat Records.
Parcel # 70-70-15-09-36-000.
The notation "36" illustrates a manual correction made to the Deed, at some unknown time, to replace the erroneous number "19" originally typed, with the number 36.
The Deed does not state the street address of the Property. Debtors own and live in a manufactured home which is affixed to the real estate and considered a part thereof. On December 19, 2001, Debtors granted a Mortgage to Defendant to secure a promissory note payable to Defendant in the amount of $127,928.77. At the time of execution of the Mortgage, Defendant intended to obtain and the Debtors intended to grant a mortgage on the Property described in the Deed. The Mortgage was recorded on December 26, 2001 in the Muskingum County Official Record Volume 1634, at Page 442. Debtors were not involved in the preparation and recording of Defendant's Mortgage.
The legal description contained in the Mortgage is different from that set forth on the Deed. The Mortgage references the legal description as follows:
All of the property located at 3680 CHURCH HILL RD in the City/Town/Village of ZANESVILLE, County of MUSKINGUM, State of OH, in which the borrower has an ownership, leasehold or other legal interest. This property is more particularly described on the schedule titled "Additional Property Description" which is attached hereto as Exhibit A, together with a security interest in that certain 2011, 72 x 28 28 72-07 mobile home, serial number DHIN32357E.
*SEE PAGE 2*
. . . .
* The Borrower does hereby authorize the Lender or its assigns to obtain a more detailed property description after the Borrower has signed the Mortgage, and to attach Exhibit A after the Borrower has signed the Mortgage.
The Mortgage does not include a schedule titled "Additional Property Description," but does have an attachment titled "Exhibit A" ("Mortg. Ex. A") with the following legal description:
Situated in the Southeast Quarter of Section 2, Township 2, Range 7, Washington Township, Muskingum County, Ohio, bounded and described as follows:
Beginning at a stake on the South line of said Southeast Quarter, Section 2, a distance of 1195.38 feet West of the Southeast corner of said Quarter Section; thence running North 83 degrees 24 minutes West, on the South line of said Quarter Section, 587.94 feet to a point in the center of County Road No. 110; thence running North 10 degrees 30 minutes West in the center of said road, 413.90 feet to a point; thence running North 61 degrees 12 minutes East in the center of Township Road No. 190, 870.59 feet to a point; thence running South 6 degrees 36 minutes West 899.91 feet to the place of beginning, containing ten (10[)] acres, more or less.
Said premises are subject to the Deed Restrictions for Church Hill Farms. Copy attached.
The Deed Restrictions for Church Hill Farms are not attached to the Mortgage or Mortg. Ex. A. The Property is comprised of a 10.214 acre parcel known as Lot # 14 of Church Hill Farms ("Lot 14"). But, Mortg. Ex. A only refers to "10 acres, more or less." The legal description set forth on Mortg. Ex. A is given in a metes and bounds description of a 5.043 acre tract and a 5.031 acre tract ("Lots 1 and 2") in Church Hill Farms, but does not describe Lot 14 in any fashion.
Mortg. Ex. A contains a metes and bounds description of Lots 1 and 2 of Church Hill Farms, but does not state the actual acreage of those Lots. Only the plat map of Church Hill Farms, which was not attached to the Mortgage or Deed, reveals the actual acreage of Lots 1 and 2.
The Muskingum County Official Record reveals that the Property described in the Deed is titled to Debtors. The Mortgage, recorded six months after the Deed, names the Debtors as the mortgagors, stating:
According to the Muskingum County Official Record, Debtor Mark W. White also owns property with one Clyde A. White, known as Shady Lane Farms #2 Salt Creek PT Lot 106 10.693A. That deed, however, is not related to the Property owned by Debtors in this case or to Lots 1 and 2.
[T]he parties [and] their addresses . . . are as follows:
MORTGAGOR: MARK W. WHITE, UNMARRIED, AND TAMMY M. SMITH, UNMARRIED 3680 CHURCH HILL RD ZANESVILLE, OH 43701
The Muskingum County Official Record reflects the following deeds in the chain of title for Lots 1 and 2:
1. A deed from Lakewood Farms, Inc. to Chad G. and Shelley M. Buchanan, for a parcel of land known as Lot #1 of Church Hill Farms . . . . Parcel # 70-70-15-02-41-000; and
2. A deed from Lakewood Farms, Inc. to Ronald B. and Troy A. Rittberger, for a parcel of land known as Lot #2 of Church Hill Farms.
The deed for Lot 2 recorded in the Muskingum County Official Record did not include a parcel number.
The Muskingum County, Ohio Auditor's record ("Auditor's Record") describes the Property as parcel number 70-15-09-36-000, reflects Debtors as the owners of the Property, and states that the Property address is "3680 Church Hill Rd". The Auditor's Record also includes the following legal description for the Property:
Although the Deed references the parcel identification number as 70 70 15 09 36 000, a comparison of the Deed and the Auditor's Record reveals that both documents refer to the Property; the Auditor's record just omits the initial numeral "70".
