REBECCA B. CONNELLY, Bankruptcy Judge.
Before the Court are cross motions for summary judgment. The question the Court must answer is whether a Chapter 13 Trustee's strong arm powers under section 544(a)(3) may defeat an unrecorded deed of trust or whether equitable remedies may block the trustee's powers.
Herbert L. Beskin, Chapter 13 Trustee (the "Trustee"), and Michael and Brandy Perrow (the "Debtors") (collectively, the "Plaintiffs") filed a complaint against BAC Home Loan Servicing LP (the "Defendant") and CTC Real Estate Services, Inc. (the "Third-Party Defendant") (collectively, the "Defendants"). The Plaintiffs seek avoidance under 11 U.S.C. § 544(a)(3) of Defendant's alleged interest in Debtors' real property and disallowance of Defendant's proof of claim under 11 U.S.C. 502.
On April 22, 2009, the Debtors filed for Chapter 13 relief. The Debtors' listed Defendant as an unsecured creditor on Schedule F.
On August 15, 2011, the Plaintiffs initiated this adversary proceeding to avoid Defendant's unrecorded deed of trust. Defendants later added the Third-Party Defendant as a necessary party. On October 15, 2011, the Plaintiffs filed an amended complaint (the "Complaint"), which is the basis of the matter for decision before the Court. The Complaint seeks to avoid Defendant's unrecorded deed of trust under 11 U.S.C. § 544(a)(3) and asks that the Court to disallow Defendant's proof of claim as untimely.
On January 27, 2013, Defendant filed a motion for summary judgment on Plaintiffs' Complaint. Plaintiffs followed suit and filed a motion for summary judgment on their Complaint on February 25, 2013. On that same day, Defendant filed a supplemental motion for summary judgment on its Counterclaim. After hearings on March 14, 2013, and April 25, 2013, the matter was taken under advisement.
The facts of this case are minimal and undisputed. On September 20, 2004, the male debtor entered into a loan (the "2004 Loan") with Charter Capital (the "Third-Party Defendant") for $133,299. The 2004 Loan was secured by a deed of trust (the "2004 DoT") on the male debtor's real property. The 2004 DoT was properly recorded October 20, 2004.
On July 20, 2005, the male debtor deeded by gift his real property to himself and the female debtor as tenants by the entirety. The deed of gift was properly recorded on August 2, 2005.
Debtors entered into a refinance loan (the "2006 Loan") with another bank on June 12, 2006, in the amount of $184,500, repayment of which was secured by a deed of trust (the "2006 DoT") on Debtors' real property. The 2006 DoT was properly recorded on July 24, 2006. The proceeds from the 2006 Loan were used to pay off the 2004 Loan, but the Third-Party Defendant never recorded a release of its 2004 DoT.
On May 15, 2007, the Debtors entered into a refinance loan (the "2007 Loan") with BAC Home Loan Servicing LP, fka Countrywide Home Loans, Inc. (the "Defendant") for $197,900, the repayment of which was secured by a deed of trust (the "2007 DoT") on the Debtors' real property. The 2007 DoT was never recorded and has since been lost, misplaced, or destroyed. The proceeds from the 2007 Loan were used to pay off the 2006 Loan and a release of the 2006 DoT was properly recorded on July 2, 2007.
On April 22, 2009, the Debtors filed for bankruptcy relief under Chapter 13 of Title 11. The Debtors' Chapter 13 plan was confirmed on September 17, 2009. The Defendant never filed an objection to the plan. After confirmation of the plan, on
This adversary proceeding is a civil proceeding arising in a case filed under Title 11 of the United States Code. Specifically, the plaintiffs in this adversary proceeding are the Chapter 13 Trustee and the Chapter 13 debtors, and the defendants are creditors of the Debtors. The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334. This matter is a core proceeding under the Bankruptcy Code because it is a proceeding to determine the Chapter 13 Trustee's ability to use his "strong-arm" powers under Section 544 of the Bankruptcy Code and to determine the extent, priority, and validity of an alleged lien under Section 506 of the Bankruptcy Code. 28 U.S.C. §§ 157(b)(2)(B) and (K). This Bankruptcy Court can hear this matter pursuant to 28 U.S.C. § 157(b)(1) and the Western District of Virginia District Court Order of Reference.
In Stern v. Marshall, the Supreme Court found that a bankruptcy court may have statutory authority to hear a "core proceeding" under 28 U.S.C. § 157, yet not Constitutional authority to issue a final judgment in that proceeding. ___ U.S. ___, 131 S.Ct. 2594, 2608, 180 L.Ed.2d 475 (2011). In Stern, the Supreme Court determined that a bankruptcy court could not issue a final ruling on a state law counterclaim against a non-creditor third party even if the counterclaim was a core proceeding. Id. at 2615. The test for whether a bankruptcy court has constitutional authority to enter a final judgment is "whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Id. at 2618.
