Seelen v. Couillard (In re Couillard)

• Decision Date: 09 November 2012
• Docket Number: Bankruptcy No. 12–11610–7.,Adversary No. 12–132.
• Citation: 486 B.R. 466
• Parties: In re Douglas Lee COUILLARD and Deborah Mae Couillard, Debtors. Christopher M. Seelen, Trustee of the Douglas Lee Couillard and Deborah Mae Couillard Estate, Plaintiff, v. Douglas Lee Couillard, Deborah Mae Couillard, and Bank of America, N.A., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

486 B.R. 466

In re Douglas Lee COUILLARD and Deborah Mae Couillard, Debtors.Christopher M. Seelen, Trustee of the Douglas Lee Couillard and Deborah Mae Couillard Estate, Plaintiff,

v.Douglas Lee Couillard, Deborah Mae Couillard, and Bank of America, N.A., Defendants.

Bankruptcy No. 12–11610–7.

Adversary No. 12–132.

United States Bankruptcy Court, W.D. Wisconsin.

Nov. 9, 2012.

Christopher M. Seelen and Terri M. Smith, Ruder Ware, L.L.S.C., Eau Claire, WI, for Plaintiff.

J. Bushnell Nielsen and L. Katie Mason, Reinhart Boerner Van Deuren s.c., Milwaukee, WI, for Bank of America, N.A.

DECISION

THOMAS S. UTSCHIG, Bankruptcy Judge.

Whether one is baking a cake, building a house, or recording a mortgage, sometimes even the slightest deviation from the directions can lead to catastrophe. Cakes don't rise, buildings fall down, and ... mortgages aren't perfected.¹ In this case, a lender made a mistake in recording its mortgage and then attempted to fix the problem. But for the debtors' bankruptcy, the error might have been considered inconsequential. However, the bankruptcy trustee believes that the mistake invalidates the lender's mortgage as against a subsequent purchaser under state law and brought this adversary proceeding to avoid the mortgage pursuant to 11 U.S.C. § 544(a). The lender has moved for summary judgment and the issue before the Court is whether, as a matter of law, the mortgage was properly recorded.²

This is a core proceeding under 28 U.S.C. § 157(b)(2)(K), and the Court has jurisdiction under 28 U.S.C. § 1334. This order constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. Summary judgment is appropriate where there are no disputed issues of material fact and the moving party is entitled to summary judgment as a matter of law. SeeFed. R. Bankr.P. 7056, incorporating Fed.R.Civ.P. 56(c). Summary judgment is to be denied only if there is a “genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When necessary, all facts are construed in the light most favorable to the non-moving party, and all reasonable inferences are drawn in favor of that party. Heft v. Moore, 351 F.3d 278, 282 (7th Cir.2003); see also Schuster v. Lucent Techs., Inc., 327 F.3d 569 (7th Cir.2003).

The essential facts are as follows. The Couillards own property near Tomahawk, Wisconsin. Their property consists of two principal parcels, which for convenience will be called the “homestead parcel” and the “vacant land.” In addition, there is an easement which provides access to a nearby road (otherwise, the other parcels are effectively landlocked).³ They bought the entire property in 2007 and refinanced their mortgage the following year.⁴

The original purchase money mortgage contained accurate legal descriptions for all three pieces of the puzzle: the homestead parcel, the vacant land, and the easement. Unfortunately, the refinancing did not go as smoothly. During the refinancing, the Couillards executed a mortgage in favor of Countrywide Bank, FSB, the predecessor in interest to Bank of America.⁵ This mortgage did not contain legal descriptions for either the homestead parcel or the vacant land.⁶ The Couillards nonetheless signed the mortgage on April 23, 2008, and the bank recorded it in the office of the Lincoln County Register of Deeds on May 16, 2008.⁷

Someone apparently discovered the problem shortly after the mortgage was recorded. On July 28, 2008, an “affidavit of correction” was executed by a person named Marilyn Montaperto.⁸ The affidavit was then recorded on July 30, 2008.⁹ The affidavit states that the April 23 mortgage contained an “error” regarding the legal description, and attached the “correct” descriptions of the homestead and the vacant land as an exhibit. ¹⁰ The affidavit does not indicate what, if any, role Ms. Montaperto played in the mortgage transaction, nor does it reflect that she had any personal knowledge of the “error.” In addition, the affidavit is not signed by the Couillards or acknowledged by them in any way.¹¹

The Lincoln County Register of Deeds posted the April 23 mortgage in the official grantor-grantee index.¹² The affidavit of correction was posted in the official tract index.¹³ The bank appears to concede that the mortgage itself would not appear in the tract index. Instead, a search of the tract index would reveal the affidavit of correction, which would presumably lead an investigator to discover the mortgage. Meanwhile, a party searching the grantor-grantee index would learn that the Couillards had given a mortgage to the bank on April 23, 2008, but might remain unaware of the fact that the bank claimed more collateral than was described in the document itself.¹⁴

