THOMAS A. VARLAN, District Judge.
Appellant Bank of America ("Bank of America") has appealed [Doc. 8] the Memorandum and Judgment (the "Judgment") [Doc. 1-35; Doc. 1-36] of the United States Bankruptcy Court for the Eastern District of Tennessee (the "Bankruptcy Court") in favor of Richard and Deana Greene and Trustee, John P. Newton, Jr. (the "Trustee"). Appellee, the Trustee, has submitted a response in opposition to that appeal [Doc. 12]. Bank of America has filed a reply [Doc. 13] to that response.
The Court has carefully reviewed the parties' briefs in light of the entire record and the controlling law. For the reasons set forth below, the decision of the Bankruptcy Court will be affirmed and Bank of America's appeals will be dismissed.
In February 2009, Richard and Deana Greene (the "debtors") executed a deed of trust (the "DOT") in favor of Homeowners Mortgage of America, Inc. ("Homeowners Mortgage"), covering real property located at 825 Garners Landing Boulevard, Seymour, Tennessee (the "Property") [Doc. 1-35, p. 2]. On March 11, 2009, Homeowners Mortgage submitted the DOT via electronic filing to the Sevier County Register of Deeds (the "Register") [Id., pp. 2, 7 n. 6; Doc. 1-22, ¶ 4]. The Register accepts instruments for registration via electronic filing through Business Information Systems ("BIS"), an electronic recording vendor [Doc. 1-35, p. 6; Doc. 1-22, ¶ 4]. The Register maintains a documents log which lists all instruments received for registration [Doc. 1-35, p. 6; Doc. 1-22, ¶ 5]. The documents log indicates the instrument numbers assigned to instruments upon receipt and the address to which a copy of the received instrument is to be returned after registration [Doc. 1-35, p. 7 n. 6; Doc. 1-22, ¶ 5]. The return address in the documents log for instruments delivered by BIS is typically listed as "Ingeo" or "Simplifile" [Doc. 1-35, p. 7 n. 6; Doc. 1-22, ¶ 5].
On March 11, 2009, the Register received an electronic copy of the DOT from Homeowners Mortgage [Doc. 1-35, pp. 6-7]. The Register accepted the DOT for registration, assigned it instrument number 09015404, and listed the instrument number and the return address of Simplifile in the documents log [Id.]. Lois McCurry ("McCurry"), chief deputy of the Register, assigned the DOT book number 3300 and page number 584-594 [Id., p. 7]. A copy of the recorded DOT, including the assigned instrument, book, and page numbers, was transmitted to Network Closing Services, Inc. ("NCS"), the closing agent for the debtors' loan [Id., pp. 7 n. 6, 12].
In the meantime, on June 17, 2009, the debtors filed a Chapter 7 Voluntary Petition of bankruptcy (the "Chapter 7 petition"), and the Trustee was appointed to serve as trustee of the debtors' bankruptcy estate [Doc. 1-35, p. 5]. In the Chapter 7 petition, the debtors listed the Property on the schedule and list of real property which, pursuant to 11 U.S.C. § 541, became part of the bankruptcy estate [Id.]. The Chapter 7 petition also indicated that the debtors had signed the DOT to secure a promissory note entered into in February 2009, and that Bank of America was the secured creditor [Doc. 1-1].
The Trustee reviewed the Chapter 7 petition, including the accompanying schedules, and investigated the Property listed on the schedules, along with Bank of America's purported interest as the secured creditor [Doc. 1-35, pp. 5-6]. From the Trustee's investigation and review of the applicable property records, the Trustee found no recorded deeds of trust encumbering the Property and therefore requested that Bank of America file a proof of claim with documentation establishing its security interest over the Property [Id., p. 5]. On March 18, 2010, Bank of America filed a proof of claim against the debtors based on the DOT in the amount of $203,938.18 [Id., p. 6]. Attached to the proof of claim was a copy of the electronically filed DOT containing the Register's stamp, dated March 11, 2009, and reflecting that the DOT was, on that date, accepted by the Register, assigned instrument number 09015404, and assigned book number 3300 and page numbers 584-594 [Id.].