The Defendants have requested summary judgment on multiple state law counterclaims. Some of these counterclaims do not stem from the bankruptcy itself, but ultimately impact the claim allowance process. The Counterclaim lists several equitable remedies, all of which allegedly allow the Defendant to claim an interest or lien in the Debtors' real property superior to that of the Trustee's interest under section 544(a)(3). If, however, the Defendant does not have a valid interest or lien, or the Trustee is able to avoid Defendant's interest, then the Defendant may not have an allowed secured claim. 11 U.S.C. § 506(a). As a consequence, Defendant may have an unsecured claim. Id. As an unsecured creditor, Defendant's proof of claim would be susceptible to disallowance as untimely because Defendant's proof of claim was filed thirty-eight days after the bar date. 11 U.S.C. §§ 501 and 502. Plaintiffs' Complaint specifically requests such relief. The equitable remedies put forth by Defendants in the Counterclaim are, therefore, necessary to the claims allowance process because they will ultimately determine whether Defendants' claim is secured and allowed or unsecured and, potentially, disallowed. Stern, 131 S.Ct. at 2618. Furthermore, to the extent the Counterclaim asserts affirmative defenses to the Trustee's ability to exercise his strong-arm power, they stem from the bankruptcy itself. Id. The Court concludes that it has authority to issue a final ruling on all matters currently before it.
This matter comes before the Court on cross motions for summary judgment on Plaintiffs' Complaint and Defendants' motion for summary judgment on counts II through VI of their Counterclaim. On motions for summary judgment, the Court must apply a different standard of review than it would on the merits of the case at trial. The Fourth Circuit has summarized the standard:
News and Observer Publishing Co. v. Raleigh-Durham Airport, 597 F.3d 570, 576 (4th Cir.2010) (internal citations and quotations omitted) (summarizing Supreme Court precedents). A party may move for full or partial summary judgment on any claim or defense. See FED. R. CIV. P. 56(a) (made applicable by FED. R. BANKR. P. 9056). See also 11-56 MOORE'S FEDERAL PRACTICE — Civil ¶ 56.02.
With this standard in mind, the Court will address the cross motions for summary judgment and Defendants' motion for summary judgment on counts II through VI of their Counterclaim. The Court will address the matters out of turn. First, the Court will address Defendants' motion for summary judgment on Plaintiffs' Complaint. Next, the Court will address the Trustee's status as a bona fide purchaser of real property under section 544(a)(3), which Plaintiffs have raised as grounds for granting their Complaint. After that, the Court will address the Defendants' supplemental motion for summary judgment on their Counterclaim, which alleges equitable remedies and is incorporated in Defendants' answer as affirmative defenses to the Plaintiffs' Complaint. Last, the Court will address Plaintiffs' motion for summary judgment on their Complaint.
Section 544(a) of the Bankruptcy Code grants the trustee "the rights and powers of, or [the ability to] avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by" certain creditors or a bona fide purchaser of real property. 11 U.S.C. § 544(a). Section 544(a) is most often invoked by Chapter 7 trustees in a Chapter 7 case. See 11 U.S.C. § 704 (charging the Chapter 7 trustee with the potential liquidation of the estate for the benefit of unsecured creditors). The trustee's strong arm powers under section 544(a), however, are not exclusive to Chapter 7 trustees. Section 103(a) of the Code makes section 544(a) applicable in a Chapter 13 case. See 11 U.S.C. § 103(a). As such, a Chapter 13 trustee may appear and invoke the strong arm powers under section 544(a) to avoid a
The ability of the Chapter 13 trustee to bring an action under section 544(a) on behalf of or with a particular debtor is relevant in this case because the entirety of Defendants' motion for summary judgment on Plaintiffs' Complaint rests on the assertion that it is Debtors, not the Trustee, who are the party bringing this action. Defendants' motion for summary judgment ignores the fact that the Trustee is a plaintiff in this action.
