In re Herr
| Decision Date | 22 October 1987 |
| Docket Number | Bankruptcy No. 85-40108. |
| Parties | In re Maurice Glenn HERR and Audrey Jean Herr, Debtor(s). |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana |
Jack O'Bryan, Lafayette, Ind., for debtor.
Mary Holste, Indianapolis, Ind., for American Fletcher Serv.
On April 23, 1985 the Debtors filed their Application to Determine Status of Claims in this Chapter 7 case.
The Debtors asserted that on December 14, 1984, the Debtors granted American Fletcher Financial Services, Inc. (hereinafter: "American") a mortgage on certain real estate to secure a certain indebtedness by the Debtors to American upon which there is presently due $6,439.36.
The Debtors further asserted that the value of said real estate is $100.00 and therefore, the Debtors pray that American's claim be deemed secured to the extent of $100.00 and unsecured in the amount of $6,339.36 pursuant to § 506.
On May 3, 1985, American filed its response to the Debtors' Motion and asserted that there was a "scrivener's error" in said mortgage, as evidenced by the legal description in a certain mortgage given by the Debtors to American on February 8, 1984, which mortgage was "renewed" by the December 14, 1984, mortgage.
American further responded that the intention of the parties was that the legal description as set out in the February 8, 1984 mortgage was to be included in the December 14, 1984 mortgage, which is further evidenced by the Federal Truth In Lending Disclosure Statements signed by the Debtors on February 8, 1984, and December 14, 1984 which stated that the note was secured by a mortgage on the Debtors' residence, and that the mortgage should be reformed to correct the scrivener's error to show the true intention of the parties, or in the alternative that the court find that the value of the real estate described in the December 14, 1984 mortgage is in excess of $100.00.
A hearing was held on July 18, 1985, and the Debtors were granted 30 days to file a petition to void American's lien pursuant to § 522(h) supported by a brief.
On December 14, 1984, the Debtors filed their Motion to Avoid a Transfer upon Refusal of the Chapter 7 Trustee to Act pursuant to § 522(h). That Motion reasserts the same facts as set out in the Motion to Determine Secured Status filed by the Debtors as to the December 14, 1984, mortgage and alleges that the trustee had declined to assert his voiding powers as a hypothetical lien creditor of real estate pursuant to § 544(a)(3), and that inasmuch as American is seeking to have the mortgage reformed to include real estate other than that listed in the mortgage, the trustee could have voided such a mortgage pursuant to 11 U.S.C. § 544(a)(3). The Debtors further allege the Debtors may void the transfer (mortgage) of the property of the Debtors to American to the extent that the Debtor could have exempted such property under § 522(g)(1) if the trustee had voided such transfer if the transfer is voidable under § 544, and the trustee does not attempt to void such transfer. The Trustee has declined to exercise his voiding powers in this case.
The Debtors filed their brief in support of said motion on August 22, 1985. American filed its memorandum in opposition thereto on September 19, 1985, and the Debtors filed their answer thereto on October 3, 1985.
On April 28, 1986, the Court issued its Memorandum Opinion and Order whereby it made the following findings of fact:
In re Herr, unpublished opinion, United States Bankruptcy Court, Northern District of Indiana, Hammond Division, Case No. 85-40148, April 28, 1986, pp. 1-2.
The Court will not burden this opinion by a repetition of its conclusions of law in the April 28, 1986 order. In summary, the Court concluded that Indiana law would apply as to whether the Debtors in their limited status of bona fide purchaser under § 544(a)(3) could prevail over American, that Indiana Courts are in accord with the general rule that the execution and filing of a second mortgage does not extinguish the lien of the first mortgagee, but that the Courts may look to the intentions of the parties. Walters v. Walters, 73 Ind. 425 (1881).
The Court concluded that further evidence based on the relevant documents was necessary to determine if there was any intention by the parties to extinguish the first mortgage by the execution of the second mortgage, and if not, whether the first mortgage correctly described the real estate, was properly recorded, and put the Debtor with the status of a hypothetical bona fide purchaser pursuant to § 544(a)(3) on constructive notice. The Debtor was given 30 days to submit any evidence relevant to the issue.
On May 13, 1986, the April 28, 1986 order was modified on the time and order of the submission of additional evidence pursuant to agreement of the parties filed May 7, 1986.
On August 15, 1986, the parties jointly filed the following documents:
Document 11 is a satisfaction of the first mortgage dated February 8, 1984, executed December 21, 1984, by American and which was filed by American with the Tippecanoe County recorder on December 27, 1984. That document is a certification by American that said mortgage "has been fully paid and satisfied, and the same is hereby released." This first mortgage was as to a portion of Lot 10 and Lot 11.
Thus, it is clear that the intention of American was not to keep the first mortgage in place when the second mortgage was executed but to rely exclusively on the second mortgage.
American in its supplemental memorandum filed September 10, 1986, argues that Document 12, which is a title search done by record data as to Lot 11 performed on or about June 27, 1986, or after the Debtors commenced this case and achieved the status of a hypothetical bona fide purchaser, reflects the recording of the December 14, 1984 mortgage and, that the Debtors, with the status of hypothetical bona fide purchaser could have by reasonable inquiry, after being put on constructive notice by said mortgage, determined the full extent of American's lien interest in the real estate, citing, Hoffman v. Foreman, 163 Ind.App. 263, 323 N.E.2d 651, 657 (1975) for the proposition that Indiana law imposes a duty of inquiry upon prospective purchasers and a purchaser may be bound by facts that would have been discovered by reasonable inquiry.
It is clear that as of the date of the Debtors' petition commencing this case on March 8, 1985, only one pre-petition mortgage by the pre-petition Debtors (as a separate entity from the post-petition Debtors with the post-petition status of a bona fide purchaser) to American was legally in existence and duly recorded, and that was the second mortgage given by the Debtors to American dated December 14, 1984, and recorded December 17, 1984, by which the Debtors granted to American a mortgage on part of Lot 10 only. A search of the records by a bona fide purchaser on March 8, 1985, would fail to reveal the existence of any duly recorded mortgage by the Debtors to American which had not been released and satisfied by American as to Lot 11. The fact that the first mortgage had been duly executed and recorded could, of course, be reasonably determined by the reference thereto in the satisfaction of mortgage filed on December 27, 1984. However, a bona fide purchaser had every right to rely on the public records as to the condition of Lot 11 as of March 8, 1985, and a search of the February 8, 1984 mortgage as satisfied as to Lot 11 on December 27, 1984, would clearly reveal that no duly...
To continue reading
Request your trial