STRUCTURES
LOT 14 10.21A CHURCH HILL FARMS.
On March 24, 2011, Debtors filed a Petition for Relief under Chapter 7 of the Bankruptcy Code. Plaintiff is the duly appointed case trustee of Debtors' bankruptcy estate. Upon discovery of the defect in Defendant's Mortgage, Plaintiff commenced this adversary proceeding, invoking the "strong arm" powers granted bankruptcy trustees under § 544, and the additional avoidance powers under §§ 547 and 549.
III. Conclusions of Law
A. Count One
Plaintiff brings Count One of the Complaint under § 544 of the Bankruptcy Code. Section 544 provides in pertinent part:
(a) The 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 by11 U.S.C. § 544.
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(3) a bona fide purchaser of real property, other than fixtures, 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.(b) (1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
As succinctly stated by Judge Clark of this District,
Section 544(a) provides that the trustee in bankruptcy has the rights of a bona fide purchaser for value and may avoid any transfer of real property that is voidable by such a purchaser. 11 U.S.C. § 544(a)(3). The extent of the rights of a bona fide purchaser for value is determined by the law of the state in which the property is located. See Owen-Ames-Kimball Co. v. Mich. Lithographing Co. (In re Mich. Lithographing Co.), 997 F.2d 1158, 1159 (6th Cir. 1993).Rieser v. Household Realty Corp. (In re Madden), 2005 WL 4050174, at *2 (Bankr. S.D. Ohio Jun. 2, 2005) (some internal quotation marks omitted).
In Ohio, a bona fide purchaser for value is a purchaser who "takes in good faith, for value, and without actual or constructive knowledge of any defect." Terlecky v. Beneficial Ohio, Inc. d/b/a Beneficial Mortg. Co. of Ohio (In re Little Key), 292 B.R. 879, 883 (Bankr. S.D. Ohio 2003) (citing Shaker Corlett Land Co. v. City of Cleveland, 139 Ohio St. 3d 66, 68, 41 N.E. 243 (1942)). "[A] bona fide purchaser for value is bound by an encumbrance upon land only if he has constructive knowledge of the encumbrance." Id. (quoting Tiller v. Hinton, 19 Ohio St. 3d 66, 68, 482 N.E. 2d 946, 949 (1985)). But, "a purchaser will be charged with knowledge of a previous encumbrance upon real property when he has knowledge of facts which would induce a prudent person to make an inquiry by which he would have or could have obtained knowledge of a prior encumbrance." Id. (quoting Thames v. Asia's Janitorial Service, Inc., 81 Ohio App. 3d 579, 587, 611 N.E. 2d 948, 953 (1992)).
"The purpose of the 'strong arm clause' is to cut off unperfected security interests, secret liens and undisclosed pre-petition claims against a debtor's property as of the commencement of the case," and ensure equal distribution of a debtor's assets among its creditors. Therefore, § 544(a)(3) empowers a trustee in bankruptcy to avoid interests in real property that are unperfected on the date of filing, under the guise of either a bona fide purchaser of real property or a judgment lien creditor, whether or not such a purchaser or creditor actually exists. Courts have uniformly interpreted § 544(a) to allow a trustee to "enjoy[] the status of a hypothetical bona fide purchaser, without regard to any actual knowledge of the [t]rustee." First S. Bank v. Stanphill (In re Stanphill), 312 B.R. 691, 694 (Bankr. N.D. Ala. 2004) (citations omitted). Thus, Plaintiff must prevail unless there is constructive notice of Defendant's claim. The question, therefore, is whether the Mortgage gave the world sufficient notice of the interest of Defendant to alert a purchaser of the outstanding encumbrance, thereby preventing Plaintiff from standing in the shoes of a bona fide purchaser or a judgment lien holder. In other words, the question is whether the Mortgage provided the purchaser with sufficient "facts which would induce a prudent person to make an inquiry by which he would have or could have obtained knowledge of [the] prior encumbrance." Terlecky v. Beneficial Ohio, Inc. d/b/a Beneficial Mortg. Co. of Ohio (In re Little Key), 292 B.R. 879, 883 (Bankr. S.D. Ohio 2003) (quoting Thames v. Asia's Janitorial Service, Inc., 81 Ohio App. 3d 579, 587, 611 N.E. 2d 948, 953 (1992)).
Canney v. Merchants Bank (In re Canney), 284 F.3d 362, 374 (2d Cir. 2002) (quoting 5 Collier on Bankruptcy ¶ 544.03 (15th ed. rev. 2001)).
Several courts have addressed the issues presented by the Mortgage or some variation thereof. In Little Key, the court was faced with a similar issue; however, the legal description in the Little Key mortgage was only slightly inaccurate, having a typographical error of a single digit in the recording information of a prior deed. The legal description described the property by metes and bounds, in which there was no error. Therefore, that court found that the mortgage provided the trustee with constructive notice. Little Key is distinguishable from the case before the Court. In this case, the legal description wholly fails to describe the Property on which Defendant sought to obtain a mortgage; it contains a legal description of the parcels known as Lots 1 and 2 of Church Hill Farms.