Defendants rely on Freeman v. Eli Lilly Fed. Credit Union (In re Freeman), 72 B.R. 850 (Bankr.E.D.Va.1987) for the proposition that it is the debtor, not the Chapter 13 trustee, who has standing to bring suit under section 544(a). In particular, the Defendants rely on the conclusion from Freeman, in which the court stated, "it is only logical that [the Chapter 13 debtor] should be extended the powers possessed by the trustee which work toward enhancing their own bankruptcy estate." Freeman, 72 B.R. at 854. Such a statement, however, does not lead to the conclusion that a Chapter 13 debtor has exclusive standing to bring a section 544(a) action. Rather, analysis of the Code leads to the contrary conclusion: a Chapter 13 debtor may only bring a section 544(a) action after the Chapter 13 trustee fails to do so. See 11 U.S.C. § 522(h) (made applicable to a Chapter 13 debtor by 11 U.S.C. § 103(a)). Section 544(a) explicitly grants certain powers and rights to the trustee without mention of any other party in interest. See 11 U.S.C. § 544(a) ("The trustee shall have...."). A statutory provision that designates a particular party empowered to act in a particular way is the least appropriate in which to presume nonexclusivity as to who may act. Hartford Underwriters Insurance Comp. v. Union Planters Bank, 530 U.S. 1, 120 S.Ct. 1942, 1947-48, 147 L.Ed.2d 1 (2000) (disqualifying a party-in-interest from bringing a § 506(c) action because § 506(c) exclusively grants such power to the trustee) (citing 11 U.S.C. § 544(a) as example where exclusivity is presumed). In the case of section 544(a), Congress chose in section 522(h) to allow the debtor to step into the shoes of the trustee for certain avoidance actions under limited circumstances. Cf. Osting v. Blockberger (In re Osting), 337 B.R. 297, 306 (Bankr. N.D.Ohio 2005) (citing Hartford Underwriters) (finding that where Congress intends for a provision to be non-exclusive, it knows how to say so); Mitrano v. United States (In re Mitrano), 468 B.R. 795, 801-02 (Bankr.E.D.Va.2012) (calling into question the precedential value of Freeman in light of the holdings in Osting and Hartford Underwriters). As such, Defendants' conclusion that the Debtors have exclusive standing to bring this action is inapposite to the provisions of the Code. The Trustee has standing to bring this action under section 544(a) and is the real party in interest in this action.
As the real party in interest, it is the Trustee's knowledge as a hypothetical
A central issue before the Court is whether a lien or interest exists on Debtors' real property that may be avoided by the Trustee under his section 544(a) strong arm powers. By bringing the section 544(a) action, Plaintiffs have conceded that some interest existed between Debtors and Defendant, but that such interest is voidable by a hypothetical bona fide purchaser. The extent of that interest is only relevant in so far as it relates to the Defendant's rights as to hypothetical bona fide purchasers, not the Debtors. It is uncontested that Debtors and Defendant entered into the 2007 Loan to refinance the 2006 Loan. Furthermore, it is uncontested that Debtors granted Defendants the 2007 DoT as security for the 2007 Loan. As between the Debtors and the Defendant, a valid, enforceable interest in Debtors' real property was created at the moment the Debtors granted Defendant the 2007 DoT. See VA.CODE ANN. § 55-59 (West 2013); Hunton v. Wood, 101 Va. 54, 43 S.E. 186, 187 (1903) (finding that a deed is good as to the parties to the deed upon enactment). Although the 2007 DoT created a valid and enforceable interest between the Debtors and the Defendant, the issue in this case is whether Defendant's interest is valid and enforceable as against a hypothetical bona fide purchaser of real estate under § 544(a)(3). To answer that question, we must look to Virginia law.
Under section 55-96 of the Virginia Code, every deed of trust or mortgage is "void as to all purchasers for valuable consideration without notice not parties thereto and lien creditors, until and except from the time it is duly admitted to record...." Virginia is a race notice jurisdiction; meaning, generally, the first creditor to record its interest has priority over others who record or purchase thereafter. It is undisputed that Defendant has failed to record its interest in Debtors' real property, as exhibited by the 2007 DoT.
Under 11 U.S.C. § 544(a)(3), the Trustee is able to step into the shoes of a bona fide purchaser of real estate — a purchaser for valuable consideration without notice. The trustee's rights as a bona fide purchaser under section 544(a) are limited to those rights he or she would have under applicable state law; no more and no less. Havee, 775 F.2d at 1218-19. As such, the question we must answer is whether the Trustee may step in front of, and avoid entirely, Defendant's unrecorded interest in Debtors' real estate under applicable Virginia law.
A bona fide purchaser of real estate is an individual who purchases real estate from another for value and without notice of an objecting creditor's adverse claim to an interest in the property. See VA.CODE ANN. § 55-96; Neff v. Edwards, 148 Va. 616, 139 S.E. 291, 294 (1927) ("A bona fide purchaser, — that is, one who, without such knowledge or notice, actual or constructive, and who has not been put on such inquiry as would lead to knowledge or notice, and has paid the consideration..."). As a hypothetical, bona fide purchaser under 544(a)(3), a trustee is statutorily deemed to have purchased the real estate from the debtor for valuable consideration. The trustee's rights and powers under section 544(a)(3) are defined by applicable state law. Havee, 775 F.2d at 1218-19. The trustee, therefore, is deemed to have the same knowledge of the creditor's interest as would a hypothetical purchaser under state law. Only a purchaser without knowledge of another's failure to record an instrument may take advantage of the other's failure. National Mut. Bldg. & Loan Ass'n v. Blair, 36 S.E. 513, 515 (Va. 1900). As such, the ability of the Trustee to avoid Defendant's interest in Debtors' real property rests on what knowledge a hypothetical purchaser would have under applicable Virginia law of Defendant's interest as of the date of the filing of the bankruptcy petition.
