ROBERT D. MARTIN, UNITED STATES BANKRUPTCY JUDGE.
On November 8, 2013, debtor, Theodore Wenzel, filed a voluntary chapter 7 petition. Green Tree Servicing LLC (Green Tree), filed a timely proof of claim asserting a security interest in Wenzel's home. Wenzel objected to that claim and then brought this adversary proceeding to determine the validity of Green Tree's lien. On October 20, 2015, the bankruptcy trustee was joined as a plaintiff. The parties stipulated to the facts of the case and agreed to submit their dispute to the court on briefs. The following discussion constitutes my findings of facts and conclusions of law.
On January 25, 2008, Matthew and Jennifer Bach purchased a home financed by Countrywide Bank which took a mortgage to secure its note. That mortgage, recorded in Rock County on January 31, 2008, identified the property's street address as 2203 S. Osborne Avenue, Janesville, Wisconsin 55346, and tax key number as #241-0411400072, but it failed to include a legal description of the property. Where the legal description was to have been provided the mortgage states: "Exhibit A." No "Exhibit A" is attached to the recorded mortgage.
On November 1, 2009, Wenzel purchased the house from Jennifer Bach and gave her a mortgage securing a debt of $116,000. That mortgage was recorded in Rock County. It contained both the street address of the property and the correct legal description. Wenzel contends that he had no actual knowledge of the Countrywide mortgage when this mortgage was recorded.
On October 17, 2013, Countrywide assigned its mortgage to Green Tree. The written assignment included the legal description of the property and made reference to the Countrywide mortgage and its recording date. Twenty-two days later this bankruptcy case was commenced.
On May 13, 2014, Green Tree filed its proof of claim asserting a security interest in the property. On June 12, 2015, the trustee filed a motion requesting the court approve the sale of the Property to Wenzel for $8,536.00, which is the fair market value of the property minus the homestead
Plaintiffs contend that the lack of a legal description in the Countrywide mortgage made it void as against subsequent purchasers under Wisconsin statute, Wis. Stat. § 706.08(1)(a). They argue that the absence of a legal description in the Countrywide mortgage made it undiscoverable in the tract index at the time Wenzel purchased the home. The trustee argues that Green Tree's recording of the assignment within 90 days before the debtor filed his petition was a voidable preference pursuant to § 547(b).
Green Tree contends that disclosure in tract indexes is not dispositive of validity and constructive notice in Wisconsin, citing Bank of New York Mellon Trust Co. v. Wittman, No. 12-C-846, 2013 WL 173801 (E.D.Wis. Jan. 16, 2013). The inclusion in Countrywide's mortgage of the debtors' identity, the property's address, and the tax identification number, were sufficient to provide constructive notice through the grantor/grantee index of Countrywide's interest in the property. In support of its factual contention. Green Tree has submitted the declaration of one of its attorneys, Tanya Salman, in which Salman has provided a screen shot of a search conducted in the Rock County Register of Deeds grantor/grantee database. In it, Salman shows that a search under the seller's name, Jennifer Bach, discloses the Countrywide mortgage as an encumbrance on the property.
Wenzel brought his complaint under 11 U.S.C. § 542, which provides that:
11 U.S.C. § 542 (2012). Section 542 requires turnover to the trustee, not the debtor. Accordingly, the trustee, not Wenzel, has standing to bring a complaint under its provisions. See In re Trujillo, 485 B.R. 238, 247 (Bankr.D.Colo.2012) ("The fact that § 542(a) requires turnover to the trustee in a chapter 7 case is also significant for another reason. It means that the Debtors in this case have no standing to assert a right of turnover under § 542(a).") (emphasis in the original); 5 Collier on Bankruptcy ¶ 542.03 (16th ed. 2015). The trustee also seeks recovery on the theory that recording the assignment to Green Tree was a preferential transfer avoidable under § 547(b).
Because the other elements of a preference are not disputed, all the trustee must show is that until the assignment from Countrywide to Green Tree was recorded, neither Countrywide nor Green Tree had an enforceable interest in the Wenzel's house. And, to rebut the objection to its claim to secured status, Green Tree must establish that Countrywide's mortgage was valid at the time of the assignment to Green Tree. These crossed swords of the parties' burdens are successfully sorted out by reference to Bank of New York Mellon, and the fabric of Wisconsin's "race-notice" recording statute:
Wis. Stat. § 706.08 (2016).
