In re Stubbs

• Decision Date: 13 September 2005
• Docket Number: Adversary No. 04-6069.,Bankruptcy No. 04-60428 JPK.
• Citation: 330 B.R. 717
• Parties: In re Sheila Gregory STUBBS, Debtor. Sheila Gregory Stubbs, and Paul R. Chael as Chapter 13 Trustee, Plaintiffs, v. Chase Manhattan Mortgage Corporation; Deutsche Bank National Trust Company, as Custodian Trustee f/k/a Bankers Trust Company of California; Advanta Finance Corp.; and Bankers Trust Company of California a/k/a California Bankers Trust Company, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

330 B.R. 717

In re Sheila Gregory STUBBS, Debtor.

Sheila Gregory Stubbs, and Paul R. Chael as Chapter 13 Trustee, Plaintiffs, v. Chase Manhattan Mortgage Corporation; Deutsche Bank National Trust Company, as Custodian Trustee f/k/a Bankers Trust Company of California; Advanta Finance Corp.; and Bankers Trust Company of California a/k/a California Bankers Trust Company, Defendants.

Bankruptcy No. 04-60428 JPK.

Adversary No. 04-6069.

United States Bankruptcy Court, N.D. Indiana, Hammond Division.

September 13, 2005.

COPYRIGHT MATERIAL OMITTED

Robert A. Davidson, Esq., Freeland & Associates, P.C., Highland, IN, and Julia M. Hoham, Esq., Attorney for Chapter 13 Trustee, Merrillville, IN, for Plaintiffs.

Brian T. Brothers, Esq., Feiwell & Hannoy, Indianapolis, IN, for Defendants.

DECISION AND ORDER

J. PHILIP KLINGEBERGER, Bankruptcy Judge.

This adversary proceeding was commenced by a Complaint, based upon 11 U.S.C. § 544(a)(3), filed on March 15, 2004 by Sheila Gregory Stubbs ("Stubbs"), who is the debtor in the Chapter 13 case pending in this Court as Case No. 04-60428¹. On May 5, 2004, Stubbs filed an amended complaint adding one additional count — a Judicial Determination of Treatment of Secured Claim for purposes of 11 U.S.C. §§ 1322 and 1325. The defendant Chase Manhattan Mortgage Corporation ("Chase") appeared by counsel on August 4, 2004, and the defendant Deutsche Bank National Trust Company, as Custodian Trustee f/k/a Bankers Trust Company of California appeared by counsel on October 28, 2004. The defendants Bankers Trust Company of California a/k/a California Bankers Trust Company and Advanta Finance Corp. have not appeared.² The appearing defendants filed the answer to Stubbs' amended complaint on June 29, 2004.

By its Order Regarding Further Proceedings entered on January 24, 2005, the Court memorialized the parties' agreement that this proceeding would be presented to the Court by means of a stipulated record. The parties were ordered to file a stipulation of facts and their respective briefs, and responses thereto, if any. Lastly, the January 24 Order stated that "the Court will determine this adversary proceeding solely upon the record established by the parties' stipulation."

Given the parties' submissions following the Court's January 24, 2005 order, a brief note on the procedural posture of this case is necessary.

As noted above, the Court ordered the parties to submit this adversary proceeding for the Court's determination on a stipulated record. Instead, the parties' submissions consistently refer to matters concerning motions for summary judgment. On February 18, 2005, a Parties' Stipulation of Facts for Purposes of Summary Judgment, along with an exhibit attached thereto, was filed. On April 27, 2005, plaintiffs filed a Joint Motion for Summary Judgment, a Statement of Facts to Which there is no Genuine Issue, a Joint Brief in Support of Plaintiff's Motion for Summary Judgment — together with an exhibit. The record gets even more interesting, as on the same date, Chase filed its Brief in Support of Defendant's Motion for Summary Judgment. Once again, to what summary judgment mechanism were the parties referring? The record was made more interesting by the Plaintiff's June 1, 2005 filing of a document entitled "Response to Plaintiff's Motion for Summary Judgment." That title is misleading, however, as the body of this filing reveals that it is a response not to the Plaintiff's motion, but rather the plaintiffs' response to the defendant's motion for summary judgment — once again, a motion which does not exist. Given the Court's Order of January 24, 2005, and the parties' subsequent filings, the Court is faced with a quandary. Should this matter be determined based on the Plaintiff's Summary Judgment Motion, or should it be determined based on the stipulated record? The Court determines that it will disregard the titles of the parties' filings. Pursuant to Fed.R.Bank.P. 7016/Fed.R.Civ.P 16, during the course of the adversary proceeding, the Court directed "the attorneys for the parties ... To appear before it for ... conferences before trial for [the purpose of] expediting the disposition of the action"; Fed.R.Civ.P. 16(a). In the course of those conferences, specifically the conference memorialized by the Court's January 24, 2005 order, the Court "entered an order which stated that the case would be submitted on a stipulated record, as the Court was fully authorized to do by Fed.R.Civ.P. 16(e)". As stated in that rule, the January 24, 2005 order "[controlled] the subsequent course of the action unless modified by a subsequent order", which it was not. Accordingly, this decision will be based on the stipulated record, along with the parties' briefs, exhibits, and responses thereto.³

This adversary proceeding is now before the Court for consideration upon the stipulated record.

