In re Cook

• Decision Date: 09 August 2006
• Docket Number: No. 05-6613.,05-6613.
• Citation: 457 F.3d 561
• Parties: In Re: Kenneth Wayne COOK; Melissa Cook, Debtors. J. James Rogan, Appellant, v. Bank One, National Association, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

457 F.3d 561

In Re: Kenneth Wayne COOK; Melissa Cook, Debtors.

J. James Rogan, Appellant, v. Bank One, National Association, Appellee.

No. 05-6613.

United States Court of Appeals, Sixth Circuit.

Argued: July 21, 2006.

Decided and Filed: August 9, 2006.

ARGUED: J. James Rogan, Danville, Kentucky, for Appellant. Richard A. Vance, Stites & Harbison, Louisville, Kentucky, for Appellee. ON BRIEF: J. James Rogan, Danville, Kentucky, for Appellant. Richard A. Vance, Stites & Harbison, Louisville, Kentucky, for Appellee.

Before: GILMAN and COOK, Circuit Judges; DOWD, District Judge.^*

OPINION

RONALD LEE GILMAN, Circuit Judge.

J. James Rogan, as the trustee of Kenneth and Melissa Cook's bankruptcy estate, brought this action to assert his interest in real property that was mortgaged by the Cooks. He argues that Bank One, National Association, which claims to own the mortgage, does not have a perfected security interest in the property that is superior to Rogan's interest as a judicial lien creditor. Both the bankruptcy court and the district court ruled against Rogan. The district court also affirmed the bankruptcy judge's holding that Bank One, in recording its interest as the assignee of the mortgage, did not violate the automatic stay of any proceedings against the Cooks after they filed for bankruptcy. For the reasons set forth below, we likewise AFFIRM the judgment of the bankruptcy court.

I. BACKGROUND

A. The promissory note and the mortgage

In December of 2000, NCS Mortgage Lending Company (NCS) loaned the Cooks $100,000 to enable them to purchase a residence in Berea, Kentucky. An "Adjustable Rate Note" (the promissory note) and a mortgage were executed in connection with the loan. The mortgage was properly recorded in the Madison County Clerk's office.

In January of 2001, NCS assigned its interest in the promissory note and the mortgage to First Greensboro Home Equity, Inc., and this assignment was also duly recorded. The promissory note and the mortgage then became part of the secondary mortgage market. On the same day as First Greensboro acquired its interest in the documents, it executed an "Assignment of Note." Because the assignment did not include the name of the assignee, it is considered as an indorsement in blank. See Black's Law Dictionary 774 (6th ed.1997) (defining a "blank indorsement" as an assignment made "without mention of the name of any person in whose favor the indorsement is made"). This assignment was not recorded until April of 2004, when an "Assignment of Mortgage" was filed in Madison County reflecting the assignment from First Greensboro to Lehman Brothers Bank.

Under the "ARC Trust Agreement" dated October 1, 2001, Lehman Brothers conveyed a large number of mortgage loans that it had acquired to Structured Asset Securities Corporation. These loans were then transferred to Bank One as trustee for the issuance of "Amortizing Residential Collateral Trust Mortgage Pass-Through Certificates." Gary Sleeper, as Bank One's agent, averred in an affidavit that the Cooks' original promissory note and the mortgage are in the possession of Bank One as part of the ARC Trust's documents.

The ARC Trust Agreement required that all mortgages assigned to Bank One be recorded. Although the Cooks' original mortgage is recorded, Bank One acknowledges in its brief that a mortgage assignment naming it as assignee was not recorded prior to the filing of the bankruptcy petition. In 2004, however, Bank One did record its interest in the mortgage.

B. Bankruptcy proceedings

The Cooks filed for bankruptcy on April 25, 2003 and listed Bank One as a secured creditor due to the home mortgage. Bank One then filed a proof of claim stating that the Cooks owed it $99,371 plus interest based on the promissory note that is secured by the NCS mortgage. Rogan, in his capacity as the bankruptcy trustee, filed an objection to the proof of claim, asserting that Bank One has not presented evidence showing the perfection of a security interest in its favor. The trustee argued that "the interest of the trustee as a judicial lien creditor . . . in the real property of Debtors was superior to the unperfected interest of Bank One." See 11 U.S.C. § 544(a)(1) (granting a bankruptcy trustee the status of a hypothetical lien creditor who is deemed to have perfected his interest as of the date of the filing of the bankruptcy petition).

