In Re Bertha Joanna Hagler

• Decision Date: 10 December 2009
• Docket Number: Bankruptcy No. 07-65231.,Adversary No. 07-6456.
• Citation: 429 B.R. 42
• Parties: In re Bertha Joanna HAGLER, Debtor.Neil C. Gordon, Trustee, Plaintiff,v.U.S. Bank, National Association, as Trustee, on behalf of Holders of the Home Equity Pass-Through Certificates, Series 2006-1, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

429 B.R. 42

In re Bertha Joanna HAGLER, Debtor.Neil C. Gordon, Trustee, Plaintiff,v.U.S. Bank, National Association, as Trustee, on behalf of Holders of the Home Equity Pass-Through Certificates, Series 2006-1, Defendant.

Bankruptcy No. 07-65231.

Adversary No. 07-6456.

United States Bankruptcy Court,

N.D. Georgia,

Atlanta Division.

Dec. 10, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

J. Thomas Salata, The Law Offices of J. Thomas Salata, Alpharetta, GA, for Debtor.

Michael F. Holbein, Arnall Golden Gregory LLP, Atlanta, GA, for Plaintiff.

Neil C. Gordon, Atlanta, GA, pro se.

J. Ben Vitale, Lewis E. Hassett, Morris, Manning & Martin, L.L.P., Atlanta, GA, for Defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

JAMES E. MASSEY, Bankruptcy Judge.

The primary issues in this adversary proceeding are (1) whether under Georgia law a deed to secure debt that is unattested but nonetheless filed and recorded by a Superior Court clerk provides constructive notice of the grantee's lien to a bona fide purchaser and (2) whether the label “Georgia-Second Mortgage” in a footer on the bottom of the first page of a properly attested security deed excites attention so as to put a bona fide purchaser on a duty of inquiry that would lead to the discovery of an earlier recorded but unattested security deed.

On October 12, 2005, Bertha Joanna Hagler obtained two loans to refinance an existing loan secured by her residence located at 145 Brookeivey Lane, Alpharetta, Georgia (the “Property”). The new loans were secured by two security deeds in favor of Mortgage Electronic Registration Systems, Inc. as nominee for Wilmington Finance, a division of AIG Federal Savings Bank. The first of those security deeds, which was recorded at Deed Book 41309, Page 393, Fulton County Georgia Records, was unattested. The second one to be recorded (in Deed Book 41309, Page 415, Fulton County Georgia Records) was attested by a notary and an unofficial witness. The second security deed was created using a form identified in a footer at the bottom of the first page at the left margin as: “Georgia-Second Mortgage-1/80-fnma/fhlmc uniform instrument with mers,” below which in small type are the words “Form 3811 Amended 7/02.” Memorandum of Law in Support of Defendant's Motion for Summary Judgment, Doc. No. 28, p. 82.

On November 8, 2005, both deeds were filed with, and recorded and indexed by, the Clerk of the Superior Court of Fulton County, Georgia. Shortly thereafter, Wilmington assigned the two security deeds to U.S. Bank, National Association, as Trustee, on behalf of Holders of the Home Equity Pass-Through Certificates, Series 2006-1. On April 2, 2007, the debtor filed the petition initiating this case under Chapter 7 of the Bankruptcy Code. Neal C. Gordon is the Chapter 7 Trustee. During the course of the case, the Trustee sold the Property free and clear of liens, and those liens attached to the proceeds of the sale (the “Proceeds”).

In the original complaint, Plaintiff named only Wilmington as a defendant. After the assignment of Wilmington's interest to U.S. Bank came to light, Plaintiff amended the complaint to add U.S. Bank as a defendant. Wilmington agreed to a judgment that it had no interest in the Proceeds. U.S. Bank adopted the answer and other documents filed in this proceeding by Wilmington.

I.

Section 544(a)(3) of the Bankruptcy Code grants to a bankruptcy trustee so-called “strong-arm” powers that may enable the trustee to set aside or avoid transfers of the debtor's real property. That section provides:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-...

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

11 U.S.C. § 544(a)(3). State law determines the extent of the powers of a bona fide purchaser of real property. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) (“Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”); In re Hedrick, 524 F.3d 1175, 1182 (11th Cir.2008).

