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affirming the bankruptcy court's conclusion that the limitations period in § 546 does not bar the trustee from defensively asserting rights as a bona fide purchaser under § 544
Summary of this case from S. Bank & Trust Co. v. Alexander (In re Alexander)Opinion
Case No. 3:13-cv-136 Bankruptcy Case No. 11-3028
03-25-2014
BANK OF NEW YORK, Appellant, v. DANNY G. SHEELEY, JR., et al., Appellees.
Judge Timothy S. Black
DECISION AND ENTRY: (1) DENYING APPELLEES' MOTION TO DISMISS
(Doc. 9); (2) AFFIRMING THE DECISIONS OF THE BANKRUPTCY COURT;
AND (3) TERMINATING THIS CASE ON THE COURT'S DOCKET
This case is before the Court on appeal from the United States Bankruptcy Court for the Southern District of Ohio. This Court has jurisdiction pursuant to 27 U.S.C. § 158 and Federal Rule of Bankruptcy Procedure 8001. Appellant and Appellees filed briefs on appeal. (Docs. 5, 10, 14). In addition, Appellees filed a Motion to Dismiss. (Doc. 9). Appellant filed a Memorandum in Opposition to Appellees' Motion to Dismiss. (Doc. 13). This appeal and Appellees' Motion to Dismiss are now ripe for decision.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The parties stipulated to the underlying facts relied upon by the Bankruptcy Court. The Court restates these facts and the procedural history as set forth by the Bankruptcy Court without internal record citation.
On February 28, 2003, Danny G. Sheeley, Jr. and Jackie L. Sheeley (the "Sheeleys") obtained title to real property commonly known as 2292 Ogden Road, Wilmington, Ohio 45117 (the "Residence Parcel") through a trustee deed. The deed was recorded in 2003 in the Clinton County Recorder's Office (the "Recorder's Office"). In July 2006, the Sheeleys executed a mortgage on the Residence Parcel in favor of Accredited Home Lenders, Inc. in the amount of $202,500 (the "Accredited Mortgage"), which was recorded in the Recorder's Office.
On July 26, 2006, the Sheeleys obtained title to a vacant parcel of real property (the "Vacant Parcel") through a general warranty deed, which was recorded in August 2006. The Vacant Parcel, which has the address of 2262 Ogden Road, Wilmington, Ohio, is adjacent to the Residence Parcel. Later in 2006, the Sheeleys refinanced the Accredited Mortgage with Countrywide Bank, N.A. ("Countrywide"). On November 1, 2006 Danny Sheeley executed the following documents:
(1) a note in favor of Countrywide in the amount of $208,800 the "Note") which lists the address of the Residence Parcel;Jackie Sheeley signed the Notice of Right to Cancel, the Owners Affidavit, the Truth in Lending Disclosure Statement, the Itemization of Amount Financed, and the Notices Affidavit.
(2) a HUD-1 Settlement Statement, which stated on line 104, "Payoff First Mortgage to Accredited Home Lenders" in the amount of $206,449.71; and
(3) a Document Correction and Fees Agreement, Identity Affidavit, Truth in Lending Disclosure Statement, Uniform Residential Loan Application, Signature and Name Certification, New Loan Payment Form, Itemization of Amount Financed, and Notices Affidavit.
In order to secure the Note, the Sheeleys also executed a Mortgage in the amount of $208,000 in favor of MERS, solely as nominee for Countrywide (the "Mortgage"), which was recorded in the Recorder's Office on November 9, 2006. The granting clause of the Mortgage states as follows:
Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS the following described property located in the County of Clinton:The street address set forth on the Mortgage is the correct street address of the Residence Parcel. However, Exhibit A attached to the Mortgage contains the metes and bounds legal description of the Vacant Parcel, and not the metes and bounds legal description of the Residence Parcel. The Sheeleys admit that they intended the Mortgage to serve as a lien against the Residence Parcel, and that $206,449.71 of the loan proceeds from this transaction were used to pay off the Accredited Mortgage.
