DEBTOR CASE NO. 94-60460





VS. ADV. NO. 95-6002






This matter is before the Court on the plaintiff's Motion for Summary Judgment against defendant First National Bank of Corbin ("FNB"), filed herein on July 20, 1995. The Motion asks for a ruling that FNB has no lien against the Clay County property owned by defendant Deby Coal Company ("DCC") which is the subject of a January 15, 1987, mortgage ostensibly between the plaintiff and defendant Deby Coal Company, Inc. ("DCCI"). FNB has filed a Response and a Supplemental Response, and defendant First State Bank of Manchester ("FSB") has also responded to the Motion for Summary Judgment although the Motion is not directed at FSB. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to '157(b)(2)(K).

The plaintiff initiated this matter by the filing of its Complaint on January 17, 1995, against fifteen defendants--the four referenced above, the debtor personally, the debtor's wife, his four children, the trusts set up in each of their names, and an individual named Curtis Hopkins. All the defendants except Curtis Hopkins filed answers. In addition, FNB filed a Crossclaim against the other defendants and a Counterclaim against the plaintiff on February 21, 1995. FNB's Counterclaim and Crossclaim states that it was granted a Summary Judgment from the Laurel Circuit Court on June 3, 1994, against the debtor and defendant Robin R. McGhee in the principal amount of $304,860.09. On June 7, 1994, FNB filed a Notice of Judgment Lien in the Clay County Court Clerk's Office in regard to all real and personal property of the judgment debtors in Clay County. FNB alleges that its lien is prior and superior to all other liens on the same property.

The plaintiff filed its First Amended Complaint on April 21, 1995, adding the trustee as a party defendant. The First Amended Complaint also asked that the above-referenced real estate mortgage be reformed so as to show DCC as the mortgagor. The trustee filed his Answer, Counterclaim and Crossclaim on May 15, 1995. The record indicates that the debtor's wife died on April 26, 1995. The plaintiff filed its Motion for Summary Judgment as set out above. It filed a Second Amended Complaint on August 9, 1995, seeking to amend paragraph 20 of the original Complaint by referring to a corrected version of the above-referenced mortgage and attaching a copy of a so-called Corrected Real Estate Mortgage dated March 30, 1995, and showing DCC as the mortgagor. It was executed by the debtor in his capacity as DCC's General Partner.

The debtor filed his Chapter 7 case in this Court on October 18, 1994. Schedule B, Personal Property, includes the following entry at item 12: "Stock and interest in incorporated and unincorporated businesses--Deby Coal Company, Inc." The debtor is listed as the "person in possession" and identified as "partner". The "co-owners" are identified as the debtor's four children. The following is entered at item 13: "Interests in partnerships--None". Schedule D, Creditors Holding Secured Claims, includes the plaintiff's claim of $544,000.00 In regard to this claim, DCCI is listed as the "co-debtor", with reference to the January 15, 1987 mortgage. FNB's claim is also listed in Schedule D.

As set out above, the plaintiff and FNB both assert liens on the real property in question, the plaintiff by virtue of its mortgage and FNB by virtue of its judgment lien. Their assertions have raised the issue of the ownership of the property. The plaintiff contends that DCC is the owner; FNB's position is that the property never passed to the partnership, or if it did, that it passed back out to the debtor because the partnership was dissolved. The fact that the mortgage was ostensibly entered into between the plaintiff and DCCI, not DCC, raises the question of the validity of the mortgage. The plaintiff maintains that the characterization of the mortgagor as DCCI was a mere "scrivener's error," and has attempted to replace DCCI as mortgagor with DCC by means of a purported Corrected Real Estate Mortgage, as set out above. However, as of the date of the filing of his Chapter 7 petition, the partnership was dissolved by virtue of KRS 362.200 and the partner filing bankruptcy lost his authority to act on behalf of the partnership by virtue of KRS 362.320(3)(b). Therefore, it would appear that the Corrected Real Estate Mortgage is a nullity and ineffective to change the relations of the various claimants as they existed on the date the petition was filed.

Copies of various documents have been filed by both parties in support of their contentions. The plaintiff has filed copies of the January 15, 1987 mortgage, as well as a Promissory Note and Guaranty of Payment of the same date. The mortgage, as stated above, was entered into by the plaintiff and DCCI, and was executed by the debtor as president of DCCI; the Promissory Note was executed by the debtor as president of DCC; and the Guaranty of Payment was executed by the debtor personally. The plaintiff has also filed a copy of a Partnership Agreement dated August 2, 1982, between the debtor and Clayborn Wooten as Successor Trustee for the debtor's children. This Agreement recites that the parties had entered into a partnership agreement on May 31, 1975, and that they sought to "clarify the terms and conditions thereof." The Partnership Agreement does not refer to the Clay County property, nor is there anything in the record to indicate that this property was conveyed to the partnership.