On May 4, 2010, the Trustee initiated an adversary proceeding by filing a complaint against Bank of America and seeking to avoid, pursuant to 11 U.S.C. § 544, Bank of America's lien on the Property, along with a determination that the Property is free and clear of liens [Id., p. 7]. Bank of America moved for summary judgment and the Trustee responded in opposition [Id.]. After Bank of America filed the motion for summary judgment, the Bankruptcy Court advised the parties that it may grant summary judgment for the nonmoving Trustee independent of Bank of America's motion [Id., p. 4]. On March 11, 2011, after additional briefing, including the submission of supporting exhibits and documents, along with oral argument, the Bankruptcy Court entered the Judgment in favor of the Trustee, denied Bank of America's motion for summary judgment, and ordered that the Property could be sold free and clear of Bank of America's lien [Id., pp. 4-5, 19-20; Doc. 1-36].
Bank of America filed a notice of appeal of the Judgment to this Court, docketed as Case No. 3:11-CV-231. That appeal raises four issues [Doc. 8, p. 4]. First, based on the undisputed material facts, was the Bankruptcy Court correct in entering summary judgment in favor of the Trustee [Id.]. Second, whether Bank of America holds a valid security interest in the Property [Id.]. Third, whether the Trustee is entitled to sell the Property free and clear of Bank of America's lien [Id.]. Fourth, whether Bank of America is entitled to an order granting relief from the automatic
After the Bankruptcy Court entered Judgment in favor of the Trustee, Bank of America moved the Bankruptcy Court to stay enforcement of the Judgment and for approval of a supersedeas bond. The Bankruptcy Court denied both motions. The Bankruptcy Court then authorized the sale of the Property free and clear of Bank of America's lien and required the Trustee to retain the proceeds of the sale subject to further order. Bank of America appealed this order to this Court, docketed as Case No. 3:11-CV-376.
Upon docketing of the second appeal, the magistrate judge deemed both appeals related. Bank of America moved to consolidate the two appeals because the actions involve the same transaction or occurrence, the same parties, and the same issues, and because filing additional appeal briefs in the later-filed appeal would be a waste of time and resources. With no submitted opposition by the Trustee, the magistrate judge granted the motion and consolidated the two appeals, with Case No. 3:11-CV-231 being designated the lead case [Doc. 14].
A district court reviews the findings of fact of a bankruptcy court for clear error, and the conclusions of law de novo. See In re Behlke, 358 F.3d 429, 433 (6th Cir.2004). Federal Rule of Bankruptcy Procedure 8013 provides that "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses." Fed. R. Bankr.P. 8013. Where a bankruptcy court makes a determination on a motion for summary judgment, the bankruptcy court's decision is purely a question of law. Thus, the district court reviews the award of summary judgment de novo. See In re Cannon, 277 F.3d 838 (6th Cir. 2002); In re Batie, 995 F.2d 85, 89 (6th Cir.1993). "On an appeal the district court... may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr.P. 8013.
Federal Rule Bankruptcy Procedure 7056 makes Federal Rule of Civil Procedure 56 applicable to bankruptcy adversary proceedings. Fed. R. Bankr.P. 7056. Thus, summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). The burden is on the moving party to show conclusively that no genuine issue of material fact exists, and the Court must view the facts and all inferences to be drawn therefrom in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Morris v. Crete Carrier Corp., 105 F.3d 279, 280-81 (6th Cir.1997); White v. Turfway Park Racing Ass'n, Inc., 909 F.2d 941, 943 (6th Cir.1990).
"Once the moving party presents evidence sufficient to support a motion under Rule 56, the nonmoving party is not entitled to a trial merely on the basis of allegations." Curtis Through Curtis v. Universal Match Corp., 778 F.Supp. 1421, 1423 (E.D.Tenn.1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). The nonmoving party is required to come forward with some significant probative evidence which makes it necessary to resolve the factual dispute at trial. White, 909 F.2d at 943-44. The moving party is entitled to
The filing of a Chapter 7 bankruptcy petition creates a bankruptcy estate, comprised in part of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The trustee in the bankruptcy case then becomes the representative of the bankruptcy estate, see 11 U.S.C. § 323(a), with the authority to "collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest[.]" 11 U.S.C. § 704(a)(1). Pursuant to 11 U.S.C. § 544(a), often referred to as the "strong-arm clause," In re Biggs, 377 F.3d 515, 517 (6th Cir.2004), a trustee is allowed to "avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by... a bond fide purchaser of real property... 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(a). In other words, the trustee hypothetically purchases the debtor's property at the commencement of the bankruptcy case, then determines whether that property is subject to any valid prior interest. Biggs, 377 F.3d at 517. While the authority of the trustee is conferred by the bankruptcy code, the powers of the trustee are determined under the applicable state law. See In re Muller, 185 B.R. 552, 554 (Bankr. M.D.Tenn.1995).