As Neff illustrates, there are two forms of notice under Virginia law: actual and constructive. 139 S.E. at 294. In either form, notice focuses on whether the purchaser, at the time of the purchase, had knowledge of the objecting party's interest in the seller's real estate. See Grayson Lumber Co. v. Young, 118 Va. 122, 86 S.E. 826, 828 (1915) (holding that another's adverse interest would not affect a purchaser's interest without notice that the purchased land was encumbered by the other's interest); Smith v. Throne, 488 F.Supp.2d 534, 547 (E.D.Va.2007) (applying Virginia law) ("To attain the status of a bona fide purchaser for value, a mortgagee must establish that it paid value for its interest in the property without notice of the plaintiff's rights.") (citing Ransome v. Watson's Adm'r, 145 Va. 669, 134 S.E. 707, 709 (1926) (emphasis in original and emphasis added, respectively)). Actual
Under Virginia law, a purchaser is charged with constructive "notice of all the facts appearing [on the face of the title papers under which he buys], or to the knowledge of which anything there appearing will conduct him." Shaheen v. County of Mathews, 265 Va. 462, 579 S.E.2d 162, 172 (2003) (quoting Burwell's Adm'rs v. Fauber, 62 Va. (21 Gratt.) 446, 463 (1871)). A purchaser cannot actively avoid acquiring information in order to avoid acquiring notice of an adverse interest in the property he or she is purchasing. Id. ("[The purchaser] has no right to shut his eyes or ears to the inlet of information, and then say he is a bona fide purchaser without notice.")
The purpose of the recordation requirement of Virginia Code section 55-96 is to give constructive notice to purchasers or creditors seeking to acquire some interest or right in another's property. Shaheen, 579 S.E.2d at 171 (citing Chavis v. Gibbs, 198 Va. 379, 94 S.E.2d 195, 197 (1956)). In line with its purpose, deeds properly recorded under section 55-96 constitute "constructive notice to subsequent purchasers, and the titles they take are subject to whatever adverse conveyances or encumbrances they should have discovered in a proper search of the records." Falson v. Union Camp Corp., 224 Va. 54, 294 S.E.2d 821, 825 (1982) (citing Chavis, 94 S.E.2d 195).
Based on the information before the Court, there is nothing to suggest that a bona fide purchaser of Debtors' real property would have had actual notice of Defendant's interest in Debtors' property. Besides Defendants' assertions that Debtors' actual knowledge of the 2007 DoT controls, addressed supra, Defendants have provided the Court with no evidence that a hypothetical purchaser would have had knowledge of Defendant's interest and most assuredly no evidence that would fix upon the purchaser an imputation of bad faith. See Grayson Lumber, 86 S.E. at 828. Therefore, we find that the Trustee, as a hypothetical purchaser of Debtors' property, would not have had actual notice of Defendant's interest in Debtors' property.
The Trustee, however, is charged with constructive notice of the facts appearing on Debtors' title papers. Under the facts of this case, the Trustee would have purchased Debtors' property under the 2005 deed of gift, under which the male debtor deeded his interest in the subject property to himself and the female debtor as tenants by the entirety.
Defendant's 2007 DoT, however, would not have been discovered by a proper search of the land records. Defendant failed to record the 2007 DoT. Although it is undisputed that the 2007 Loan was used to satisfy the 2006 Loan, which resulted in the recorded release of the 2006 DoT, the recorded release of the 2006 DoT makes no reference to any interest held by Defendant.
Defendants have alleged
Recordation of the 2007 DoT or reference by the recorded release of the 2006 DoT to Defendant's interest would have been sufficient to give a purchaser constructive or, alternatively, inquiry notice of Defendant's interest in Debtors' property. Neither occurred. As such, the Trustee, as a hypothetical purchaser, would not have had constructive notice of Defendant's interest in the property as of the filing of the bankruptcy petition.
Defendant failed to record its 2007 DoT in Debtors' real property. As explained above, a purchaser of Debtors' real property would not have had actual or constructive notice of Defendant's interest in the property. If paying valuable consideration for the property, such a purchaser would be a bona fide purchaser. As such, under Virginia Code section 55-96, a bona fide purchaser of Debtors' property would be entitled to avoid Defendant's unrecorded interest in the property. Shaheen, 579 S.E.2d at 172. As section 544(a)(3) grants the Trustee the power of a bona fide purchaser and the facts establish that the Trustee qualifies as a bona fide purchaser under Virginia law as to Defendant's interest in Debtors' real property, the Trustee is entitled to rely on Virginia Code section 55-96 and avoid Defendant's interest in Debtors' real property under section 544(a)(3), subject to any affirmative defenses that Defendants may invoke to defeat the interest of a bona fide purchaser.
