Opinion
Case No. 10-17967 Adversary Case No. 11-1147
04-01-2013
In Re DAVID CHARLES HAWTHORNE TRINA MARIE HAWTHORNE Debtors HENRY E. MENNINGER, JR., TRUSTEE Plaintiff v. DAVID C. HAWTHORNE TRINA M. HAWTHORNE PNC MORTGAGE Defendants
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.
____________
Jeffery P. Hopkins
United States Bankruptcy Judge
Chapter 7
Judge Hopkins
MEMORANDUM OF DECISION
INTRODUCTION
This is an action to avoid a mortgage. The case is typical, in many respects, to others that come before the Court for adjudication: The mortgage describes the encumbered property with a correct street address and parcel number, but an incorrect legal description. In most instances, courts have excused these errors and thwarted attempts by bankruptcy trustees to avoid the mortgages of creditors whose documents are beset with such minor imperfections. See In re Bunn, 578 F.3d 487 (6th Cir. 2009) and its progeny. This case, however, involves facts that set it apart. Here, because the mortgage contained the wrong legal description, it was recorded outside the chain of title. A bona fide purchaser arriving on the scene late with no knowledge of any facts about the property after a diligent search of the record may not have discovered the mortgage. Under the circumstances, the bona fide purchaser or chapter 7 bankruptcy trustee, in our case, cannot be charged with constructive notice of the mortgage; it was not in the chain of title. Thus, the mortgage is unenforceable against the bona fide purchaser or the trustee who occupies that same status in bankruptcy.
Counsel in this case agreed to have this action decided on stipulation of facts in lieu of trial where the same evidence would have been presented by witnesses. See Doc. 22. Stipulations have been filed (Docs. 24 and 40) and the issues have been briefed. The Court appreciates the professionalism shown by both counsel in opting to have the case tried in this manner. This option promotes judicial economy and saved valuable client time and expense.
The Court has not considered any evidence outside of the stipulations. In particular, the Affidavit of Robert F. Eder (Doc. 28 at Ex. A) is not part of the stipulated record. The objection thereto (Doc. 29) will be sustained by separate order.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(a) and (b). This proceeding arises in a case referred to this Court by the Standing Order of Reference entered in this District and is determined to be a core proceeding pursuant to 28 U.S.C. §157(b)(2)(A), (K) and (O). The Court is authorized to enter final judgment in this proceeding.
FACTS
Drawn from the stipulations, the Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.
Several years before their chapter 7 case was filed, the Debtors, David and Trina Hawthorne (hereinafter the "Hawthornes"), executed a mortgage ("Mortgage") while owning real property located at 459 Breezy Lane in Clermont County, Ohio ("Breezy Lane"). The Mortgage describes the encumbered property with the complete address for Breezy Lane. It also describes the property by the parcel number related to Breezy Lane. However, the Mortgage includes a legal description that describes a property other than Breezy Lane. The legal description references a property in Arcadia Subdivision in Pierce Township which the Hawthornes never owned. Breezy Lane is located in Breezy Blossom Acres Subdivision in Union Township.
National City Mortgage Company ("National City"), the predecessor in interest to the current mortgagee PNC Mortgage ("PNC"), had the Mortgage recorded. The Clermont County, Ohio Recorder ("Recorder") indexed the Mortgage as follows:
+---------------------------------------------------------------------+ ¦Inst Type ¦File Date ¦Time ¦Volume¦ ¦Inst No ¦Inst Date¦ +----------+----------+------------+------+----+------------+---------¦ ¦MTG ¦9/22/2003 ¦01:15:00 ¦001693¦2651¦200300060927¦8/28/2003¦ +---------------------+-----------------------------------------------¦ ¦Grantor(s) ¦ ¦ ¦ ¦Grantee(s) ¦ ¦HAWTHORNE TRINA M ¦ ¦ ¦ ¦NATIONAL CITY MORTGAGE COMPANY ¦ ¦HAWTHORNE DAVID C ¦ ¦ +---------------------+-----------------------------------------------¦ ¦Property ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ARCADIA SUB Unit: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦City: CLERMONT COUNTY¦ ¦ ¦ ¦ ¦Block: 00000¦Lot: 00050-00050 ¦ ¦RM1: SECOND addition ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Location: PIERCe twp ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦RM1: $100,170.00 ¦ ¦ ¦ +---------------------------------------------------------------------+
The Hawthornes still owned Breezy Lane when they filed their bankruptcy petition. The chapter 7 trustee ("Trustee") commenced this action to avoid the Mortgage under the strong arm powers of 11 U.S.C. §544(a)(3).
