Opinion
Case No. 12-16677 Adversary No. 13-1051
10-08-2014
Chapter 13
ORDER GRANTING TRUSTEE'S MOTION FOR SUMMARY JUDGMENT
In this adversary proceeding, the chapter 13 trustee seeks to avoid a mortgage against the debtors' residence pursuant to 11 U.S.C. § 544(a)(3). The issue in this case is whether the debtor-wife—who is the sole titleholder—effectively mortgaged the property where both the debtors signed the mortgage but only the debtor-husband is defined as the "Borrower," which by the terms of the mortgage is the party granting the security interest. For the reasons set forth below, this Court concludes that the trustee may avoid the mortgage.
I. Background
This matter is before this Court on Plaintiff Margaret A. Burks, Trustee's (the "Trustee") Motion for Summary Judgment [Docket Number 10], Defendant Guardian Savings Bank, FSB's ("Guardian") Memorandum in Opposition [Docket Number 12], the Trustee's Reply [Docket Number 13] and the parties' Stipulations [Docket Number 11].
Debtors David G. Ferrarelli ("Mr. Ferrarelli") and Denise L. Ferrarelli ("Mrs. Ferrarelli") reside at 6717 Menz Lane, Cincinnati, Ohio (the "Property"). The Property is titled solely in the name of Mrs. Ferrarelli from a deed dated March 4, 1994. On August 24, 2012, Mr. Ferrarelli and Mrs. Ferrarelli refinanced the Property with Guardian as evidenced by a promissory note signed by both Mr. Ferrarelli and Mrs. Ferrarelli (the "Note"), a mortgage signed by both Mr. Ferrarelli and Mrs. Ferrarelli (the "Mortgage") and a master mortgage (the "Master Mortgage"), which was not signed by either Mr. Ferrarelli or Mrs. Ferrarelli. The Debtors' signatures on the Note and Mortgage are genuine and the acknowledgment was proper. The Note defines the borrowers as both Mr. Ferrarelli and Mrs. Ferrarelli. The Note was not recorded. The Mortgage defines the borrower as "David G. Ferrarelli, married." The Mortgage was recorded. The Master Mortgage does not identify the borrowers by name. The Master Mortgage was also recorded.
II. Jurisdiction
This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(K).
In count one of the complaint, the Trustee contends that the Mortgage does not create a lien upon the Property under Ohio law. Citing Stern v. Marshall, 131 S.Ct. 2594 (2011), Guardian contends that this Court does not have jurisdiction to decide an issue of state law that is not implicated by the Bankruptcy Code. At a status conference held on June 17, 2014 (the "Status Conference"), the Trustee agreed not to seek relief under count one of the complaint, essentially setting this jurisdictional issue aside. The parties further agreed at the Status Conference that this Court has jurisdiction to address the claim asserted in count two of the complaint.
III. Summary Judgment Standard
The standard for summary judgment is set forth in Rule 56(a) of the Federal Rules of Civil Procedure (the "Civil Rules"), made applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure. Civil Rule 56(a) 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). "As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In reviewing a motion for summary judgment, this Court must view all inferences to be drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986); Anthony v. BTR Auto. Sealing Sys., Inc., 339 F.3d 506, 511 (6th Cir. 2003).
IV. Legal Analysis
In count two of the complaint, the Trustee contends that the Mortgage is avoidable pursuant to 11 U.S.C. § 544(a)(3) because the titleholder of record—Mrs. Ferrarelli—did not pledge her title as security as required by applicable Ohio state law and therefore the Mortgage is not enforceable against third parties, including the Trustee. Section 544(a) of the Bankruptcy Code, commonly referred to as the "strong-arm clause," provides in relevant part that:
Unless otherwise indicated, the terms "Bankruptcy Code," "Section" and "§" refer to Title 11 of the United States Code, 11 U.S.C. § 101 et seq.
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(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 of11 U.S.C. § 544(a)(3). Under § 544(a)(3), a bankruptcy trustee "may 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." Argent Mortg. Co., LLC v. Drown (In re Bunn), 2008 WL 4449551, at *2, 2008 U.S. Dist LEXIS 91744, at 86 (S.D. Ohio Sept. 30, 2008)(citations omitted), aff'd 578 F.3d 487 (6th Cir. 2009); see also Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1027 (6th Cir. 2001)(affirming avoidance of an improperly executed mortgage by a bankruptcy trustee pursuant to § 544(a)(3)).
property of the debtor or any obligation incurred by the debtor that is voidable by—
. . .
(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.
The Trustee asserts that in order for a mortgage to encumber the interest of a titleholder under Ohio law, the titleholder must grant the creditor a security interest of his or her property within the mortgage instrument. The Trustee notes that Mr. Ferrarelli—and not the titleholder Mrs. Ferrarelli—is defined as the "Borrower" in the Mortgage. The Trustee further notes that the Mortgage provides that the "Borrower does hereby mortgage, grant, and convey" a security interest in the Property to Guardian. Because Mrs. Ferrarelli is not defined as a "Borrower" in the Mortgage, the Trustee asserts that Mrs. Ferrarelli did not encumber her interest in the Property to Guardian. There is ample case law in this district to support the Trustee's position. Field v. McKinney (In re McKinney), Case No. 11-11157, Adv. No. 11-1113 (Bankr. S.D. Ohio entered Nov. 21, 2012)(Perlman, J.); Hardesty v. The Huntington Nat'l Bank (In re Payne), 450 B.R. 711 (Bankr. S.D. Ohio 2011)(Preston, J.); Menninger v. Mortg. Elec. Registration Sys., Inc. (In re Earl), Case No. 07-15692, Adv. No. 09-1097 (Bankr. S.D. Ohio 2010)(Perlman, J.); Kindt v. ABN Amro Mortgage Group, Inc. (In re Wallace), 2007 WL 6510864, 2007 Bankr. LEXIS 4651 (Bankr. S.D. Ohio Nov. 15, 2007)(Hopkins, J.); see also Schlarman v. Chase Home Finance LLC (In re Padgitt), 2008 WL 4191517, 2008 Bankr. LEXIS 3063 (Bankr. E.D. Ky. Sept. 11, 2008)(discussing Kentucky law).