In response, Bank One filed an amended proof of claim that changed the name of the owner of the security interest to "Bank One National Association, as Trustee for ARC 2001-BC6 Trust." Bank One also submitted (1) a copy of the original promissory note and NCS mortgage, (2) the assignment from First Greensboro to Lehman Brothers, (3) an affidavit from Gary Sleeper, as Bank One's agent, stating that "the Cooks' note and mortgage were assigned to Bank One as trustee of the ARC 2001-BC6 Trust, on or about October 1, 2001," and (4) an "Assignment of Mortgage" from Lehman Brothers Bank to Bank One as Trustee for the ARC Trust.

Rogan then filed an adversary proceeding seeking a declaration that the interest of the trustee in the Cooks' property was superior to all other creditors. In September of 2004, Rogan obtained a default judgment that confirmed the trustee's priority over the interests of NCS, First Greensboro, and Lehman Brothers. Bank One, however, asserted its interest in the property, and Amanda Thompson, as counsel for Bank One, filed an affidavit with the bankruptcy court that stated in pertinent part as follows:

1. I am employed as counsel to represent the interests of Bank One National Association, as Trustee for ARC 2001-BC6 Trust in this bankruptcy case.

2. I am in possession of the original adjustable rate note executed by Kenneth and Melissa Cook on December 29, 2000.

3. Attached is a true and accurate copy of this original note.

Both parties then moved for summary judgment, each claiming a superior interest in the Cooks' property. The bankruptcy court held that because "[c]ounsel for Bank One is in possession of the original note" (which the court considered to be "bearer paper" because it was indorsed in blank), "Bank One is a `holder' and . . . prima facie entitled to enforce the note." In addition, the court held that the assignment of the promissory note to Lehman Brothers and then to Bank One, which were not recorded until after the Cooks filed for bankruptcy, did not violate the automatic stay because the "assignment of the mortgage loan between creditors was an assignment of the property of the creditors; it did not involve property of the bankruptcy estate."

The district court affirmed the judgment of the bankruptcy court, holding that (1) Bank One had physical possession of the promissory note, (2) this possession endowed Bank One with a perfected interest in the Cooks' property, and (3) Bank One did not violate the automatic stay placed on proceedings against the Cooks' property by recording its interest in the promissory note and the mortgage. Rogan timely appealed.

II. ANALYSIS

A. Standard of review

"In a case which comes to us from the bankruptcy court by way of an appeal from a decision of a district court, we review directly the decision of the bankruptcy court." Brady-Morris v. Schilling, 303 F.3d 671, 676 (6th Cir.2002). We give no deference to the district court's decision, but review the bankruptcy court's findings of fact under the clearly erroneous standard. Id. "A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court is left with a definite and firm conviction that a mistake has been committed." Simon v. Chase Manhattan Bank, 250 F.3d 1020, 1027 (6th Cir.2001) (citation and quotation marks omitted). Conclusions of law made by the bankruptcy court, however, including the decision to grant summary judgment, are reviewed de novo. Brady-Morris, 303 F.3d at 676.

Summary judgment is proper where there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). In considering a motion for summary judgment, courts must construe the evidence and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The central issue is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

B. Perfection of a security interest under Kentucky law

The first issue on appeal is whether Bank One's interest in the promissory note and the mortgage is perfected and therefore superior to Rogan's interest as a judicial lien creditor. See Black's Law Dictionary 1137 (6th ed.1997) (defining perfection as "the process whereby a security interest is protected, as far as the law permits, against competing claims to the collateral"). Pursuant to 11 U.S.C. § 544, a bankruptcy trustee is considered a bona fide purchaser of the debtor's real estate and may therefore avoid certain obligations placed on the property that are voidable under state law. See Kovacs v. First Union Home Equity Bank, 408 F.3d 290, 293 (6th Cir.2005) (holding that a bankruptcy trustee was entitled to avoid mortgages that were not properly executed) (citing 11 U.S.C. § 544(a)(3)).

Kentucky law governs the question of whether Bank One has a perfected security interest in the promissory note that is superior to Rogan's interest as the bankruptcy trustee. See Morehead v. State Farm Mut. Auto. Ins. Co., 249 F.3d 445, 447 (6th Cir.2001) ("According to the Bankruptcy Code, a transfer is perfected when a creditor on a simple contract cannot acquire a judicial lien that is superior to the interest of the transferee. A more precise definition of perfection is left to state law.") (...