The trustee's complaint is based upon the “strong-arm” powers which Congress has granted to bankruptcy trustees. The purpose of these provisions is to equip the trustee with the ability to gather property of the estate for the benefit of unsecured creditors. HSBC Bank USA v. Perkins, 451 B.R. 555 (N.D.Ala.2011). Under 11 U.S.C. § 544(a)(3), a bankruptcy trustee shall have the rights and powers of a “bona fide purchaser of real property ... that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case.” As such, a bankruptcy trustee in Wisconsin may exercise the rights of a subsequent purchaser under Wis. Stat. § 706.08(1). In re Carley Capital Group, 117 B.R. 951, 957–58 (Bankr.W.D.Wis.1990).

In Wisconsin, an interest in property can be defeated if it is left unrecorded (or is not properly recorded). Wis. Stat. § 706.08(1)(a) provides that:[E]very conveyance that is not recorded as provided by law shall be void as against any subsequent purchaser, in good faith and for a valuable consideration, of the same real estate or any portion of the same real estate whose conveyance is recorded first (emphasis added).

These recording requirements “shall govern every transaction by which any interest in land is created, aliened, mortgaged, assigned or may be otherwise affected in law or in equity.” SeeWis. Stat. § 706.001(1). For purposes of this statute, a purchaser in good faith is one without notice of any existing rights in the land. Bump v. Dahl, 26 Wis.2d 607, 133 N.W.2d 295, 299 (Wis.1965).

Outside of bankruptcy, if a subsequent purchaser has either actual or constructive notice of a prior competing interest, these protections are unavailable. In re R.C.R. Corp., 58 B.R. 291, 295 (Bankr.W.D.Wis.1986) ( “The ‘no notice’ requirement of the statute means that a party must have neither actual knowledge nor constructive notice of the rights of other parties.”). In the bankruptcy context, actual knowledge is irrelevant to the trustee's hypothetical bona fide purchaser status. See11 U.S.C. § 544(a) (the trustee's rights are “without regard to any knowledge of the trustee or of any creditor”); see also Berge v. Value Enterprises, Ltd. (In re Berge), 39 B.R. 960 (Bankr.W.D.Wis.1984).

However, if state law provides that a subsequent purchaser would have had constructive notice of an interest in property, the trustee may be similarly bound. R.C.R. Corp., 58 B.R. at 295:see also In re Probasco, 839 F.2d 1352, 1355 (9th Cir.1988) (constructive notice of unrecorded interest precluded avoidance); Lassman v. OneWest Bank, FSB (In re Swift), 458 B.R. 8, 13 (Bankr.D.Mass.2011)(“a trustee's ability to avoid a transfer is subject to constructive knowledge”). Prospective purchasers can be charged with notice of competing claims that are revealed by “use or occupancy of the real estate” or a review of the chain of title (i.e., the records in the office of the register of deeds and other public records). SeeWis. Stat. § 706.09(2)(a); Bump, 133 N.W.2d at 300.

The recording statute contemplates that relevant instruments will be properly filed so that the complete title history of a parcel can be quickly determined from the public record, thereby preventing subsequent purchasers from being hurt by hidden (or undiscovered) transactions. See Kordecki v. Rizzo, 106 Wis.2d 713, 317 N.W.2d 479, 482 (Wis.1982). Wisconsin law anticipates that subsequent purchasers and other parties will normally obtain notice of earlier conveyances from the title record. SeeWis. Stat. § 706.09(1)(b). A prior adverse interest which relies upon a conveyance outside the chain of title for its validity or priority is essentially subordinated to later—but properly recorded—interests. In this regard, § 706.09(1)(b) provides that a subsequent purchaser's interest is superior to an interest created by:

Any conveyance, transaction or event not appearing of record in the chain of title to the real estate affected, unless such conveyance, transaction or event is identified by definite reference in an instrument of record in such chain. No reference shall be definite which fails to specify, by direct reference to a particular place in the public land record, or, by positive statement, the nature and scope of the prior outstanding interest created or affected by such conveyance, transaction or event, the identity of the original or subsequent owner or holder of such interest, the real estate affected, and the approximate date of such conveyance, transaction or event (emphasis added).

Purchasers are presumed to know about every properly recorded conveyance of the property. Kordecki, 317 N.W.2d at 482–83 (a purchaser in good faith is “deemed to have examined the record and to have notice of the contents of all instruments in the chain of title and of the contents of instruments referred to in an instrument in the chain of title”). The chain of title includes all “instruments, actions and proceedings discoverable by reasonable search of the public records and indices affecting real estate in the offices of the register of deeds and in probate and of clerks of courts of the counties in which the real estate...