UNITED
STATES BANKRUPTCY COURT FOR
EASTERN
DISTRICT OF KENTUCKY
LEXINGTON
DIVISION
IN RE:
KEITH D. CARNES and VIVIAN L. CARNES
DEBTORS CASE NO. 03-54076
ANNA C. JOHNSON, Trustee
for the bankruptcy estate of
Keith
Carnes and Vivian Carnes PLAINTIFF
VS. ADV. NO. 04-5569
FIFTH THIRD BANK, INC.; HOMEAMERICAN
CREDIT, INC., D/B/A UPLAND MORTGAGE;
AMERICAN BUSINESS MORTGAGE SERVICES,
INC.; and AMERICAN BUSINESS CREDIT CORP. DEFENDANT
MEMORANDUM OPINION
Introduction
Anna C. Johnson
(the “Trustee”), the trustee for the estate of Keith D. Carnes and Vivian L.
Carnes (the “Debtors”), is before the court on the Motion for Judgment on the
Pleadings that she filed in the above-styled adversary proceeding on November
30, 2004. Having considered the motion, the response filed by HomeAmerican
Credit, Inc., d/b/a Upland Mortgage (“HomeAmerican”), on December 13, 2004, and
the briefs and arguments of counsel, the court will sustain the motion.
Factual and Procedural Background
On December 15,
1997 Sadie M. Carter, the mother of Debtor Vivian Carnes, executed a Deed of
Conveyance transferring the real property located at 273 St. Margaret Drive,
Lexington, Kentucky (the “Property”) jointly to Ms. Carter and Ms. Carnes “to
be held in fee simple title by [Ms. Carter] for and during her life and with
the rights of survivorship (after the death of [Ms. Carter]) in fee simple
title in [Ms. Carnes], her heirs and assigns, forever.” Similarly, the habendum
clause reads: “TO HAVE AN[D] TO HOLD the above described property unto SADIE M.
CARTER, for and during her natural life in fee simple title with the
survivorship interests in fee simple absolute title to VIVIAN CARNES, her heirs
and assigns forever.” On June 22, 2001 Ms. Carter executed a Mortgage on the
Property in favor of Fifth Third Bank, Kentucky-Lexington. The Mortgage was not
recorded. On June 26, 2001 the original mortgagee assigned the Mortgage to
HomeAmerican. Ms. Carter is still living and apparently resides in the subject
residence with the debtors.
On November 26,
2003 the Debtors (daughter and her spouse) filed a voluntary petition for
relief under Chapter 7 of the Bankruptcy Code. On October 22, 2004 the Trustee
filed the Complaint initiating this adversary proceeding, seeking to avoid
the Mortgage and preserve it for the benefit of the Debtors’ bankruptcy estate.[1]
The Complaint also seeks authority to sell the Property. On November 24, 2004
HomeAmerican filed an answer admitting that the Mortgage was never recorded.
On November 30, 2004 the Trustee filed the motion now before the court. On
December 1, 2004 Default Judgments were entered against the other defendants
and, on December 7, 2004 an Agreed Order was entered vacating the Default
Judgment against American Business Credit Corp. but stipulating that it holds
no interest in the Property. On December 13, 2004 HomeAmerican filed a
response to the Motion for Judgment on the Pleadings and, on December 15,
2004, the Trustee filed a reply. The court conducted a hearing on the motion
on December 16, 2004, at which time the Trustee clarified that she is seeking
to avoid the Mortgage only with respect to the Debtors’ bankruptcy estate’s
interest in the Property.
Legal Discussion
Section 382.270
of the Kentucky Revised Statutes prescribes the effect of an unrecorded
mortgage:
No deed or deed of trust or mortgage
conveying a legal or equitable title to real property shall be valid against a
purchaser for a valuable consideration, without notice thereof, or against
creditors, until such deed or mortgage is acknowledged or proved according to
law and lodged for record.
A bankruptcy trustee is by statute a
bona fide purchaser “without regard to any knowledge.” 11 U.S.C. § 544(a)(3).
