In re Tim Phalen And Lorie Buxton, Bankruptcy No. 09–62256.

• Decision Date: 04 March 2011
• Docket Number: Bankruptcy No. 09–62256.,Adversary No. 09–2572.
• Parties: In re Tim PHALEN and Lorie Buxton, Debtors.Susan L. Rhiel, Plaintiff,v.The Huntington National Bank, Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

445 B.R. 830

In re Tim PHALEN and Lorie Buxton, Debtors.Susan L. Rhiel, Plaintiff,
v.
The Huntington National Bank, Defendant.

Bankruptcy No. 09–62256.

Adversary No. 09–2572.

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

March 4, 2011.

[445 B.R. 833]

Susan L. Rhiel, Columbus, OH, for Plaintiff.Amelia A. Bower, Columbus, OH, for Defendant.

MEMORANDUM OPINION ON TRUSTEE'S MOTION FOR SUMMARY JUDGMENT JOHN E. HOFFMAN, JR., Bankruptcy Judge.I. Introduction

Before they commenced their case under Chapter 7 of the Bankruptcy Code, Tim Phalen and Lorie Buxton (collectively with Phalen, “Debtors”) granted The Huntington National Bank (“Huntington”) a mortgage on their real property located at 45 South Chesterfield Road, Columbus, Ohio 43209 (“Property”). The certificate of acknowledgment on the mortgage (“Certificate of Acknowledgment”) identified Buxton, but not Phalen, as having acknowledged the signing of the mortgage. Contending that the mortgage encumbering Phalen's one-half interest in the Property (“Phalen's Mortgage”) is therefore defectively executed and that her status as a hypothetical bona fide purchaser gives her a superior interest in the Property, the

[445 B.R. 834]

Chapter 7 trustee, Susan L. Rhiel (“Trustee”), seeks to avoid Phalen's Mortgage under 11 U.S.C. § 544(a)(3) and preserve it for the benefit of Phalen's bankruptcy estate under § 551. The Trustee also seeks additional relief discussed in more detail below. In response, Huntington argues that Phalen's Mortgage was not defectively executed and that, even if it were, the Trustee would not be entitled to avoid Phalen's Mortgage because she had constructive notice of it despite any defective execution.

The Court concludes that: (1) Phalen's Mortgage is defectively executed because the notary public failed to certify any acknowledgment that Phalen made of his signature; and (2) the Trustee did not have constructive notice of Phalen's Mortgage and, therefore, has the status of a bona fide purchaser of the Property from Phalen. Accordingly, the Court grants summary judgment in favor of the Trustee on her causes of action that seek avoidance of Phalen's Mortgage under § 544(a)(3) and preservation of that mortgage for the benefit of Phalen's estate under § 551. For the reasons stated below, however, the Court declines to grant summary judgment in favor of the Trustee on her remaining requests for relief.

II. Jurisdiction

The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. The adversary proceeding is a core proceeding. See 28 U.S.C. § 157(b)(2)(F) and (K).

III. Procedural and Factual Background

By the complaint commencing this adversary proceeding (“Complaint”) (Doc. 1), the Trustee seeks a declaratory judgment that Phalen's one-half interest in the Property is unencumbered because the Certificate of Acknowledgment fails to satisfy the requirements of Ohio Revised Code § 5301.01(A) and the requirements of Ohio's version of the Uniform Recognition of Acknowledgments Act, Ohio Revised Code §§ 147.51 through 147.58 (“URAA”) (Count One). Based on those sections of the Ohio Revised Code as well as § 5301.25, she also seeks to: (a) avoid Phalen's Mortgage pursuant to 11 U.S.C. §§ 544(a)(3) and 547(b) (Count Two and Count Three, respectively); (b) preserve Phalen's Mortgage for the benefit of Phalen's bankruptcy estate under § 551 (Count Four); and (c) recover the Property transferred or its value from Huntington under § 550 (Count Five). After Huntington filed its answer (“Answer”) (Doc. 4), the Trustee filed her motion for summary judgment on all counts of the Complaint (“Motion”) (Doc. 9). This matter is now before the Court on (1) the Motion; (2) Huntington's brief in opposition (“Opp'n Br.”) (Doc. 10); (3) the Trustee's reply to Huntington's opposition brief (“Reply”) (Doc. 13); and (4) the Trustee's notice of supplemental authority (Doc. 14) and notice of additional supplemental authority (Doc. 15).

The parties did not file a stipulation of facts, but the pleadings and the documents filed in the Debtors' bankruptcy case establish the undisputed material facts set forth below.