Having determined that the Trustee may qualify under Virginia Code section 55-96 as a bona fide purchaser, the Court must determine whether any of Defendant's alleged equitable remedies, incorporated as affirmative defenses, are sufficient to prevent the Trustee, as a bona fide purchaser, from avoiding his interest in Debtors' real property.
Defendants' Counterclaim alleges that imposition of a constructive trust for the benefit of Defendants is "necessary, equitable, and appropriate" "in order to prevent a fraud or injustice that would otherwise ensue."
Under Virginia law, the imposition of a constructive trust in favor of a creditor is sufficient to protect that creditor's interest from that of a lien creditor, but not a bona fide purchaser. See Enterprise Leasing Co. v. Mepco, Inc. (In re Mepco), 276 B.R. 94, 101 (Bankr.E.D.Va.
In bankruptcy, section 544(a)(1) grants a trustee the rights and powers of a hypothetical judicial lien creditor with a perfected interest as of the filing of the petition. A trustee in bankruptcy relying on section 544(a)(1) cannot have any greater power or rights than a judicial lien creditor under state law. Havee, 775 F.2d at 1218-19. If a constructive trust was imposed or recognized in favor of Defendant, Virginia law would prevent the Trustee from avoiding Defendant's interest in Debtors' property because Debtors would not have had an equitable interest in the property as of the filing of the bankruptcy petition to which the Trustee's interest could attach. Without an equitable interest in the property, the Trustee's interest as a judicial lien creditor would be inferior to those of Defendant.
The situation, however, is different when a trustee claims an interest as a bona fide purchaser under section 544(a)(3). It is well settled under Virginia law that a bona fide purchaser of property takes such property free of any latent equity against it. HSBC Bank, 427 B.R. at 116 (citing cases). It is equally well settled that the existence of a constructive trust is such a latent equity against property. Id. at 122; see also Carter v. Allan, 62 Va. 241, 249 (1871) (holding "it has been the uniform course of decision in [Virginia], as well as in the other States of the Union, to hold that the bona fide purchaser of a legal title is not affected by a latent equity founded on a trust, fraud or incumbrance, or otherwise, of which he had not notice, actual or constructive."). Thus, a trustee relying on his powers as a bona fide purchaser under section 544(a)(3) takes the property free of any latent equity, including property subject to a constructive trust.
A trustee is permitted to bring property subject to a constructive trust into the estate for the benefit of unsecured creditors under section 544(a)(3) despite the fact that such property is not property of the estate under section 541(d). Under section 541(d), when the debtor holds only legal title in property, it is property of the estate only to the extent of debtor's legal title. 11 U.S.C. § 541(d). The equitable interest does not become property of the estate. Id. As discussed above, the imposition of a constructive trust on property held by a debtor would vest only legal, not equitable title in the debtor. See Richardson, 409 S.E.2d 148. Section 541(d), however, applies only to property coming into the estate through sections 541(a)(1) and (a)(2). Wells Fargo Funding v. Gold, 432 B.R. 216, 221 (E.D.Va.2009). Section 541(d) has no effect on a trustee's ability to void a creditor's equitable interest in property and bring such interest into the estate under section 544(a)(3) for the benefit of unsecured creditors. Id.
As a bona fide purchaser of real property under section 544(a)(3), the trustee's ability to rely on his or her strong arm powers to bring property into the estate as
Defendants have requested that this Court impose and establish, as of May 15, 2007, an equitable lien on Debtors' real property for Defendant's benefit.
Under Virginia law, an equitable lien exists where an "express executor agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, ... a security for a debt or other obligation...." Hoffman v. First Nat. Bank of Boston, 205 Va. 232, 135 S.E.2d 818, 821-22 (1964). The lien created is enforceable against the property. Id. at 822. As the Court has already addressed, under Virginia law, a bona fide purchaser of property takes such property free of any latent equity against it. HSBC Bank, 427 B.R. at 116 (citing cases); see also Carter, 62 Va. at 249 (holding "it has been the uniform course of decision in [Virginia], as well as in the other States of the Union, to hold that the bona fide purchaser of a legal title is not affected by a latent equity founded on a trust, fraud or incumbrance, or otherwise, of which he had not notice, actual or constructive."). The recognition of an equitable lien is an equitable remedy in which an encumbrance is imposed on certain real property in the name of equitable considerations. Thus, a trustee, as a bona fide purchaser under section 544(a)(3), takes the property free of any latent equity, including property subject to an equitable lien.