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and N.D.Ind.L.R. 200.1. Further, this matter constitutes a "core" proceeding as defined by 28 U.S.C. § 157(b)(2)(K) and (O).

FACTS

The facts which gave rise to this adversary complaint are not in dispute and are largely embodied in the "Parties' Stipulation of Facts ..." ("Stip"). On April 22, 1998, Stubbs, as mortgagor, executed a mortgage to Advanta Finance Corp. ("Advanta")⁴ for the properties located at 4969 Adams Street, Gary, Indiana, and 3615 Connecticut Street, Gary, Indiana. [Stip. ¶¶ 1-3, Exhibit A]. The mortgage was recorded on April 23, 1998. [Id. ¶ 2]. The document was notarized by Notary Darin Loucks. [Id. ¶ 4]. On February 23, 2004, Chase filed a Proof of Claim — Claim #4 — in Stubbs' Chapter 13 case. [Amended Complaint ¶ 5, Answer ¶ 5]. Claim # 4 designates Chase's claim in the amount of $84,888.43 to be a secured claim. [Id.].

The only relevant facts with respect to determination of this case concern the format of the signatures and acknowledgment in the defendants' mortgage. The wonders of modern technology allow the Court to reproduce exactly in this decision the critical portion of the mortgage document, and that is the following:

NOTE: DOCUMENT IS ELECTRONICALLY NON-TRANSFERRABLE.

Plaintiffs in this case argue, and the Defendants deny, that the acknowledgment of the mortgage is deficient as it fails to state who appeared before the attesting official at the time the document was notarized.

DISCUSSION

Stubbs' amended complaint seeks to avoid a mortgagee's lien based on an alleged improper acknowledgment. This adversary proceeding is based on 11 U.S.C. § 544(a)(3), a "strong-arm" statute which provides the trustee with the standing of a hypothetical lien holder or a bona fide purchaser for value, which in turn permits the trustee to avoid prepetition consensual liens or conveyances by the debtor where there exists a defect in perfection. 11 U.S.C. § 544(a)(3) provides:

§ 544. Trustee as lien creditor and as successor to certain creditors and purchasers

(a) 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 — * * *

(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.

Initially, the case was commenced by the debtor alone. Subsequently, the Chapter 13 trustee was joined as a plaintiff. The issue of whether or not a Chapter 13 debtor can invoke the trustee's § 544(a)(3) power to avoid a mortgage is subject to dispute among courts. However, the United States District Court for the Northern District of Indiana recently resolved the issue: In U.S. v. Dewes (In re Dewes), 315 B.R. 834 (N.D.Ind.2004), the Honorable Allen Sharp held that a Chapter 13 debtor has standing to pursue strong-arm avoidance claims.

The Plaintiffs seek avoidance of Chase's security interest in the real property by arguing that the acknowledgment is defective; that as a result, although recorded, the mortgage fails to provide constructive notice under applicable Indiana law; and that as a result, the mortgagee's interests are subordinate to the rights of a hypothetical bona fide purchaser.

In the case of In re Baldin, 135 B.R. 586 (Bankr.N.D.Ind.1991), the Honorable Kent Lindquist, in a case involving essentially the same issue as that presented in this case, stated:

The Seventh Circuit has held that actual notice by the prepetition debtor of the encumbrance or defect, as opposed to constructive notice, is irrelevant when § 544(a) is invoked by a trustee or debtor-in-possession with the status of a hypothetical creditor, or bona fide purchaser. In In re Sandy Ridge Oil Co., Inc., 807 F.2d 1332 supra, the Court stated as follows:

The rights enforced in bankruptcy are rights created by state law. Matter of Kaiser, 791 F.2d 73, 74 (7th Cir.1986). Accordingly, the courts generally look to state law to determine whether property is an asset of a debtor. In re Brass Kettle Restaurant, Inc., 790 F.2d 574, 575 (7th Cir.1986); see also, In re K & L Limited, 741 F.2d 1023, 1030 n. 7 (7th Cir.1984); Matter of Gladstone Glen, 628 F.2d 1015, 1018 (7th Cir.1980). Here, however, Congress has required that we do otherwise.

Section 544(a) states that a trustee "shall" be able to avoid an encumbrance that would be voidable by a bona fide purchaser "without regard to any knowledge of the trustee or of any creditor." The natural interpretation of this language is that actual knowledge of the encumbrance will never prohibit a trustee from invoking § 544(a)(3).

The Third Circuit's analysis of the legislative history of § 544(a) in McCannon v....