Sage M. Sigler, U.S. Bankruptcy Court Judge.
The above-styled matter is before the Court on cross-motions for summary judgment filed by the Chapter 7 Trustee (the "Trustee") and Pingora Loan Servicing, LLC ("Pingora") and LoanDepot.com, LLC ("LoanDepot" and, collectively with Pingora, the "Defendants"). Having considered the briefs and materials submitted in support of the motions, and the oppositions thereto, the Court grants the Trustee's Motion for Summary Judgment and denies Defendants' Motion for Summary Judgment. This Order memorializes the Court's decision and constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052(a). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(K) and venue is proper. The Bankruptcy Court has authority to enter a final determination in this matter.
Virginia Sue Lindstrom ("Debtor" or "Borrower") filed a voluntary chapter 7 petition on February 22, 2017. (Bankr. Case No. 17-53265-SMS, Doc. 1). Debtor received a discharge on June 19, 2017. (Id. at Doc. 12). The Trustee initiated this adversary proceeding by filing a Complaint against Defendants on July 25, 2018. (Doc. 1).
On December 14, 2018, Defendants and the Trustee each filed a Motion for Summary Judgment along with their supporting pleadings (the "Defendants' Motion," Doc. 11, the "Trustee's Motion," Doc. 12, and collectively, the "Motions"). On January 4, 2018, the Trustee filed her Response to Defendants' Motion for Summary Judgment (the "Trustee's Response," Doc. 13) and her Response to Statement of Uncontested Facts (the "Trustee's Response to Statement of Uncontested Facts," Doc. 14), and Defendants filed their Response to Plaintiff's Motion for Summary Judgment (the "Defendants' Response," Doc. 15, and, collectively with the Trustee's Response and Trustee's Response to Statement of Uncontested Facts, the "Responses"). On January 18, 2019, Defendants filed their Reply to Plaintiff's Response (the "Defendants' Reply," Doc. 16), and the Trustee filed her Reply to Defendants' Response (the "Trustee's Reply," Doc. 17, and, together with Defendants' Reply, the "Replies"). On May 15, 2019, the Court heard oral arguments on the Motions, the Responses, and the Replies. On May 20, 2019, the Trustee sent letter correspondence to the Court via e-mail, which the Court construes as a post-hearing supplemental brief (the "Trustee's Letter Brief," Doc. 20, Ex. A), and Defendants filed their Objection and Response to Plaintiff's May 20, 2019, Letter Brief to the Court (the
The following facts are undisputed. On June 10, 2005, Debtor acquired ownership in the real property located at 956 Subhill Court, Lawrenceville, GA 30043 (the "Property") by virtue of a warranty deed. (Doc. 12-2, ¶ 1). On or about August 10, 2015, Debtor executed a security deed (the "Security Deed") in favor of LoanDepot to secure a debt in the amount of $174,500.00. (Doc. 11-1, ¶ 4; 12-2, ¶ 2). The Security Deed was filed in the real property records of Gwinnett County, Georgia on August 19, 2015, and recorded on pages 238 through 258 of Deed Book number 53766. (Doc. 11-1, ¶ 6; Doc. 12-2, ¶ 2).
Debtor signed the Security Deed on Deed Book Page 250 (the "Attestation Page") as "Borrower." (Doc. 11-1, ¶ 10; Doc. 14, ¶ 10). The Signature Page also contains the signature of Dorothy S. Lindstrom ("Ms. Lindstrom") as "Unofficial Witness." (Doc. 11-1, ¶ 9; Doc. 14, ¶ 10). The last page of the Security Deed (Deed Book, Page 251) is a notary acknowledgment (the "Acknowledgment") dated August 10, 2015, that contains the printed name and signature of Elliott Braxton Smith ("Mr. Smith"), a notary public, as well as his notary seal. (Doc. 11-1, ¶ 11; Doc. 14, ¶ 11).