Based on the foregoing, there is no need to reach the question of whether an equitable lien should be imposed in favor of Defendant's. The Court has already determined that the Trustee qualifies as a bona fide purchaser under Virginia law. Imposition or recognition of an equitable lien would create or recognize a latent equity on Debtors' real property. The Trustee, as a bona fide purchaser, would be permitted to avoid the equitable interest created by an equitable lien on the property. As such, we do not need to reach the question of whether a constructive trust should be imposed on Debtors' real property for the benefit of Defendant because regardless of the outcome, Plaintiffs
Count III of Defendants' Counterclaim asks this Court to grant specific performance of a provision contained in a "Document Correction Agreement," for which the Debtors signed in conjunction with the 2007 Loan.
In light of this provision, Defendant alleges that equity and justice dictate that the Court order Debtors to execute any and all "documents necessary to effectuate the legal transfer of the Property, in trust, for the benefit of the [Defendants] to secure the [2007 Loan]."
The Court need not determine if Defendants are entitled to judgment as a matter of law on their request for specific performance of the "Document Correction Agreement." Even if the Court ordered specific performance of the "Document Correction Agreement," such relief would not defeat the Trustee's rights as a bona fide purchaser of Debtors' property. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court's refusal to reach the issue of imposing a constructive trust because the trustee could defeat such a claim under section 544(a)(3)).
As we have stated previously, a bona fide purchaser of property takes such property free of any latent equity against it, so long as he purchases without notice of such equity. HSBC Bank, 427 B.R. at 116 (citing cases); Carter, 62 Va. at 249. Under the "Document Correction Agreement," the re-execution of the 2007 DoT would grant Defendant a valid and enforceable interest in Debtors property as against the Debtors. However, under Virginia
Re-execution of the 2007 DoT will not help Defendants succeed against a bona fide purchaser; only a prior recordation of its interest or a finding of notice would allow Defendant to succeed against a bona fide purchaser. In conjunction with their request for specific performance of the "Document Correction Agreement," Defendants contend that "equity and the ends of justice further require that this Court enter an order authorizing [Defendants] to record the replacement version of the [2007 DoT]."
In In re Ware, the Bankruptcy Court for the Eastern District of Virginia considered a creditor's request to retroactively reform a defective deed of trust to place its interest in debtor's property ahead of that of other creditors and the Chapter 7 trustee. The Court ultimately concluded that the trustee could avoid the creditor's interest under sections 547 and 550, but not section 544(a)(3) because of a pending lis pendens action that was filed in state court prior to the filing of the bankruptcy petition. In re Ware, 2013 WL 1163953, *7 (Bankr.E.D.Va.2013). No lis pendens suit was filed in this case and, as that was the sole grounds for denying the trustee's powers under section 544 and Virginia Code section 55-96, the Court finds the reasoning of Ware to be persuasive in this case. The court in Ware started with the principle that reformation of a deed of trust is an equitable remedy. Id. at *6. From that principle, the Court found that in any equitable ruling, the rights of intervening parties without notice are protected under Virginia's recording statute. Id. In Ware, as is the case here, the intervening party was the trustee. Id. The court found that allowing the creditor to retroactively reform its recorded deed of trust to place it ahead of the trustee would be improper. Id. In coming to its conclusion, the court determined that placing a creditor who recorded a defective deed of trust ahead of intervening interests would not only violate the equitable nature of reformation of a deed, but also violate the Code's distribution system and the powers explicitly granted the trustee in such actions. Id.
In this case, Defendants are not asking to reform a recorded, but defective, deed of trust, as was the case in Ware; rather, Defendants are requesting that we allow them to record an interest that they have slept on for approximately six years. Such a request is even greater than that requested by the creditor in Ware, and the Court finds that such a request is contrary to the purpose and structure of the Code, as well as Virginia's recordation statute. To the extent necessary, Plaintiffs, not Defendants, are entitled to judgment as a matter of law on this issue. See FED. R.CIV.P. 56(f)(1) (adopted by FED. R. BANKR.P. 7056). Furthermore, Defendants have not addressed the issue of the automatic
It is undisputed that Defendant did not record its 2007 DoT. Furthermore, the Court has determined that Defendants' request to record its interest in Count III is without merit. Lastly, the Court previously determined that the Trustee, acting as a bona fide purchaser of real property under Virginia law, would not have had notice of Defendant's interest in Debtors' real property. Without a finding to the contrary on one of these three factors, re-execution of the 2007 DoT would not defeat the Trustee's ability as a bona fide purchaser to avoid Defendant's unrecorded interest in Debtors' property, regardless of whether that interest was established by the actual 2007 DoT or a re-executed version. As such, we need not reach the question of whether specific performance of the "Document Correction Agreement" is appropriate in this case. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court's refusal to reach the issue of an equitable remedy because the trustee could defeat such a claim under section 544(a)(3)).
