In re Ritchie

• Decision Date: 24 September 2009
• Docket Number: BAP No. 09-8011.
• Citation: 416 B.R. 638
• Parties: In re Benjamin RITCHIE, Debtor. Stephen Palmer, Plaintiff-Appellee, v. Washington Mutual Bank, Defendant-Appellant.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

416 B.R. 638

In re Benjamin RITCHIE, Debtor Stephen Palmer, Plaintiff-Appellee, v. Washington Mutual Bank, Defendant-Appellant.

BAP No. 09-8011.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued August 19, 2009.

Decided and Filed September 24, 2009.

COPYRIGHT MATERIAL OMITTED

ARGUED: Nathan L. Swehla, Lerner, Sampson & Rothfuss, Cincinnati, Ohio, for Appellant. John D. Kermode, Atkinson, Simms & Kermode, Lexington, Kentucky, for Appellee. ON BRIEF: Nathan L. Swehla, Lerner, Sampson & Rothfuss, Cincinnati, Ohio, for Appellant. John D. Kermode, Atkinson, Simms & Kermode, Lexington, Kentucky, for Appellee.

Before FULTON, HARRIS, and SHEA-STONUM, Bankruptcy Appellate Panel Judges.

OPINION

FULTON, Chief Judge.

Washington Mutual Bank f/k/a Washington Mutual Bank, F.A., successor by merger to Washington Mutual Home Loans f/k/a North American Mortgage Company ("WaMu") appeals an order of the bankruptcy court granting the motion for summary judgment of Stephen Palmer, chapter 7 trustee ("Trustee"), and avoiding WaMu's lien on the debtor's manufactured home.

I. ISSUES ON APPEAL

The issues raised by this appeal are whether the doctrine of lis pendens applies to personal property for which a certificate of title is required under Kentucky law, and whether the bankruptcy court was precluded by a prior state court judgment from avoiding WaMu's interest in the debtor's manufactured home.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). An order granting summary judgment is final. Buckeye Ret. Co., LLC, Ltd. v. Swegan (In re Swegan), 383 B.R. 646, 649 (6th Cir. BAP 2008).

The bankruptcy court's grant of summary judgment is reviewed de novo. Schultz v. U.S., 529 F.3d 343, 349 (6th Cir.2008). "Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination." General Elec. Credit Equities, Inc. v. Brice Rd. Devs., LLC (In re Brice Rd. Devs., LLC), 392 B.R. 274, 278 (6th Cir. BAP 2008).

III. FACTS

On October 22, 2001, Benjamin Ritchie ("Debtor") executed a promissory note and mortgage in consideration for a $47,000 loan from WaMu. The mortgage encumbered both real estate located at 1790 Mount Marian Road, Carlisle, Kentucky, 40311, and a manufactured home to be situated on the real property. The mortgage was duly and properly filed in the Nicholas County Clerk's Office on October 31, 2001.

The Debtor used the proceeds of the loan to purchase a manufactured home which was subsequently rendered a total loss as a result of heavy fire damage. As the named loss payee on the insurance policy for the home, WaMu received and released the insurance proceeds to the Debtor to purchase a replacement manufactured home. WaMu failed, however, to record its lien on the certificate of title to the replacement manufactured home.

On January 20, 2006, WaMu initiated a foreclosure action on the property in the Nicholas County Kentucky Circuit Court. The Debtor appeared in the foreclosure case, through his attorney, and filed an answer to the foreclosure complaint. WaMu then amended its complaint to add the Debtor's wife, Nina Ritchie ("Ritchie"), as a defendant, and to include its claim that it held a security interest in the manufactured home located on the real property. The amended complaint asserted that while the parties intended the mortgage to secure a valid, first lien on the manufactured home, the Debtor and Ritchie failed to surrender the title to the home preventing WaMu from noting its lien on the title. WaMu sought a judgment from the state court that it had a valid lien on the home, as well as an order that the home be deemed a fixture on the property and sold as part thereof in satisfaction of its lien. On October 2, 2006, WaMu filed a notice of lis pendens in the Nicholas County Kentucky land records. The notice specifically referenced the manufactured home.

In November, 2006, WaMu filed a motion for summary judgment as to the Debtor, who had answered the complaint, and a motion for default judgment as to Ritchie, who had not answered the complaint. At a hearing on the motions, counsel for the Debtor raised the issue of whether WaMu held a valid lien on the home in the absence of a notation on the title. The motion for summary judgment was denied and Ritchie was permitted time to answer the complaint. The Debtor and Ritchie then filed an answer denying that WaMu held a valid lien on the home.