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF.
Parcel ID Number: [left blank] which currently has the address of 2292 OGDEN RD, WILMINGTON, Ohio 45177-7184 ("Property Address"):
On May 12, 2008, the Sheeleys filed a joint petition for relief under Chapter 13 of Title 11 of the United States Code, their schedules and Statement of Financial Affairs and a Chapter 13 plan (the "Plan"). The Residence Parcel was scheduled as having a value of $150,000 with no encumbrances. The Vacant Parcel was scheduled as having a value of $17,500 and encumbered by the Mortgage with an estimated balance of $218,000 on the Petition Date.
Paragraph 18 of the Plan listed the Residence Parcel as Parcel No. 1, but listed no lienholders. The Vacant Parcel was listed as Parcel No. 2 with Countrywide as the lienholder. The Plan provides for the surrender of the Vacant Parcel to Countrywide or its successor, i.e., the Bank, allowing the Bank to sell that property in accordance with its contractual rights and applicable law. Neither Countrywide nor the Bank objected to the Plan and the court entered an order confirming the Plan on July 21, 2008 (the "Confirmation Order").
On October 29, 2008, MERS, as nominee for Countrywide, executed an assignment of the Mortgage to the Bank of New York, as Trustee for the Benefit of Alternative Loan Trust 2007-OA2 Mortgage Pass-Through Certificates, Series 2007-OA2 by and through BAC Home Loans Servicing, L.P., its servicer, (the "Bank"), which was recorded on November 3, 2008 (the "Assignment").
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The Bank commenced this adversary proceeding through a complaint seeking declaratory judgment that the Mortgage is a valid first mortgage lien on the Residence Parcel as to the Sheeleys' fee simple interests and requesting that the Mortgage be reformed to correct the legal description from that of the Vacant Parcel to that of the Residence Parcel and to add Jackie Sheeley's name to the granting clause. The Sheeleys filed an answer asking that the Bank's requests be denied.
Ultimately, the parties filed competing cross-motions seeking summary judgment. The Bankruptcy Court concluded that "the filing of the Sheeleys' bankruptcy petition effectively deprived the Bank" of the ability to reform the mortgage to reflect that it encumbered the Residence Parcel because: (1) the Trustee possessed the rights of a bona fide purchaser without knowledge of the Mortgage at the time the petition was filed pursuant to 11 U.S.C. § 544(a); and (2) a mortgage cannot be reformed against a bona fide purchaser without notice of the encumbrance. (Doc. 1-40). In addition, the Bankruptcy Court concluded that Appellees were not time-barred from asserting the rights of a bona fide purchaser defensively. (Id.) The Bank now appeals.
III. MOTION TO DISMISS - EQUITABLE MOOTNESS
The Court first addresses Appellees Motion to Dismiss. (Doc. 9). Appellees move to dismiss this appeal arguing that it is equitably moot because of the completion and discharge of the underlying bankruptcy case. The Bank argues that the doctrine of equitable mootness applies only to appeals from a confirmation order, not an appeal from a final decision in an adversary proceeding. Certainly, at least one court has noted that "there is grave doubt that equitable mootness should ever apply to the appeal of an adversary proceeding." Official Comm. Of Unsecured Creditors (In re Age Refining, Inc.), 537 F. App'x 393, 398 (5th Cir. 2013).
However, even if this Court assumes the doctrine of equitable mootness applies to the appeal of a final judgment in this case, the Court, in exercising its discretion, declines to apply the doctrine to the circumstances presented. See Curreys of Nebraska, Inc. v. United Producers, Inc. (In re United Producers, Inc.), 526 F.3d 942, 946 (6th Cir. 2008) (stating that the determination of equitable mootness "'involves a discretionary balancing of equitable and prudential factors rather than the limits of the federal courts' authority under Article III'") (citation omitted).