Accordingly, an unrecorded Kentucky mortgage is avoidable under § 544(a) of
the Bankruptcy Code. See Rogan v. America’s Wholesale Lender (In re Vance),
99 Fed. Appx. 25, 27-28 (6th Cir. 2004) (trustee may avoid mortgage not acknowledged
in accordance with KRS 382.270); see also Simon v. Chase Manhattan Bank (In
re Zaptocky), 250 F.3d 1020, 1027-28 (6th Cir. 2001) (trustee may avoid
mortgage that was improperly recorded under Ohio law). Accordingly, it is
clear that the Trustee may avoid HomeAmerican’s Mortgage to the extent that it
encumbers the bankruptcy estate’s interest in the Property. It is also clear
that the Trustee may sell the estate’s interest free and clear of the Mortgage.
11 U.S.C. § 363(f)(4).
The question
that remains is the extent of the interest held by the Debtors’ bankruptcy
estate. The Trustee contends that the deed conveyed a fee simple estate to Ms.
Carnes subject to a life estate retained by Ms. Carter. HomeAmerican argues
that the deed conveyed a fee simple estate to Ms. Carter and a contingent
remainder interest to Ms. Carnes.
As a general
rule, a trustee may only sell the bankruptcy estate’s interest in property. 11
U.S.C. § 363(b)(1).[2]
Property of the estate consists of “all legal or equitable interests of the
debtor in property as of the commencement of the case.” Id. § 541(a)(1).
“In the absence of any controlling federal law, ‘property’ and ‘interests in
property’ are creatures of state law.” Barnhill v. Johnson, 503 U.S.
393, 398, 112 S. Ct. 1386, 1389 (1992) (citing, inter alia, Butner v.
United States, 440 U.S. 48, 54, 99 S. Ct. 914, 918 (1979)).
In Kentucky,
there is a presumption that the estate conveyed is a fee simple:
Unless a different purpose appears
by express words or necessary inference, every estate in land created by deed
or will, without words of inheritance,[3]
shall be deemed a fee simple or such other estate as the grantor or testator
had power to dispose of.
K.R.S. § 381.060(1). On the other
hand, another Kentucky statute provides:
If any estate is given by deed or
will to any person for his life, and after his death to his heirs, or the heirs
of his body, or his issue or descendants, such estate shall be construed to be
an estate for life only in such person, and a remainder in fee simple in his
heirs, or the heirs of his body, or his issue or descendants.
K.R.S. § 381.090. The court
concludes that the latter statute applies and, therefore, that a “different purpose
[than fee simple] appears by express words or necessary inference.”
Very similar to
this case is East Kentucky Energy Corp. v. Niece, 774 S.W.2d 458, 459
(Ky. Ct. App. 1989), in which the deed conveyed the property to Drucilla King,
then added:
The conditions of this conveyance is
[sic] such that at the death of said Drucilla King that the above lands
is [sic] to descend to the heirs of her body belonging to the said Grantor
James King, and that the said James King is to use and control the said land
during his natural life.
The court held that Drucilla King
received a life estate:
A life estate is a freehold interest
in land where the term continues during the life of the owner or some other
person. The most obvious way to create a life estate would be to state “to A
for his lifetime.” or “for and during her life.” . . .
But under the definition of a life
estate, it appears to us that life estate arises whenever the deed as a whole
expresses the intent of the grantor that the term of the estate conveyed would
be measured by the lives of one or more persons. Thus, when A, owner in fee simple, conveys “to B until he dies” or “to B and at
his death to B’s children” a life estate for B is created.
Because the deed states that at the
death of Drucilla the property would “descend” to certain heirs, we conclude
that the estate conveyed to Drucilla was to continue for
her life. KRS 381.090 provides that “if any estate shall be given by deed or
will to any person for his life, and after his death to his heirs, or the heirs
of his body, or his issue or descendants, the same shall be construed to be an
estate for life only in such person, and a remainder in fee simple in his heirs
or the heirs of his body, or his issue or descendants.” Therefore, Drucilla
received a life estate and remainder interests existed in the heirs of her body
belonging to James.