On October 22, 2009 (“Petition Date”), the Debtors filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code. On both the date that they granted the mortgage and on the Petition Date, the Debtors owned the Property in fee simple by way of a general warranty deed signed on December 3, 2008 and recorded on December 5, 2008 in the Franklin County, Ohio Recorder's Office (“Recorder”). See Compl., Ex. A. Prior to the Petition Date, on or about December 3, 2008, the Debtors executed a “Short Form Mortgage,” thereby

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granting Huntington a lien on the Property. The Short Form Mortgage was recorded on December 5, 2008. See Compl., Ex. B. The Short Form Mortgage incorporates by reference certain provisions of a master mortgage (“Master Mortgage”). The Master Mortgage does not reference the Short Form Mortgage; indeed, the Master Mortgage was recorded on January 3, 2008—nearly a year before Phalen and Buxton executed the Short Form Mortgage.

Because Buxton and Phalen executed the Short Form Mortgage—as opposed to the more common form of mortgage in which the signature of each borrower typically appears at the end of a 15–to–20–page document—their signatures as borrowers appear on page 3 of the document, the same page on which the following Certificate of Acknowledgment appears:

BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Security Instrument (including those provisions of the Master Mortgage Form that are incorporated by reference) and in any Rider executed by Borrower and recorded with it.

Executed this 3rd day of December, 2008.

Lorie Buxton (Seal)

Lorie Buxton -Borrower

Timothy F. Phalen (Seal)

Timothy F. Phalen -Borrower

_______________[Space Below This Line For Acknowledgment]_______________

STATE OF OHIO, Franklin County ss:

The foregoing instrument was acknowledged before me this 3rd day of December, 2008 by Lorie Buxton.

My commission expires:

Karen J. Garvin

Notary Public State of Ohio

The italicized text reproduced above represents each individual's actual signature. The Certificate of Acknowledgment, which begins after the words “Space Below This Line For Acknowledgment” includes an additional item—the notarial seal of Karen J. Garvin—that is not reproduced above. The Certificate of Acknowledgment clearly does not contain the name of, or any other reference to, Phalen. See id.IV. Arguments of the Parties

Because the Certificate of Acknowledgment does not contain the name of or otherwise identify Phalen, the Trustee contends that Phalen's Mortgage was not executed in accordance with the requirements of § 5301.01(A) or the requirements of the URAA, was not properly recorded and, pursuant to Ohio Revised Code § 5301.25(A), did not provide constructive notice to the Trustee as a hypothetical bona fide purchaser under § 544(a)(3). As Chapter 7 trustees regularly do when alleging that mortgages are unperfected, the Trustee moves for summary judgment on the claims for relief asserted in the Complaint that seek (1) avoidance of Phalen's Mortgage under 11 U.S.C. § 544(a)(3) (Count Two) and (2) preservation of Phalen's Mortgage for the benefit of Phalen's estate under § 551 (Count Four). Here, however, the Trustee also moves for summary judgment on her claims for relief seeking: (1) a declaration that Phalen's one-half interest in the Property is unencumbered (Count One); (2) avoidance of Phalen's Mortgage as a preferential transfer under § 547(b) (Count Three); and (3) recovery of the Property transferred or its value from Huntington under § 550 (Count Five). In support of her preferential-transfer claim, the Trustee contends that Huntington's failure to perfect Phalen's Mortgage—due to its defective execution—means that Phalen's transfer of his interest in the Property to Huntington did

[445 B.R. 836]

not occur until immediately prior to the Petition Date, so that the transfer occurred within the preference period. And, according to the Trustee, all the remaining elements of § 547 are satisfied. In the Motion, the Trustee fails to articulate the legal basis for the relief she seeks in Count One (a declaration that Phalen's one-half interest in the Property is unencumbered) or Count Five (recovery under § 550) of the Complaint.

Huntington does not address the Trustee's request for avoidance under § 547(b) or the relief she seeks under §§ 550 and 551. Nor does Huntington discuss the Trustee's request for a declaratory judgment that Phalen's one-half interest in the Property is unencumbered. Rather, Huntington limits its response to opposing the Trustee's attempt to avoid Phalen's Mortgage based on the alleged defect in the Certificate of Acknowledgment and in that regard asserts five arguments. Three of Huntington's arguments are an attempt to persuade the Court that Phalen's Mortgage is not defectively executed at all. In support of this position, Huntington contends that the Certificate of Acknowledgment is sufficient with respect to Phalen because it: (1) includes a phrase (“acknowledged before me”) that is defined in the URAA so as to effectively identify Phalen; (2) appears on the same page as Phalen's signature as “Borrower”; and (3) substantially complies with Ohio law. Huntington's other two arguments are to the effect that, even if Phalen's Mortgage were defectively executed, such defective execution does not matter. In this regard, Huntington first asserts that Ohio Revised Code § 5301.25(A)—which makes defectively executed instruments for the conveyance or encumbrance of real estate ineffective against subsequent bona fide purchasers—does not apply to mortgages. Huntington also argues that defective execution of Phalen's Mortgage is of no import because the Trustee had...