In re Trosky, Bankruptcy No. 5-05-bk-51389.

• Decision Date: 07 September 2006
• Docket Number: Bankruptcy No. 5-05-bk-51389.,Adversary No. 5-05-ap-50183.
• Citation: 371 B.R. 701
• Parties: In re Frank G. TROSKY and Patricia G. Trosky, Debtors. M & T Mortgage Corporation, Movant, v. Frank G. Trosky and Patricia G. Trosky, Respondents. Frank G. Trosky and Patricia G. Trosky, Plaintiffs, v. M & T Mortgage Corporation f/k/a Franklin First Savings Bank., Defendant.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

371 B.R. 701

In re Frank G. TROSKY and Patricia G. Trosky, Debtors.

M & T Mortgage Corporation, Movant, v. Frank G. Trosky and Patricia G. Trosky, Respondents.

Frank G. Trosky and Patricia G. Trosky, Plaintiffs, v. M & T Mortgage Corporation f/k/a Franklin First Savings Bank., Defendant.

Bankruptcy No. 5-05-bk-51389.

Adversary No. 5-05-ap-50183.

United States Bankruptcy Court, M.D. Pennsylvania.

September 7, 2006.

COPYRIGHT MATERIAL OMITTED

Michael G. Oleyar, Hazleton, PA, for Plaintiffs.

Ann E. O'Donnell, Leslie E. Puida, Goldbeck McCafferty and McKeever, Philadelphia, PA, for Defendant.

OPINION¹

JOHN J. THOMAS, Bankruptcy Judge.

Pending before the Court is the disposition of both the Debtors' Complaint to Determine Secured Status and Avoid Liens (Doc. No. 1 to 5-05-ap-50183) and M & T Mortgage Corporation's ("M & T") Motion for Relief from Stay to proceed with a quiet title and ensuing foreclosure action (Doc. No. 19 to 5-05-bk-51389). For the following reasons, M & T's Motion for Relief from Stay is denied insofar as it seeks relief to pursue a quiet title action in state court, but granted insofar as it seeks to pursue a foreclosure action in state court. The prayer seeking to avoid M & T's lien in Debtor's complaint is denied, and the current status of M & T's lien is discussed below.

I. Background

Debtors voluntarily mortgaged their interest in their home located at 75 Mono Drive, Mountaintop, Pennsylvania, on August 11, 1995 to M & T's predecessor, Franklin First Savings Bank for $129,300. At that time, M & T properly recorded the mortgage in Luzerne County. Thereafter, M & T erroneously² recorded a satisfaction of this mortgage in Luzerne County on February 5, 1998. On June 22, 1998, PNC Bank filed a mortgage on the property. HSBC Mortgage Services ("HSBC") filed another mortgage against the property recorded on September 9, 1999. The parties have stipulated that the Debtors did not personally pay off the M & T mortgage.

II. Motion For Relief From Stay To Proceed with a State Court Quiet Title Action

M & T is seeking relief from the automatic stay to allow them to proceed with their quiet title action and/or mortgage foreclosure on the mortgage premises in state court. (Doc. No. 19, 5:05-bk-51389.) This request is denied with respect to leave to proceed with its quiet title action³. Although the determination of property rights in the assets of a debtor's estate is governed by state law⁴, the Court finds there is sufficient Pennsylvania precedent, including precedent from the Pennsylvania Supreme Court directly on point, to allow this Court to resolve the issues involved herein pursuant to the Court's concurrent jurisdiction with the state courts under 28 U.S.C. § 1334(b). Applicable Pennsylvania law includes: Appeal of Myton, 3. Pennyp. 211, *4 (Pa.1883), WL 13552(Pa.); Appeal of Callahan, 124 Pa. 138, 144, 16 A. 638 (1889) Saint v. Cornwall, 207 Pa. 270, 56 A. 440 (1903)⁵; A-1 Discount Co. v. Nardi, 735 A.2d 121, 123 (Pa.Super.1999); and Alliance Funding Co. v. Stahl, 829 A.2d 1179 (Pa.Super.2003).

III. Complaint to Determine Secured Status of M & T's Lien

Debtors are attempting to avoid/strip off or strip down M & T's mortgage by using a combination of Bankruptcy Code Sections 522(h), 544, 1322(b)(2), and 506(d).

1. The Lien As Applied to the Debtors is Still Valid

As discussed above, state law governs the determination of property rights in the assets of a debtor's estate. See Butner v. U.S., 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Turning to Pennsylvania law, the first issue to address is what effect filing an erroneous satisfaction⁶ has on a mortgagee's security interest. "Entry of satisfaction on the margin of the mortgage at the Recorder's office creates the presumption that the mortgage has been discharged, but the presumption may be rebutted." Kenneth E. Grey, Pennsylvania Mortgages § 9-5 (2d ed.); St. Clement's Building & Loan Ass'n v. McCann, 126 Pa.Super. 20, 190 A. 393, 394 (1937). A multitude of Pennsylvania courts have found a satisfaction inadvertently and erroneously applied to the wrong mortgage may be set aside in equity, and the mortgage reinstated when in reality the mortgage was not paid. See A-1 Discount Co. v. Nardi, 735 A.2d 121, 123 (Pa.Super.1999), Alliance Funding Co. v. Stahl, 829 A.2d 1179 (Pa.Super.2003), St. Clement's Building & Loan Ass'n, 190 A. 393 at 394, Appeal of Myton 3. Pennyp. 211, *4 (Pa 1883) (Pennsylvania Supreme Court holding the satisfaction of a mortgage may be set aside for mistake).

