US v. Arnol & Mildred Shafer Farms, Inc.
| Decision Date | 29 November 1989 |
| Docket Number | Civ. No. S 89-377. |
| Parties | UNITED STATES of America, Appellant, v. ARNOL & MILDRED SHAFER FARMS, INC., Appellee. |
| Court | U.S. District Court — Northern District of Indiana |
Orest S. Szewciw, Hammond, Ind., Clifford D. Johnson, South Bend, Ind., for appellant.
David R. Krebs, Indianapolis, Ind., for appellee.
In this action the United States of America, on behalf of its agency, the Farmers Home Administration (FmHA), appeals from a final order of the Bankruptcy Court. The two issues presented are (1) whether the Bankruptcy Court erred in determining that the mortgage of FmHA fails to provide constructive notice to a debtor-in-possession having the status of a bona fide purchaser under Indiana law and for purposes of 11 U.S.C. § 544; and (2) whether the Bankruptcy Court's further finding — that Aetna Finance Company's mortgage is a second lien — is contrary to 11 U.S.C. § 551. Pursuant to 28 U.S.C. § 158(a), this court has jurisdiction over the United States's petition for judicial review.
The relevant facts are not in dispute. On January 7, 1987, Arnol & Mildred Shafer Farms, Inc. (Shafer, Inc.), the debtor-in-possession, filed its Complaint to Determine the Nature, Extent and Priority of Liens on certain real property that represents the sole asset of Shafer, Inc.1 The parties' stipulation of facts—filed and agreed to by Shafer, Inc., and Defendants (Aetna Finance Company, d/b/a ITT Financial Services-Commercial Division, d/b/a Thorp Credit (Aetna); Peru Trust Company (Peru Trust), and United States of America through the FmHA)—provides as follows:
In an opinion issued July 13, 1989, 102 B.R. 712, the Bankruptcy Court determined that Peru Trust and Aetna hold first and second mortgages, respectively, on the Premises in controversy; and that the mortgage of FmHA is invalid as to Shafer, Inc., due to defects in form, execution, and acknowledgment. Accordingly, the Bankruptcy Court granted Shafer, Inc.'s Complaint. The United States of America appeals that determination. For reasons described herein, this court REVERSES the opinion of the Bankruptcy Court and ORDERS that the FmHA mortgage is a valid mortgage on the Shafer, Inc., real estate.
In an appeal from a bankruptcy court's decision, a district court applies two different standards of review: one for findings of fact; the other for conclusions of law. In the Matter of Busick, 65 B.R. 630, 632 (N.D.Ind.1986); In re Tesmetges, 47 B.R. 385, 388 (E.D.N.Y.1984). The Federal Rules of Bankruptcy Procedure provide the relevant standard of review when the appellant alleges errors of fact. Rule 8013 dictates that "findings of fact shall not be set aside by the district court unless clearly erroneous." See also In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985). A finding is clearly erroneous when, "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985).
The relevant standard of review for conclusions of law also is governed by Rule 8013, which provides the district court with the discretion to "affirm, modify, or reverse" the bankruptcy court's legal conclusions. See also In the Matter of Evanston Motor Co., 735 F.2d 1029, 1031 (7th Cir. 1984). When a bankruptcy judge's conclusions are challenged, the district court must make a de novo review and may overturn the findings if they are contrary to law. Busick, 65 B.R. at 632; Tesmetges, 47 B.R. at 388.
Having found the Bankruptcy Court's factual findings not clearly erroneous, this court proceeds to review independently the Bankruptcy Court's conclusions of law.
11 U.S.C. § 544, also called the "strong arm clause," permits a trustee or debtor-in-possession to avoid an "obligation incurred by the debtor that is voidable by . . . a bona fide purchaser of real property . . . from the debtor, against whom applicable law permits such transfer to be perfected . . . whether or not such a purchaser exists." 11 U.S.C. § 544(a)(3). Thus, the debtor-in-possession may avoid an obligation if the creditor failed to comply with the applicable recording statute (here, Indiana law) the provisions of which are to ensure that bona fide purchasers are provided constructive notice of the existence of a mortgage.
In Indiana a bona fide purchaser is one who buys in good faith for value and without notice of prior interests in the property. In re Herr, 79 B.R. 793, 798 (Bankr.N.D.Ind.1987), citing Indiana Law Encyclopedia, Sales of Realty, § 102 at 341. The express language of § 544(a) provides that the actual notice of the debtor-in-possession is irrelevant. Thus, a creditor who seeks to counter the debtor-in-possession's efforts to avoid an obligation must show that the debtor-in-possession had constructive notice as determined by applicable state law.
Under Indiana law a mortgage gives constructive notice of its existence to subsequent purchasers if it is properly acknowledged and recorded. C. Callaghan Co. v. Lafayette Consumers Co., 102 Ind. App. 319, 2 N.E.2d 994, 1000 (1936). Constructive notice may be implied where a proper examination of the record would have led a reasonable man to conclude that the property to be mortgaged was subject to a prior encumbrance. 20 Indiana Law Encyclopedia Mortgages § 108 at 96-97, citing, inter alia, Mishawaka-St. Joseph Loan & Trust Co. v. Neu, 209 Ind. 433, 196 N.E. 85 (1935).
In its Complaint to Determine the Nature, Extent and Priority of Liens, Shafer, Inc., argued that the mortgage of FmHA is invalid under Indiana law because of defects in form, execution, and acknowledgment.
Shafer, Inc., alleged that the mortgage incorrectly identifies the mortgagor as "Arnol and Mildred Shafer Livestock Farms, Inc." rather than "Arnol and Mildred Shafer Farms, Inc.," the true corporate entity. Plaintiff thus insists that the addition of the word "livestock" misnames the mortgagor and thereby fails to provide constructive notice to a subsequent bona fide purchaser, rendering the mortgage invalid.
The Bankruptcy Court determined that, due to the relative similarity of the names, a reasonably diligent search by a bona fide purchaser would have revealed the mortgage recorded in the name of Arnol & Mildred Shafer Livestock Farms, Inc. Appellant does not challenge this conclusion, and this court agrees that the variation in the form of the mortgage is insufficient to nullify the constructive notice provided by recording the mortgage or to render the mortgage invalid under § 544 as to Shafer, Inc.
Shafer, Inc., contended the mortgage is invalid because Arnol and Mildred Shafer executed the mortgage in their individual, rather than corporate, capacities. Next to the Shafers' handwritten signatures, the designations "Pres." and "Treas.," respectively, also appear in handwriting. The Shafers' names are typed just below their handwritten signatures. Shafer, Inc., argued that, had the Shafers intended to execute the mortgage on the corporation's behalf, the proper corporate name should have appeared by their signatures. This court disagrees. While this form would have been entirely appropriate, it is not the exclusive method by which a corporation may execute a document. Bickart v. Henry, 67 Ind.App. 493, 116 N.E. 15, 16 (1917).
The Bankruptcy Court addressed the issue of corporate execution by applying the Bickart case. The Bickart court, adopting the position of the Wisconsin Supreme Court in City of Fond Du Lac v. Otto's Estate, 113 Wis. 39, 88 N.W. 917 (1902), determined that, even with the corporate name omitted, an instrument is properly executed by the corporation "where it appears in the body of the instrument that the corporation is the grantor or obligor . . . and the instrument is signed simply with the signature of the proper...
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