In re Thacker
| Decision Date | 30 November 1998 |
| Docket Number | Adversary No. 98-5016.,Bankruptcy No. 98-50141(3)13 |
| Citation | 229 BR 139 |
| Parties | In re Joe THACKER and Elizabeth Ann Thacker, Debtors. Joe Thacker and Elizabeth Ann Thacker, Plaintiffs, v. United Companies Lending Corporation, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Kentucky |
David E. Arvin, Hopkinsville, KY, for Debtors.
T. Morgan Ward, Jr., Bethany A. Breetz, Louisville, KY, for Defendant.
William W. Lawrence, Louisville, KY, Trustee.
This Adversary Proceeding was brought by the Debtors, Joe and Elizabeth Ann Thacker ("Debtors" or "Thackers"), for the purpose of setting aside a mortgage they consensually placed on their property to secure a debt owed to Defendant, United Companies Lending Corporation ("Defendant/Creditor"). The Thackers, who filed their bankruptcy action under Chapter 13, assert their cause of action under the strongarm powers granted to trustees by 11 U.S.C. § 544(a). In support of their cause of action, the Thackers cite two defects in the Mortgage.
The matter is presently before the Court on the Defendant/Creditor's Motion to Dismiss this action and the Thackers' Cross-Motion for Summary Judgment. The Court has reviewed the briefs filed by both parties, together with the relevant statutes and the case law, and finds that the undisputed facts establish the Mortgage at issue was sufficient to place any bona fide purchaser on inquiry notice of the Defendant/Creditor's security interest. Accordingly, the Thackers are not entitled to have the Mortgage set aside, and the Defendant/Creditor is entitled to Judgment as a matter of law. The Defendant/Creditor's Motion to Dismiss will be sustained by separate Order, and the Thackers' Motion for Summary Judgment will be overruled.
In 1995, the Thackers borrowed $41,000.00 from the Defendant/Creditor. To secure that loan, the Thackers granted the Defendant/Creditor a Mortgage on their real property, located in Christian County, Kentucky. The Thackers signed the Mortgage in the presence of a Notary Public on December 29, 1995. The Mortgage was thereafter recorded in the Christian County Clerk's office in Mortgage Book 565, Page 582.
On February 11, 1998, the Thackers filed for bankruptcy under Chapter 13 of the Bankruptcy Code. On April 24, 1998, they initiated this Adversary Proceeding, seeking to avail themselves of the strong-arm powers given to a bankruptcy trustee under 11 U.S.C. § 544(a). They ask that the Mortgage be set aside as void, alleging that it is defective in two respects.
First, the Thackers point out that the Mortgage failed to contain a description of the encumbered real property within the body of the Mortgage. The description of the property was, instead, included on an untitled page physically attached to the Mortgage. It is not uncommon for property descriptions to be attached to mortgages and incorporated by reference, however, in this case, the space on the printed form Mortgage where the property description should have been inserted was left completely blank. It did not include the description, nor did it include any language incorporating the property description by reference. The description itself was attached to the Mortgage on an untitled page. It did not reference any particular paragraph or clause of the Mortgage, or state that it was intended to be included in the body thereof.
Based on these facts, the Thackers assert the Mortgage fails to comply with the requirements of Kentucky's "Conveyances and Encumbrances" Statute, K.R.S. Chapter 382; Kentucky's Statute of Frauds, K.R.S. Chapter 371.010; and Kentucky common law,1 all of which requires Mortgages to contain a written description of the encumbered property. The Thackers additionally assert that the attachment of the description behind the Mortgage caused it to be physically placed after the parties' signatures, thus, violating K.R.S. 446.060(1). That Statute reads, "when the law requires any writing to be signed by a party thereto, it shall not be deemed to be signed unless the signature is subscribed at the end or close of the writing."
The second defect in the Mortgage alleged by the Thackers concerns the Acknowledgment by the Notary Public. The Certificate of Acknowledgment, which immediately follows the signatures of the Thackers, states: "The foregoing instrument was acknowledged before me this 29th day of Dec. 1995 by _______________." The Certificate is signed by Helen M. McGar, a Notary Public. The Certificate does not, however, state who acknowledged or signed "the foregoing instrument." Rather, the space provided is left blank. The Thackers assert that this omission constitutes a fatal defect under K.R.S. 423.130 and K.R.S. 423.160, governing the required format and information to be provided to have an effective Acknowledgment.
Despite the alleged defects, the Christian County Clerk's office recorded the Mortgage with the attached detailed property description in Mortgage Book 565, Page 582.