The primary Pennsylvania authority for setting aside erroneous satisfactions remains St. Clement's, wherein the court (addressing a situation similar to the instant case) reasoned:

The record is not necessarily conclusive upon the parties as there is nothing so sacrosanct about the satisfaction of a mortgage that stops the truth from being shown. All that is incumbent upon the part of this plaintiff to attain the relief it seeks is to prove the defendants were not entitled to have the mortgage satisfied.... On the same principle, a release or satisfaction entered by accident or inadvertence, as where it is made to apply to the wrong mortgage, or by a mistake as to an essential fact, so that it is not in accordance with the real intention of the party, may be set aside and the mortgage reinstated, except as the rights of third persons may prevent.

Alliance Funding Co. 829 A.2d at 1182 (quoting St. Clement's, 190 A. at 394.)

Here, the Court finds that M & T has presented sufficient evidence to show the Troskys were not entitled to have the mortgage satisfied. Thus, under the aforementioned reasoning of St. Clement's, the satisfaction will be expunged from the record and the mortgage equitably reinstated against the Troskys, with the rights of the third party mortgagees to be determined separately. See St. Clement's, 190 A. at 394.

2. Rights of PNC & HSBC as Third Party Creditors

By setting aside the satisfaction of M & T, the Debtors are returned to the positions they were in prior to the entry of the erroneous satisfaction. Paul v. Eurich, 39 W.N.C. 455, *3, 3 Pa.Super. 299, 1897 WL 3993, (Pa.Super.1897). However, Pennsylvania courts are clear that setting aside a satisfaction does not necessarily return M & T, the mortgagee, back to the front of the priority list when third party creditors are involved. See Alliance Funding Co., 829 A.2d at 1182, and St. Clement's, 190 A. at 394. The problem herein is what to do when you have two perfected secured parties (PNC and HSBC) and one party with an equitable⁷ security interest (M & T).

Under Pennsylvania law, priority between multiple perfected interests is governed by the first in time, first in right principal. 42 Pa C.S.A. § 8141 and 21 P.S. § 622. The purpose of the recording statutes is to put prospective creditors on alert that the property may already be encumbered. Beckman v. Altoona Trust Co. 332 Pa. 545, 549, 2 A.2d 826 (1938). Looking to the time-line of filings in the instant case, M & T's lien was perfected on August 11, 1995, when it was recorded. That perfection lasted until February 5, 1998, when M & T erroneously filed the satisfaction⁸; the moment it filed the satisfaction its secured lien status converted into an equitable security interest against the Debtors. See, generally, Alliance Funding Co., 829 A.2d at 1182, and St. Clement's, 190 A. at 394. This equitable security interest was neither filed, nor perfected, and thus is not entitled to priority over conflicting perfected security interests filed after the date of the erroneous satisfaction. See, generally, 42 Pa C.S.A § 8141. When PNC recorded their security interest on June 22, 1998, and HSBC recorded their security interest on September 9, 1999, both became paramount to M & T's equitable security interest.

At the end of the day, the priority of liens would be PNC with a secured claim of $54,318.17, HSBC with a secured claim for $28,708.54, then M & T with a secured claim of $121,143.25⁹, a total of at least $204,169.96.

IV. M & T's Lien and the Debtor's Ability to Employ the Powers of 11 U.S.C. § 522(h)

Having established equity will restore the mortgage at least against the Debtor, the question remains can the Debtor use the powers granted to a Chapter 13 trustee as a bona-fide purchaser for value under § 544 to avoid the lien, because the lien was equitable at the time of the filing? Debtors claim they have the authority to do this pursuant to § 522(h) which states in pertinent part:

(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee could have avoided such transfer, if(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and (2) the trustee does not attempt to avoid such transfer.

11 U.S.C. § 522(h)

A debtor's ability to employ § 522(h) is contingent on the applicability of § 522(g)(1). Section 522(g)(1) is a provision dealing with the exemption of property, allowing a debtor to exempt previously transferred property if—

(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and (B) the debtor did not conceal such property."

11 U.S.C. § 522(g)(1).

The shortcoming in the Debtors' argument lies in the fact that there was no involuntary transfer of the Debtors' property. The transfer of property here was the Debtors voluntarily mortgaging their property interests to M & T's predecessors, Franklin First Savings Bank, for $129,300 back in 1995. Because the Debtors could not have exempted any property under § 522(g)(1), they cannot avoid a transfer of property under § 522(h).

V. Can Debtors Strip the Lien in their Plan Despite § 1322(b)(2)?

Finally, Debtors ask that, if this Court finds M & T is secured but in a...