Helbling v. Cleary et al

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
In re:
DAVID CLEARY JR.,
Debtor.
LAUREN HELBLING,
TRUSTEE,
Plaintiff,
v.
DAVID CLEARY JR., et al.,
Defendants.
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Case No. 09-14900
Chapter 7
Adversary Proceeding
No. 09-1285
Judge Arthur I. Harris
MEMORANDUM OF OPINION 1
This matter is currently before the Court on the motion for partial summary
judgment filed by the plaintiff-trustee, Lauren Helbling, and the joint brief in
opposition of Carrington Mortgage and Deutsche Bank National Trust Company
1 This Memorandum of Opinion is not intended for official publication.
The court incorporates by reference in this paragraph and adopts as
the findings and orders of this court the document set forth below.
This document was signed electronically on July 01, 2010, which may
be different from its entry on the record.
IT IS SO ORDERED.
Dated: July 01, 2010
_____________________________
Arthur I. Harris
United States Bankruptcy Judge
__________________________________________________________________________________________
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(“Deutsche Bank”). The main issue is whether the trustee is entitled to avoid a
mortgage because the notary’s certificate of acknowledgment failed to recite the
names of the parties whose signatures were acknowledged. The Court must also
decide whether the filing of one or both foreclosure actions imparted the trustee
with constructive notice resulting in inability to act as a bona fide purchaser for
value. If the trustee is charged with constructive notice, then the Court must
consider whether the second foreclosure action was an avoidable preference. For
the reasons that follow, the Court holds that the Mortgage was not executed in
accordance with Ohio’s statutory requirements but that the trustee is charged with
constructive notice of the interest of Deutsche Bank as a result of the filing of the
second foreclosure action. However, the filing of the second foreclosure acted to
perfect the defective mortgage as against third persons, and it is a preferential
transfer. As such, the Mortgage can be avoided by the trustee as a preference.
Accordingly, the trustee’s motion for partial summary judgment is granted.
FACTS AND PROCEDURAL BACKGROUND
On December 30, 2009, the plaintiff-trustee and defendants Deutsche Bank
and Carrington submitted the following stipulations:
1. 	Jurisdiction of this Court is proper and as set forth in
Paragraph 1 of the complaint.
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2. 	This is a core proceeding as set forth in Paragraph 2 of the
Complaint.
3. 	Plaintiff is the duly appointed, qualified and acting Trustee of
the estate of the debtor.
4. 	A legal description for property known as 4155 West 114th
Street, Cleveland, OH is shown as Exhibit A to the Complaint
(“Property”).
5. 	The petition in this case was filed on May 31, 2009.
6. 	The Debtor’s interest in the Property is property of the
bankruptcy estate pursuant to 11 U.S.C. § 541.
7. 	The Debtor is the owner, in fee simple of the Property, by virtue
of a General Warranty Deed filed in Instrument
No. 200302030753 of the records of Cuyahoga County, Ohio
on February 3, 2003.
8. 	Deutsche Bank National Trust Company (“Deutsche”) is the
holder of a mortgage on the Property (the “Mortgage”), which
Mortgage is at issue in this proceeding.
9. 	The Mortgage was filed on May 5, 2004, as Instrument
No. 200405050625 in the records of Cuyahoga County, Ohio.
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10. 	A true and exact copy of the Mortgage is attached to the
Complaint as Exhibit B.
11. 	The original mortgagee under the Mortgage is New Century
Mortgage Corporation. The Mortgage was assigned to
Deutsche of record by assignment filed December 16, 2008 as
Instrument No. 200812160236, Cuyahoga County Records.
12. 	The acknowledgment provision of the Mortgage on page 15
reads as follows:
This instrument was acknowledged before me this 30th day of April 2004, by
Stamp 	JERRY RUSSO
Notary Public
In and for the State of Ohio
My Commission Expires
May 19, 2008
/s/ Jerry Russo
Notary Public
13. 	Debtor’s initials appear at the bottom of Mortgage pages 1
through 13, and page 15 and page 17.
