TERRY L. MYERS, Chief Judge.
The chapter 7 trustee, Jeremy Gugino ("Trustee") filed a motion to avoid or invalidate the lien of U.S. Bank National Association ("U.S. Bank") in real property owned by Debtors, relying on § 544(a), § 544(b) and § 558.
In July, 2006, Paul and Shanell McMurdie ("Debtors") executed and delivered a note in favor of Mortgageit, Inc., in the principal amount of $148,000.00. The note was secured by a deed of trust recorded on July 27, 2006, in the real property records of Boise County, Idaho, against real property located at 3 Syringa Drive in Garden Valley, Idaho ("Property"). The note correctly lists the physical address of the Property and the amount of the indebtedness. And the note was executed by Debtors. Likewise, the deed of trust was executed by Debtors, and it correctly lists the physical address of the Property and gives the Boise County tax parcel identification number.
Debtors filed their voluntary chapter 7 bankruptcy petition on May 27, 2010. On the date of filing, Debtors owed $149,097.23 under the note. Debtors value the Property at $74,000.00 in their schedules. There are no other liens attached to the Property and Debtors are not claiming the property as exempt.
U.S. Bank, as holder of the note on the Property, brought a motion for relief from the automatic stay. Doc. No. 26. Trustee objected to that motion based on his asserted ability to avoid U.S. Bank's lien. See Doc. No. 32.
Trustee contends that under Idaho's statute of frauds and a recent Idaho Supreme Court decision interpreting that statute in the context of real property transactions, Ray v. Frasure, 146 Idaho 625, 200 P.3d 1174 (2009), inclusion of only the physical street address in the deed of trust without a legal description of the Property renders the transfer unenforceable and invalid. Trustee contends Ray applies to this case through one of two Code provisions, § 544(b) and/or § 558.
Trustee first argues that he can avoid the transfer under § 544(b). Section 544(b) states:
In order to invoke § 544(b), Trustee must allege the existence of an unsecured creditor with an allowable claim under § 502 who may avoid the transfer under state law. 5 Collier on Bankruptcy ¶ 544.06[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010). Here, the Trustee has not alleged that an unsecured creditor exists that would possess the standing to bring a state cause of action to avoid Debtors' transfer of a security interest to U.S. Bank. Given that failure, relief cannot be entered on Trustee's § 544(b) claim.
Alternatively, Trustee relies on § 558 which states:
(Emphasis added). Trustee alleges in his Motion, and in his opposition to U.S. Bank's motion for relief from stay, that Debtor has a statute of frauds defense to U.S. Bank's enforcement of its alleged secured position. Trustee argues that the lack of a legal description of the Property makes the deed of trust unenforceable under the Idaho statute of frauds. Thus, he argues, U.S. Bank has no secured interest in the Property. Pursuant to § 558, Trustee seeks to utilize that defense and prohibit U.S. Bank from asserting its secured position.
Idaho's statute of frauds requires that an agreement for the sale of real property, or an interest therein, be in writing in order to be valid. See Idaho Code § 9-505(4). And Idaho Code § 9-503 states that:
More specific to the issues presented here, a "mortgage, deed of trust or transfer in trust can be created, renewed or extended only by writing, executed with the formalities required in the case of a grant or conveyance of real property." Idaho Code § 45-902.
When interpreting state law, this Court is bound by the decisions of the state's highest court. When state law is unsettled or has not directly addressed an issue, this Court "must predict how the highest state court would decide the issue." See In re Sterling Mining Co., 415 B.R. 762, 767-68 (Bankr.D.Idaho 2009) (quoting In re First Alliance Mortgage Co., 471 F.3d 977, 993 (9th Cir.2006)). In order to accomplish this goal, the Court may review decisions from the state court, decisions from other jurisdictions, statutes, treatises, and restatements for guidance. See Spear v. Wells Fargo Bank, N.A. (In re Bartoni-Corsi Produce, Inc.), 130 F.3d 857, 861 (9th Cir.1997).
