In re Periandri
| Citation | 266 BR 651 |
| Decision Date | 10 September 2001 |
| Docket Number | No. 00-8087.,00-8087. |
| Parties | In re Jerome John PERIANDRI, Debtor. Alan J. Treinish, Chapter 7 Trustee, Plaintiff-Appellant, v. Norwest Bank Minnesota, N.A., et al., Defendants-Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit |
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Stephen D. Hobt, Cleveland, Ohio, argued and on brief, for Appellant.
Amelia A. Bower, Cleveland, Ohio, argued and on brief, for Appellees.
Before: BROWN, COOK, and HOWARD, Bankruptcy Appellate Panel Judges.
The Chapter 7 trustee appeals the bankruptcy court's order granting summary judgment to Norwest Bank Minnesota, N.A. ("Norwest") based on Ohio's lis pendens statute, Ohio Rev.Code § 2703.26. The bankruptcy court's order assumes that the Chapter 7 trustee could not obtain the status of a bona fide purchaser under Ohio law in order to avoid Norwest's mortgage under 11 U.S.C. § 544(a)(3) due to the constructive notice provided by Norwest's foreclosure action that was pending in state court when the bankruptcy petition was filed. For the reasons stated below, we AFFIRM the decision of the bankruptcy court.
The issue on appeal is whether Norwest's pending state court foreclosure action provided constructive notice to the Chapter 7 bankruptcy trustee pursuant to Ohio's lis pendens statute so as to prevent the trustee from obtaining the status of a bona fide purchaser under 11 U.S.C. § 544(a)(3).
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the appellate panel. A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1).
The bankruptcy court's order granting summary judgment, which is a final order, presents a conclusion of law that is reviewed de novo. Myers v. IRS (In re Myers), 216 B.R. 402, 403 (6th Cir. BAP 1998), aff'd, 196 F.3d 622 (6th Cir.1999). "De novo means that the appellate court determines the law independently of the trial court's determination." Id. (quoting Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (6th Cir. BAP 1997)). "No deference is given to the trial court's conclusions of law." Booher Enters. v. Eastown Auto Co. (In re Eastown Auto Co.), 215 B.R. 960, 964 (6th Cir. BAP 1998) (citation omitted).
Norwest is the holder of a first mortgage on Mr. Periandri's ("Debtor") residence. The mortgage was executed by the Debtor on March 31, 1997. On February 13, 1998, Norwest commenced a foreclosure action against the Debtor in state court, which was stayed upon the filing of the Debtor's Chapter 13 bankruptcy case on May 11, 1999. The Chapter 13 case was then converted to a case under Chapter 7 on March 10, 2000, and Mr. Treinish, the appellant ("trustee"), was appointed as the case trustee. The foreclosure action is unresolved and is still pending in the state court.
After the first meeting of creditors, the Chapter 7 trustee filed a complaint pursuant to 11 U.S.C. § 544(a)(3) to determine the validity of Norwest's mortgage and to set the mortgage aside as improperly executed. The complaint alleged that the Debtor's signature on the mortgage instrument was witnessed by only one person in violation of Ohio Rev.Code § 5301.011, thus rendering the mortgage defective and avoidable by the trustee standing in the shoes of a bona fide purchaser.2 The trustee's complaint was met with a motion for summary judgment contending that, pursuant to Ohio's lis pendens statute, the state court foreclosure action provided constructive notice to the trustee, thus preventing the trustee from obtaining the status of a bona fide purchaser for purposes of avoidance under § 544(a)(3).
On appeal, the trustee argues that the lis pendens statute does not operate to transform the allegedly invalid mortgage into a valid lien. He contends that because the mortgage is invalid no constructive notice was provided by the filing of the foreclosure action so as to defeat the bona fide purchaser status afforded to the trustee under § 544(a)(3). In an order granting Norwest's summary judgment motion, the bankruptcy judge simply stated: "This Court finds that the portion of the Motion for Summary Judgment relating to Ohio's lis pendens statute, Ohio Rev.Code § 2703.26, is well taken and is, therefore, granted." This appeal followed.
Before beginning our analysis, we note what we do not decide in this appeal. Whether the mortgage was defectively executed under Ohio Rev.Code § 5301.01 is not before this panel, since the grant of summary judgment precluded a determination of that issue. The effect of defective execution upon recording of a mortgage in Ohio is not an issue before us. See Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1027-28 (6th Cir.2001) (). As the Sixth Circuit's statement indicates, effective recording of mortgages is one form of constructive notice of the mortgagee's interest in the property described in the recorded mortgage.
At issue in this appeal is whether Ohio's lis pendens statute, Ohio Rev.Code § 2703.26, provides another form of constructive notice and, if so, whether its effect in this case is to deprive the trustee of bona fide purchaser status. We conclude that lis pendens operates upon the filing of a judicial foreclosure suit in Ohio, if the subject property is specifically described, and that it provides constructive notice to all of the mortgagee's interest, whatever that may be.3 Under the undisputed facts of this case, the Chapter 7 trustee had constructive notice of Norwest's equitable interest at the time the bankruptcy case was commenced so as to bar the trustee's use of § 544(a)(3) of the Bankruptcy Code.
Section 544(a)(3) provides:
11 U.S.C. § 544(a)(3).
It is well established that state law determines the extent of the trustee's rights under § 544(a)(3). Simon v. Chase Manhattan Bank (In re Zaptocky), 232 B.R. 76, 79 (6th Cir. BAP 1999) , aff'd, 250 F.3d 1020 (6th Cir.2001). "Accordingly, the trustee can prevail only if, under Ohio law, a person with the status described in § 544(a)(1), (2), or (3) as of the commencement of the case could avoid the mortgagee's interest in the Debtors' property under the mortgage." In re Zaptocky, 232 B.R. at 79-80.
The statute's "knowledge of the trustee" is a reference to actual knowledge. See, e.g., Watkins v. Watkins, 922 F.2d 1513, 1514 (10th Cir.1991) () (citations omitted). As the Sixth Circuit has recognized, "the Bankruptcy Code's strong arm clause does not immunize a trustee who has constructive knowledge of a prior mortgage." In re Zaptocky, 250 F.3d at 1027 (citing In re Mich. Lithographing Co., 997 F.2d at 1159). See also, Probasco v. Eads (In re Probasco), 839 F.2d 1352, 1354-55 (9th Cir.1988) (); Condren v. Harrison (In re Borison), 226 B.R. 779, 787 (Bankr.S.D.N.Y.1998) (). Further, "the provision of Bankruptcy Code § 544(a)(3) that the trustee takes the powers of a bona fide purchaser of real property, `without regard to any knowledge of the trustee or any creditor,' does not over-ride provisions of state law which impute notice of claims to real estate, such as a lis pendens, to all the world." Saghi v. Walsh (In re Gurs), 27 B.R. 163, 164 (9th Cir. BAP 1983) (quoting 11 U.S.C. § 544(a)).
This brings us to the language of Ohio's statute, which provides:
When summons has been served or publication made, the action is pending so as to charge third persons with notice of its pendency. While pending, no interest can be acquired by third persons in the subject of the action, as against the plaintiff\'s title.
Lis pendens is founded on public policy and " " Meck v. Clabaugh, 16 Ohio App. 367, 1922 WL 1722, at *1 (Ohio Ct.App.1922) (citation omitted); see also In re Borison, 226 B.R. at 790. The doctrine has enjoyed long vitality in Ohio. See Cook v. Mozer, 108 Ohio St. 30, 140 N.E. 590, 592 (1923) ().
The Ohio statute itself is composed of two sentences, each of which functions in a different way to accomplish the same end. The first...
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