ISSUE
The issue presented is whether, under Ohio law, the Mortgage is outside the chain of title due to its erroneous legal description.
APPLICABLE LAW
Pursuant to 11 U.S.C. § 544(a)(3), a trustee hypothetically purchases the debtor's real estate when the bankruptcy petition is filed. In re Biggs, 377 F.3d 515, 517 (6th Cir. 2004). If the trustee could have obtained bona fide purchaser status at that time, then the trustee may avoid an existing mortgage. In re Michigan Lithographing Co., 997 F.2d 1158, 1159 (6th Cir. 1993). State law determines whether a trustee could have obtained bona fide purchaser status. Id.
Under Ohio law, a bona fide purchaser can be anyone who provides valuable consideration, in good faith, without notice. Shaker Corlett Land Co. v. City of Cleveland, 139 Ohio St. 536, 542 (1942). Notice may be actual or constructive. Cambridge Prod. Credit Ass'n v. Patrick, 45 N.E.2d 751, 756 (Ohio 1942). However, because § 544(a)(3) applies "without regard to any knowledge of the trustee" the sole inquiry is whether the trustee had constructive notice of the mortgage. Noland v. Wells Fargo Bank N.A. (In re Williams), 395 B.R. 33, 44 (Bankr. S.D. Ohio 2008).
To be charged with constructive notice of a mortgage under Ohio law, the mortgage must be recorded in the purchaser's chain of title. Spring Lakes, Ltd. v. O.F.M. Co., 467 N.E.2d 537, 540 (Ohio 1984). "[A] document erroneously recorded due to a mistaken description in the conveying instrument is not within the chain of title and does not provide constructive notice[.]" Columbia Gas Transmission Corp. v. Bennett, 594 N.E.2d 1, 6 (Ohio Ct. App. 1990).
HOLDING
The incorrect legal description caused the Mortgage to be recorded outside the chain of title. Under the circumstances, a bona fide purchaser cannot be charged with constructive notice. Thus, the Mortgage is unenforceable against the bona fide purchaser or bankruptcy trustee cloaked with that status and the trustee can avoid the Mortgage under 11 U.S.C. § 544(a)(3).
COLUMBIA GAS
Ordinarily, in cases of conveyances of real property, a recorder's index has not been considered essential to make the record effective against subsequent purchasers. See Green v. Garrington, 16 Ohio St. 548 (1866). The mere recording of an instrument places a purchaser on constructive notice even if the instrument is not properly indexed. Id. However, as illustrated in Columbia Gas, an exception arises if the misindexing occurs, through no fault of the recorder, because of an erroneous legal description in the instrument. Columbia Gas, 594 N.E.2d at 6-7. A document erroneously recorded due to a mistaken description in the conveying instrument is not within the chain of title and cannot provide constructive notice to subsequent bona fide purchasers. Id. at 6 (citing 1 McDermott's Ohio Real Property (4 Ed. 1988) 28, 29, Section 1-31C).
Columbia Gas addressed the issue of whether a homeowner could be charged with constructive notice of an easement for a gas line running near his property.
Richard Bennett ("Bennett") owned property at 101 Ironwood Drive, Montgomery County Ohio ("Ironwood"). Ironwood was located in Orchard Hill Estates subdivision ("Orchard Hill"). Before platting, Ironwood was located in Town 1, Range 6 of Miami Township, Montgomery County ("Town 1"). More specifically, Section 20 of Town 1 ("Section 20").