14. 	A foreclosure action was filed as to the subject property in Case
No. 663230 of the Cuyahoga County, Ohio Common Pleas
Court on June 25, 2008 by Deutsche. The property was
described in the foreclosure Complaint. The debtor answered in
that case on September 25, 2008. The case was dismissed
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without prejudice on October 30, 2008.
15. 	A foreclosure action was filed as to the subject property in Case
No. 694194 of the Cuyahoga County, Ohio Common Pleas
Court on May 28, 2009 by Aeon Financial. The property was
described in the foreclosure Complaint. The debtor filed a
Notice of Suggestion of Stay on June 15, 2009. The Court
entered an Order staying the case on June 19, 2009. The case
was dismissed without prejudice on August 5, 2009.
On August 28, 2009, the trustee of the Chapter 7 estate initiated this
adversary proceeding seeking to avoid the Mortgage and to determine the
respective interests of various parties in the real property. The complaint named as
defendants the debtor; Carrington Mortgage; CitiFinancial Inc.; Aeon Financial,
LLC; Beneficial Ohio, Inc.; TFC National Bank; Deutsche Bank National Trust
Company; and the Cuyahoga County Treasurer. The treasurer, Citifinancial, David
Cleary, Aeon Financial, TFC National Bank, and Carrington/Deutsche Bank filed
answers to the complaint. Aeon Financial and TFC National Bank disclaimed any
interest, and all parties stipulated that the Cuyahoga County Treasurer has a first
lien for taxes and assessments. Default was entered against Beneficial Ohio on
March 24, 2010. On January 13, 2010, the trustee filed a motion for partial
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summary judgment seeking to avoid the Mortgage held by Deutsche Bank. On
February 3, 2010, Deutsche Bank filed a brief in response. Briefing on the
trustee’s partial motion for summary judgment is complete, and the Court is ready
to rule.
JURISDICTION
Determinations of the validity, extent, or priority of liens are core
proceedings under 28 U.S.C. section 157(b)(2)(K). The Court has jurisdiction over
core proceedings under 28 U.S.C. sections 1334 and 157(a) and Local General
Order No. 84, entered on July 16, 1984, by the United States District Court for the
Northern District of Ohio.
SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56(c), as made applicable to bankruptcy
proceedings by Bankruptcy Rule 7056, provides that a court shall render summary
judgment, if the pleadings, depositions, answers to interrogatories, and admissions
on file, together with affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to judgment as a matter of
law.
The moving party bears the burden of showing that “there is no genuine
issue as to any material fact and that [the moving party] is entitled to judgment as a
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matter of law.” Jones v. Union County, 296 F.3d 417, 423 (6th Cir. 2002). See
generally Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the moving
party meets that burden, the nonmoving party “must identify specific facts
supported by affidavits, or by depositions, answers to interrogatories, and
admissions on file that show there is a genuine issue for trial.” Hall v. Tollett,
128 F.3d 418, 422 (6th Cir. 1997). See, e.g., Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 252 (1986) (“The mere existence of a scintilla of evidence in support
of the plaintiff’s position will be insufficient; there must be evidence on which the
jury could reasonably find for the plaintiff.”). The Court shall view all evidence in
a light most favorable to the nonmoving party when determining the existence or
nonexistence of a material fact. See Tenn. Dep’t of Mental Health & Mental
Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996).
DISCUSSION
Under the “strong arm” clause of the Bankruptcy Code, the bankruptcy
trustee has the power to avoid transfers that would be avoidable by certain
hypothetical parties. See 11 U.S.C. § 544(a). Section 544 provides in pertinent
part:
(a) The trustee shall have, as of the commencement of the case, and without
regard to any knowledge of the trustee or of any creditor, the rights and
powers of, or may avoid any transfer of property of the debtor or any
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obligation incurred by the debtor that is voidable by –
. . . .
(3) a bona fide purchaser of real property, other than fixtures, from
the debtor, against whom applicable law permits such transfer to be
perfected, that obtains the status of a bona fide purchaser and has
perfected such transfer at the time of the commencement of the case,
whether or not such a purchaser exists.