Id. at 460 (citations omitted); accord,
Combs v. Combs, 166 S.W.2d 969, 970 (Ky. 1942). Likewise, it is clear in
this case that “the deed as a whole expresses the intent of the grantor that
the term of the estate conveyed would be measured by the li[fe] of [Ms.
Carter],” so the deed gave rise to a life estate in Ms. Carter.
The only
difference between Niece and this case is that the deed’s granting
clause purports to convey the Property to Ms. Carter “in fee simple title
. . . for and during her life” (emphasis added). However, the highest court of
Kentucky has made clear that such language is not dispositive:
The rule is that where by a deed a
fee is granted, and the deed as a whole shows an intention to vest the grantee
with a fee, an attempted limitation upon the fee will be disregarded. But in
all cases the effect of the deed turns upon its proper construction when read
as a whole; and if upon the whole instrument it appears that the grantor’s intention
was to vest a less estate than a fee in the grantee, that intention will be
carried into effect; for deeds like other instruments must be construed
according to the intention of the parties where that intention is
sufficiently expressed in the instrument.
In the case at bar, while by the
first clause of the deed, the grantor conveys the property to Mary Schafer,
her-heirs and assigns forever, this is immediately followed by a statement that
this conveyance is to be for her natural lifetime, and that the property after
her death shall revert to the children of the grantor. The two clauses of the
deed are to be read together in ascertaining the grantor’s intention; and
upon the whole instrument, the estate granted was only intended to be a life
estate. To give the instrument a greater application would be to defeat the
plainly expressed intention of the grantor. This cannot be done.
Dinger v. Lucken, 137 S.W. 776, 776 (Ky. 1911)
(citations omitted); accord, e.g., Woodward v. Thissell,
218 F. 810 (6th Cir. 1914). Likewise, here, the deed purported to convey the
Property to Ms. Carter in fee simple, with that language followed immediately
by a statement that the conveyance was to be for and during her life and that
the property after her death would revert to Ms. Carnes. Accordingly, “upon
the whole instrument, the estate granted was only intended to be a life
estate” and “[t]o give the instrument a greater application would be to defeat
the plainly expressed intention of the grantor.” Thus, KRS 381.090 and the
common law of Kentucky dictate the conclusion that Ms. Carter holds a life
estate and Ms. Carnes holds a remainder.[4]
Conclusion
For the
foregoing reasons, the court will enter a separate order sustaining the
Trustee’s motion and a judgment authorizing the Trustee to sell the Debtors’
bankruptcy estate’s interest in the Property free and clear of HomeAmerican’s
interest.
Copies to:
J.D. Kermode, Esq.
Thomas D. Murphy, II, Esq.
Mark D. Dietz, Esq.
[1]Because the Trustee is not seeking a recovery of the
Property or its value under 11 U.S.C. § 550(a), no lien is available to HomeAmerican
under § 550(e). Suhar v. Burns (In re Burns), 322 F.3d 421, 427-29 (6th
Cir. 2003).
[2]Under certain circumstances, a trustee may sell both
the estate’s interest and the interest of a co-owner of property, 11 U.S.C. §
363(h), but the Trustee in this case has not joined Ms. Carter in this
proceeding and sought such relief.
[3]The phrase “without words of inheritance” was included
in the statute to make clear that words of inheritance are not necessary to
create a fee simple; the inclusion of the phrase does not mean that including
words of inheritance prevents the creation of a fee simple estate. Hall v.
Wright, 87 S.W. 1129, 1130 (Ky. 1905).
[4]KRS Section 381.110 provides: “The alienation of a
particular estate on which a remainder depends . . . shall not operate . . . to
defeat, impair or affect such remainder.” Accordingly, Ms. Carnes’s remainder
would have come into the bankruptcy estate free and clear of the Mortgage
conveyed by Ms. Carter even if the Mortgage had been duly recorded.