Recorded contemporaneously with the Security Deed in the Deed Book at Pages 253 through 255 is an Acknowledgement and Waiver of Borrower's Rights Rider (the "Rider"), which includes a Closing Attorney's Affidavit (the "Affidavit"). (Doc. 11-1, ¶¶ 12,16; Doc. 14, ¶¶ 12, 16). The Rider states on the first page that it is "incorporated into and shall be deemed to amend and supplement the ... Security Deed." (Doc. 11-1, p. 24). The Affidavit appears on page 3 of the same document and it includes the following language:
(Doc. 11-1, ¶ 16, p. 26; Doc. 14 at ¶ 16).
Debtor filed a voluntary chapter 7 petition on February 22, 2017. (Doc. 11-1, ¶ 2; Doc. 12-2, ¶ 3). On or about March 28, 2017, the Trustee became the permanent chapter 7 trustee for the bankruptcy estate. (Doc. 11-1, ¶ 3; Doc. 12-2, ¶ 4). The Trustee filed her "Notice of Bankruptcy Filing and Claim of Chapter 7 Trustee" in the Gwinnett County Real Property Records on September 14, 2017, in Deed Book number 55539, page 128. (Doc. 12-2, ¶ 6). On November 20, 2017, an assignment transferring the Security Deed from Loan-Depot to Pingora was recorded in the Gwinnett County Real Property Records in Deed Book number 55539, page 337. (Doc. 11-1, ¶ 4; Doc. 12-2, ¶ 7).
On September 7, 2018, the Trustee filed the Restated Complaint seeking to avoid the secured interest of LoanDepot pursuant to 11 U.S.C. § 544 and recover the Property or its value from Defendants for the benefit of the estate under 11 U.S.C. §§ 550 and 551.
Pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, incorporating Rule 56 of the Federal Rules of Civil Procedure, a grant of summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). The movant bears the "initial responsibility of informing the ... court of the basis for its motion, and identifying those portions of pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal quotation marks omitted); accord, e.g., Mann v. Taser Int'l, Inc., 588 F.3d 1291, 1303 (11th Cir. 2009). The court must resolve a motion for summary judgment by viewing all evidence and drawing all reasonable inferences in the light most favorable to the non-moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598,
Section 544(a)(3) of the Bankruptcy Code provides that the trustee may avoid any transfer of the property of the debtor ... that is voidable by a bona fide purchase 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)(3). The Trustee arguesthat the Security Deed was ineligible for recordation under Georgia law because it reflects only one attesting witness and, therefore, failed to give constructive notice to a bona fide purchaser, rendering it avoidable.
O.C.G.A. § 44-14-33 (the "Recording Statute") provides that a security deed "must be attested by an officer as provided in Code Section 44-2-15, and attested by one other witness."
It is undisputed that the Security Deed in this case is patently defective. The Attestation Page reflects only the signatures of the Borrower and one attesting witness, Ms. Lindstrom. However, Defendants argue that any defect was cured in compliance with the requirements of the remedial provisions of O.C.G.A. § 44-2-18 (the "Remedial Statute"). Specifically, Defendants contend that the Affidavit signed by Mr. Smith, attached to the Rider that was recorded contemporaneously with the Security Deed, cured the defect because Mr. Smith is a subscribing witness who testified to the execution and attestation of the Security Deed.
The Remedial Statute provides that:
O.C.G.A. § 44-2-18 (2016).
At oral argument, the parties clarified to the Court that their sole dispute is whether Mr. Smith is a subscribing witness who could testify to the execution of the security deed and its attestation. But following oral argument, the Trustee argued in the Letter Brief that the Remedial Statute is unavailable to Defendants. (Doc. 20, Ex. A; Doc. 21). The Trustee contends that the Remedial Statute is unavailable with respect to a security deed that is "acknowledged" based on the "plain unambiguous language" of the Remedial Statute, which provides that a security deed may be recorded upon the affidavit of a subscribing witness "[i]f a deed is neither attested by nor acknowledged ...." Id. Because the Security Deed was acknowledged by Mr. Smith, the Trustee argues that the Remedial Statute is not available to cure the defect in the Security Deed. The Trustee clarifies that the Remedial Statute was available to cure the defect in the security deed in Kim
The Trustee's interpretation of the Remedial Statute ignores its history and its practical application. Prior to 2015, the Recording Statute permitted attestation
The Remedial Statute is a cure statute that operates in conjunction with the Recording Statute. While the Georgia legislature amended the Recording Statute and not the Remedial Statute, the legislative history behind the 2015 amendment confirms that the change was intended to impact the operation of the Recording Statute alone. Absent any Georgia case law on point, this Court concludes that, in light of the 2015 amendment to the Recording Statute, interpreting the Remedial Statute to preclude the cure of a defective attestation because there was also an acknowledgment (which was allowed under the prior Recording Statute) would be antithetical to the purpose of the Remedial Statute. The Court therefore concludes that the Remedial Statute is applicable in this case.