11 U.S.C. § 544. Any transfer under section 544 is preserved for the benefit of the
estate. See 11 U.S.C. § 551.
Page 10 of the Mortgage provides that “[t]his Security Instrument shall be
governed by federal law and the law of the jurisdiction in which the Property is
located.” Accordingly, because the real property in question is located in Ohio,
the Court will apply Ohio law to determine whether the trustee may avoid the
Mortgage using the “strong arm” clause. See Simon v. Chase Manhattan Bank
(In re Zaptocky), 250 F.3d 1020, 1024 (6th Cir. 2001) (applicable state law
governs determination whether hypothetical bona fide purchaser can avoid
mortgage).
Under Ohio law, a bona fide purchaser is a purchaser who “ ‘takes in good
faith, for value, and without actual or constructive knowledge of any defect.’ ”
Stubbins v. Am. Gen. Fin. Servs. (In re Easter), 367 B.R. 608, 612
(Bankr. S.D. Ohio 2007) (quoting Terlecky v. Beneficial Ohio, Inc. (In re Key),
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292 B.R. 879, 883 (Bankr. S.D. Ohio 2003)); see also Shaker Corlett Land Co. v.
Cleveland, 139 Ohio St. 536 (1942). The Bankruptcy Code expressly provides
that a bankruptcy trustee is a bona fide purchaser regardless of actual knowledge.
See In re Zaptocky, 250 F.3d at 1027 (“actual knowledge does not undermine
[trustee’s] right to avoid a prior defectively executed mortgage”). Because actual
knowledge does not affect the trustee’s strong-arm power, contrary to the
assertions made by the defendants, the Court need only determine whether the
trustee had constructive knowledge of the prior interest held by Deutsche Bank.
Ohio law provides that “an improperly executed mortgage does not put a
subsequent bona fide purchaser on constructive notice.” In re Zaptocky,
250 F.3d at 1028. Ohio courts have refused to allow a recorded mortgage to give
constructive notice when the mortgage has been executed in violation of a statute.
See In re Nowak, 104 Ohio St. 3d 466, 469 (2004) (listing cases). The first
question, then, is whether the Mortgage was executed in compliance with, or
substantially conforms to applicable statutory law.
The Mortgage Was Not Properly Executed
in Accordance with Ohio Revised Code § 5301.01
Ohio Revised Code § 5301.01, requires four separate acts to properly
execute a mortgage: (1) the mortgage shall be signed by the mortgagor; (2) the
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mortgagor shall acknowledge his signing in front of a notary public, or other
qualified official; (3) the official shall certify the acknowledgment; and (4) the
official shall subscribe his name to the certificate of acknowledgment.
Ohio Rev. Code § 5301.01(A) (2004); see Drown v. GreenPoint Mortgage
Funding, Inc. (In re Leahy), 376 B.R. 826, 832 (Bankr. S.D. Ohio 2007) (listing
four requirements provided by Ohio Rev. Code. § 5301.01). 2 The first issue in
this case is whether the certificate of acknowledgment, which omitted the name of
the borrower, satisfies the third requirement to proper execution of a mortgage.
Certification of an acknowledgment is governed by Ohio Revised Code
sections 147.53-147.58. Ohio Revised Code section 147.53 provides:
The person taking an acknowledgment shall certify that:
(A) The person acknowledging appeared before him and acknowledged he
executed the instrument;
(B) The person acknowledging was known to the person taking the
acknowledgment, or that the person taking the acknowledgment had
2 In Zaptocky, the Sixth Circuit identified “three major prerequisites for the
proper execution of a mortgage: (1) the mortgagor must sign the mortgage deed;
(2) the mortgagor’s signature must be attested by two witnesses; and (3) the
mortgagor’s signature must be acknowledged or certified by a notary public.”
Zaptocky, 250 F.3d at 1024. The differences between Zaptocky’s three
requirements and Leahy’s four requirements are (A) the deletion in Leahy of
Zaptocky’s second requirement – attestation by two witnesses – due to a change in
the statute, and (B) the Leahy court’s breaking down of Zaptocky’s third
requirement – certification of acknowledgment – into three separate parts.