In response to Plaintiffs' Complaint, Defendants have asserted that their interest is entitled to be equitably subrogated to the position of the 2006 DoT and/or the 2004 DoT.
In determining this issue, the Court starts with the basic principle that under Virginia law a bona fide purchaser of property takes such property free of any latent equity against it. HSBC Bank, 427 B.R. at 116 (citing cases). This principle is broad enough to cover any "latent equity founded on a trust, fraud or incumbrance, or otherwise, of which he had not notice, actual or constructive." Carter, 62 Va. at 249. Subrogation is a remedy which allows one creditor to step into the shoes of another creditor through the payment of the debt owed the other creditor. Federal Land Bank v. Joynes, 179 Va. 394, 401, 18 S.E.2d 917 (1942). It is a purely equitable remedy "founded upon principles of natural justice," not contract or privity. Id.; see also Gatewood v. Gatewood, 75 Va. 407, 411 (1881); Morgan v. Gollehon, 153 Va. 246, 248-49, 149 S.E. 485 (1929). Under the doctrine, "although the debt is paid and satisfied, a court of equity will keep alive the lien for the benefit of the party who made the payment, provided he as security for the debt, `has such an interest in the land' as entitled him to the benefit of the security given for its payment." Gatewood, 75 Va. at 411 (quotations in original). Subrogation is, therefore, an equitable remedy that keeps alive an encumbrance on real property that would otherwise
If, in the alternative, the rights of a creditor established through the doctrine of equitable subrogation could defeat the rights of a bona fide purchaser, the Court would need to address the question of whether Defendants are entitled to equitable subrogation under the facts of this case. The question of whether to grant equitable subrogation is necessarily a fact intensive inquiry and, as such, is governed by general principles of law rather than bright line rules. Centreville Car Care, Inc. v. North American Mortg. Co., 263 Va. 339, 345, 559 S.E.2d 870 (2002). Virginia recognizes two general principles that guide our inquiry: "First, subrogation is not appropriate where intervening equities are prejudiced. Second, ordinary negligence of the subrogee does not bar the application of subrogation where an examination of the facts shows that the equities strongly favor the subrogee." Id. (citing cases) (emphasis in original) (internal quotations omitted). In addition to these principles, Virginia recognizes that "subrogation is generally allowed where the loan was made by one who took a security from the borrower which turned out to be invalid." Morgan, 153 Va. at 250, 149 S.E. 485. At its heart, the doctrine of equitable subrogation is concerned with restoring the interests of the parties to their intended position relative to others. See Joynes, 179 Va. at 401-02, 18 S.E.2d 917. The doctrine, however, is not concerned with the creation of rights not created prior to trial. Such a remedy would undermine the intent of the legislature in enacting Virginia Code section 55-96.
There is a difference, in equity, if not also in law, between an invalid security interest in real property and a security interest in real property that a creditor failed to perfect. Equitable subrogation is concerned with the former, but not the latter. Compare Mayer v. U.S. (In re Reasonover), 236 B.R. 219 (Bankr.E.D.Va. 1999) (finding that creditor taking under a broken chain of title was entitled to be equitably subrogated to the position of the entity paid with its funds); First Community Bank v. E.M. Williams & Sons, Inc. (In re E.M. Williams & Sons, Inc.), 2009 WL 2211727 (Bankr.E.D.Va.2009) (finding that creditor, who took a deed of trust from an individual without ownership rights in the property, was entitled to be equitably subrogated to the rights of the entity paid with its funds) with Centreville, 559 S.E.2d 870 (finding that creditor, who took under a valid deed of trust, but failed to discover an existing second deed of trust, was not entitled to be equitably subrogated to the position of the first deed of trust holder); Deutsche Bank National Trust Comp. v. IRS, 361 Fed.Appx. 527 (4th Cir.2010) (finding that creditor, who was the last in a chain of assignments of a
What is at issue in this case is Defendant's failure to record the 2007 DoT, which under Virginia Code section 55-96 is required to perfect the interest in Debtors' real property against intervening interest holders. Equitable subrogation is not appropriate in such circumstances. To hold otherwise would prejudice intervening equities under a guise of equity when state law dictates that such intervening equities are entitled to take free. See VA.CODE ANN. § 55-96 (West 2013). Such a conclusion would be directly contrary to the first guiding principle of equitable subrogation. Centreville Car Care, 263 Va. at 345, 559 S.E.2d 870.