In Tennessee, deeds of trust are among the documents eligible for registration. See Tenn.Code Ann. § 66-24-101(a)(8). Tennessee recording statutes follow what has been referred to as a race-notice recording system, Trustmark Nat'l Bank v. Deutsche Bank Nat'l Trust Co., No. W2009-01658-COA-R3-CV, 2010 WL 3269978, at *12 (Tenn.Ct.App. June, 16, 2010), and the Tennessee Supreme Court has articulated the five leading propositions embraced in those recording statutes:
Id. (quoting Wilkins v. McCorkle, 112 Tenn. 688, 80 S.W. 834, 835 (1904) (discussing the recording statutes set forth in Shannon's Code)).
As stated by the Bankruptcy Court in the Memorandum supporting the Judgment, "[a]ll instruments registered pursuant to § 66-24-101 shall be notice to all the world from the time they are noted for
[Doc. 1-35, pp. 13-14 (quoting Tenn.Code Ann. § 8-13-108) ]. "All of the instruments mentioned in § 66-24-101 shall have effect between the parties to the same ... without registration; but as to other persons, not having actual notice of [the instruments] only from the noting thereof for registration on the books of the register, unless otherwise expressly provided." Id. § 66-26-101, see id. §§ 66-24-101(a)(1), (4), (8). In other words, fulfilling the requirements of § 8-13-108 is imperative because, although an instrument will continue to be effective between the parties thereto, see id. § 66-26-101, "[a]ny instruments not so registered, or noted for registration, shall be null and void as to existing or subsequent creditors of, or bona fide purchasers from, the makers without notice." Id. § 66-26-103. Thus, § 66-26-105 sets forth the priority of instruments as follows:
Id. § 66-26-105.
Under Tennessee law, "[n]otice is generally said to take two forms, actual or constructive. Constructive notice is notice implied or imputed by operation of law and arises as a result of the legal act of recording an instrument under a statute by which recordation has the effect of constructive notice." Blevins v. Johnson Cnty., 746 S.W.2d 678, 682 (Tenn.1988).
Id. at 683 (internal citations omitted). Furthermore, the Tennessee Supreme Court has explicitly held that "[a] legally registered deed of trust places subsequent creditors and purchasers on constructive notice." In re Marsh, 12 S.W.3d 449, 454 (Tenn.2000).
The Bankruptcy Court found that the DOT was accepted by the Register on March 11, 2009, assigned an instrument number, listed in the documents log, and registered under book and page numbers [Doc. 1-35, pp. 17-19]. The Bankruptcy Court found that these actions by the Register constituted registration of the DOT and afforded it notice under Tennessee law for the period of time in which the DOT was actually recorded on the Register's books [Id.]. However, that same day, the Register improperly voided the DOT,
On appeal, Bank of America argues that McCurry's improper voiding of the DOT, and her registration of the different, subsequently filed instrument in its place, was unlawful, ultra vires, and void. Thus, Bank of America contends, although the Register's actions resulted in the DOT not appearing in the Trustee's search of the records at the time of the debtors' Chapter 7 petition, the Register's improper actions should have no effect on the recordation, validity, and enforceability of the DOT because it remained notice to all the world of Bank of America's lien, thus binding subsequent parties such as the Trustee. Bank of America submits that Tennessee case law confirms this position, that is, that a recorded instrument gives notice to all the world, despite an error by a filing official in the recording of the instrument, and even if that instrument would not be found from a search of the property records [Doc. 8, pp. 16-20 (citing and discussing Philips v. Erwin, 1 Tenn. 235 (D.Cir. Ct.Tenn.1807); Flowers v. Wilkes, 31 Tenn. 408, 1852 WL 1772 (1852); Swepson v. Exch. & Deposit Bank, 77 Tenn. 713, 1882 WL 4091 (1882); Hughes v. Powers, 99 Tenn. 480, 42 S.W. 1 (1897); Wilkins v. Reed, 156 Tenn. 321, 300 S.W. 588 (1927)) ]. Accordingly, Bank of America submits that the Bankruptcy Court was in error when it found otherwise.