In Stanphill, the mortgageholder filed a complaint to reform its mortgage on property of the estate after the trustee filed a motion to sell the property. The mortgage did not have just an error in the legal description but completely failed to include the legal description of the subject property altogether; through mutual error, the mortgage documents omitted any description of approximately 300 acres of property that both parties intended to include. The subject property was a separate and distinct parcel than that actually described in the Stanphill mortgage. The court, finding that the mortgage failed to give constructive notice, denied the bank's request for reformation. Like the mortgage in Stanphill, the Mortgage in this case omitted the legal description for the Property, but included a formal legal description for completely different real estate.
Similarly, the bankruptcy court in Hamilton v. Washington Mut. Bank (In re Colon), 2005 Bankr. LEXIS 2376 (Bankr. D. Kan. Dec. 5, 2005), found the mortgage legal description fatally defective because it specified lot 29 rather than lot 79 of a particular subdivision. All other information was correct, including the street address and the parcel identification number. The bankruptcy court found nothing in the mortgage to put a purchaser on notice that he needed to undertake further inquiry. On appeal the Bankruptcy Appellate Panel ("BAP") upheld avoidance of the mortgage. On further appeal, however, the Tenth Circuit Court of Appeals reversed the decisions of the BAP and bankruptcy court, remanding the case to the bankruptcy court with instructions to enter judgment in favor of the bank/mortgage holder. The Tenth Circuit relied on a Kansas statute and caselaw, which made clear that under Kansas law, "one is on notice of the contents of every properly filed document." Hamilton v. Wash. Mut. Bank FA (In re Colon), 563 F.3d 1171, 1179 (10th Cir. 2009) (citing Kan. Stat. Ann. § 58-2222 (2005)). Reversing the decision of the BAP, the Tenth Circuit stated:
Although Stanphill and Colon were "not decided under Ohio law, both Alabama and Kansas law recognize, as do Ohio courts, that constructive notice chills the bankruptcy trustee's avoidance rights under § 544(a). Thus, they are persuasive in this case." See Stubbins v. Am. Gen. Fin. Serv., Inc. (In re Easter), 367 B.R. 608, 614 (Bankr. S.D. Ohio 2007). See also Field v. Ocwen Loan Servicing, LLC (In re Schlabach), 2012 Bankr. LEXIS 878, at *10 (Bankr. S.D. Ohio Mar. 1, 2012) (Buchanan, J.) ("Because the Bankruptcy Code provides that a bankruptcy trustee is a bona fide purchaser regardless of actual knowledge, constructive knowledge is the only relevant inquiry in the context of an avoidance action under Section 544(a)(3) of the Bankruptcy Code." (citation omitted)); Stanphill, 312 B.R. at 694 ("[T]he Trustee's legal position [as a bona fide purchaser] will fail only if there was constructive notice of [a] competing claim to the propert[y]. . . . [C]onstructive notice [exists] . . . if the facts were such as to cause a reasonable person to inquire as to the possible existence of a competing interest."); Colon, 563 F.3d at 1174 ("Under Kansas law a BFP a purchaser for value who has neither constructive notice . . . nor actual notice . . . of an encumbrance takes the property free of the encumbrance." (citations omitted)).
Here, recorded documents in the Debtors' chain of title give the same street address and parcel identification number as the Bank's mortgage, together with the correct lot number. A recorded Subordination Agreement also clearly indicates that the Bank's mortgage [encumbers] the same property as the subordinated second mortgage on the Debtors' house. . . . [O]ne exercising 'reasonable prudence and diligence,' . . . would have determined that the Bank has a mortgage on the Debtors' house. Therefore, the mortgage cannot be avoided by the trustee.Colon, 563 F.3d at 1173.
Similar to the factual circumstances in Colon, Defendant's Mortgage in the instant case was properly recorded pursuant to the requirements of § 5301.01 of the Ohio Revised Code. Under § 5301.01:
The recording of the instrument in the office of the county recorder of the county in
which the subject property is situated is constructive notice of the instrument to all persons, including without limitation, a subsequent purchaser in good faith or any other subsequent holder of an interest in the property . . . .OHIO REV. CODE ANN. § 5301.01(B)(1)(b) (LexisNexis 2012). Moreover, Sixth Circuit precedent confirms that a purchaser is on notice of the contents of documents in the chain of title that comport with § 5301.01. See Argent Mortgage Co., LLC v. Drown (In re Bunn), 578 F.3d 487, 489 (6th Cir. 2009) (citing Thames, 611 N.E.2d at 953) ("Ohio law deems any purchaser including bankruptcy law's hypothetical BFP to have constructive notice of all instruments executed by the current owner of the land that are 'properly recorded.'"). See also H&S Co. v. City of Aurora, 2004 Ohio App. LEXIS 3157, at *14 (Ohio Ct. App. Jun. 30, 2004) (holding that "Ohio has long abided by the principle that a purchaser of real property is charged with constructive notice of all prior conveyances recorded in his chain of title. . . . Thus, the proper filing of a conveying instrument that comports with R.C. 5301.01 will impute constructive notice of that document, and its incorporated encumbrances, upon the purchaser." (citations omitted)).
