In re Cocanougher
| Citation | 378 B.R. 518 |
| Decision Date | 14 November 2007 |
| Docket Number | BAP No. 06-8049. |
| Parties | In re William COCANOUGHER and Tina Cocanougher, Debtors. MG Investments, Inc. and Citifinancial Mortgage Co., Inc., Defendants-Appellants, v. Anna C. Johnson, Trustee, Plaintiff-Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit |
ARGUED: Dennis R. Williams, Adams, Stepner, Woltermann & Dusing, Covington, Kentucky, for Appellants. John D. Kermode, Atkinson, Simms & Kermode, Lexington, Kentucky, for Appellee.
ON BRIEF: Marc D. Dietz, Adams, Stepner, Woltermann & Dusing, Covington, Kentucky, for Appellants. John Martin Simms, Atkinson, Simms & Kermode, Lexington, Kentucky, for Appellee.
Before: AUG, GREGG, and LATTA, Bankruptcy Appellate Panel Judges.
In this appeal, the Appellant, Citifinancial Mortgage Co., Inc., f/k/a Associates Home Equity Service, Inc. as successor in interest to MG Investments, Inc. ("Citifinancial"), appeals the bankruptcy court's judgment voiding Citifinancial's security interests in real estate owned by the Debtors, William and Tina Cocanougher. The bankruptcy court voided the mortgages based on its finding that both mortgages were defective because the names of the Debtors do not appear in the body of the acknowledgment certificate as required by Kentucky Revised Statute § 423.130. Subsequent assignments of the mortgages were also defective because they failed to provide a brief description of the notes and the date of the notes as required by Kentucky Revised Statute § 382.290. As a result of the defects in the documents, the bankruptcy court found that neither the mortgages nor the assignments were sufficient to put the trustee on notice of Citifinancial's mortgages. We AFFIRM the decision of the bankruptcy court.
The issues raised by this appeal are:
1. Whether summary judgment was warranted on the Trustee's complaint to avoid Citifinancial's mortgages based on the defective notary clauses that did not comply with Kentucky law. See 11 U.S.C. § 544; Ky.Rev.Stat. § 382.270.
2. Whether the assignments of the mortgages were sufficient to give the Trustee constructive notice or inquiry notice of Citifinancial's security interest.
3. What effect, if any, does the amendment to Kentucky Revised Statute § 382.270 which became effective July 12, 2006, have on the Trustee's ability to avoid the mortgages.
The Bankruptcy Appellate Panel ("BAP') of the Sixth Circuit has jurisdiction to decide this appeal. By order entered September 8, 2006, the United States District Court for the Eastern District of Kentucky authorized appeals to the BAP. A final order of the bankruptcy court may be appealed as of right. 28 U.S.C, § 158(a)(1). For purposes of appeal, a final order "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). The bankruptcy court's order granting the Trustee's motion for summary judgment resulting in the avoidance of Citifinancial's mortgage liens is a final order and states conclusions of law that are reviewed de novo. Treinish v. Norwest Bank Minn., NA (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001). "De novo means that the appellate court determines the law independently of the trial court's determination." Id.
Because there are no factual disputes, summary judgment is appropriate for one of the parties. See Rogan v. Am.'s Wholesale Lender d/b/a Countrywide Home Loans, Inc. (In re Vance), 99 Fed.Appx. 25, 27 (6th Cir.2004).
The facts of this appeal are set forth below in chronological order.
March 20, 2000: The Debtors granted a first mortgage on real estate to MG Investments securing a note in the principal amount of $98,800. On March 22, 2000, the mortgage was recorded in the Office of the Clerk for Mercer County, Kentucky ("Mercer County Clerk's Office").
March 20, 2000: The Debtors granted a second mortgage on the same real estate to MG Investments securing a note in the principal amount of $24,700. On March 22, 2000, the second mortgage was recorded in the Mercer County Clerk's Office.
May 23, 2000: MG Investments assigned the first mortgage to Associates Home Equity Services, Inc. and that assignment was recorded on June 5, 2000, in the Mercer County Clerk's Office.
May 23, 2000: MG Investments assigned the second mortgage to Associates Home Equity Services, Inc. and that assignment was recorded on June 7, 2000, in the Mercer County Clerk's Office. Presumably, sometime after the assignments were entered into, Associates Home Equity Services, Inc. became known as Citifinancial Mortgage Co., Inc. Neither party has referenced any filings that would give notice of this change.