Having determined that the Remedial Statute is applicable, the Court must now determine whether Mr. Smith's affidavit satisfied the Statute's requirements. The Remedial Statute requires an
The Trustee argues that because Mr. Smith failed to sign as a witness on the Attestation Page of the Security Deed, and because the Affidavit does not affirmatively state that Mr. Smith himself witnessed the execution of the Security Deed, Mr. Smith is not a subscribing witness and the Affidavit does not substantially comply with the Remedial Statute to cure the defect in the Security Deed. Defendants allege that Mr. Smith is a subscribing witness because he signed the Rider as a witness, which was expressly incorporated into the Security Deed and recorded therewith. Defendants rely on Gordon v. Terrace Mortgage Co. (In re Kim), 571 F.3d 1342 (11th Cir. 2009), a case in which the Eleventh Circuit closely examined the components of the Remedial Statute in the context of an affidavit similar to the one here.
In Kim, the security deed the trustee sought to avoid had two attesting witnesses' signatures on the attestation page, including the signature of the closing attorney as a notary, but it lacked the official notary seal. Kim, 571 F.3d at 1344. The accompanying affidavit stated that "I reviewed with and explained to the Borrower(s) the terms and provisions" of the loan and "[a]fter said review with and explanation to Borrower(s), Borrower(s) executed the Security Deed and `Waiver of Borrower's Right.'" Id. at 1345-46. The affidavit was signed by the closing attorney, a separate notary, and includes the notary's seal. Id. at 1346. The bankruptcy court held that the affidavit failed to satisfy the requirements of the Remedial Statute because the affiant testified only to the execution of the deed and not to its attestation. Id. The Eleventh Circuit disagreed and explained that although the attestation page lacked the notary seal, based on the language in the accompanying affidavit and because the closing attorney's signature is present on the attestation page, the closing attorney was in effect testifying that he witnessed the borrower execute the security deed. Id. at 1346-47.
This case differs from Kim in two respects. First, While the language of the affidavits in this case and in Kim is extremely similar, it is not identical. In Kim, the affidavit states that "I reviewed with and explained to the Borrower(s) ... After said review with and explanation to Borrower(s),
Second, the Attestation Page lacks Mr. Smith's signature entirely, whereas in Kim, two attesting witnesses had signed the attestation page, but it was not properly notarized.
Nevertheless, without a statement testifying that Mr. Smith in fact witnessed the execution of the Security Deed, Mr. Smith cannot be a subscribing witness and he cannot testify to the Deed's attestation as required by the Remedial Statute. Mr. Smith's signature appears only on the Acknowledgment and the Affidavit attached to the Rider. (See Doc. 5, Ex. A). Though the Acknowledgement is on the last page of the Security Deed and could thus be viewed as part of the Security Deed, acknowledgement is not an attestation. "Acknowledgment is the act of a grantor in going before some competent officer and declaring the paper to be his
The Recording Statute provides that if a mortgage is duly executed and recorded, constructive notice has been provided to a subsequent bona fide purchaser. But absent proper recordation or satisfaction of the Remedial Statute, a security deed is invalid even if all requisite actions by the parties took place, including the actual witnessing of the execution. Because the Affidavit only acknowledges—and does not attest to—the execution of the Security Deed, the requirements of the Remedial Statute have not been met. The Security Deed therefore remains defective and subject to avoidance.
