In Re Elizabeth Ann Carrillo

• Decision Date: 15 January 2010
• Docket Number: Adversary No. 09-1018.,Bankruptcy No. 08-12655-SSM.
• Citation: 431 B.R. 692
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re Elizabeth Ann CARRILLO, Fernando Alex Carrillo, Debtors.Robert O. Tyler, Trustee, Plaintiffv.Ownit Mortgage Loan Trust, series 2006-3, et al., Defendants.

431 B.R. 692

In re Elizabeth Ann CARRILLO, Fernando Alex Carrillo, Debtors.

Robert O. Tyler, Trustee, Plaintiff

v.Ownit Mortgage Loan Trust, series 2006-3, et al., Defendants.

Bankruptcy No. 08-12655-SSM.

Adversary No. 09-1018.

United States Bankruptcy Court,

E.D. Virginia,

Alexandria Division.

Jan. 15, 2010.

COPYRIGHT MATERIAL OMITTED

Richard A. Golden, Esquire, Golden & Golden, P.C., Fairfax, VA, for plaintiff.

Madeline A. Trainor, Esquire, Cyron & Miller, LLP, Alexandria, VA, for defendants U.S. Bank National Association and Mortgage Electronic Registrations Systems, Inc.

Patrick J. McKenna, Esquire, Norfolk, VA, for defendants U.S. Bank National Association and Mortgage Electronic Registration Systems, Inc.

Christopher A. Jones, Esquire, Whiteford Taylor & Preston, LLP, Falls Church, VA, for defendant Ponds at Centreville Condominium Unit Owners Association.

Richard D. Scott, Esquire, LeClair Ryan, Roanoke, VA, for Specialized, Inc., of Virginia.

MEMORANDUM OPINION

STEPHEN S. MITCHELL, Bankruptcy Judge.

This is an action by a bankruptcy trustee to avoid what he contends is a defectively-acknowledged deed of trust against a condominium unit that was foreclosed upon several months prior to the debtors' chapter 7 bankruptcy filing. A trial was held without a jury on October 22, 2009. The issues for determination are (1) whether a certificate of acknowledgment signed by a person who was in fact a notary public but that failed to state his office-indeed, irrelevantly identified him as a “managing member”-was so defective as to defeat the constructive notice that would otherwise result from recording the deed of trust in the land records; (2) if so, whether a Virginia curative statute applies; (3) and if not, whether a subsequently recorded deed of foreclosure was sufficient to provide constructive notice of the deed of trust; and (4) whether, independent of whatever constructive notice it might provide, the foreclosure of the property prior to the bankruptcy filing is a bar to avoidance. For the reasons stated, the court concludes that, although the acknowledgment of the deed of trust was defective, the curative statute applies, but that even if it does not, the foreclosure deed constituted constructive notice of the deed of trust sufficient to defeat exercise of the trustee's strong-arm powers as a hypothetical bona fide purchaser or lien creditor. This opinion constitutes the court's findings of fact and conclusions of law under Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52(a).

Background and Findings of Fact

Elizabeth Ann Carrillo and Fernando Alex Carrillo (“the debtors”) filed a petition in this court on May 12, 2008, for relief under chapter 7 of the Bankruptcy Code. Robert O. Tyler was appointed as trustee. On their statement of financial affairs, the debtors reported the foreclosure of four pieces of real estate, including a condominium unit located at “5858 Orchase [sic] Hill Court.” The evidence shows that the debtors took title to real property at 5858 Orchard Hill Court, Clifton, Virginia-described as Condominium Unit Number 5858 Orchard Hill Court, THE PONDS AT CENTREVILLE CONDOMINIUM-by deed dated January 27, 2006, and recorded on January 30, 2006, in the Clerk's Office of the Circuit Court of Fairfax County, Virginia, in Deed Book 18170, Page 1370. By deed of trust dated the same day as the deed, the debtors conveyed the property in trust to “Stoneridge” to secure a loan made by Ownit Mortgage Solutions, Inc., in the amount of $247,000.¹ On the page following the debtors' signatures is a certificate stating:

State of Virginia

County of Fairfax

The foregoing instrument was acknowledged before me this January 27, 2006 by FERNANDO CARILLO, ELIZABETH CARRILLO

He/She/They is/are personally known to me or has/have produced [blank] as identification.

There follows a signature line with an illegible signature, a line for “Title or Rank” which is filled out “Managing Member,” and the statement “My commission expires the 03/31/06 day of [blank]”.