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satisfactory evidence that the person acknowledging was the person
described in and who executed the instrument.
The Ohio Revised Code further provides that a certificate of acknowledgment is
acceptable in Ohio if it is in a form prescribed by the laws or regulations of Ohio
or contains the words “acknowledged before me,” or their substantial equivalent.
Ohio Rev. Code § 147.54. Ohio’s statutory short form acknowledgment for an
individual is as follows:
State of ________
County of ________
The foregoing instrument was acknowledged before me this (date) by
(name of person acknowledged.)
(Signature of person taking acknowledgment)
(Title or rank) (Serial number, if any)
Ohio Rev. Code § 147.55(A).
The trustee argues that the Mortgage is invalid because the certification of
acknowledgment fails to indicate or recite who appeared before the notary public
as required by Ohio law. The Court agrees. Recent case law, including a 2008
decision from the Sixth Circuit BAP, supports the trustee’s position that an
acknowledgment is defective if it fails to identify the person whose signature is
being acknowledged. See In re Nolan, 383 B.R. 391, 396 (6th Cir. B.A.P. 2008);
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In re Sauer, 417 B.R. 523, (Bankr. S.D. Ohio 2009); Daneman v. Nat’l City
Mortg. Co. (In re Cornelius), 408 B.R. 704, 708 (Bankr. S.D. Ohio 2009) (“The
absence of the name of the mortgagee acknowledging election is the functional
equivalent of no certificate of acknowledgment and renders an acknowledgment
insufficient.”); Drown v. Countrywide Home Loans, Inc. (In re Peed), 403 B.R.
525, 531 (Bankr. S.D. Ohio 2009) affirmed at No. 2:09cv347 (S.D. Ohio May 1,
2009); Terlecky v. Countrywide Home Loans, Inc. (In re Baruch), No. 07-57212,
Adv. No. 08-2069, 2009 Bankr. Lexis 608 at *22 (Bankr. S.D. Ohio
Feb. 23, 2009) (“An acknowledgment clause containing nothing relative to the
mortgagor's identity is insufficient; rather, an acknowledgment clause must either
identify the mortgagor by name or contain information that permits the mortgagor
to be identified by reference to the mortgage.”); In re Leahy, 376 B.R. at 832.
See also Smith's Lessee v. Hunt, 13 Ohio 260, 269 (1844) (holding that court was
unable to infer name of grantor when acknowledgment was blank as to the grantor
and, thus, the mortgage was defective and did not convey title).
The holdings in Nolan, Smith’s Lessee, and similar cases are also supported
by case law interpreting almost identical statutory provisions for acknowledgment
clauses in Kentucky and Tennessee. See, e.g., Gregory v. Ocwen Fed. Bank (In re
Biggs), 377 F.3d 515 (6th Cir. 2004) (affirming bankruptcy court’s decision
avoiding deed of trust under section 544 and Tennessee law when deed of trust
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omitted names of acknowledging parties); Select Portfolio Servs. v. Burden (In re
Trujillo), 378 B.R. 526 (6th Cir. B.A.P. 2007) (affirming bankruptcy court’s
decision avoiding mortgage under section 544 and Kentucky law when debtor was
not named or identified in certificate of acknowledgment).
Although no argument was made, the execution of the Mortgage does not
“substantially comply” with the statutory requirements. When the validity of a
mortgage is challenged for failure to comply with the statutory mandates of Ohio
Revised Code section 5301.01, a court can “review the nature of the error and the
balance of the document to determine whether or not the ‘instrument supplies
within itself the means of making the correction.’ ” Menninger v. First Franklin
Fin. Corp. (In re Fryman), 314 B.R. 137, 138 (Bankr. S.D. Ohio 2004) (quoting
Dodd v. Bartholomew, 44 Ohio St. 171, 176 (1886)). This principle enunciated by
the Dodd court essentially allows a court to determine whether the execution of a
mortgage is in “substantial compliance” with section 5301.01. See In re Fryman,
314 B.R. at 138. Under Ohio law, a mortgage that substantially complies with
section 5301.01 will be considered valid. See Drown v. EverHome Mortg. Co. (In
re Andrews), 404 B.R. 275, 279 (Bankr. S.D. Ohio 2008) (citing Mid-American
Nat'l Bank & Trust, 451 N.E.2d 1243, 1245-46 ) (Ohio Ct. App. 1982)).