In 1950, the developer of Orchard Hill conveyed a gas line easement through the subdivision. A gas line was installed along the boundary of Ironwood. The easement deed expressly encumbered lands in Sections 21 and 22 of Town 1 ("Sections 21 and 22"). It made no reference to Section 20.
The deed was recorded. The recorder indexed the deed in two places: (1) a grantor-grantee index; and (2) a tract index, under Sections 21 and 22.
In 1988, Bennett began excavating his property at Ironwood to build a garage. Bennett planned to build the garage within eight feet of the gas line. Upon discovery of this fact, Columbia Gas filed suit to enjoin construction within twenty-five feet of the gas line.
The Ohio court of appeals concluded that Bennett did not possess constructive notice of the easement. Columbia Gas, 594 N.E.2d at 6. The deed contained an erroneous description because it failed to reference Section 20 as part of the property encumbered. Consequently, the recorder did not reference Section 20 in the grantor-grantee index of the deed. Nor did the recorder index the deed under Section 20 in the tract index. Thus, the gas company's easement was not in Bennett's chain of title. He could not, as a bona fide purchaser, be charged with constructive notice of it. Ultimately, the Columbia Gas court held that the easement was unenforceable against Bennett. Id.
Columbia Gas is not limited to situations where the recorder uses a tract index. If employed, tract indexes are used "in addition to" grantor-grantee indexes. See Ohio Rev. Code § 317.20 ("When, in the opinion of the board of county commissioners, sectional indexes are needed and it so directs, in addition to the alphabetical indexes provided for in section 317.18 of the Revised Code, the board may provide for making, in books prepared for that purpose, sectional indexes to the records of all real estate in the county[.]")(emphasis added). Thus, Columbia Gas necessarily decided that the grantor-grantee index did not provide constructive notice of the deed. See Columbia Gas, 594 N.E.2d at 6 ("neither would an examination of the grantor-grantee index have revealed an easement for a gas transmission line").
Columbia Gas summarized the law: "Where an instrument erroneously identifies the property burdened and that erroneous description causes the instrument to be recorded outside the chain of title through no fault of the recorder, a subsequent bona fide purchaser cannot as a matter of law be charged with constructive notice of the conveyance." Id. at 7. This standard of Ohio law governs the outcome of this proceeding.
There are decisions that address whether the content (as opposed to the index) of a mortgage provides constructive notice, under Ohio law, notwithstanding an incorrect legal description or the omission of a legal description. See In re Bunn, 578 F.3d 487 (6th Cir. 2009)(omitted description); In re Easter, 367 B.R. 608 (Bankr. S.D. Ohio 2007)(incorrect description); see also In re Sheeley, Adv. No. 11-3028 (Bankr. S.D. Ohio Apr. 2, 2012)(incorrect description); In re Schlabach, Adv. No. 10-1229 (Bankr. S.D. Ohio Mar. 1, 2012)(omitted description). It does not appear that these courts were asked to decide whether the index was dispositive. The Trustee has done so in his brief, see Doc. 28 at 10, and his arguments raised at a May 31, 2012 hearing. Because the index of the Mortgage is dispositive in this case, resulting in no duty to examine the content of the Mortgage, the Court does not reach this issue.
INDEX OF THE MORTGAGE
Here, the defective legal description in PNC's Mortgage caused the Recorder to erroneously record the instrument in the index outside the chain of title. It appears that this misindexing was due to a scrivener's error by National City when the property description for Pierce Township was used rather than Union Township. The only descriptors of the encumbered property found in the index are the following: Property
ARCADIA SUB Unit:
City: CLERMONT COUNTY Block: 00000 Lot: 00050-00050
RM1: SECOND ADDITION
Location: PIERCE TWP
Although PNC's Mortgage referenced the correct address and parcel number for Breezy Lane, neither of these descriptors are referenced in the Recorder's index. Similar to the grantor-grantee index in Columbia Gas, there is nothing in the index to suggest to subsequent purchasers that the Mortgage is in Breezy Lane's chain of title. Through no fault of the Recorder, the index erroneously describes a different subdivision in a different township. As a matter of Ohio law, a subsequent bona fide purchaser cannot be charged with constructive notice of the conveyance.
