Opinion
Case No. 05-71326, Adv. Pro. No. 06-2556.
March 31, 2008
MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT
This cause came on for consideration of: (a) Plaintiff's Motion for Summary Judgment (Doc. No. 42) ("Trustee Motion") filed by the Chapter 7 trustee, Larry J. McClatchey ("Trustee"); (b) Defendant's Motion for Summary Judgment (Doc. No. 40) ("MERS Motion") filed by Mortgage Electronic Registration Systems, Inc. ("MERS"); and (c) the responses and replies filed by the Trustee (Doc. Nos. 43, 46 and 50), MERS (Doc. Nos. 48 and 49) and Defendant April Harvey ("Harvey") (Doc. No. 44).
For the reasons set forth below, the Court denies both the Trustee Motion and the MERS Motion. Having considered the record and the arguments of the parties, the Court makes the following findings of fact and conclusions of law.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K) and (O).
I. Standard of Review
Under Fed.R.Civ.P. 56(c), which is made applicable in this adversary proceeding by Fed.R.Bankr.P. 7056, summary judgment is appropriate where "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Novak v. MetroHealth Med. Ctr., 503 F.3d 572, 577 (6th Cir. 2007). In reviewing a motion for summary judgment, the Court views the evidence, all facts, and any inferences drawn therefrom in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Novak, 503 F.3d at 577; Skowronek v. Am. S.S. Co., 505 F.3d 482, 484 (6th Cir. 2007) (the court "must draw all reasonable inferences in favor of the nonmoving party").
"`[A]s to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.'" Niecko v. Emro Mktg. Co., 973 F.2d 1296, 1304 (6th Cir. 1992) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). "Entry of summary judgment is appropriate `against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.'" Novak, 503 F.3d at 577 (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)); see also Ransier v. Standard Fed. Bank (In re Collins), 292 B.R. 842, 845 (Bankr. S.D. Ohio 2003). The filing of cross-motions does not alter the standards governing the determination of summary judgment motions. See Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991); Collins, 292 B.R. at 845.
II. Findings of Fact
The facts which appear undisputed in the record may be summarized as follows: On June 15, 2001, Charles McLemore, Jr. ("Debtor") executed a quitclaim deed ("Quitclaim Deed") by which he transferred his interest in the real property located at 3657 Wilmore Street, Dayton, Ohio ("Property") to his father, Charles McLemore, Sr. ("McLemore"). The Quitclaim Deed was recorded in the public records of Montgomery County, Ohio on June 20, 2001. The Debtor was incarcerated at the time he executed the Quitclaim Deed and the notary public before whom the deed purportedly was acknowledged neither worked at the prison nor visited the Debtor there.
On October 10, 2005 ("Petition Date"), the Debtor filed a Petition for Relief under Chapter 7 of the Bankruptcy Code. On December 1, 2005 — after the Petition Date — McLemore executed a general warranty deed ("Harvey Deed") by which he transferred the Property to Harvey. On the same day, Harvey granted to MERS a mortgage on the Property ("Mortgage").
The Trustee contends that the Quitclaim Deed is ineffective and void because it was not properly acknowledged under Ohio law. In Count I of his Second Amended Complaint, the Trustee seeks to avoid the Harvey Deed under § 549(a) as an unauthorized postpetition transfer of property of the Debtor's estate. In Count IV, the Trustee seeks to avoid the Mortgage if he is successful in avoiding the Harvey Deed. The Trustee seeks summary judgment only against Harvey and MERS on Count I and Count IV, respectively, not against McLemore or any of the other defendants.
In response, Harvey asserts that she was a good faith purchaser of the Property. She and MERS also contend that the Trustee did not file a copy or notice of the Debtor's petition in the real estate records, intimating that they did not have knowledge of the Debtor's bankruptcy case or the Trustee's interest in the Property. As a result, they argue, the Trustee cannot avoid the Harvey Deed or the Mortgage.
III. Conclusions of Law
A. Trustee Motion for Summary Judgment
The Court denies the Trustee Motion for two reasons: (i) it is premature and (ii) there is a genuine issue of material fact regarding the circumstances under which Harvey purchased the Property.
First, the Trustee Motion is premature. The Trustee's cause of action against Harvey is based on § 549(a), which provides as follows:
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate —
(1) that occurs after the commencement of the case; and
(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.
11 U.S.C. § 549(a). The Trustee contends that the purchase by Harvey effectuated an unauthorized postpetition transfer of property of the estate. For the Trustee to prevail, therefore, the Property must be property of the estate.
Property is property of the estate, if at all, pursuant to § 541(a) of the Bankruptcy Code, which states:
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) [A]ll legal or equitable interests of the debtor in property as of the commencement of the case.
(2) All interests of the debtor and the debtor's spouse in community property as of the commencement of the case . . .
(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of this title.
(4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510(c) or 551 of this title.
(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date —
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor's spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case.
11 U.S.C. § 541(a). The Property is property of the estate only if it fits within one of these categories.
Section 541(b) and (c) provide certain exceptions to § 541(a)'s inclusion of property in property of the estate. None of those exceptions applies here.