"A bankruptcy case that is equitably moot is not technically moot, but rather equitable mootness occurs where the plan of reorganization is substantially consummated, and where it is no longer 'prudent to upset the plan of reorganization.'" Guardian Sav. & Loan Ass'n v. Arbors of Houston Associates Ltd. P'ship (In re Arbors of Houston Associates Ltd. P'ship), 172 F.3d 47, 1999 WL 17649, *2 (6th Cir. Jan. 3, 1999) (citations omitted). In considering whether equitable mootness applies, three factors should be considered: "(1) whether a stay has been obtained; (2) whether the plan has been 'substantially consummated'; and (3) whether the relief requested would affect either the rights of parties not before the court or the success of the plan." City of Covington v. Covington Landing Ltd. P'ship, 71 F.3d 1221, 1225 (6th Cir. 1995) (citation omitted).
Here, the first two factors favor a finding that the issues are equitably moot. First, the Bank did not obtain a stay. However, such a failure "is not fatal" to the Bank's appeal. Bank of Montreal v. Official Comm. Of Unsecured Creditors (In re American HomePatient, Inc.), 420 F.3d 559, 564 (6th Cir. 2005). Second, as conceded by the Bank, the plan is complete.
Although the first two factors favor the finding of equitable mootness, the third is the "most important factor[.]" Id. Here, Appellees identify no specific third party interest that would be affected by the outcome of this appeal. Instead, Appellees simply argue, without elaboration, that "Bank of New York's requested relief would require returning the bankruptcy case to pre-confirmation status." (Doc. 9).
In weighing the equitable considerations, and finding no identifiable third party interests impacted by a potential reversal of this adversary proceeding on appeal, the Court declines to find this appeal equitably moot and DENIES Appellees' Motion to Dismiss. (Doc. 9). Accordingly, the Court will address the merits of this appeal.
V. MERITS OF APPEAL
The arguments in this case center around the rights and powers of the Trustee under 11 U.S.C. § 544(a)(3) as a hypothetical bona fide purchaser of property. Specifically, § 544(a)(3) states that:
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 by—This provision, "commonly referred to as the 'strong-arm clause,' bestows upon a bankruptcy trustee the status of a hypothetical bona fide purchaser for value without actual knowledge of any prior liens." Field v. Ocwen Loan Servicing, LLC, (In re Schlabach), 490 B.R. 555, 560 (Bankr. S.D. Ohio 2012) (citing Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020 (6th Cir. 2001)).
a bona fide purchaser of real property . . . from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
On appeal, the Bank sets forth three main arguments: (A) that the Bankruptcy Court erred in ruling that the mortgage failed to provide constructive notice of the encumbrance to the Trustee; (B) that the Bankruptcy Court erred in concluding that the Bank was not entitled to a declaratory judgment finding that the mortgage encumbered the residential property and should be reformed; and (C) that the Bankruptcy Court erred in concluding that Appellees were not time-barred by 11 U.S.C. § 546(a) from asserting the rights and powers set forth in § 544(a).
A. Constructive Notice
The Court first addresses whether the Trustee had constructive notice of the Mortgage on the Residential Parcel. The strong-arm clause allows a bankruptcy trustee to "avoid any transfer of real property that would have been unenforceable against a bona fide purchaser of the property at the time a bankruptcy petition was filed." In re Schlabach, 490 B.R. at 560 (citations omitted). The Trustee's rights as a bona fide purchaser under § 544(a)(3) are defined "by the substantive law of the state governing the property in question." Id. (citing Hunter v. Bank of New York (In re Anderson), 266 B.R. 128 (Bankr. N.D. Ohio 2001); Owen-Ames-Kimball Co. v. Michigan Lithographing Co. (In re Michigan Lithographing Co.), 997 F.2d 1158 (6th Cir.1993)).
