IN The MATTER of TRENT R. JONES v. MISER
| Decision Date | 29 March 2011 |
| Docket Number | CASE NO. 09-32472 HCD,PROC. NO. 10-3023 |
| Parties | IN THE MATTER OF TRENT R. JONES and SHAWN MARY JONES, DEBTORS. J. RICHARD RANSEL, PLAINTIFF, v. BRIAN K. MISER, DEFENDANT. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana |
OPINION TEXT STARTS HERE
Appearances:
J. Richard Ransel, Esq., Trustee, counsel for plaintiff, Thorne, Grodnik LLP, and
Wendy K. Walker-Dyes, Esq., counsel for defendant, Baker & Daniels LLP,
At South Bend, Indiana, on March 22, 2011.
Before the court is the Motion for Summary Judgment filed by the plaintiff J. Richard Ransel, chapter 7 Trustee ("plaintiff or "Trustee") of the bankruptcy case of Trent R. Jones and Shawn Mary Jones, chapter 7 debtors ("debtors"). He seeks to avoid the debtors' pre-petition transfer of real property to the defendant, pursuant to 11 U.S.C. § 544(a)(3), and to avoid the transfer, which was recorded post-petition, pursuant to 11 U.S.C. § 549(a)(1). The defendant Brian K. Miser ("defendant") has responded. After the briefing schedule had passed, the court took the matter under advisement.1
BACKGROUND
The debtors filed for relief under chapter 7 of the Bankruptcy Code on May 26, 2009, and the chapter 7 Trustee brought this adversary proceeding on February 26, 2010. The underlying facts are not in dispute. Prior to the bankruptcy, the debtors owned an undivided one-half interest in the real property commonly known as 30 W. Second Street in Peru, Indiana. Ted and Susan Jones owned the other undivided one-half interest. The defendant purchased the real property, both the debtors' half and the Ted/Susan Jones half, on November 3, 2006, by warranty deed. The deed was recorded more than two and one-half years later, on June 19, 2009, in the office of the Miami County Recorder. The recording occurred after the debtors had filed bankruptcy. However, the defendant had leased the storefront to an antique furniture store soon after he purchased the real estate. That business operated in the storefront portion of the property and remained in operation from December 2006 until September 2010.
The Trustee alleged in the Complaint that, as of the date of the debtors' filing in bankruptcy, the debtors owned half the real estate as a matter of record. He then claimed that he, as Trustee, had the status of bona fide purchaser of real property on the date of the commencement of the case, pursuant to 11 U.S.C. § 544(a)(3), and that he could avoid any transfer of property of the estate that occurred after the commencement of the case pursuant to 11 U.S.C. § 549(a)(1).
The defendant, by counsel, filed an Answer to the Complaint.2 He admitted that the debtors were the previous owners of an undivided one-half interest in the property, but denied that, as of the date of filing the bankruptcy petition, the debtors owned half of the real estate as a matter or record. As affirmative defenses, the defendant asserted that the plaintiff had "actual, constructive, implied, or inquiry notice of Miser's ownership and possession of the property" and that the defendant "did not receive any post-petition transfer from the Debtors." R. 13 at 3.
The Trustee then filed a Motion for Summary Judgment and memorandum in support. Based upon the undisputed facts, the Trustee contended that his interest in the real estate was superior to that of an owner who had not perfected his interest in the property by recording the deed in a timely fashion. He claimed that, as a bona fide purchaser, he held a superior interest in this property under § 544(a)(3). He further asserted that as Trustee he could avoid a transfer of property made after the commencement of the case under § 549(a)(1).
In his Response, the defendant denied that the Debtors owned any interest in the real estate on the petition date. He argued that his leasing of the storefront reflected his possession of the property and use of it from December 2006 until September 2010. The defendant claimed that the Trustee could not use the strong-arm power of § 544(a)(3) to avoid the debtors' portion of the defendant's pre-petition purchase of the property, although the deed was unrecorded, because the subsequent possession of the property provided notice. In addition, he contended, the Trustee could not avoid the defendant's purchase of the debtors' interest in the property as a post-petition transfer because the transfer was deemed complete upon the pre-petition execution and delivery of the deed. He further asserted that the Trustee's claim was barred by the statute of limitations.