The Trustee's theory is that, due to the allegedly defective acknowledgment, McLemore had no title to convey to Harvey as of the Petition Date, and therefore the Property was property of the bankruptcy estate as of the commencement of the case. Indeed, some courts have held that property brought into the estate by virtue of § 541(a)(3) is property of the estate as of the date of commencement of the case. See, e.g., John Hancock Life Ins. Co. v. Jankowski (In re Hospitality Inv. Corp.), 283 B.R. 451, 455 (Bankr. E.D. Mich. 2002) ("It is this court's opinion that the estate's interest in the transferred property was acquired upon commencement of the case. 11 U.S.C. § 541(a)(3)."). However, the Trustee's premise is without merit because the Quitclaim Deed did not need to be recorded, let alone properly acknowledged, to pass title from the Debtor to McLemore. See Wayne Bldg. Loan Co. v. Yarborough, 228 N.E.2d 841, 853 (Ohio 1967) ("In Ohio, a deed does not have to be recorded to pass title. Whether or not recorded, a deed in Ohio passes title upon its proper execution and delivery, so far as the grantor is able to convey it. . . . Until [the transferee's] title was cut off by a bona fide purchaser from the record owner . . . [the transferee] retained power to act as to the subject premises."); Citizen's Nat'l. Bank v. Denison, 133 N.E. 2d 329, 332 (Ohio 1956) ("A defectively executed conveyance of an interest in land is valid as between the parties thereto, in the absence of fraud." (Citations omitted.)); Holstein v. Crescent Communities, Inc., 2003 WL 22077778 at *6 (Ohio Ct.App. Sept. 9, 2003) ("The Ohio Supreme Court has consistently held that recording is not necessary to give validity to instruments of conveyance, and whether or not recorded, a deed passes title upon its proper execution and delivery, so far as [the] grantor is able to convey it."). Thus, the Property did not automatically become property of the estate by virtue of the faulty Quitclaim Deed. The language of the relevant sections of the Bankruptcy Code, § 541 and § 544, make it clear that the Trustee must seek avoidance of the transfer from the Debtor to McLemore in order to press his claim that property of the estate was transferred from McLemore to Harvey.
Section 541(a)(3) describes property of the estate as, among other things, "[a]ny interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of this title." (Emphasis added.) In the instant case, the relevant recovery section is § 550, which provides that a trustee may recover property or its value "to the extent that a transfer is avoided" under sections 544, 549, or other avoidance sections of the Bankruptcy Code. Similarly, the power vested in the trustee by § 544(a), the section under which the Trustee presumably would seek to avoid the Debtor's transfer to McLemore, does not automatically render transferred assets property of the bankruptcy estate, but rather requires action on the part of the trustee. It provides that "The trustee shall have . . . the rights and powers of, or may avoid any transfer of property of the debtor . . . that is voidable by — . . . (3) a bona fide purchaser of real property. . . ." (Emphasis added.) See Suhar v. Burns (In re Burns), 322 F.3d 421, 427 (6th Cir. 2003) ("[A]voidance is a necessary precondition to § 550 recovery . . ."); Yoppolo v. Liberty Mortg. (In re Morgan), 276 B.R. 785, 789 (Bankr. N.D. Ohio 2001) ("[Section] 550(a) states, in relevant part, that, `. . . to the extent that a transfer is avoided under section 544 . . . of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property . . . [.]' An examination of this statutory language clearly reveals that before a trustee is entitled to recover any property previously transferred by the debtor, the trustee must first avoid the underlying transfer."); Gunner v. Muhammad (In re Silver), 270 B.R. 219, 220 (Bankr. S.D. Ohio 2001) ("At the time of the bankruptcy filing, as between the debtor and the defendant, the defendant was the owner of the Property. Therefore, under § 541 of the Bankruptcy Code, the debtor had no legal interest in the Property on his bankruptcy filing date. The trustee, however, is entitled to avoid the prepetition transfer of the Property from the debtor to the defendant because the deed was not recorded. The lack of such recording and the trustee's status as a bona fide purchaser of real property, without regard to any knowledge under 11 U.S.C. § 544(a)(3), compel that result."); In re Hoerr, 2004 WL 2926156 at *2 (Bankr. C.D. Ill. 2004) ("Section 541(a)(3) . . . comes into play only if an avoidance action is successfully prosecuted. It gives no additional powers to the Trustee and does not enable the Trustee to `end run' the necessity of first avoiding the transfer."). Inasmuch as the Trustee has not yet avoided the Quitclaim Deed, the Trustee Motion is premature.
In fact, the Trustee does not appear to request avoidance of the Quitclaim Deed in his Second Amended Complaint and does not seek summary judgment on any such avoidance cause of action in the Trustee Motion.
The Court also must deny the Trustee Motion because there is a genuine issue of material fact regarding the circumstances under which Harvey purchased the Property.
Section 549(c) sets forth a good faith exception to the Trustee's avoidance power under § 549(a):
The trustee may not avoid under subsection (a) of this section a transfer of real property to a good faith purchaser without know ledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to the interest of such good faith purchaser. A good faith purchaser without knowledge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of any present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected.