Furthermore, to allow a creditor to perfect its already valid interest through equitable subrogation would reward a creditor's negligence to the detriment of others. While negligence on the part of the party seeking subrogation is not an absolute bar, it is a factor to be considered and should only be overlooked when the balance of equities strongly favors the negligent party. Id. In cases where negligent creditors have been allowed equitable subrogation, the creditors took the steps necessary to properly perfect their interest, only to realize that such interest was invalid, generally because of a failure by the title search company to discover a break in the chain of title. Reasonover, 236 B.R. 219; E.M. Williams & Sons, 2009 WL 2211727. In those cases, unlike here, the creditors did not sleep on their rights; rather, they were surprised to learn that their rights were not what they believed them to be. Id. As such, those cases contained facts strongly favoring overlooking the negligent failure to discover a break in the chain of title. No such facts exist in this case. Defendant had everything it needed to perfect its interest in 2007. The fact that it failed to properly record its 2007 DoT; that the 2007 DoT is now lost, misplaced, or destroyed; and that Defendant now stands to lose a sum of money does not shift the balance of equity in its favor, let alone strongly in its favor. Every unsecured creditor in bankruptcy stands to lose a sum of money. Based on the foregoing, Defendant would not be entitled under the facts of this case to equitable subrogation to either the 2006 DoT or the 2004 DoT. If the Court were forced to address this question, Plaintiffs, not Defendants, would be entitled to judgment as a matter of law on count III of Defendants' Counterclaim. FED.R.CIV.P. 56(f)(1) (made applicable by FED. R. BANKR. P. 7056) (granting the Court authority to grant summary judgment for the nonmovant).
Defendants have suggested that as a court of equity, this Court should follow the maxim that "equity regards as done that which ought to be done" and enter an order pursuant to section 105 of
Furthermore, granting Defendants relief under section 105(a) in this case is contrary to the purpose of that provision. Under section 105(a), the Court is granted authority to enter orders necessary or appropriate to carry out the provisions of the Code. As we have already said, allowing Defendant to perfect its interest against the rest of the world now would run counter to the Code's distribution system and the strong arm powers explicitly granted a trustee for situations just like this. Ware at *6. As such, there is no court order to effectuate, and judgment in favor of the Defendant, in this case, would be contrary to the purpose of the Code. Relief under section 105 is not appropriate in this case. Count six of Defendant's counterclaim is, therefore, denied summary judgment and cannot form the basis of an affirmative defense to Plaintiffs' Complaint.
Plaintiffs' motion for summary judgment seeks determination as a matter of law that they are entitled to judgment on their Complaint.
Counts I and II of Plaintiffs' Complaint request this Court determine that the unrecorded 2007 DoT is void and that Defendants are without an interest in Debtors' real property, respectively. Previously in this opinion, the Court has determined that the Trustee qualifies as a bona fide purchaser of real property under Virginia law. As a bona fide purchaser of real property, the Trustee is granted the power under section 544(a)(3) to void any interests that such a person would be entitled to avoid under applicable state law. Under applicable Virginia law, a bona fide purchaser takes the purchased property free and clear of any unnoticed adverse interest in the property. VA.CODE ANN. § 55-96 (West 2013). Defendant's unrecorded 2007 DoT is such an unnoticed adverse interest. Furthermore, the Court has determined that equitable defenses
Based on the Court's determination that Defendant is without an interest in Debtors' real property as of the date of the bankruptcy filing, Defendant is an unsecured creditor. As an unsecured creditor, Defendant was required to file a proof of claim within ninety (90) days after the first date set for the meeting of creditors under section 341(a). FED. R. BANKR.P. 3002(a). In Debtors' bankruptcy case, the first 341(a) meeting was scheduled for May 19, 2009, and the deadline for filing unsecured claims was August 17, 2009. See In re Perrow, No. 09-61234 (Bankr.W.D.Va. Apr. 22, 2009). Defendant, however, filed its proof of claim on September 24, 2009, approximately thirty-eight days after the deadline for filing claims. As such, Defendant's claim was not timely filed.
Under section 502(a), a claim filed is deemed allowed, unless a party in interest objects. Count III of Plaintiffs' Complaint has objected to the timeliness of Defendant's claim and seeks disallowance of that claim.
Based on the foregoing, the Court concludes that Defendants' motions for summary judgment are denied and Plaintiffs' motion for summary judgment is granted in its entirety. The Court will issue a corresponding order consistent with the findings in this opinion. Copies of this memorandum opinion are directed to be sent to the Chapter 13 Trustee; the Debtors; counsel for the Debtors; Defendants; and counsel for Defendants.
Along these lines, Defendant has alleged that its interest in Debtors' property is entitled to be equitably subrogated to the holder of the 2004 DoT. To the extent that equitably subrogating Defendant's interest to the 2004 DoT would affect the Trustee's constructive notice of Defendant's interest, we do not reach that question. Defendant's equitable subrogation claim is addressed infra.