In Bump v. Dahl, the Wisconsin Supreme Court held that: "Purchasers in good faith are purchasers without notice of existing rights in the land." 26 Wis.2d 607, 133 N.W.2d 295, 299 (1965). This court observed in In re Thulis, that: "A bona fide purchaser (or a good faith purchaser) is one without notice, either actual or constructive of any existing rights in the land." 474 B.R. 668, 673 (Bankr.W.D.Wis. 2012). Under state law, constructive notice:
In re Wittman, No. 10-22811, 2012 WL 2742099, at *5 (Bankr.E.D.Wis. July 9, 2012) (quoting Bump, 133 N.W.2d at 299)). As to the appropriate "avenues of information":
Bump, 133 N.W.2d at 300. Accordingly, the question here becomes whether the grantor/grantee index maintained by the office of the register of deeds is one of the records a bona fide purchaser must consult.
In Bank of New York Mellon, the bankruptcy court held that failure by the Chapter 13 debtors' mortgagee to include the appropriate lot number in the legal description contained in the mortgage was fatal to the validity of the mortgage as against the bankruptcy trustee's strong-arm power under § 544(a)(3). Wittman, 2012 WL 2742099, at *8. There, the court acknowledged that the county register of deeds maintained both a grantor/grantee and tract index, and that the mortgage would have been identifiable in the former, as it contained the debtors' identity, the property's address, and the tax ID. However, the court found that the possibility of identification through the grantor/grantee index was irrelevant. Id. at *2.
In reaching this conclusion, the bankruptcy court relied heavily on Wis. Stat. § 706's chain of title provisions. Specifically, the court held that because the tract index was the only one referenced in § 706.09(4)'s "chain of title" definition, that an investigation of a grantor/grantee index by a subsequent purchaser would be unnecessary to establish his bona fides. Id. at **6-7.
In reversing the bankruptcy court's decision, the district court held that "a purchaser of real estate in Wisconsin must search both the grantor/grantee index and, where one exists, the tract index in order to be considered bona fide and without notice." Bank of New York Mellon, 2013 WL 173801, at *6 (E.D.Wis. Jan. 16, 2013). The court observed:
Id. In support of this conclusion, the court looked to the Wisconsin Supreme Court's Hiles v. Atlee decision. 80 Wis. 219, 49 N.W. 816 (1891). To wit:
Bank of New York Mellon, 2013 WL 173801, at *7 (quoting Hiles, 49 N.W. at 817)).
The court found further support for its holding in the various back-stop provisions in § 706 which provide that instruments may have been properly recorded even if they are improperly indexed in a tract index. See Wis. Stat. §§ 706.08(2) and 706.05(7) (2016). Additionally, as to the bankruptcy court's § 706.09(4) analysis, the district court held: "That the subsection specifically notes that `a tract index shall be deemed an index where the same is publicly maintained' cannot be reasonably read as excluding other indexes maintained by the register of deeds, especially the grantor/grantee index which all registers of deeds are required to maintain." Bank of New York Mellon, 2013 WL 173801, at *7. Finally, as to Brown, the court found that it was inapposite. Specifically, the court observed that: "the only index discussed in the case is the tract index," the adverse claimants in Brown "conceded" that the subsequent mortgagee "had taken its mortgage in good faith and for value and that a search of the index would not have shown their quitclaim deed in the chain of title," and the issue in Brown was "whether the [subsequent mortgagee] had a duty to also search a separate `computer system' at the register of deeds office." Id. at *8 (citing Brown, 656 N.W.2d at 59-61). By contrast, the court observed that instead of the idiosyncratic computer system discussed in Brown, in Bank of New York Mellon "the Mortgage was properly recorded in the grantor/grantee index." Id.
So, despite the deficient legal description, a mortgage's appearance in the grantor/grantee index establishes constructive notice to subsequent purchasers and the bankruptcy trustee may not use his strong-arm power to avoid the mortgage.
Here, unlike Bank of New York Mellon, Countrywide failed to include any legal description in its mortgage. However, like Bank of New York Mellon, a search of the Rock County grantor/grantee index reveals Countrywide's mortgage as an encumbrance on the property.