Guardian contends that the Mortgage, when viewed in conjunction with the Note and the Master Mortgage, creates a valid encumbrance of Mrs. Ferrarelli's interest in the Property under Ohio law such that the Mortgage is effective as against a hypothetical bona fide purchaser—such as the Trustee. Guardian first notes that the Master Mortgage, which was recorded with and incorporated by reference into the Mortgage, provides that "BORROWER COVENANTS that Borrower is lawfully seised of the estate hereby conveyed and has the right to mortgage, grant and convey the Property." To the extent that Guardian is asserting that this warranty provision serves to convey Mrs. Ferrarelli's interest in the Property because she is the only party to the Mortgage that is "seised of the estate", such an argument has already been rejected in this district because Mrs. Ferrarelli is not defined as a "Borrower" in the Mortgage. See In re Payne, 450 B.R. at 724 n.13 ("[T]he Court notes that there is nothing in the legal description or in any part of the Mortgage stating that the Property is owned by Mrs. Payne. To the contrary, the Mortgage states that 'BORROWER [Mr. Payne only] COVENANTS that Borrower is lawfully seised of the estate hereby conveyed and has the right to mortgage, grant and convey the Property[.]'").
Guardian next contends that this Court cannot reach the conclusion that Mrs. Ferrarelli's signature on the Mortgage had no purpose. Guardian suggests that such purpose was to mortgage her interest in the Property since Mrs. Ferrarelli is the sole titleholder of the Property. Guardian essentially asks this Court to reform the Mortgage to correct an implied mistake in the definition of the term "Borrower." This argument likewise has been rejected in this district. Id. at 721 n.9 ("[E]ven if [the creditor] has requested reformation of the Mortgage, such reformation cannot be invoked to abrogate the rights of an innocent intervening third party such as the Trustee and the creditors whose interests he represents.")(internal citations and quotation marks omitted).
The last argument that Guardian raises in support of its position is that the Note, which is the "foundation" of the Mortgage, establishes that Mrs. Ferrarelli is a "Borrower." Guardian observes that the Mortgage references a "Note" and defines it as "the promissory note signed by Borrower." Guardian further observes that each of the Debtors' names and the word "Borrower" is typed under their signatures on the Note and that the Note contains the following provision:
In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust, or Security Deed (the "Security Instrument"), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note.Guardian asserts that foregoing connections between the Note and the Mortgage are an admission by Mrs. Ferrarelli that she was giving a mortgage to Guardian. Guardian also points out that both Mr. and Mrs. Ferrarelli signed the Mortgage below a provision that reads "BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this [Mortgage] . . ." Interpreting the Note and the Mortgage together, and giving consideration to the terms of the Master Mortgage which provides that "words in the singular shall mean and include the plural and vice versa," Guardian argues that the word "Borrower" must be interpreted in the Mortgage to include both Mr. and Mrs. Ferrarelli. Guardian further argues that the fact that Mr. and Mrs. Ferrarelli each signed both the Note and the Mortgage distinguishes this case from In re Payne and In re McKinney—under the facts of which cases both debtors signed the mortgage but only one debtor signed the promissory note—suggesting that the Note has more significance under the facts of this case.
The flaw in this argument lies in the fact that the Note is not recorded. While a bankruptcy trustee is charged with constructive notice of a valid and properly recorded mortgage, Rhiel v. Cent. Mortg. Co. (In re Kebe), 469 B.R. 778, 786 (Bankr. S.D. Ohio 2012)(observing that under Ohio law, bona fide purchasers—including bankruptcy trustees—are charged with constructive knowledge of a properly recorded mortgages)(citations omitted), Guardian cites no authority for the supposition that a bankruptcy trustee should be charged with constructive notice of the unrecorded note; and § 544(a) clearly provides that a bankruptcy trustee is not charged with actual knowledge of its existence. See Field v. Ocwen Loan Servicing, L.L.C. (In re Schlabach), 490 B.R. 555, 560 (Bankr. S.D. Ohio 2012)("Because the 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 § 544(a)(3).") (citing In re Zaptocky, 250 F.3d at 1027). Accordingly, the provisions in the Note do not affect prior decisions in this district finding mortgages similar to the Mortgage at issue in this case to be ineffective as against a bankruptcy trustee.
V. Conclusion
Because the definition of "Borrower" in the Mortgage does not include Mrs. Ferrarelli, and because the sole titleholder to the Property is Mrs. Ferrarelli, to maintain consistency with other courts in this district, this Court finds that the Mortgage does not create a lien on the Property under Ohio law and that the Trustee may avoid the Mortgage under § 544(a)(3).
The Trustee's Motion for Summary Judgment is GRANTED.
IT IS SO ORDERED.
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.
Dated: October 8, 2014
/s/_________
Beth A. Buchanan
United States Bankruptcy Judge
copy to:
Francis J. DiCesare, Esq.
Amelia A. Bower, Esq.