The factual circumstances in Colon, however, can be differentiated from those in this case. While both the Colon mortgage and the Mortgage in this case contain the proper street address, Defendant's Mortgage does not include any other identifying information, such as the parcel identification number, which was an identifier contained in the Colon mortgage. Even while reversing the bankruptcy court's decision, the Tenth Circuit emphasized that there must at least be the suggestion of some problem in the recorded documents for a purchaser to be compelled to make further inquiry: "[A] purchaser of real estate in Kansas is deemed to have 'notice [or at least constructive notice] of the contents of all the prior recorded deeds and mortgages' in the grantor's chain of title. . . . The purchaser 'is chargeable with notice of the facts appearing upon their face, and also with knowledge of all facts suggested therein, and which, with the exercise of reasonable prudence and diligence, he might have ascertained.' . . . We [impart] . . . the general rule that if a document in the chain of title suggests a substantial problem, the purchaser must make reasonable inquiry." Colon, 563 F.3d at 1173, 1180 82 (emphasis added) (citations omitted).
The Court decided a similar question in Stubbins v. Am. Gen. Fin. Serv., Inc. (In re Easter), 367 B.R. 608 (Bankr. S.D. Ohio 2007). In Easter, the Chapter 7 trustee sought to avoid the mortgage utilizing his "strong arm" powers under § 544. The debtors had acquired a 0.553 acre parcel of property by survivorship deed; the deed's legal description for the subject property described a larger parcel and then excepted two smaller tracts of the land (by additional legal description) from that larger parcel. The debtors entered into some sort of credit relationship with the defendant, for which the debtors granted the defendant a mortgage. The mortgage contained the correct street address and the tax parcel identification number for the subject property. The legal description contained in the mortgage, however, did not contain the entirety of the legal description set forth in the deed. The mortgage's legal description did not refer to the subject property conveyed to the debtors in the deed, but instead referred only to the two small tracts specifically excepted from the larger parcel. As a result the subject property was not described in the mortgage at all. Thus, the Court concluded that the mortgage from the debtors to the defendant did not, by its stated legal description, encumber the subject property. The Court explained that "the street address and parcel number are not part of the Property's legal description; inclusion of that information is not statutorily mandated, but is often included for the convenience of the parties." Easter, 367 B.R. at 614.
Since Little Key, Stanphill, Colon and Easter, the Sixth Circuit of Appeals has spoken on this issue in Bunn. Bunn is controlling on this Court. In Bunn, the Sixth Circuit considered whether a recorded mortgage that contains the street address of residential property but not the legal description of the parcel of land is sufficient to preclude the trustee from invoking the Bankruptcy Code to set aside the otherwise-valid mortgage. "The Sixth Circuit focused on what a reasonably prudent real estate purchaser would conclude upon discovery and review of such a mortgage." Field v. Ocwen Loan Servicing, LLC (In re Schlabach), 2012 Bankr. LEXIS 878, at *16 (Bankr. S.D. Ohio Mar. 1, 2012) (Buchanan, J.) (citing Bunn, 578 F.3d at 489 90). In Bunn, the warranty deed by which the debtor and her former husband took title to the subject property contained a precise legal description. The warranty deed referenced the property's street address and the parcel identification number, and contained a description of the property consisting of the lot number and subdivision name along with plat book recording information. On the other hand, the mortgage documents did not contain any legal description, but did indicate that the mortgage was granted on property of the same street address given in the warranty deed.
The Sixth Circuit defined precise legal description as follows:
'Precise legal description' as used here refers to a metes and bounds description, a reference to a government survey, or a reference to a recorded plat. Such a description allows any interested party to determine exactly which land is in question with reasonable precision. Less formal descriptions, such as 'all my land in Franklin County' or 'my property commonly known as Blackacre,' would require a party desiring to know exactly which land is at issue to track down an instrument with a precise legal description. So long as such an instrument exists, an informal description may suffice to transfer title.Bunn, 578 F.3d at 488 n.3 (citations omitted).
The bankruptcy court ruled for the trustee after concluding that the mortgage did not provide constructive notice to a bona fide purchaser on the basis that "neither the parcel number nor the street address, nor both together, would lead [a] third party to discover precisely what property is covered by the [m]ortgage. Both a street address and a permanent parcel number may refer to a geographic area that contains more or less property than what the mortgagor intended to encumber." Bunn, 578 F.3d at 488. The district court reversed holding that a bona fide purchaser "has a duty to make a reasonable inquiry when an irregularity or a suspicious circumstance is apparent on the recorded instrument." Id. (emphasis added).