DISCUSSION
The plaintiff moves for summary judgment on his Complaint. Under Rule 56(c) of the Federal Rules of Civil Procedure, made applicable in this court by Rule 7056 of the Federal Rules of Bankruptcy Procedure, summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-86 (1986). In order to avoid trial, the moving party bears the burden of showing that no genuine issue of material fact is in dispute. See Anderson, 477 U.S. at 256; Celotex, 477 U.S. at 322. "To avoid summary judgment . . . the nonmoving party [is] required to set forth 'specific facts showing that there is a genuine issue for trial,' Fed. R. Civ. P. 56(e), and, further [has] to produce more than a scintilla of evidence in support of his position." Silk v. City of Chicago, 194 F.3d 788, 798 (7th Cir. 1999). In order to demonstrate that a real factual dispute exists, the nonmovant must produce evidence of the dispute rather than relying solely on the allegations or denials in its pleadings. See Barber v. United States (In re Barber), 236 B.R. 655, 659 (Bankr. N.D. Ind. 1998); N.D. Ind. L.B.R. B-7056-1. Summary judgment must be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
The parties dispute two strictly legal issues: whether the Trustee has the authority under his strong-arm powers in § 544(a)(3) to avoid a lien on property purchased pre-petition and recorded post-petition; and whether the Trustee has the authority under § 549(a)(1) to avoid a transfer of property made after the commencement of the case.
Section 544(a)(3), often called the strong-arm statute, allows a bankruptcy trustee to stand in the shoes of a bona fide purchaser and authorizes a trustee to avoid an encumbrance when a bona fide purchaser could do so.3 See In re Hershman, 417 B.R. 97, 99 (N.D. Ind. 2009). "A bona fide purchaser who buys real estate in good faith but without actual or constructive notice that a third party has rights in the property takes title to the property free and clear of the third party's claim," and a trustee has the same power. Id. (citing In re Sandy Ridge Oil Co., Inc., 807 F.2d 1332, 1333 (7th Cir.1986)). State law governs who is a "bona fide purchaser" and what is required for perfection against such an entity. See In re Sandy Ridge Oil Co., Inc., 807 F.2d at 1336.
"In Indiana, a bona fide purchaser takes free of any transfer of real estate which is unrecorded and of which he has no constructive or actual notice." In re Sagamore Park Properties, No. 94-40175, 1995 WL1049898 at *2 (Bankr. N.D. Ind. Dec. 4, 1995), aff'd, 200 B.R. 332 (N.D. Ind. 1996) (emphasis added). The Honorable Judge Robert E. Grant, Bankruptcy Judge for the Northern District of Indiana, made clear that
[t]he only change because of bankruptcy is that actual notice is irrelevant. 11 U.S.C. § 544(a). Thus, under § 544(a)(3) the debtor's actual notice regarding the status of the title record is irrelevant. Instead, only the constructive notice gained by a review of the title record, under Indiana law, matters.
Id. (citing U.S. v. Arnol & Mildred Shafer Farms, Inc., 107 B.R. 605, 608 (N.D. Ind. 1989)); see also In re Hershman, 417 B.R. at 99; In re Camp, 2007 WL 2257653 at *4 (N.D. Ind. Aug. 2, 2007). The defendant argued that the Trustee had notice because of the clear and open possession of the property and use of it as a store. This notice, he insisted, put a bona fide purchaser on inquiry to examine whether the possessor had a claim of ownership and right to possession. However actual notice of possession or ownership is irrelevant under § 544(a)(3), "regardless of any state law of actual notice." In re Camp, 2007 WL 2257653 at *4 (citing cases). "An encumbrance can be avoided only if a bona fide purchaser would not have constructive notice of it." Id. (emphasis added).
Both the state statutes and cases require a mortgage to be properly recorded to provide constructive notice to subsequent purchasers. See, e.g., Ind. Code § 32-21-4-1 (); Bank of New York v. Nally, 820 N.E.2d 644, 648 (Ind. 2005) (). As the court emphasized in Camp, these requirements must be followed because:
[t]he purpose of the Indiana recording statutes . . . is to put all the world on notice of prior liens and encumbrances thereby providing stability to commercial transactions involving the transfers and encumbrances of realty. Strict compliance with [these] statutes permits innocent third parties to rely on the authenticity and validity of documents in that they were properly executed, acknowledged, and recorded.
In re Camp, 2007WL 2257653 at *5 (quoting In re Baldin, 135 B.R. 586, 601 (Bankr. N.D. Ind. 1991)).
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