In February, 2007, WaMu again filed a motion for summary judgment which was denied by the state court based on the challenge as to the creation and perfection of the lien on the home. The court permitted WaMu to again amend its complaint to assert additional facts in support of its position that it held a valid lien. Because no answer was filed to this amended complaint, WaMu moved for a default judgment. Counsel for the Debtor appeared at a hearing on the motion for default, and that motion was denied. Still no answer was filed and WaMu again moved for a default judgment. Despite an appearance and opposition by counsel for the Debtor once again, on January 22, 2008, the state court granted the motion for default judgment and entered a judgment and order of sale. The state court found, in pertinent part, that:

[T]he parties intended that [WaMu] was to be given a security interest in the original manufactured home on the real estate ... and that its interest was not perfected due to the non-feasance of [the Debtor] and/or Defendant Kentucky Escrow Corp. Subsequently, the ... manufactured home was destroyed by a fire and the manufactured home was replaced with proceeds from the Hazard Insurance Policy that listed [WaMu] as a covered beneficiary. As a result, the Court finds that under the Equitable Lien Doctrine, [WaMu's] interest transferred from [the original home] to the current manufactured home on the real estate ... by virtue of the fact that the insurance proceeds ... were to be used to purchase the [new] manufactured home.

The Court further finds that the manufactured home is permanently affixed to the land but not in conformance with KRS 186A.297.

The Court hereby directs [the Debtor] to surrender the title....

The Court further finds that [WaMu] is entitled to have the manufactured home on the subject real estate sold together with the real estate....

....

The Court further finds that said promissory note is further secured by the [manufactured home]....

(J.A. at 1034-36.) (emphasis added.)

On February 14, 2008, the Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code.¹ The Trustee then filed an adversary complaint pursuant to 11 U.S.C. §§ 544, 547, 550, and 551 in which he asserted that WaMu failed to perfect its lien on the Debtor's manufactured home prior to the Debtor filing his petition for relief, and therefore, any interest WaMu may have in the home is avoidable by the Trustee. Furthermore, the Trustee asserted that any interest WaMu may have obtained by virtue of the state court judgment was avoidable as a preferential transfer.

WaMu asserted in response that its notice of lis pendens filed in the land records placed the Trustee on constructive notice of its interest in the manufactured home thereby precluding the Trustee from obtaining a subsequent superior interest and avoiding WaMu's interest. WaMu further argued that res judicata and the Rooker-Feldman doctrine prevented the bankruptcy court from effectively overturning its interest in the home which had been recognized by the state court's judgment and sale order. Finally, WaMu argued that there was no preferential transfer.

In December, 2008, the Trustee and WaMu filed cross motions for summary judgment. The bankruptcy court held a hearing on the motions on January 23, 2009, at which it ordered each party to file proposed findings of fact and conclusions of law. On February 17, 2009, the bankruptcy court issued an order adopting the proposed findings of fact and conclusions of law submitted by the Trustee, granting the Trustee's motion for summary judgment, and denying the summary judgment motion of WaMu. The Trustee's conclusions of law adopted by the bankruptcy court were, in pertinent part, that a lien on the Debtor's manufactured home, which is personal property, can only be perfected by a notation on the certificate of title; WaMu's lien was not noted on the certificate of title; the lien is unperfected; the filing of a notice of lis pendens did not perfect the lien; the doctrine of lis pendens does not apply to personal property and because WaMu "did not perfect its interest in the manufactured home prior to the debtor filing for bankruptcy protection, the trustee as a hypothetical judgment lien creditor obtains priority and the lien is avoidable. 11 U.S.C. § 544." (J.A. at 1112.) Further, the conclusions of law adopted by the court were that the Trustee's complaint was not barred by either res judicata or the Rooker-Feldman doctrine because none of the bankruptcy court's holdings conflicts with the state court judgment; and, finally, that "[e]ven if [WaMu] is correct that res judicata or the Rooker-Feldman doctrine apply and require this Court to hold that the Circuit Court Judgment perfected the defendant's lien, which is disputed, the lien was perfected during the preference period and is avoidable pursuant to 11 U.S.C. § 547." (J.A. at 1113.)

WaMu's timely appeal followed.

IV. DISCUSSION

Pursuant to 11 U.S.C. § 544(a)(1), a bankruptcy trustee holds the status of a hypothetical judgment lien creditor who is deemed...