The Sixth Circuit affirmed the judgment of the district court, concluding that Ohio law deems any purchaser, including a bona fide purchaser, to have constructive notice of all instruments executed by the current owner of the land that are properly recorded and that the law assumes that any such purchaser has searched the relevant title indexes and examined the deeds in the chain of title. The Sixth Circuit observed that:
Nothing in the documents indicated that the mortgage company sought a lien on anything less than the full property Bunn explicitly mortgaged [to the lender] 'the following described property,' and provided a description that included not only the street address but also the tax identification number that applied to the entire parcel. That number is also identical to that in the deed by which Bunn originally took title, and that deed did have a precise legal description.Bunn, 578 F.3d at 489 (emphasis added). Thus, the Sixth Circuit held that the trustee was placed on constructive notice and could not avoid the mortgage even though the legal description was omitted, because the debtor's deed described the property by lot number and subdivision name immediately followed by the auditor's parcel number and street address and the recorded mortgage restated the same parcel number and street address. As further noted by the Bunn court:
No Ohio case directly suggests that the Ohio courts would set aside an otherwise valid mortgage in favor of a third party purchaser in these circumstances. On the contrary, a reasonably prudent real estate purchaser, upon discovering that a residential lot has a mortgage that describes the lot by address but not by plat number when both address and plat number are on the granting deed and the seller owns no other real estate in the county, is unlikely to proceed as if the lot were unencumbered.Id. at 490 (emphasis added).
Thus no purchaser could attain BFP status, and the trustee may not use his strong-arm powers to set aside the mortgage.
This issue was also recently examined by other courts in this district. In Schlabach, the chapter 7 trustee filed an action to avoid a mortgage on the debtors' residence. The debtors' residence was situated on two adjoining parcels, denominated Parcel 11 and Parcel 12. The parcels were acquired by separate deeds in the same year from the same grantor. The faces of the first and second mortgages relating to the residence, and the attached legal descriptions each recited the correct street address for the debtors' residence, but the attached legal descriptions contained inconsistent references to the parcel numbers and metes and bounds descriptions. The face of the first mortgage referenced only the correct street address for the debtors' residence. The legal description attached to the first mortgage referenced Parcel 11, but set forth the metes and bounds description for Parcel 12. The face of the second mortgage referenced Parcel 12, by its parcel identification number, but the legal description attached to the second mortgage referenced Parcel 11 and set forth the metes and bounds description for Parcel 11. Neither legal description attached to the first mortgage or the second mortgage was wholly correct, because both parcels comprised the debtors' residence.
The chapter 7 trustee sought to avoid the first mortgage in its entirety pursuant § 544(a)(3), based on the lack of notice of the first mortgage as a result of the irregularities in that mortgage's legal description. The court found that the contents of the first mortgage and the record as a whole including references to the correct street address in the two mortgages and exhibits to the mortgages, and the information in the deeds conveying each parcel in the same year and from the same grantor contained sufficient information that a reasonably prudent purchaser would have constructive notice and that the first mortgage encumbered the entirety of the debtors' property. Hence, the court denied the trustee's motion for summary judgment.
As an alternative, the chapter 7 trustee and second mortgage holder challenged the extent and/or validity of the first mortgage based on the irregularities in the legal descriptions. The court denied summary judgment on that basis.
The Schlabach holding was distinguished by the court in Bank of New York v. Sheeley (In re Sheeley), 2012 Bankr. LEXIS 1374 (Bankr. S.D. Ohio Apr. 3, 2012) (Humphrey, J.). In Sheeley, the debtors obtained title to a parcel of property that became their residence and title to a vacant parcel of real property adjacent to the residence parcel. The residence parcel and the vacant parcel were acquired approximately three and one-half years apart. Each deed contained a metes and bounds description for the parcel subject to the deed. In 2006, the debtors borrowed money from and granted a mortgage to Countrywide Bank, N.A. ("Countrywide"). The note and mortgage referenced the address for the residence parcel. However, the exhibit A attached to the mortgage contained the metes and bounds legal description for the vacant parcel; it did not contain the metes and bounds legal description for the residence parcel. The debtors intended that the mortgage encumber the residence parcel. The Sheeley court concluded that Schlabach was distinguishable, "[b]ecause the legal descriptions attached to [the Schlabach] mortgages described both parcels either by reference to the parcel number or through the metes and bounds description and contained the correct street address . . . ." Sheeley, 2012 Bankr. LEXIS 1374, at *26 n.6.
The Sheeley opinion addressed several other issues relating to the subject property pertaining to the debtors' Chapter 13 plan. Those issues are not pertinent to the Court's analysis in this matter.