In Ohio, "[i]t is a general rule that a purchaser, who in good faith acquires the legal title to lands for a valuable consideration without notice of an existing equity, takes title free from such equity." Shaker Corlett Land Co. v. City of Cleveland, 139 Ohio St. 536, 541, 41 N.E.2d 243 (Ohio 1942) (citations omitted). Thus, "a bona fide purchaser for value is bound by an encumbrance upon land only if he has constructive or actual knowledge of the encumbrance." Tiller v. Hinton, 19 Ohio St.3d 66, 68, 482 N.E.2d 946 (Ohio 1985). "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." In re Schlabach, 490 B.R. at 560 (citing In re Zaptocky, 250 F.3d at 1027).
"'Constructive notice' has been defined as knowledge of 'circumstances which ought to have excited apprehension and inquiry in the mind of a prudent and reasonable [person].'" Wells Fargo Bank v. Schwartz, No. 96641, 2012 WL 759164, *4 (Ohio App. Mar. 8, 2012) (alterations in original) (citing Varwig v. RR. Co., 54 Ohio St. 455, 44 N.E. 92 (1896)). "A person with actual notice of circumstances sufficient to put a prudent person on inquiry as to a particular fact is deemed to have constructive notice of the fact itself in all cases in which that person might have learned the fact with a reasonable inquiry." Id. (citations omitted).
Here, in concluding that the Trustee did not have constructive notice of the mortgage, the Bankruptcy Court cited Stubbins v. Am. Gen. Fin. Services, Inc. (In re Easter), 367 B.R. 608 (Bankr. S.D. Ohio 2007). The Bank argues that a subsequent decision from the Sixth Circuit, Argent Mortg. Co., LLC v. Drown (In re Bunn), 578 F.3d 487 (6th Cir. 2009), is at odds with the conclusion in Easter and governs the circumstances presented in this case.
In Easter, debtors acquired .553 acres of land by a recorded survivorship deed. In re Easter, 367 B.R. at 611. The deed contained a legal description of the land conveyed and specifically excluded two small parcels within the .553 acres from the conveyance. Id. Subsequently, debtors granted a mortgage that set forth the correct street address and parcel identification number of the property debtors intended to encumber. Id. However, the mortgage contained the wrong legal description of the property, i.e., the legal description set forth the description of the property that was specifically excluded from the conveyance to debtors. Id. The court there held that "[i]nsisting 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." Id. at 614. Accordingly, the court concluded "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." Id.
In Bunn, debtor acquired a parcel of land via warranty deed. Id. at 488. The deed contained the property address and a precise legal description of the property, including the lot number. Id. at 488. Subsequently, debtor granted a mortgage on the property containing the correct address and parcel identification number, but setting forth no legal description of the land encumbered. Id. There, the court reasoned and concluded as follows:
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 "proper[ly] record[ed]." . . . The law assumes that any purchaser of Bunn's residential property has searched the relevant title indexes and examined the deeds in the chain of title. Id. at 953-54. Thus, the law credits the hypothetical purchaser with knowledge of the deed by which Bunn took title to the property and of the recorded mortgage at issue.Id. at 489 (internal citations and footnote omitted). The court also concluded that "substantive Ohio mortgage law does not appear to require a precise legal description of the mortgaged property." Id. at 490.
Such a purchaser would thus have notice that Bunn had mortgaged her property for $90,000. The mortgage documents, while not containing a formal legal description of the property, did indicate that they related to the 8707 Shear Drive property. Nothing in the
documents indicated that the mortgage company sought a lien on anything less than the full property-Bunn explicitly mortgaged "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.
The Ohio courts would likely hold that a purchaser would have knowledge that the mortgage encumbers the property, and that such a purchaser thus could not set aside the mortgage under Ohio's recording act. When any purchaser would have constructive knowledge of the mortgage, the trustee cannot assume the position of a hypothetical BFP because no such good-faith purchaser can exist.