11 U.S.C. § 549(c) (emphasis added). At trial, Harvey will have the burden of proof on the issues of good faith, lack of knowledge, and purchase for fair value. See, e.g., Ford v. Loftin (In re Ford), 296 B.R. 537, 550 n. 23 (Bankr. N.D. Ga. 2003) ("The burden of proving the § 549(c) defense is on the parties claiming it."). If Harvey meets her burden of showing that she purchased the Property for fair equivalent value and had no knowledge of the commencement of the Debtor's bankruptcy case when she purchased the Property, then the Trustee will be unable to avoid the transfer to Harvey unless he filed a copy or notice of the Debtor's petition in the real estate records before Harvey recorded the Harvey Deed. Harvey and MERS contend that the Trustee did not make such a filing. On these points, neither party submitted affidavits or other admissible evidence to support their respective factual assertions, so the Court is left with the parties' pleadings. However, in her Answer, Harvey denied the allegations of the Trustee's Second Amended Complaint that Harvey lacks good faith purchaser status and that she knew or should have known that the deed from McLemore was ineffective to convey title to her.
Because the Debtor filed his bankruptcy case before the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), generally effective October 17, 2005, all references to the Bankruptcy Code in this opinion are to the pre-BAPCPA version.
The Court notes that Harvey was not included on the Debtor's creditor matrix filed with his Chapter 7 petition or on any of the Debtor's schedules, including Schedule F.
The Trustee argues that Harvey's good faith is not material because, in light of the allegedly defective acknowledgment, McLemore had no title to convey to Harvey as of the Petition Date. As discussed above, this is incorrect. McLemore's power to convey title to the Property ends only when the Trustee avoids the Quitclaim Deed. See Hospitality Inv. Corp., 283 B.R. at 455 ("The transferee merely held voidable title to the transferred property. The successful exercise of the trustee's avoiding power causes the affected transfer to become void, allowing the trustee to recover the property under 11 U.S.C. § 550.").
Under these circumstances, it is evident that Harvey's good faith remains an issue of material fact.
B. MERS Motion for Summary Judgment.
The Court denies the MERS Motion because it is based on two incorrect legal arguments. First, MERS argues that the Trustee cannot avoid the Quitclaim Deed under § 544(a)(3) because the Debtor did not hold legal title to the Property as of the Petition Date. This argument is untenable. See Geygan v. World Savs. Bank, FSB (In re Nolan), ___ B.R. ___, 2008 WL 649063 (B.A.P. 6th Cir. Mar. 12, 2008). In Nolan, the defendant, as MERS does here, argued that the trustee could not be a bona fide purchaser under § 544(a)(3) because the debtor did not have legal title to the property as of the commencement of the case. The court disagreed:
The trustee can use section 544(a) even against interests in property in which the debtor actually has no rights when the petition is filed. The section expressly permits avoiding prepetition transfers of the debtor's property, and avoidance of such a transfer is possible through section 544(a) even if the transfer left the debtor without any rights to the property at the time of the bankruptcy. The key is whether, notwithstanding the transfer, a subsequent lien creditor or purchaser claiming through the debtor would, under local law, acquire rights to the property superior to the interest of the prior transferee.
Nolan, 2008 WL 649063 at *5 (citation omitted). To hold otherwise would render § 544(a) almost meaningless.
MERS also relies on the following provision of Ohio's Marketable Title Act:
Any person having the legal capacity to own land in this state, who has an unbroken chain of title of record to any interest in land for forty years or more, has a marketable record title to such interest as defined in section 5301.47 of the Revised Code, subject to the matters stated in section 5301.49 of the Revised Code.
A person has such an unbroken chain of title when the official public records disclose a conveyance or other title transaction, of record not less than forty years at the time the marketability is to be determined, which said conveyance or other title transaction purports to create such interest, either in:
(A) The person claiming such interest; or
(B) Some other person from whom, by one or more conveyances or other title transactions of record, such purported interest has become vested in the person claiming such interest;
with nothing appearing of record, in either case, purporting to divest such claimant of such purported interest.
Ohio Rev. Code Ann. § 5301.48. MERS argues that this provision protects the interests of innocent third parties where the title defect is not disclosed in the public record. MERS misinterprets the provision. Ohio Rev. Code Ann. § 5301.48 allows that, when there is an unbroken chain of title that spans at least the preceding forty years, unrecorded claims and interests that arose prior to that root of title are extinguished. See Minnich v. Guernsey Savs Loan Co., 521 N.E.2d 489, 491-92 (Ohio Ct.App. 1987); Semachko v. Hopko, 301 N.E.2d 560, 563-564 (Ohio Ct.App. 1973). In the instant case the alleged title defect — the lack of proper acknowledgment — arose within the last few years. Accordingly, the Ohio Marketable Title Act does not protect Harvey or MERS.
IV. Conclusion
In light of the foregoing, the Trustee Motion and the MERS Motion are DENIED. Trial on all remaining issues will be set by separate order of the Court.