In response, the Trustee contends that the Court should affirm the Judgment of the Bankruptcy Court because the critical issue is that on the date of the debtors' Chapter 7 petition, the DOT was not in the property records, was not registered, did not appear in the chain of title for the Property, and did not give actual or constructive notice to the Trustee of Bank of America's interest in the Property. The Trustee argues that whether the DOT was ever registered, or how it became unregistered, are of no consequence if the DOT was not registered and did not appear in the property records at the time the Chapter 7 petition was filed, therefore giving no notice of Bank of America's lien to the Trustee, a subsequent bona fide purchaser.
Bank of America argues that two principles flow throughout the case law construing Tennessee's recording statutes [Doc. 8, p. 17]. First, that an error of a register of deeds will not injure one who submits an instrument to the register of deeds and does everything the law requires of him, and second, that in such a situation, the instrument will be effective and notice to all the world even though, due to an error of the register, it may not appear from a search of the registered instruments in the property records [Id.].
The first case cited by Bank of America, Philips v. Erwin, rejects the defendant's assertion that a grant was invalid because it lacked an essential requisite, the countersignature of the secretary of state. Id., 1 Tenn. at 235. The Philips court found
In Flowers v. Wilkes, the court considered a bill of sale that had been duly acknowledged, delivered to the register of deeds for registration, and immediately noted in the register's books. Id., 1852 WL 1772, at *1. However, the bill of sale was not registered in fact until approximately eight years later. Id. In the intervening period, a prior, unrecorded deed of gift that predated the bill of sale and involved the same property was registered in fact, followed later by the registration in fact of the bill of sale. Id. The plaintiff claimed that the deed of gift, the first to be registered in fact, had priority over the bill of sale, the second to be registered in fact, due to the order of registration. Id. at *2. The court disagreed, holding that, "[t]he party claiming under a deed, or other instrument, proved in proper form, and filed with the register, and noted by him in his book ... will stand in the same attitude, as well in respect to creditors of the vendor as purchasers from him, as if such deed or other instrument had been then actually spread upon the register's books." Id. The court's only discussion of notice was in regard to the bona fide purchaser's notice of the bill of sale, which the Flowers court observed had been done without notice of the prior deed of gift because the gift was accompanied by neither registration nor possession. Id. at *2. The court did not discuss notice in regard to whether the bill of sale appeared in a search of the property records.
Swepson v. Exchange & Deposit Bank considered an improperly recorded deed of trust that was "properly acknowledged and noted for registration, but ... was recorded in the book for registration of chattel mortgages, etc., and not in the book of trust deeds or conveyances of real estate." Id., 1882 WL 4091, at *5. Despite this error, the Swepson court held that because the applicable statute "directs the register to keep a book for the registration of trust deeds, etc. This section is directly to the register, and when a deed is noted and registered, it is notice to `all the world,' from the time it is noted[.]" Id. Similar to Flowers, the Swepson court did not discuss whether the party challenging the validity of the deed lacked notice of the deed because it was recorded in the wrong book. There was also no discussion of whether a search of the property records would have revealed the deed.
Hughes v. Powers considered the entry of a notation for a deed of land intended for registration in a notebook maintained by a register. Id., 42 S.W. at 1. Instead of the statutorily required description of the date of reception, grantor, grantees, and nature of the instrument, the notation contained "ditto marks" under the columns for date of reception, grantors, and grantees, with the only written description of the instrument being that of a "warranty deed" under the column describing the nature of the instrument. Id. at *1-*2. It was argued by the plaintiffs that the ditto marks were "without intelligible meaning" and should be ignored, thus rendering the
The Hughes court agreed with the defendant, finding that the ditto marks "should be read as a repetition or reproduction of the words and figures in the line above them[,]" and that, given this, the "notation is sufficient, and gave the deed effect against the creditors of the vendor from the date of noting, though the deed was not in fact registered until after the complainants filed their bill." Id. at *2. The Hughes court noted that the actual deed was not registered in fact until after the plaintiffs filed their objection to the notation containing the ditto marks, but that the notation was "sufficient, and gave the deed effect against creditors of the vendor from the date of noting." Id. at 2. Similar to Philips, Flowers, and Swepson, the Hughes court did not discuss whether the unregistered deed represented by the notation, ditto marks or otherwise, gave the plaintiffs notice of the deed upon a search of the property records.