The Sheeley court also distinguished the Sixth Circuit's holding in Bunn:
In Bunn the mortgage lacked any legal description and the Sixth Circuit concluded that the validity of a mortgage under Ohio law did not depend on the inclusion of a precise legal description if the property provides a description of the land and that description leads back through the recorded chain of title to the 'precise legal description.' . . . In this case . . . the [Sheeleys'] Mortgage contained a precise legal description of a different property. . . . Even if a bona fide purchaser traced the chain of title back to the Sheeleys' deeds, the matter would not have been clarified since they acquired the Residence Parcel and the Vacant Parcel through separate deeds at separate times, with separate metes and bounds descriptions. Even though the correct street address on the Mortgage would have referred back to the correct metes and bounds description on the deed for the Residence Parcel, the precise legal description for the Vacant Parcel included in the Mortgage prevail[ed] over the less precise street address."Sheeley, 2012 Bankr. LEXIS 1374, at *25 26.
Importantly, courts considering the issue of notice imputed to a bona fide purchaser have analyzed the totality of the circumstances on a case-by-case basis. See Bunn, 578 F.3d at 490 ("It is instructive to compare this case with those in which Ohio courts have set aside mortgages as inadequate to give constructive notice."); Colon, 563 F.3d at 1182 ("We now turn to the specifics of the case before us to determine the extent of constructive notice to a purchaser of the [d]ebtors' house."); Drown v. Colony Mortg. Corp. (In re Bridgeforth), 2011 Bankr. LEXIS 3353, at *5 6 (Bankr. S.D. Ohio Sept. 14, 2011) ("[T]he actual issue is whether the total contents of the first mortgage provide constructive notice to a hypothetical creditor based upon a reasonable search of related real estate records. . . . [Here,] the legal description in the first mortgage and deed were in agreement . . ., the property address in the schedules matches the first mortgage and deed[, and] the same tax identification number is used in the first mortgage and the deed. All these factors demonstrate that the Plaintiff, as a trustee seeking to recover assets for the benefit of creditors, had sufficient notice that there was a lien on the property." (citation omitted)); Little Key, 292 B.R. at 883 ("In the instant case, the Court finds that the total contents of the mortgages would have put a hypothetical lien creditor or a potential bona fide purchaser on constructive notice.").
Defendant relies on Bunn and Schlabach to support its position. First, Defendant relies on Bunn to assert that a purchaser is on inquiry notice of that which is in the record, and has an obligation to check that information rather than treat it as irrelevant. To support its contention, Defendant asserts that the chain of title for the Property discloses the Deed (from 2001) as well as the plat for Church Hill Farms, and that a buyer reviewing those documents would not be confused by the later deed referring to Lots 1 and 2.
Bunn is distinguishable from the facts of this case. The Bunn mortgage did not contain any legal description, but included the identical parcel number and street address found in the deed, which deed also contained a "precise" legal description. Bunn, 578 F.3d at 489. Here, the Mortgage does contain a precise, but wrong legal description: it contains the legal description for Lots 1 and 2 rather than that for Lot 14. Additionally, although the Mortgage referenced the correct street address, it did not reference any parcel identification number. The Deed, on the other hand, contained a precise legal description of the Property and listed the parcel number, but did not contain the street address for the Property or any other street address.
Unlike the circumstances in Bunn, the information in the Mortgage and Deed cannot be cross-referenced because they contain alternate identifiers. Clarifying the holding in Bunn, the Sheeley court concluded, "The more precise description is preferred over the less specific one . . . a metes and bounds description therefore trumps a street address that is also recited in the mortgage." Sheeley, 2012 Bankr. LEXIS 1374, at * 25 (citing Wagner v. Christiana Bank & Trust Co. (In re Wagner), 353 B.R.106, 119 (Bankr. W.D. Pa. 2006)). Thus, in the instant case, the precise legal description for Lots 1 and 2 prevails over the less precise street address included in the Mortgage.
The Court also finds Schlabach to be distinguishable. In Schlabach, the court was able to cross-reference the street addresses in the mortgages with the information in the deeds and other information in the record. The Mortgage in this case contains the correct street address but does not contain the correct legal description or parcel identification number; it describes two wholly different lots. It also includes a description of the manufactured home situated on the Property. In contrast, the Deed contains the correct legal description and parcel identification number, but does not reference the street address nor does the Deed mention a manufactured home. This information does not put a reasonable, prudent person on notice that he should make further inquiry. Given that the Mortgage and Deed contain inapposite information and legal descriptions for different properties, Plaintiff did not have the type of notice of a potential encumbrance that would require him to search the chain of title relating to the real estate described in the Mortgage or other documents under Debtors' names. See Easter, 367 B.R. at 614 ("Therefore, the Court finds that [the] street address and parcel number in the Mortgage did not put the Trustee on notice of a potential encumbrance such that he lost his status as a bona fide purchaser."). As the court observed in In re Speer, "[Defendant's] approach would require a searching party to examine each document under a debtor's name, determine if it was properly described and properly indexed and, even if on the surface it appeared to be properly recorded, surmise the parties' actual intent in recording such a document, even where the record in question pertained to property not in question. We do not believe this is required of the reasonable purchaser or its title searcher." Citifinancial, Inc. v. Speer (In re Speer), 328 B.R. 699, 704 (Bankr. W.D. Pa. 2005) (citation omitted).