Ohio law does not require the examination of every conveyance, made by someone in the chain of title, related to the same subdivision as the subject property. Columbia Gas, 594 N.E.2d at 6 ("even if a title examiner had undertaken an exhaustive inspection of all conveyances by Southard relative to the Orchard Hills Estates . . . the law does not require such exhaustive scrutiny."). If so, a purchaser certainly is not required to examine every conveyance related to a different subdivision located in a different township.
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To be certain, this case turns almost entirely on the facts. Seen through the prism of bankruptcy the issues can become somewhat distorted. The ususal participants line up on both sides of the issue: the trustee and an occasional debtor who want the mortgage avoided and the mortgage holder, fearful perhaps that the property description may be too inexact to pass muster, but claiming still that the mortgage should be enforced. However, imagine for the moment this scenario occurring outside bankruptcy. Let's say instead of a bankruptcy trustee adorned with a legal cloak that appears to give him or her certain special statutory powers, another individual, though normally averse to conflict, let's call his name Bennett also, is the transferee. This Bennett no doubt is a bona fide purchaser. Before the purchase, Bennett or his title agent has checked the records in the county recorder's office and he has no acquired knowledge about any encumbrances on the property such as any liens, mortgages or easements. Our Bennett in the hypothetical is, for all intents and purposes, a stranger to the property he just purchased. Regardless of how diligent his search, Bennett may never have discovered the mortgage at issue in this case by performing just the normal title search. Why? Because the mortgage was recorded, through no fault of the county recorder, outside the chain of title. A faulty property description in the mortgage caused it to be misindexed. What then occurs if this Bennett wants to refinance or sell the property and he hears for the first time from the lien holder whose mortgage is misindexed? The law holds that Bennett does not have constructive knowledge. Further, as a bona fide purchaser in our hypothetical, the mortgage is unenforceable against Bennett. Given that the bankruptcy trustee here has the identical legal status as Bennett, he too can treat the Mortgage as unenforceable. Finally, using the special statutory powers previously mentioned, the trustee can avoid the Mortgage under §544(a)(3) and preserve for the benefit of all the unsecured creditors of this bankruptcy estate the value of the interest just avoided, under 11 U.S.C. §551.
That PNC received an assignment of the Mortgage and succeeded to the rights of the original mortgage holder National City is inconsequential. The rule in Ohio is that an assignee of a mortgage succeeds to all the rights of the original mortgage holder. LaSalle Bank N.A. v. Zapata, 921 N.E. 2d 1072, 1075-76 (Ohio Ct. App. 2009). Moreover, courts in Ohio have long recognized the principle that the rights of assignees of a mortgage can rise no higher than those of their assignors and that any defense which could be asserted against the assignor can be equally asserted against the assignees. Cast Stone Co. Inc. v. McGown, 102 N.E. 2d 615, 619 (Ohio Ct. App. 1951). In this instance, PNC is bound by the same fate that would befall National City were it still the mortgage holder: No bona fide purchaser can be charged with constructive notice of PNC's Mortgage since it falls outside the chain of title.
CONCLUSION
PNC's Mortgage contains an erroneous legal description which, through no fault of the Recorder, caused the instrument to be misindexed and recorded outside the chain of title. Consequently, as a matter of Ohio law, the Trustee: (1) cannot now be charged with constructive notice of the Mortgage; and (2) is vested with the status of a bona fide purchaser. Thus, PNC's Mortgage is unenforceable against the Trustee and is subject to avoidance under § 544(a)(3).
A judgment to this effect will be entered. Copies to: Michael J. Menninger
mjmenninger@woodlamping.com
Henry E. Menninger, Jr.
hemenninger@woodlamping.com
Amelia A. Bower
abower@plunkettcooney.com
Eric A. Steiden
Steiden@fuse.net