Following In re Bunn, courts have considered its holding and rationale in several circumstances. In Mason v. Ocwen Loan Servicing, LLC (In re Votaw), No. 11-6087, 2012 WL 529242, at *3-4 (Bankr. N.D. Ohio Feb. 17, 2012), the court faced circumstances where a granting deed set forth an incorrect street address, but stated the correct legal description and parcel numbers. Id. at *1. A subsequent mortgage on the property set forth the correct street address, no parcel number and an incorrect legal description of the property encumbered. Id. at *2. There, the court distinguished Bunn from those circumstances where a "mortgage contains a legal description for property not being mortgaged" and agreed with the proposition that, "'if a legal description is so inaccurate or faulty as to be actually misleading, it does not constitute constructive notice to [a] third party." Id. at *2-3 (quoting Hanrahan v. Univ. of Iowa Comty. Credit Union (In re Thomas), 387 B.R. 4 (Bankr. N.D. Iowa 2008).
In Schlabach, debtors acquired two adjoining parcels of land under two separate deeds. In re Schlabach, 490 B.R. at 558. The first parcel was approximately two acres and the second parcel was just over a fifth of an acre. Id. While the parcels had different parcel numbers, they shared the same street address. Id. Intending to encumber the first parcel, debtors granted a mortgage which contained the correct street address. Id. The legal description attached to the mortgage referenced the correct parcel number, the correct street address, but set forth the metes and bounds description of the second parcel. Id. The trustee sought to avoid the first mortgage under § 544(a)(3) based upon the conclusion set forth in Easter. Id. at 560-61.
The bankruptcy court in Schlabach, finding Bunn controlling, concluded that a hypothetical bona fide purchaser would have constructive notice the first mortgage because, "at a minimum, a potential purchaser is deemed to have searched the record by the name of the purchaser's grantor . . . which in this case would reveal the existence of the First Mortgage in the Debtors' chain of title." Id. at 563 (internal citation omitted). In addition, the bankruptcy court concluded "that a reasonably prudent purchaser looking at the two deeds and the First Mortgage would have constructive notice that the entirety of the Property was encumbered by the First Mortgage" because:
When examining the deeds in the Debtors' chain of title, a potential purchaser would find that both parcels of the Property were acquired in the same year and from the same grantor. A potential purchaser likely would conclude that the smaller parcel bore some relationshipId. (internal citations omitted) (alterations in original).
to the adjoining larger parcel, particularly since the Property is residential property. Moreover, a reasonably prudent purchaser likely would not conclude that a financial institution would lend $145,000 secured by just a .2044 acre parcel of residential land where the mortgage also references the parcel number for the larger 2.0436 acre parcel. "Even if the most the purchaser knew was that [the First Mortgage] covered at least some of [the Property], the purchaser should not be able to cut off the [First Mortgage] after buying all of the [P]roperty."
The Bankruptcy Court in this case, just like the court in Votaw, distinguished Bunn on the basis that the mortgage in Bunn "lacked any legal description[,]" whereas the mortgage in this case contained a precise legal description, albeit, for a property the Sheeleys did not intend to encumber. (Doc. 1-15, PAGEID 343). The Court agrees with the Bankruptcy Court that the circumstances in Bunn are significantly distinguishable from the circumstances presented here because, in Bunn, the street address alone was a sufficient description for a mortgage under Ohio law and there was no conflicting information anywhere in the mortgage regarding the property encumbered.
Although the Bank points to Schlabach to suggest that Bunn also applies to circumstances where the mortgage contains inconsistent information concerning the property encumbered, the Court finds Schlabach distinguishable. In Schlabach, both parcels owned by the debtors had the same street address, and therefore, both the mortgage and the attachment contained the proper street address. In addition, the attachment contained the correct parcel identification number.