Moreover, "[a] real estate legal description is generally a detailed, exact, specific description . . . Insisting that a purchaser cross-check all pieces of information included on the Mortgage, when it contains a detailed, specific legal description in which there is no ambiguity, places an unreasonable burden on the purchaser." Easter, 367 B.R. at 614. Though the Court acknowledges that there may be inconsistency between the Property as described in the Deed (by legal description and parcel number) versus that real estate described in the Mortgage (the Property's correct street address but an incorrect legal description), there is no apparent ambiguity on the face of the documents. As noted, the Property is comprised of a 10.214 acre tract. But, Mortg. Ex. A only refers to "10 acres, more or less." The legal description included in Mortg. Ex. A sets forth solely a precise or metes and bounds description of Lots 1 and 2 in Church Hill Farms as the subject property, but does not state the actual acreage of the individual lots. There is no discrepancy or ambiguity between the two documents in the street address or parcel number.
Given the size of Lots 1 and 2 5.043 and 5.031 acres, respectively they could also be generically described as "10 acres, more or less."
Thus, upon discovery of the Mortgage, a reasonable and prudent person would not necessarily perceive an irregularity, ambiguity or suspicious circumstance in the legal description (for Lots 1 and 2 rather than Lot 14) or any other identifiers such as the street address and parcel number. Therefore, the Mortgage from the Debtors to the Defendant does not by its stated legal description encumber the Property. Further, the Court finds that the street address in the Mortgage did not put Plaintiff on notice of a potential encumbrance such that he lost his status as a bona fide purchaser. Easter, 367 B.R. at 614.
"A bona fide purchaser for value is bound by an encumbrance upon land only if he has constructive knowledge of the encumbrance." Id. at 612 (emphasis added) (citations omitted). As the Court concluded in Easter:
That the Mortgage can be found during a search of the public records should be no surprise to anyone: there is no dispute that the Mortgage is a mortgage or that it is recorded in the [county] public records . . . It naturally should, therefore, be found upon a search of the public records. However, . . . the issue is not whether the Mortgage is of public record, but rather the effect of the legal description and whether it withstands the attack of the Trustee. This Court thinks it does not.Id. at 614 15. Likewise, that the chains of title for the Property and Lots 1 and 2 are traceable in the public records of Muskingum County is of little significance. A mortgage does not put a trustee on constructive notice when the mortgage contains the correct street address, but no parcel number and an incorrect or wholly different legal description. See Easter, 367 B.R. at 614. See also Sheeley, 2012 Bankr. LEXIS 1374, at *26 (same); Jahn v. Bank of America (In re Lawson), 2011 WL 1167115 (Bankr. E.D. Tenn. Mar. 28, 2011) (same)). The Court, therefore, concludes that there was nothing in the Mortgage to put the Trustee on notice that he needed to undertake further inquiry.
Defendant also contends that because Muskingum County employs a name index for its property records, a purchaser would first be on notice of the Mortgage through the chain of title in the index, which links the present purported owner and his or her grantor, and every predecessor grantor and grantee by deed. Even though this type of indexing carries some persuasion, Defendant fails to illustrate, however, how this relates to the Mortgage and how one searching the records would determine from the name index that Debtors intended to grant a mortgage on property other than that described in Defendant's Mortgage. Defendant suggests that reasonable minds could conclude that Debtors would have mortgaged property they actually owned on that date. But which one? Copies of Muskingum County public records provided by Defendant reflect that three Tammy Smiths (Debtor Tammy White's former name) and one Tamara White owned real estate in the area at the relevant time. Moreover, as noted above, there is no apparent reason on the face of the documents compelling Plaintiff to make further inquiry; therefore he has no reason to employ indexing. Thus, the Court concludes that Plaintiff has carried his burden of proving the avoidability of the Mortgage and that he is entitled to a declaration that Debtors' interest in the Property is not subject to Defendant's Mortgage. The Court, therefore, concludes that Plaintiff is entitled to summary judgment on Count One.
B. Count Two
In Count Two of his Complaint, Plaintiff seeks an order avoiding all mortgage payments made to Defendant during the preference period, and/or entering judgment for said amounts pursuant to § 547. The avoidance of Defendant's mortgage in section A of this opinion may indeed render Debtors' mortgage payments preferential transfers. The payments were a transfer of Debtor's property, for the benefit of Defendant and appear to be on account of the antecedent debt arising out of the Mortgage loan transaction. However, the Motion does not discuss the avoidance of Debtors' mortgage payments. Therefore, Plaintiff has failed to illustrate that he is entitled to summary judgment on Count Two.
