In re Colon

• Decision Date: 04 May 2009
• Docket Number: No. 07-3313.,07-3313.
• Citation: 563 F.3d 1171
• Parties: In the Matter of: Jorge COLON; Antoinette Valentina Ortiz-Colon, a/k/a Toni Ortiz-Colon, Debtors, Jan M. Hamilton, Trustee, Plaintiff-Appellee, v. Washington Mutual Bank FA, Defendant-Appellant, Jorge Colon; Antoinette Valentina Ortiz-Colon, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

563 F.3d 1171

In the Matter of: Jorge COLON; Antoinette Valentina Ortiz-Colon, a/k/a Toni Ortiz-Colon, Debtors Jan M. Hamilton, Trustee, Plaintiff-Appellee, v. Washington Mutual Bank FA, Defendant-Appellant Jorge Colon; Antoinette Valentina Ortiz-Colon, Appellees.

No. 07-3313.

United States Court of Appeals, Tenth Circuit.

May 4, 2009.

Thomas M. Franklin, The Franklin Law Firm, Kansas City, MO, for Defendant-Appellant.

Jan Hamilton, Chapter 13 Trustee, (Teresa L. Rhodd, Staff Attorney, Office of Chapter 13 Trustee, with her on the brief), Topeka, KS, for Plaintiff-Appellee.

Before MURPHY, Circuit Judge, BRORBY, Senior Circuit Judge, and HARTZ, Circuit Judge.

HARTZ, Circuit Judge.

A bankruptcy trustee, who acts in the interests of the debtor's general creditors may acquire for the bankruptcy estate a greater right to a debtor's real property than the debtor himself had. In particular, if there is a lien on a piece of property, the bankruptcy estate may take the property free of the lien (that is, avoid the lien) if the lien would not bind a hypothetical bona fide purchaser (BFP) of the property from the debtor. On this appeal we must decide whether this rule permits a trustee to avoid a mortgage on the ground that it misstates the lot number in its description of the property.

Washington Mutual Bank (the Bank) holds a recorded mortgage on the house of the Debtors in this case, Jorge Colon Jr. and Antoinette Ortiz-Colon. The mortgage recites the correct street address and parcel identification number for the house but misstates the lot number. The bankruptcy court, affirmed by this circuit's Bankruptcy Appellate Panel (BAP), held, applying Kansas law, that because of this error a purchaser would not be on constructive notice of the Bank's mortgage. It therefore allowed the bankruptcy trustee, Jan Hamilton, to avoid the mortgage. We disagree and reverse because a purchaser is deemed to know the contents of recorded documents in the Debtors' chain of title and, armed with this knowledge, a reasonably prudent purchaser would readily discover that the Bank's mortgage encumbers the Debtors' house.

The parties and the courts below were apparently unaware of Bacon v. Lederbrand, 98 Kan. 631, 160 P. 1029 (Kan.1916), which holds that a purchaser of real estate in Kansas is deemed to have "notice of the contents of all the prior recorded deeds and mortgages" in the grantor's chain of title, id. at 1030 (emphasis added), not just the contents of the county register's indices. The purchaser "is chargeable with notice of the facts appearing upon their face, and also with knowledge of all facts suggested therein, and which, with the exercise of reasonable prudence and diligence, he might have ascertained." Id. (internal quotation marks omitted). Here, recorded documents in the Debtors' chain of title give the same street address and parcel identification number as the Bank's mortgage, together with the correct lot number. A recorded Subordination Agreement also clearly indicates that the Bank's mortgage is on the same property as the subordinated second mortgage on the Debtors' house. We hold that one exercising "reasonable prudence and diligence," id., would have determined that the Bank has a mortgage on the Debtors' house. Therefore, the mortgage cannot be avoided by the trustee.

We now summarize the proceedings below. Then we turn to the authority overlooked in those proceedings, explaining why that authority requires reversal and distinguishing the cases relied upon by the bankruptcy court, the BAP, and the trustee.

I. BACKGROUND

Under 11 U.S.C. § 544(a)¹ a bankruptcy trustee can avoid a mortgage if it could be avoided by a hypothetical lien creditor or by a hypothetical BFP of the property. The trustee's power to avoid transfers under this provision of the bankruptcy code is known as the "strong arm" power. Morris v. Hicks (In re Hicks), 491 F.3d 1136, 1140 (10th Cir.2007); see 5 Collier on Bankruptcy ¶ 544.02 (Lawrence P. King ed., 15th ed.2000) (referring to § 544(a) as the "strong arm clause"). The status and rights of the hypothetical lien creditor and BFP are determined by state law. See Watkins v. Watkins, 922 F.2d 1513, 1514 (10th Cir.1991); Midlantic Nat'l Bank v. Bridge (In re Bridge), 18 F.3d 195, 200 (3d Cir.1994). Under Kansas law a BFP—a purchaser for value who has neither constructive notice, see Beams v. Werth, 200 Kan. 532, 438 P.2d 957, 967 (1968), nor actual notice, see Larson Operating Co. v. Petroleum, Inc., 32 Kan. App.2d 460, 84 P.3d 626, 632 (2004), of an encumbrance—takes the property free of the encumbrance. See Miller v. Alexander, 13 Kan.App.2d 543, 775 P.2d 198, 202-04 (1989).