Nothing in the present case provides evidence of substantial compliance
with section 5301.01. See In re Peed, 403 B.R. at 536 (presence of initials on
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each page of mortgage, including acknowledgment clause page, did not
substantially comply with requirement that acknowledgment clause identify
person whose signature is being acknowledged); accord Bank of America N.A. v.
Corzin, (In re Bergman), 2010 U.S. Dist. LEXIS 8755 Case No. 5:09cv2520
(N.D. Ohio Feb. 2, 2010) (same), In re Cornelius, 408 B.R. at 708 (same); In re
Andrews, 404 B.R. at 279 (same). Therefore, the Mortgage was improperly
executed because the certification of acknowledgment fails to indicate or recite
who appeared before the notary public as required under Ohio Revised Code
section 5301.01.
The Second Foreclosure Action Precludes the Trustee from Avoiding the
Mortgage under 11 U.S.C. § 544
Having found that the Mortgage is defective, the Court must determine
whether the trustee is charged with constructive notice of Deutsche Bank’s
interest as a result of either of the foreclosure actions. This Court finds that the
second foreclosure action imparted constructive notice to the trustee, under the
rule of lis pendens.
The most recent version of Ohio’s lis pendens statute provides that “[w]hen
a complaint is filed, the action is pending so as to charge a third person with
notice of its pendency. While pending, no interest can be acquired by third
persons in the subject of the action, as against the plaintiff’s title.” Ohio Rev.
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Code Ann. § 2703.28. Thus, the filing of a foreclosure complaint prior to the date
of filing of the bankruptcy petition imparts constructive notice to a bankruptcy
trustee of the plaintiff’s interest, whatever that might be, in the property. See
Treinish v. Norwest Bank Minn. (In re Periandri), 266 B.R. 651, 659 (6th Cir.
BAP 2001).
As to the June 25, 2008, foreclosure, filed by Deutsche Bank, the trustee
cannot be charged with constructive notice because the case was not pending at
the commencement of the bankruptcy petition on May 31, 2009. The section
requires that the case be “pending” in order to charge third parties with notice.
Ohio Rev. Code Ann. § 2703.28.
Deutsche Bank asserts that because the second foreclosure action was
pending when the case was filed, the trustee was on notice of Deutsche Bank’s
interest due to the fact it was a defendant and the complaint listed it as holding an
interest in the property. This Court agrees. “The Ohio lis pendens statute operates
to provide constructive notice of the pendency of a suit concerning specifically
described property and with it the knowledge, albeit deemed or imputed, of all
claims against the property that might reasonably be discerned from an
investigation into the circumstances of the litigation.” In re Periandri, 266 B.R. at
656. 	The Ohio Supreme Court has quoted this passage from Periandri, holding
that lis pendens puts a prospective purchaser on notice of any possible claims to
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the subject property. See Beneficial Ohio, Inc. v. Ellis, 121 Ohio St. 3d 89, 92
(Ohio 2009) (“the statute places the burden upon [third persons] to examine the
county records to determine whether a lawsuit involving the property is pending . .
. . a person who seeks to acquire an interest in property should bear the
responsibility for checking county records.”) See also Stern v. Stern, No. 97 JE
77, 1999 WL 1243316 at *3 fn. 2 (Ohio App. 1999) (“Pursuant to R.C. 2703.26,
which is the codification of the doctrine of lis pendens, a purchaser is charged
with notice of any issues presented in a pending lawsuit which directly concern
the property to be purchased.”)