The Mortgage clearly referenced the loan from Defendant/Creditor to the Thackers, and acknowledged that Defendant/Creditor was granted the Mortgage to secure the loan. The Thackers do not dispute that they signed the Mortgage, that the Mortgage concerned the land at issue, that they received the consideration set forth in the Mortgage, or that the attached property description adequately describes the encumbered property. Rather, they bring this action in the role of a third-party bona fide purchaser, via the § 544(a) strong-arm powers granted to bankruptcy trustees.
At the outset, the Court is asked to determine whether a Chapter 13 debtor has standing to utilize the avoiding powers granted to a bankruptcy trustee by the § 544(a)(3) strong-arm clause of the Bankruptcy Code. Section 544(a)(3) grants a trustee "the rights and powers of a bona fide purchaser of real property from the debtor if, at the time the bankruptcy is commenced, a hypothetical buyer could have obtained bona fide purchaser status." In re Michigan Lithographing Co., 997 F.2d 1158 (6th Cir.1993); See also In re Tillery, 124 B.R. 127 (Bankr.M.D.Fla. 1991). If the Thackers are determined to have standing to assert the strong-arm avoiding powers under that section, the Court must then address the issue of whether the Mortgage was fatally defective such that a bona fide purchaser could have avoided it.
The law is divided on the issue of whether Chapter 13 debtors may avail themselves of the § 544(a) strong-arm powers. A number of courts have held that a Chapter 13 debtor has standing to assert the avoiding power granted by § 544. In re Tillery, 124 B.R. 127 (Bankr.M.D.Fla.1991); In re Boyette, 33 B.R. 10 (Bankr.N.D.Tex.1983); In re Einoder, 55 B.R. 319 (Bankr.N.D.Ill.1985); In re Ottaviano, 68 B.R. 238 (Bankr.D.Conn.1986); In re Colandrea, 17 B.R. 568 (Bankr.D.Md. 1982). This Court joined with this line of cases in 1987. In re Weaver, 69 B.R. 554 (Bankr.W.D.Ky.1987).
There is a contrary line of cases, however, reaching the opposite holding; i.e., that Chapter 13 debtors may not avail themselves of the trustee's § 544(a) strong-arm avoidance powers. In re Carter, 2 B.R. 321 (Bankr.D.Colo.1980); In re Walls, 17 B.R. 701 (Bankr.S.D.W.Va.1982); In re Driscoll, 57 B.R. 322 (Bankr.W.D.Wis.1986); In re Mast, 79 B.R. 981 (Bankr.W.D.Mich.1987); In re Bruce, 96 B.R. 717 (Bankr.W.D.Tex. 1989). The Court continues to be unpersuaded by this line of cases. The Thackers are determined to have standing to assert the § 544(a) strong-arm avoidance powers granted to trustees.
It is clear, however, that they cannot avoid the Mortgage in this case, as an equitable mortgage was created in favor of the Defendant/Creditor of which any purchaser would have had inquiry notice. See State Street Bank and Trust Company v. Heck's, Inc., 963 S.W.2d 626 (Ky.1998).
The attempted Mortgage, accompanied by the transfer to the Thackers of the consideration referenced therein, created an equitable mortgage in favor of the Defendant/Creditors. See Schram v. Burt, 111 F.2d 557, 561-62 (6th Cir.1940); State Street Bank, 963 S.W.2d at 629 and 631 (); Tile House, Inc. v. The Cumberland Fed. Sav. Bank, 942 S.W.2d 904, 905-07 (Ky.1997). The Sixth Circuit and the Supreme Court of Kentucky have expressly recognized the doctrine of equitable mortgages. Schram, 111 F.2d at 561-62; State Street Bank, 963 S.W.2d at 629 and 631; Tile House, 942 S.W.2d at 905-07. The rule has been firmly established by these Courts, as follows:
Where one party advances money to another upon the faith of a verbal agreement by the latter to secure its payment by a mortgage upon certain lands and improvements, which is not executed, or which, if executed, is so defective or informal as to fall short of being a duly executed mortgage, equity will impress upon such land and improvements a lien in favor of the creditor who advances the money for the security in satisfaction of his debt.
Schram, 111 F.2d at 561; Accord State Street Bank, 963 S.W.2d at 630-31; Tile House, 942 S.W.2d at 905-07. The doctrine of equitable mortgages is founded upon basic principles of equity which regard "that as done which was agreed to be done and should have been done . . ." Schram, 111 F.2d at 562. Where the circumstances warrant the finding of an equitable mortgage, the Court is directed to "treat the subject matter as to collateral consequences and incidences as if the acts contemplated by the parties had been done at the beginning of the transaction, always regarding the substance and not the form." Id.; See also State Street Bank, 963 S.W.2d at 629...
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