Ray is the most recent Idaho Supreme Court decision dealing with the legal adequacy, under the statute of frauds, of property descriptions in conveyances of real property. In Ray, a real estate sales contract described the property at issue with an accurate physical street address. The contract included a section for a legal description, however that section was left blank and no legal description was provided. When the sale failed to close, the purchaser attempted to sue the seller for
While the Idaho statutes do not specifically require a description of real property in the instrument of conveyance, Idaho courts have always required a description of the property or a reference to extrinsic evidence which describes the property being conveyed in order to satisfy the statute of frauds. In Ray, the Idaho Supreme Court stressed that such a property description must "adequately describe the property so that it is possible for someone to identify `exactly' what property the seller is conveying to the buyer." 200 P.3d at 1178 (citing Garner v. Bartschi, 139 Idaho 430, 80 P.3d 1031, 1036 (2003)). It reiterated that "`[a] description contained in a deed will be sufficient so long as quantity, identity or boundaries of property can be determined from the face of the instrument, or by reference to extrinsic evidence to which it refers.'" Id. (quoting Garner, 80 P.3d at 1036). The Idaho Supreme Court concluded that a property description in a real estate sales contract that consisted solely of a physical address did not satisfy the statute of frauds. 200 P.3d at 1177. Such a description, although providing the general location of the property, does not give the required exact "quantity, identity or boundaries of the real property." Id. at 1179.
U.S. Bank argues that Ray should not be controlling in this case. Instead, U.S. Bank urges this Court to look to its prior ruling, Murphy v. Provident Bank (In re Miller), 260 B.R. 158, 159-65 (Bankr.D.Idaho 2001), which analyzed the Idaho statute of frauds as it pertains to a deed of trust. It is true that the facts in Miller mirror those in this case. In Miller, the street address associated with a piece of real property was placed in a deed of trust, and although the deed purported to attach as Exhibit A the legal description of the property, no such attachment existed. Id. at 159-60. In Miller, this Court relied upon a pre-Ray Idaho Court of Appeals decision and concluded that the physical street address, even without a legal description, was sufficient to describe the property and "render the conveyance adequate under Idaho law." Id. at 165.
However, in Ray, the Idaho Supreme Court expressly found that Miller was not persuasive. Specifically, the Idaho Supreme Court, in referring to Miller, stated:
Ray, 200 P.3d at 1178-79. U.S. Bank's reliance on Miller is therefore unavailing.
The Court notes a similar argument, attempting to distinguish Ray based on the type of transaction, was unsuccessful in Magnolia Enters., LLC v. Schons, 2009 WL 1658022 (D.Idaho June 11, 2009) (determining that the Ray standards apply with equal force to an outright conveyance of property and to the conveyance of a limited property interest such as a right of first refusal). Magnolia rejected this argument because compliance with the statute of frauds in both instances would avoid litigation, prevent clouds on the title of real property and prevent unnecessary disputes as to the precise boundaries of the property being conveyed. Id. at *4. This Court agrees. The policy behind the statute of frauds applies equally to a contract for the sale of real property and to conveyances of interests in real property such as the deed of trust at issue here.
This Court's ultimate obligation is to determine how the Idaho Supreme Court would decide the issue in this case. Accord supra Magnolia Enters. In Ray, the Idaho Supreme Court made it clear that a property description that consists solely of a physical address within a contract for the sale of real property is not sufficient to satisfy the statute of frauds. 200 P.3d at 1178. The Court predicts that the Idaho Supreme Court would follow Ray's approach and apply it to the deed of trust situation at bar.
Pursuant to Ray, the property description in the deed of trust at issue is inadequate, and a defense based on the statute of frauds exists. Trustee can assert such a defense in response to U.S. Bank's request for stay relief. In addition, as this Motion (by agreement of the parties) is the equivalent of an adversary proceeding, which proceeding may be used to obtain a declaratory judgment regarding the validity, priority or extent of a lien or interest in property, see Fed. R. Bankr.P. 7001(2), Trustee may obtain such a declaration herein.
Trustee may submit a form of order.
