In the Matter of Christie, Case No. 08-30946 HCD (Bankr.N.D.Ind. 3/31/2009)
| Decision Date | 31 March 2009 |
| Docket Number | Proc. No. 08-3031.,Case No. 08-30946 HCD. |
| Parties | IN THE MATTER OF JAMES RALPH CHRISTIE and DAWN MARIE CHRISTIE, Chapter 13, Debtors. DEBRA L. MILLER, Plaintiff, v. TEACHERS CREDIT UNION, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
Rebecca Hoyt Fischer, Esq., Laderer & Fischer, P.C., South Bend, Indiana, attorney for plaintiff,
John W. VanLaere, Esq., Jones Obenchain, LLP, South Bend, Indiana, attorney for defendant,
Before the court are the Complaint to Avoid Lien filed by the plaintiff Debra L. Miller, Chapter 13 Trustee ("Trustee" or "plaintiff"), and the Answer to Complaint filed by the defendant Teachers Credit Union ("TCU" or "defendant"). The Trustee initiated this adversary proceeding by asking the court, pursuant to her avoidance powers under 11 U.S.C. § 544(a), to avoid the mortgage the debtors executed and gave to TCU. The defendant answered and asserted the affirmative defense that the complaint failed to state a cause of action upon which relief could be granted. The parties filed stipulated facts and briefs, and the court took the Complaint under advisement.
Pursuant to 28 U.S.C. § 157(a) and Northern District of Indiana Local Rule 200.1, the United States District Court for the Northern District of Indiana has referred this case to this court for hearing and determination. After reviewing the record, the court determines that the matter before it is a core proceeding within the meaning of § 157(b)(2)(K) over which the court has jurisdiction pursuant to 28 U.S.C. §§ 157(b)(1) and 1334. This entry shall serve as findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52, made applicable in this proceeding by Federal Rules of Bankruptcy Procedure 7052 and 9014. Any conclusion of law more properly classified as a factual finding shall be deemed a fact, and any finding of fact more properly classified as a legal conclusion shall be deemed a conclusion of law.
The facts were stipulated by the parties. On April 9, 2002, the debtors executed and delivered to TCU a mortgage ("first mortgage") on real estate in Walkerton, Indiana, to secure payment of a promissory note in the amount of $76,900. The mortgage was recorded with the St. Joseph County Recorder on April 17, 2002. On October 18, 2002, the debtors executed and delivered to TCU another mortgage ("second mortgage") with respect to that same real estate to secure a promissory note in the amount of $35,400. However, the second mortgage document did not identify, in the acknowledgment (sometimes called the notary jurat), the debtors as the individuals who appeared before the notary and executed the document. Nevertheless, the second mortgage was recorded in the office of the St. Joseph County Recorder on November 4, 2002. The debtors filed their voluntary petition for relief under chapter 13 on March 31, 2008, and Debra L. Miller was named the chapter 13 Trustee in the case. The defendant filed two proofs of claim in the amounts of $70,341.35 and $34,076.23. The Trustee asserts that the second mortgage, with the defective acknowledgment, should be avoided. (The second mortgage, the mortgage at issue herein, will be referred to as "the mortgage" unless there is a need to distinguish between the two mortgages.)
The Trustee filed a complaint to avoid the defendant's mortgage on the ground that, under Indiana Code 32-21-2-3, an improperly acknowledged mortgage was defective and thus was not entitled to be recorded. "Under this statute, a mortgage is eligible to be recorded if it is `(1) acknowledged by the grantor or (2) proved before a (A) judge . . . [or] (E) notary public . . . .'" Fifth Third Bank, Indiana v. Edgar County Bank & Trust, 482 F.3d 904, 906 (7th Cir. 2007). According to the Trustee, this improperly acknowledged mortgage did not serve as constructive notice of the lienholder's interest to a bona fide purchaser and should be avoided pursuant to 11 U.S.C. § 544(a). See R. 1 at 2. TCU responded that the Trustee could not avoid the mortgage because Indiana Code 32-21-4-1 was amended in 2007 to provide that a mortgage which fails to comply with Indiana Code 32-21-2-3 will nevertheless be effective to provide constructive notice to later buyers as long as the mortgage has been recorded.1 See R. 19 at 4-6.
A trustee's avoidance powers arise under § 544(a) of the Bankruptcy Code, which grants a trustee the power to avoid any transfer of the debtor's property that is voidable. The trustee obtains the status of "a bona fide purchaser of real property" ("BFP") on the date the debtor filed the petition commencing the bankruptcy case. The trustee's BFP status allows her to use applicable state law to avoid certain transfers or encumbrances when they would be voidable by a BFP. See Sandy Ridge Oil Co., Inc. v. Centerre Bank Nat'l Ass'n (In re Sandy Ridge Oil Co., Inc.), 807 F.2d 1332, 1333 (7th Cir. 1986). The parties do not question this Trustee's strong arm powers. She asserts those powers in this case to avoid the mortgage lien held by TCU which, she claims, is defective. TCU argues, however, that the Trustee is divested of those powers pursuant to the 2007 amendment to Indiana Code 32-21-4-1.