C. Count Three
In Count Three of his Complaint, the Plaintiff seeks to preserve the Mortgage for benefit of the Debtors' estate pursuant to § 551, under which "[a]ny transfer avoided under section . . . 544 . . . is preserved for the benefit of the estate but only with respect to property of the estate." 11 U.S.C. § 551. Preservation automatically follows avoidance of a transfer. Castle Nursing Homes, Inc. v. Ransier (In re Sullivan), 359 B.R. 357 (table), 2007 WL 1018763 at *6 (B.A.P. 6th Cir. Apr. 4, 2007) ("Any transfer avoided under § 544 is automatically 'preserved for the benefit of the estate." (quoting § 551) (emphasis added)); Rhiel v. Cent. Mortg. Co. (In re Kebe), 2012 WL 1134314, at *10 (Bankr. S.D. Ohio Mar. 30, 2012) (same); Terlecky v. Chase Home Fin., LLC (In re Sauer), 417 B.R. 523, 541 (Bankr. S.D. Ohio 2009) (same). Because the Court has concluded that the Mortgage is avoidable, Plaintiff is entitled to preservation of the lien represented by the Mortgage, for the benefit of Debtors' estate. The Court, therefore, concludes that Plaintiff is entitled to summary judgment on Count Three.
D. Count Four
The prayer for relief in Count Four of Plaintiff's Complaint is rather vague: Plaintiff seeks an order pursuant to §§ 549 and 550 "recovering the Property [an undefined term in the Complaint] or value thereof." All preceding allegations of the Complaint pertaining to the defects in the Mortgage are incorporated into Count Four by reference, and Plaintiff then alleges that Debtors have made prepetition and postpetition payments to Defendant, which Plaintiff may recover.
Under § 549, "the trustee may avoid a transfer of property of the estate (1) that occurs after the commencement of the case[.]" 11 U.S.C. § 549(a)(1) (emphasis added). Although Plaintiff asserted in Count Four that this adversary proceeding is brought pursuant to § 549, he did not discuss § 549 or the mortgage payments in his Motion. Thus, the Court will not address whether any prepetition or postpetition mortgage payments from Debtors to Defendant are avoidable pursuant to § 549. The Court notes however that the only postpetition transfers alleged are postpetition mortgage payments. It is unlikely that postpetition mortgage payments are recoverable inasmuch as they probably do not constitute property of the bankruptcy estate pursuant to § 541. The Court also notes that any reliance on § 549 for the recovery of prepetition mortgage payments from Debtors to Defendant is misplaced. Prepetition transactions are not the subject of § 549, which addresses transfers of property of the bankruptcy estate that occur after the commencement of the case.
Under § 550, "to the extent that a transfer is avoided under section 544 . . . the trustee may recover, for the benefit of the estate, the property transferred, or if the court so orders, the value of such property[.]" 11 U.S.C. § 550(a). However, "[r]ecovery [under § 550] is not appropriate where the avoidance of the mortgage is a sufficient remedy in and of itself. Kebe, 2012 WL 1134314, at *11 (citing Suhar v. Burns (In re Burns), 322 F.3d 421, 427 (6th Cir. 2003) ("[W]hen the avoidance alone is a sufficient remedy, there is no need for the trustee to seek recovery.")). "On the other hand, in those instances where 'merely [avoiding] the [transfer] . . . and placing the burden on the Trustee to sell the Property . . . would not restore the bankruptcy estate to where it would have been had the [transfer] not taken place' . . . recovery may be warranted." Kebe, 2012 WL 1134314, at *11 (quoting Slone v. Lassiter (In re Grove-Merritt), 406 B.R. 778, 812 (Bankr. S.D. Ohio 2009)). The issue of whether Plaintiff would be entitled to recovery of the value of the property transferred, i.e., the Mortgage, pursuant to § 550 is not ripe for summary judgment because it is too early to determine whether Plaintiff will be able to sell the Property. See Kebe, 2012 WL 1134314, at *11 ("[I]t remains an open question whether the Trustee will be able to sell the Property; thus, it is too early to tell whether avoidance will be an adequate remedy on the facts of this case."). Indeed, § 550(f) provides that "An action or proceeding under this section may not be commenced after the earlier of (1) one year after the avoidance of the transfer on account of which recovery under this section is sought; or (2) the time the case is closed or dismissed." 11 U.S.C. § 550(f). This indicates that Congress intended § 550 to be invoked only after the trustee pursues liquidation unsuccessfully or under other extraordinary circumstances. The Court, therefore, concludes that Plaintiff is not entitled to summary judgment for recovery of the value of the Mortgage from Debtors to Defendant, pursuant to § 550.
IV. Conclusion
Plaintiff has carried his burden of proving the avoidability of the Mortgage. In light of the foregoing, the Court finds that there are no genuine issues of material fact and the Plaintiff is entitled to judgment as a matter of law. Accordingly it is:
ORDERED AND ADJUDGED that the Plaintiff's Motion for Summary Judgment Against Defendant is GRANTED as to Counts One and Three of Plaintiff's Complaint, and DENIED as to Counts Two and Four. Defendant's Cross-Motion for Summary Judgment is DENIED. A separate final judgment will be entered in accordance with the foregoing.
IT IS SO ORDERED. Copies to: Default List