The evidence at trial established that the signature on the certificate was that of John H. Hawthorn, who was, on the date the deed of trust was signed, both a notary public-whose commission ran through March 31, 2006-for the Commonwealth of Virginia, and also the managing member of Stoneridge Title LLC, the settlement agent. The evidence also established that the words “Managing Member” and the expiration date of Mr. Hawthorn's notary commission were not in his handwriting and were apparently inserted by a document processor in his office after he signed the certificate but before the deed of trust was delivered to a title insurance company for recording. Although the certificate provides a place for a seal, no seal had been affixed or impressed at the time the deed of trust was presented for recording (The testimony established, and the parties agree, that Virginia law in effect at that time did not require a notary to have or use a seal.) The deed of trust was recorded in the Clerk's Office of the Circuit Court of Fairfax County, Virginia, on January 30, 2006, in Deed Book 18170, Page 1373, immediately following the deed to the debtors. The clerk of the Circuit Court, called as a witness, testified that his employees routinely check that instruments presented for recording are properly acknowledged, and he speculated that the deed of trust was accepted because the inclusion of a commission expiration date implied that the person taking the acknowledgment was a notary public.

The note eventually went into default, and Specialized Inc., of Virginia (“Specialized”) was appointed as substitute trustee under the deed of trust. The deed of appointment was recorded on February 1, 2008; but how it was indexed is not shown by the record. A foreclosure sale was held on February 18, 2008, at which the property was sold to LaSalle Bank National Association, as Trustee for Ownit Mortgage Loan Trust, Mortgage Loan Asset-Backed Certificates, Series 2006-3 (“LaSalle”) for $200,900. A deed from Specialized to LaSalle was executed the same date and was recorded on April 1, 2008. The foreclosure deed was indexed in the names of the debtors and Specialized as grantors and LaSalle as grantee and refers to the execution and recording of the deed of trust, which was identified by date, grantors and grantee, and deed book and page. The debtors filed their chapter 7 petition 41 days after the foreclosure deed was recorded. The following day, the Ponds at Centreville Unit Owners Association recorded among the land records a memorandum of lien for unpaid condominium fees.

The present action was commenced by the chapter 7 trustee on January 21, 2009. The complaint, as amended, is pleaded in three counts. Count I seeks avoidance, under the trustee's “strong-arm” powers as a hypothetical bona fide purchaser of real property or hypothetical lien creditor, of the Ownit deed of trust and the subsequent foreclosure deed. Count II seeks avoidance and recovery, as a preferential transfer, of the $200,900 foreclosure proceeds applied to the note. And Count III seeks avoidance, as a preference, of the conveyance effected by the foreclosure deed and recovery by the trustee of $200,900 as the value of the property. The defendant parties are U.S. Bank, National Association, as Successor Trustee for the Ownit Mortgage Loan Trust, Ownit Mortgage Loan Asset-Backed Certificates, Series 2006-3 (“U.S.Bank”); Mortgage Electronic Registration Systems, Inc., as Nominee for U.S. Bank, National Association, Successor Trustee for the Ownit Mortgage Loan Trust, Ownit Mortgage Loan Asset-Backed Certificates, Series 2006-3 (“MERS”); Specialized, Inc. of Virginia (“Specialized”); and The Ponds at Centreville Condominium Unit Owners Association (“Ponds”). Prior to the final pretrial conference, the trustee voluntarily dismissed Counts II and III with prejudice, and the action proceeded to trial solely on Count I.

Conclusions of Law and Discussion

I.

This court has subject matter jurisdiction under 28 U.S.C. §§ 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. An action to determine the validity of a lien is a core proceeding in which a final judgment or order may be entered by a bankruptcy judge, subject to the right of appeal. 28 U.S.C. § 157(b)(2)(K),(O). Venue is proper in this district under 28 U.S.C. § 1401(a). The defendants have been properly served and have appeared generally.

II.

Among the powers enjoyed by a bankruptcy trustee to maximize property available for distribution to creditors are the so-called “strong-arm” powers in § 544(a), Bankruptcy Code. Relevant to the present action are the trustee's rights and powers as a hypothetical purchaser of real estate and hypothetical judgment lien creditor:

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- (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

* * * * * *

(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.

§ 544(a)(1), (3), Bankruptcy Code. Simply stated, the bankruptcy trustee is in the same position, with respect to real estate, as if he were a bona fide purchaser who bought the property from the...