The court begins by considering the validity of the mortgage under Indiana law prior to the enactment of the 2007 amendment. The conveyance and recording requirements for real property in Indiana are found in Title 32, Article 21 of the Indiana Statutes. The parties focus on two of those statutes. Indiana Code 32-21-4-1 sets forth mortgage recording requirements and priority rules for properly recorded mortgages; and Indiana Code 32-21-2-3 requires that, in order for a mortgage to be eligible to be recorded, the mortgage must be acknowledged by the grantor or proved before a notary public or other authorized official. Therefore, to provide constructive notice to subsequent purchasers, a mortgage "must be properly acknowledged and recorded." Camp v. Select Portfolio Servs. Inc. (In re Camp), 2007 WL 2257653 at *4 (N.D. Ind. 2007). Camp describes the state's long-standing principle, as seen in its judicial interpretations:
"[T]he recording of a document not entitled to be recorded does not afford constructive notice." In re Sandy Ridge Oil Co., Inc., 510 N.E.2d 667, 669 (Ind. 1987) (collecting cases). Following this rule, courts have held, for example, that recording a mortgage with a defective acknowledgment does not provide constructive notice. See In re Baldin, 135 B.R. [586] at 602 [Bankr. N.D. Ind. 1991]; in re Stubbs, 330 B.R. 717, 731 (Bankr. N.D. Ind. 2005), aff'd, No. 2:05-CV-439, 2006 WL 2361814, at *5 (N.D. Ind. 2006).
Id. at *5. Indiana bankruptcy cases consistently have followed Sandy Ridge, Stubbs and Baldin. See, e.g., In re Canaday, 376 B.R. 260, 265-68 (Bankr. N.D. Ind. 2007). They have found that mortgages that do not identify who appeared before the attesting official (a) are deficient, (b) do not meet the requirements of the recording statute, (c) are not entitled to be recorded, (d) do not provide constructive notice to third parties, and (e) can be avoided by a trustee under § 544(a) for the benefit of creditors. See, e.g., Groves v. Citifinancial Mtg. Co., Inc. (In re Groves), No. 07-40144, Adv. No. 07-4020, Decision at *2 (Bankr. N.D. Ind. June 6, 2008). Therefore, a long line of state and federal decisions has established that, because the defective acknowledgment in the debtors' mortgage held by TCU did not meet the requirement of the recording statute, the mortgage was not eligible to be recorded. Even though it was in fact recorded, it does not provide notice to third parties. See In re Stubbs, 2006 WL 2361814 at *5 (). The mortgage therefore is invalid under those cases and is subject to avoidance by the Trustee under 11 U.S.C. § 544(a).
However, the statute governing the "priority of recorded transactions, " Ind. Code 32-21-4-1, was amended in 2007. Before July 2007, the statute provided (a) The following must be recorded in the recorder's office of the county where the land is situated:
(1) A conveyance or mortgage of land or of any interest in land.
(2) A lease for more than three (3) years.
(b) A conveyance, mortgage, or lease takes priority according to the time of its filing. The conveyance, mortgage, or lease is fraudulent and void as against any subsequent purchaser, lessee, or mortgagee in good faith and for a valuable consideration if the purchaser's, lessee's, or mortgagee's deed, mortgage, or lease is first recorded.
Ind. Code 32-21-4-1. On July 1, 2007, the amended statute, with its added subsection (c), took effect:
(c) This subsection applies only to a mortgage. If:
(1) an instrument referred to in subsection (a) is recorded; and
(2) the instrument does not comply with the:
(A) requirements of:
(i) IC 32-21-2-3; or
(ii) IC 32-21-2-7; or
(B) technical requirements of IC 36-2-11-16(c);
the instrument is validly recorded and provides constructive notice of the contents of the instrument as of the date of filing.
Ind. Code 32-21-4-1(c) (effective July 1, 2007). TCU states that the Indiana legislature revised the statute in 2007 to establish that a mortgage recorded with a defective acknowledgment nonetheless provides constructive notice. See R. 19 at 4-5. In the court's view, perhaps a purpose of the legislature's revision was to divest a BFP and a bankruptcy trustee of the right to avoid an improperly recorded mortgage.2
The court determines, nevertheless, that the 2007 amendment to the statute applies in this case. The new subsection was in effect on March 31, 2008, the date the debtors filed their bankruptcy petition and the Trustee's avoidance powers accrued. See In re Groves, Adv. No. 07-4020, Decision at...
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