Citing Higdon v. Gates, 238 Ga. 105, 231 S.E.2d 345 (1976) and Coniff v. Hunnicutt, 157 Ga. 823, 836, 122 S.E. 694 (1924), Plaintiff contends that under Georgia law a security deed that is not attested by an official witness and an unofficial witness cannot provide constructive notice to a subsequent bona fide purchaser because it is not in recordable form. For that reason, Plaintiff asserts, a bona fide purchaser without actual knowledge of the prior interest could have acquired the Property as of the petition date free of any interest of Defendant under the first security deed. He seeks to avoid the transfer of the Property by Debtor to Wilmington and hence to avoid Defendant U.S. Bank's lien against the Proceeds pursuant to section 544(a)(3). He further seeks to preserve the avoided lien for the benefit of the estate pursuant to section 551 of the Bankruptcy Code.

Defendant contends that a 1995 amendment to O.C.G.A. § 44-14-33 changed the law to enable an unattested security deed to provide constructive notice. Alternatively, Defendant argues that the label “Second Mortgage” on the second security deed are words sufficient to excite attention, thereby creating a duty of inquiry, and that a reasonable investigation would lead to the discovery of the first security deed.

Both parties move for summary judgment. Because the material facts are not in dispute, summary judgment is appropriate. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

II.A.

In Georgia, before any deed, mortgage, or other recordable instrument may be recorded, “it must be attested or acknowledged as provided by law.” O.C.G.A. § 44-2-14(a) (emphasis added). Despite these requirements, clerks file unattested or otherwise improperly attested deeds, though presumably not very often.

There are two types of testimonial defects. First, a deed may have a latent defect, meaning that the defect is not apparent on the face of the deed. One example is a deed signed by a person who, otherwise intending to serve as a witness, did not actually observe the grantor execute or acknowledge the deed. Notwithstanding a lack of clarity on this point in a few cases decided prior to 1995, the Georgia Supreme Court held in Leeds Building Products, Inc. v. Sears Mortgage Corp., 267 Ga. 300, 477 S.E.2d 565 (1996) that a security deed with a latent defect provided constructive notice of its existence to a bona fide purchaser.

Second, a deed may have a patent defect, meaning that the defect is obvious and easily detectable. An example is a deed missing the signature of an unofficial witness. Georgia law has long provided that a deed with a patent defect with respect to attestation does not provide constructive notice to a bona fide purchaser. See, e.g., Donalson v. Thomason, 137 Ga. 848, 74 S.E. 762 (1912). There is no dispute between the parties that this was the law prior to 1995.

In 1995, § 44-14-33 was amended to read as follows:

In order to admit a mortgage to record, it must be attested by or acknowledged before an officer as prescribed for the attestation or acknowledgment of deeds of bargain and sale; and, in the case of real property, a mortgage must also be attested or acknowledged by one additional witness. In the absence of fraud, if a mortgage is duly filed, recorded, and indexed on the appropriate county land records, such recordation shall be deemed constructive notice to subsequent bona fide purchasers.

(Ga. Laws 1995, p. 1076). The amendment added the second sentence.

O.C.G.A. § 44-14-61 provides that “[i]n order to admit deeds to secure debt or bills of sale to record, they shall be attested or proved in the manner prescribed by law for mortgages.” ¹

Defendant's argument that the amendment to § 44-14-33 changed Georgia law with respect to patently defective deeds was raised in Gordon v. Terrace Mortgage Co. (In re Kim), 571 F.3d 1342, 1345 n. 4 (11th Cir.2009), but the Court of Appeals resolved the appeal without addressing the issue. Without question, the amendment clarified the pre-amendment law that a deed having a latent defect with respect to attestation nonetheless provides constructive notice.

B.

Defendant argues that its construction of § 44-14-33, as amended, is correct for the following reasons: (1) its meaning is plain; (2) the amendment is presumed to have changed the law; and (3) it reflects sound policy.

In arguing that its construction of § 44-14-33 reflects the plain meaning of that section, Defendant ignores the key words in the sentence added by the amendment. The 1995 amendment states that “ such recordation shall be deemed constructive notice to subsequent bona fide purchasers,” not that any recordation provides constructive notice. (Emphasis added.) The words “such recordation” relate back to the words “ duly filed, recorded, and indexed.” (Emphasis added.) Only a “duly” recorded mortgage provides such notice.

Defendant's reading overlooks the rule of statutory construction that “courts should construe a statute to give ‘sensible and intelligent effect’ to all of its provisions and should refrain, whenever possible, from construing the statute in a way that renders any part of...