The complaint, taken as a whole, provides constructive notice of the interest
of Deutsche Bank. The complaint provides in part
the following named defendants, to wit: David Cleary, Jr., Spouse, if
any, of David Cleary Jr., Deutsche Bank National Trust Company, as
Indenture Trustee for New Century Home Equity Loan Trust 2004-2,
Beneficial Ohio, Inc., and James Rokakis, Treasurer of Cuyahoga
County, Ohio, have or may claim to have some interest in or lien upon
said premises, but Plaintiff, not being fully advised as to the extent, if
any, of such liens or claims, says that the same, if any, are inferior and
subsequent to the lien of Plaintiff. (See Preliminary Judicial Report,
Exhibit C.)
Exhibit C to the Complaint lists Deutsche Bank as an interest holder by way of a
second mortgage, in the amount of $104,500. As a result of lis pendens, third
parties had constructive notice of the interest of Deutsche Bank at the
commencement of the bankruptcy case, and therefore the trustee cannot avoid the
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mortgage pursuant to her strong arm powers. “When any purchaser would have
constructive knowledge of the mortgage, the trustee, cannot assume the position
of a hypothetical BFP because no such good-faith purchaser can exist.” Argent
Mortgage Company, LLC v. Drown (In re Bunn), 578 F.3d 487, 489 (6th Cir.
2009).
The Perfection of Deutsche Bank’s Interest by way of Lis Pendens is an Avoidable
Preferential Transfer
A trustee may avoid as a preference any transfer of an interest of the
debtor’s property that is for the benefit of a creditor, on account of an antecedent
debt, made while the debtor was insolvent within 90 days before the filing of a
bankruptcy case that allows the creditor to receive more than what it would have
received in a typical liquidation. 11 U.S.C. § 547(b). Additionally, “a transfer of
real property other than fixtures, but including the interest of a seller or purchaser
under a contract for the sale of real property, is perfected when a bona fide
purchaser of such property from the debtor against whom applicable law permits
such transfer to be perfected cannot acquire an interest that is superior to the
interest of the transferee.” 11 U.S.C. § 547(e)(1). Thus, this Court must
determine whether a “transfer” occurred. 	The Sixth Circuit BAP has held that lis
pendens provides constructive notice of a defectively acknowledged mortgage but
that because the filing of a notice of lis pendens “took place within the preference
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period, it is considered a transfer, subject to avoidance as a preference, assuming
the other required elements of a preference exist.” Kendrick v. CIT Small
Business Lending Corp. (In re Gruseck), No. 06-8091, 2008 WL 1756243 at *8
(6th Cir. BAP 2008). See also Hurst Concrete Products Inc. v. Lane (In re Lane),
980 F.2d 601, 604 (9th Cir 1992) (because the recording of the lis pendens
operated to perfect the filer’s interest against bona fide purchasers, the recording
was a transfer under § 547(e)(1)(A)). Here, a transfer occurred because the trustee
could no longer acquire an interest superior to the interest of Deutsche Bank upon
the filing of the foreclosure complaint. The filing of the complaint acted to perfect
Deutsche Bank’s interest as against third parties (while the suit was pending) such
that no bona fide purchaser could exist.
It is undisputed that the bankruptcy was filed on May 31, 2009, and the
foreclosure was filed only three days prior on May 28, 2009. Because a transfer
of property of the debtor on account of a debt incurred in 2008, took place within
the 90 day preference window that allowed Deutsche Bank to receive more than it
would have as an unsecured creditor, the transfer is avoidable under
11 U.S.C. § 547.
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CONCLUSION
For the reasons stated above, the Court holds that the certificate of
acknowledgment in the Mortgage at issue is defective, that the filing of the second
foreclosure complaint provided the trustee with constructive notice, and the that
trustee may avoid the Mortgage as a preferential transfer. Accordingly, the
trustee’s motion for partial summary judgment is granted. While it appears that
this decision is largely dispositive, the precise interests and relative priorities of all
parties have yet to be determined. Therefore, this is not a final judgment for
purposes of 28 U.S.C. § 158. See Bankr. Rule 7054 and Fed R. Civ. P. 54(b). The
Court will conduct a status conference at 1:30 p.m. on July 20, 2010. Counsel
shall be prepared to advise the Court as to what additional steps are needed to
resolve all remaining claims in this adversary proceeding.
IT IS SO ORDERED.
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