July 22, 2005: The Debtors filed their chapter 7 petition.
September 8, 2005: Anna C. Johnson (the "Trustee") filed an adversary complaint seeking to avoid the mortgages of Citifinancial.
March 8, 2006: The bankruptcy court granted the Trustee's motion for summary judgment avoiding the mortgages based in part on the court's finding that the notary clauses in both mortgages are defective.
The notary clause of both mortgages appear as follows:
STATE OF KENTUCKY County ss
The forgoing instrument was acknowledged before me this hw/3/20/00 by
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
My Commission Expires: hw/ 8/16/00 /s/David P. Nutgrass
Notary Public
The acknowledgment appears on a page separate from the Debtors' signatures on the first mortgage and appears at the bottom of the same page as the Debtors' signatures on the second mortgage. (Appendix at 12-13 & 30.)
The bankruptcy court further found the assignments of the mortgages defective because the assignments failed to provide a brief description of the notes and the date of the notes as required by Kentucky Revised Statute § 382.290(5). As such, the court found that the assignments were not recordable, and not sufficient to put the Trustee on notice.
March 13, 2006: Citifinancial Mortgage and MG Investments filed this appeal.
April 21, 2006: The Kentucky legislature passed Senate Bill 45, amending Kentucky Revised Statute § 382.270 to provide that even if a notary clause is defective, a recorded mortgage will provide constructive notice to interested parties, including the Trustee, by virtue of the recording alone.
July 12, 2006: The amendment to Kentucky Revised Statute § 382.270 became effective.
Pursuant to law in effect at the time the Debtors filed their petition,1 the Trustee is considered a bona fide purchaser of the Debtors' real property and may therefore avoid those liens upon the property that are voidable under state law. 11 U.S.C. § 544; see also Rogan v. Bank One, Nat'l Ass'n (In re Cook), 457 F.3d 561, 566 (6th Cir.2006). Kentucky law governs the question of whether Citifinancial's security interests are superior to the Trustee's interests in the Debtors' real property. Id. It does not matter whether the Trustee personally knew of the mortgage. "Rather, the inquiry focuses on whether a bona fide purchaser would have notice" under Kentucky law. Thacker v. United Cos. Lending Corp., 256 B.R. 724, 728 (W.D.Ky.2000).
At the time the Debtors executed the mortgages and through the time the bankruptcy court rendered its judgment on March 8, 2006, Kentucky Revised Statute § 382.270 provided:
382.270 Instruments not valid against purchasers or creditors unless recorded
No deed or deed of trust or mortgage conveying a legal or equitable title to real property shall be valid against a purchaser for a valuable consideration, without notice thereof, or against creditors, until such deed or mortgage is acknowledged or proved according to law and lodged for record. As used in this section "creditors" includes all creditors irrespective of whether or not they have acquired a lien by legal or equitable proceedings or by voluntary conveyance.
Ky.Rev.Stat. § 382.270 (West 2005). Another statute that is relevant to this case, Kentucky Revised Statute § 423.130, provides:
423.130 Certificate of person taking acknowledgment
The person taking an acknowledgment shall certify that:
(1) The person acknowledging appeared before him and acknowledged he executed the instrument; and
(2) The person acknowledging was known to the person taking the acknowledgment or that the person taking the acknowledgment had satisfactory evidence that the person acknowledging was the person described in and who executed the instrument.
In State Street Bank & Trust Co. of Boston, Mass. v. Heck's, Inc., 963 S.W.2d 626 (Ky.1998), the court interpreted the phrase "without notice thereof" as used in Kentucky Revised Statute § 382.270 to mean "without actual knowledge of the existence of a mortgage, either unrecorded or improperly recorded, or knowledge of such facts as would lead a reasonably prudent person under like circumstances to inquire into the matter and discover the existence of that mortgage." Id. at 630.
In State Street Bank, an improperly executed mortgage had been recorded. The court found that "the recordation of an unrecordable instrument does not constitute constructive notice." [State Street Bank, 963 S.W.2d at 630]. The court concluded that the inquiry did not end; other factors apart from the recording itself could provide notice. In State Street, the mortgage at issue...
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