After the Debtors filed for relief under Chapter 13 of the Bankruptcy Code, the trustee filed an adversary proceeding in April 2005 to avoid the Bank's mortgage on the Debtors' house under 11 U.S.C. § 544. That mortgage was created in 2003 to secure the Debtors' refinancing of a purchase-money mortgage on their house at 3317 SW Moundview Drive in Topeka, Kansas. The mortgage was recorded with the Shawnee County Register of Deeds. It correctly stated the house's address and its parcel identification number (which is assigned by the county clerk and used by the county appraiser for tax purposes). But it also described the property as Lot 29 in Arrowhead Heights Subdivision No. 5, when the correct description is Lot 79 in the subdivision. The trustee based his avoidance claim on this error in the lot number.

The Bank filed a motion for summary judgment, which was denied by the bankruptcy court. The court ruled that the trustee's avoidance claim turned on whether he could "prove that the mortgage filed by [the Bank] would not show up in the chain of title during a reasonable title search in the Office of the Register of Deeds, and thus that the mortgage, as recorded, was insufficient to provide constructive notice." Aplt.App. Vol. I at 153 (Order Setting Mot. for Scheduling Conference, Feb. 8, 2006). It set a bench trial on that issue.

At trial the title documents, the facts surrounding the Debtors' ownership of the property, and the mortgage history of the property were submitted by stipulation. The relevant recorded documents show the following:

1. The 1999 one-page deed by which the Debtors acquired the property gives the Sellers' address as 3317 SW Moundview Dr. and contains the correct lot number for the conveyed property. In text aligned vertically along the left edge of the page, it states: "Property Address: 3317 SW Moundview Dr." Aplt.App. Vol. III at 595.

2. The purchase-money mortgage, filed with the county register one minute after the deed, describes the property as "LOT 79 [the correct number], ARROWHEAD HEIGHTS SUBDIVISION NO. 5, which has the address of 3317 SW MOUNDVIEW DR....." Id. at 680-81.

3. A second mortgage on the property, given by the Debtors in May 2001 and recorded on June 1, similarly provides the property's correct lot number and street address; in the property description it also recites "TAX ID#: 145-150-40-04-003-00-0." Id. at 694.

4. As previously noted, the mortgage at issue (which was later transferred to the Bank), filed on April 14, 2003, contains the incorrect lot number but the correct street address and parcel identification number. It recites that the mortgage secures "the following described property located in the COUNTY of SHAWNEE: LOT 29 [not 79], ARROWHEAD HEIGHTS SUBDIVISION NO. 5, IN THE CITY OF TOPEKA, SHAWNEE COUNTY, KANSAS. Parcel ID Number: 145-15-0-40-04-003-000 which currently has the address of 3317 SW MOUNDVIEW DR. Topeka, Kansas 66614." Id. at 664.

5. Filed a few minutes later is a Subordination Agreement, which subordinates the second mortgage to the Bank's mortgage. It contains the same lot-number error as the Bank's mortgage. The Agreement describes the second mortgage as a mortgage "covering property located at 3317 SW Moundview Dr., Topeka, KS 66614 (`Property') recorded on 6/1/2001, as BOOK: 3508, PAGE: 711 ...; and [LOT 2 9, ARROWHEAD HEIGHTS SUBDIVISION NO. 5 .. .]." (The bracketed language was inserted through a footnote in the document.) The book and page numbers accurately refer to the original second mortgage, which recited the correct lot number. Id. at 696.

6. The release, filed on May 13, 2003, of the 1999 purchase-money mortgage contains the correct lot number and lists the Debtors' mailing address as 3317 SW Moundview Dr.

The trustee called as a witness the Shawnee County Register of Deeds, who testified that one could search for documents in her office by book and page numbers, by a person's name, and by "legal description," but not by street address. Id. at 523. (The term legal description is sometimes used as the label for a property description by block and lot number in a named subdivision. But see Black's Law Dictionary, 913 (8th ed.1999) (defining legal description: "A formal description of real property ... complete enough that a particular piece of land can be located and identified.... The description can be made by reference to a government survey, metes and bounds, or lot numbers of a recorded plat.").) She did not describe the format of the indices or other search tools available in her office.

The trustee also submitted an expert report by Kyle Mead, an examining attorney for a local title-insurance company. Mead opined as follows:

[I]f a reasonable title search was conducted in the office of the Shawnee County Register of Deeds, based on the proper legal description of the subject property, which is Lot 79, Arrowhead Heights Subdivision No. 5, in the City of Topeka, Shawnee County, Kansas, the mortgage in question would not be found. If a reasonable title search was conducted in the office of the Shawnee County Register of Deeds, based on the name of the debtor, which search would list all mortgages which the debtor had executed, the mortgage in question would be found, but it would not show that the...