The Trustee's Motion also seeks summary judgment with respect to her ability to recover from LoanDepot as the initial transferee and Pingora as the immediate transferee under 11 U.S.C. § 550(a) and, specifically, seeks a determination that Pingora cannot avail itself of the protections of § 550(b)(1). (Doc. 12, p. 11-12). Neither Defendants' Motion nor their Response or Reply to the Trustee's Motion address this argument, but Defendants both assert a § 550(b)(1) defense in their Answers to the Restated Complaint. (Doc. 6, p. 2; Doc. 7, p. 2). Section 550(a) provides that to the extent a transfer is avoided under § 544, the trustee may recover the property transferred, or its value, from the initial transferee or any immediate or mediate transferee of such initial transferee. 11 U.S.C. § 550(a). Section 550(b)(1), however, provides that a trustee may not recover from a "transferee that takes for value ... in good faith, and without knowledge of the voidability of the transfer avoided." 11 U.S.C. § 550(b)(1).
It is undisputed that LoanDepot is the initial transferee. Thus, the protections of § 550(b)(1) are unavailable to it. See Ragsdale v. S. Fulton Machine Works, Inc. (In re Whitacre Sunbelt, Inc.), 200 B.R. 422, 425 (Bankr. N.D. Ga. 1996). It is undisputed that Pingora is a subsequent transferee and the Trustee has not argued that Pingora failed to provide value in connection with the transfer. However, Pingora may only avail itself of § 550(b)(1) protection if it received the transfer in good faith and without knowledge of the Security Deed's voidability. 11 U.S.C. § 550(b)(1). Pingora, as the transferee, bears the burden of proof. Kerr v. Roeser (In re Hackney), No. 13-5056-JRS, 2014 WL 4059787, at *1 (Bankr. N.D. Ga. April 2, 2014) (citing Goldman v. Capital City Mort. Corp. (In re Nieves), 648 F.3d 232, 237 (4th Cir. 2011)).
For purposes of § 550(b)(1), knowledge does not require a "complete understanding of the facts and receipt of a lawyer's opinion that such a transfer is voidable; some lesser knowledge will do." Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 898 (7th Cir. 1988). Further, if an immediate transferee "possesses knowledge of facts that suggest a transfer may be fraudulent, and further inquiry by the transferee would reveal facts sufficient to alert him that the property is recoverable, he cannot sit on his heels." Brown v. Third Nat'l Bank (In re Sherman), 67 F.3d 1348, 1357 (8th Cir. 1995). And under Georgia law, a transferee of property is "charged with constructive notice of the contents of a recorded instrument within its chain of title." VATACS Group, Inc. v. HomeSide Lending, Inc., 276 Ga.App. 386, 391, 623 S.E.2d 534, 539 (2005).
The Trustee argues—and the Court agrees—that the defect in the Security Deed at issue is a patent defect in that it has only one attestation on the attestation page. See Gordon v. Wells Fargo Bank, N.A. (In re Codrington), 430 B.R. 287, 292 (Bankr. N.D. Ga. 2009) (A patent defect is "obvious and easily detectable. An example is a deed missing the signature of an unofficial witness."). The undisputed facts also establish that Pingora took assignment of the Security Deed subsequent to the Trustee filing her Notice of Bankruptcy Filing and Claim of Chapter 7 Trustee (the "Notice") in the real property records. Whether Pingora actually reviewed the Security Deed or the Trustee's Notice prior to taking assignment of the Security Deed is irrelevant; Pingora was charged with constructive notice under Georgia law. The Security Deed, which is defective on its face, and the Notice "cry out for investigation" such that Pingora should have further inquired into their implications. It follows that Pingora did not take assignment of the Security deed in good faith and without knowledge of the transfer's voidability and, therefore, Pingora is not entitled to a § 550(b)(1) defense.
Because Mr. Smith was not a subscribing witness, the Affidavit fails to substantially comply with the Remedial Statute to cure the defect in the Security Deed. It follows that the Security Deed, as recorded, does not provide constructive notice to subsequent bona fide purchasers and the Trustee may therefore avoid the Security Deed pursuant to 11 U.S.C. § 544(a)(3) and recover the Property or its value from Defendants pursuant to 11 U.S.C. § 550. Further, because LoanDepot is an initial transferee and because Pingora had, at minimum, constructive knowledge of the transfer's voidability, Defendants are not entitled to a defense under 11 U.S.C. § 550(b)(1). Accordingly, it is