In other words, in Schlabach, the legal description contained in the attachment conflicted with all other information contained in the mortgage and the attachment. In re Schlabach, 490 B.R. 563-64. Further, the fact that both parcels at issue in Schlabach had the same street address is significant because the Schlabach court concluded that "a reasonably prudent purchaser would have constructive notice that the First Mortgage encumbered the entirety of the Property[,]" i.e., both parcels. Id. (emphasis added).
The case presenting the most similar facts to those presented here is Easter, the case relied upon by the Bankruptcy Court. The attachment to the mortgage in this case contains no ambiguity; it describes the Vacant Parcel only. The mortgage does list the street address for the Residence Parcel. However, as held in Easter, "[i]nsisting 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." In re Easter, 367 B.R. at 614. Because the mortgage at issue in Bunn contained no specific legal description conflicting with the street address of the property stated on the mortgage, the Court finds Bunn distinguishable from, not only the facts herein, but from the circumstances in Easter. Therefore, Bunn does not bind the Court in this case.
Based on the rationale in Easter, the Court agrees with the Bankruptcy Court that the street address on the mortgage, when it conflicts with a more specific legal description incorporated by reference in the mortgage, fails to provide constructive notice to a bona fide purchaser of the encumbrance. Accordingly, the Court AFFIRMS the Bankruptcy Court's conclusion in this regard.
B. Reformation
Having already found that the recorded mortgage fails to provide constructive notice to a bona fide purchaser of the encumbrance, the Court further agrees with the Bankruptcy Court that the mortgage cannot be reformed. As one Ohio court stated:
"Where a mortgage of real estate has been duly executed and recorded, a mistake in the attempted description of the mortgaged premises will be reformed or corrected in equity. * * * [A] mistake in the description of the property intended to be mortgaged will not be corrected as against third parties who part with value without notice of the mistake."Wells Fargo v. Mowery, 187 Ohio App.3d 268, 931 N.E.2d 1121, 1128-29 (Ohio App. 2010) (citing 69 Ohio Jurisprudence 3d 88, Mortgages and Deeds of Trust) (further citations omitted) (alterations in original). Accordingly, the Court affirms the Bankruptcy Court's conclusion that the mortgage cannot be reformed.
C. Statute of Limitations
The next issue is whether the trustee was barred by the statute of limitations in 11 U.S.C. § 546(a) from asserting the powers provided for in § 544(a)(3). Courts generally conclude that the limitations period set forth in § 546(a) does not bar defensive use of the powers set forth in § 544(a). Stearns Bank, N.A. v. Rent-A-Tent, Inc. (In re Rent-a-Tent), 468 B.R. 442, 455 (N.D. Ga. 2012); Wallick v. Cambrio (In re Block), 259 B.R. 498, 502 (Bankr. D.R.I. 2001) (agreeing that "the limitations provisions in Section 546 do not apply when the trustee uses the § 544(a)(3) strong-arm power defensively"); In re Octagon Roofing, 156 B.R. 214, 219 (Bankr. N.D. Ill. 1993) (stating that "§ 546(a) is limited to proceedings initiated by a trustee; the section does not bar defensive reliance on the trustee's avoiding powers outside the two-year time limit"); In re Badger Lines, Inc., 206 B.R. 521, 527 (E.D. Wisc. 1997) (stating that "[t]he clear weight of authority permits defensive reliance on the trustee's avoiding powers outside the two-year time limit under § 546(a)").
The Bank cites no authority for the asserted proposition that the two-year limitations period in § 546(a) applies to defensive use of the powers of a bona fide purchaser set forth in § 544(a). Based on the foregoing authorities, the Court affirms the Bankruptcy Court's conclusion that the limitations period in § 546(a) does not bar the Trustee from defensively asserting rights as a bona fide purchaser under § 544(a).
VI. CONCLUSION
Accordingly, based on all of the foregoing, the Court AFFIRMS the Decisions of the Bankruptcy Court. The Clerk shall enter Judgment accordingly, and this case shall terminate in this Court.
IT IS SO ORDERED.
__________
Timothy S. Black
United States District Judge