Finally, in Wilkins v. Reed, the defendant took, as security for a loan, a deed of trust that was properly executed, acknowledged, and contained the correct description of the property. Id., 300 S.W. at 588. The plaintiff objected to the deed of trust because the register had inadvertently omitted the signature of the notary public. Id. In its analysis of this defect, the Wilkins court discussed two types of defects, the first, a defect that "went to the issue of notice of the transfer in some form or degree," and the second, a defect that "involv[es] the authority to record, such as the omission, in fact, of the officer's signature to his certificate." Id. In regard to this first type of defect, the Wilkins court discussed a case from Pennsylvania in which the instrument was recorded under the wrong name, resulting in "no notice of the [instrument], either actual or constructive" to the purchaser who bought the property after a search of the records. Id. (citing and discussing Prouty v. Marshall, 225 Pa. 570, 74 A. 550 (Pa.1909)).
The Wilkins court then considered the second type of defect, the defect at issue in Wilkins, that is, the lack of an acknowledgment
After a review of these cases, the Court disagrees with Bank of America that the cases stand for the proposition that under Tennessee law, an instrument once recorded gives notice to all the world, despite an error by the register, and even if that instrument would not be found from a search of the property records. Except for the discussion in Wilkins regarding notice, there is no mention in these cases of the validity and priority of an instrument if a subsequent, bona fide purchaser's investigation of the property records did not reveal the instrument. In Swepson and Hughes, the instruments were in the respective register of deeds offices and were properly noted for registration but were either not registered in fact with a technically insufficient notation, or were registered in the wrong books. In Flowers, the bill of sale was filed, acknowledged, and noted by the register, but was not registered in fact and "actually spread upon the register's books" until eight years later. In Philips, there was no discussion of notice because the only issue actually addressed in that opinion pertained to whether the lack of a required signature rendered the deed void. In Wilkins, the court discussed two potential defects, one of which—a lack of a required signature—would not render a deed void, while the other—a defect pertaining to the element of notice, such as an improper description in a deed of the covered property—could void a deed.
In sum, the Court does not find these cases to show that the Bankruptcy Court's conclusion was in error under the applicable Tennessee law. Finally, the Court agrees with the Bankruptcy Court that the facts of this case are more akin to the misfiling of a document which prevents a subsequent purchaser from having notice of a property interest, rather than a technical clerical error that has no effect on notice. See, e.g., Holiday Hospitality Franchising, Inc. v. States Resources, Inc., 232 S.W.3d 41, 54 (Tenn.Ct. App. Dec.14, 2006) (finding that a mistakenly released deed would not be reinstated and could not therefore attain a priority position if the subsequent bona fide purchaser could assert a lack of notice). Here, the Bankruptcy Court found that the unregistered interest represented by the improperly voided DOT would not be given priority over a subsequent bona fide purchaser—the Trustee—who asserted a lack of notice
In this case, there is no dispute that "the [DOT] was not a matter of public record in the [Register] when the Debtors filed [the Chapter 7 petition] on June 17, 2009, [the DOT] having been voided and removed by ... McCurry on March 11, 2009." [Doc. 1-35, p. 17]. There is no dispute that the Trustee searched the Register's property records, but that his search did not put the Trustee on notice, either actual or constructive, of the DOT and Bank of America's interest in the Property. Furthermore, there is no argument that the Trustee should have done
This is not a case where it is argued that a notation of registration or a "spreading on the books" was sufficient, despite a technical defect. Rather, the Court agrees with the Bankruptcy Court that this is a case where the issue is one of the notice of the Trustee at the time of the Chapter 7 petition. While Bank of America argues that the one time registration of the DOT, irrespective of the improper voiding of that instrument, left the notice afforded by the briefly-registered DOT in effect to all the world, Bank of America has cited no case considering similar facts and stating such a proposition. Rather, neither Philips, Flowers, Swepson, or Hughes discussed or addressed whether the subsequent bona fide purchaser in each case was on notice of the unregistered or erroneously registered deeds at issue in those cases. Finally, in Wilkins, where the issue of notice was discussed, the Wilkins court stated that a defect in a deed pertaining to notice could render a deed void.
Accordingly, the Court finds, contrary to Bank of America's assertion, that the cases cited in its brief do not stand for the proposition that the one-time act of registration, if an instrument is subsequently unregistered, affords a party a priority position when it is undisputed that a subsequent bona fide purchaser had no notice of the unregistered instrument after a search of the applicable property records.
For the reasons stated herein, the Court
ORDER ACCORDINGLY.