Excerpts from a deposition given by the debtor in a U.S. District Court civil action styled "Deby Coal Co., et al. v. Minemet, Inc.," on March 17, 1993, have also been filed by the plaintiff, as well as an Affidavit of the debtor. In the deposition excerpt, the debtor states that DCCI never owned the Clay County property, or any property, and that DCC did. The Affidavit, given on August 15, 1995, states that DCC owned the property at the time the mortgage was given to the plaintiff, and that the partnership continues to own it. FNB has also filed excerpts from the March 17, 1993, deposition. There the debtor states that he does not know if he has possession of any deeds that transfer the Clay County property to DCC as it was constituted in 1982. The record indicates that the only deeds in regard to that property are the ones referenced in the plaintiff's January 15, 1987, mortgage.

The debtor also testified in the March 17, 1993, deposition concerning the evolution of the partnership:

X 91. Have there been any other partners in Deby Coal Company?

A. No.

X92. At any time?

A. No.

X93. I believe that partnership agreement refers to the fact that the agreement was made and entered into on August--

A. Well, now, what time are you wanting to go back on the partnership?

X94. I'm talking about any time.

A. Are you talking about from the beginning, back in the first beginning?

X95. Yes.

A. That would have been 1956 or '57. It was different partners back then.

X96. So the partnership agreement we filed as an exhibit here refers to the fact that the agreement was entered into August 2nd of 1982. I take it, from what you just told me, that there was another partnership or partners prior to that time?

A. Prior to that.

X97. Who were they?

A. The original partners was Wesley Conley and Leonard Conley, Elmer Begley, M.H. Smith, and Gillis Morgan. That was the originators of Deby Coal Company.

X98. Were you involved in it at that time?

A. No.

X99. When was that?

A. '56, I think.

X100. When did you become involved in it?

A. 1963 or '64.

X101. Who were the partners when you became involved in it?

A. I bought the interest of Leonard Conley, Bud Conley. I bought his part.

X102. Was Wes Conley, Mr. Begley, and Mr. Morgan also partners at that time?

A. They were still partners at that time.

X103. How did it come to pass that those other partners let the partnership and the trust come into the partnership?

A. Over the years, the partners became quite old. They wanted to get out of the business and they gave me the opportunity to buy. I bought a total of fifty percent. That gave me fifty and the other partner, which was Wesley Conley, fifty percent. In 1973 or '74, I bought Mr. Conley out and that gave me a hundred percent. In 1982, according to the records, I gave up forty percent.

The combination of documentary evidence and testimony indicates that between the time the debtor acquired one hundred percent of DCC in 1973 or 1974, and entered into the May 31, 1975 partnership agreement referred to above, he was the only individual or entity with any interest in the subject property. In fact, the April 26, 1973, deed from Clay M. Bishop and Jessie M. Bishop is to the Wesley Conley Estate and "Jack McGhee, doing business as Deby Coal Company of Manchester, Kentucky." The question therefore becomes whether the subject property became the property of DCC as it existed after 1975. As stated above, there is no record of a conveyance of this property to DCC. The 1982 Partnership Agreement sets out the debtor's capital contribution in terms of "cash and other assets."

Kentucky law provides in K.R.S. 362.195(3) that "[w]here title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, ..." subject to a limitation in K.R.S. 362.190 which is not applicable here. There is nothing in the record to indicate that the debtor ever conveyed title to the Clay County property after it came to him in 1973. Therefore, on the date of the filing of his bankruptcy petition, it may be argued that the debtor owned the Clay County property. If the debtor was the owner of the property, then the judgment lien of FNB may constitute a valid lien against the property.

The plaintiff contends that the question is whether the debtor intended to contribute the Clay County property to DCC , and that the presence or absence of documents of conveyance is irrelevant. It cites Sanderfur v. Ganter, 259 S.W.2d 15, Ky. (1953) in support of its position. The Sanderfur decision is not determinative of the question being considered here, however, as it resolved a dispute over a leasehold interest where, clearly, no formal transfer, such as by way of deed, was required. The distinction between the contribution of real or personal property to a partnership becomes critical because of real estate law requiring recording of documents conveying an interest in real estate for the purpose of giving notice to foreclose the rights of future claimants including judgment lien creditors and bona fide purchasers. With the filing of the bankruptcy herein, the trustee, by virtue of 11 U.S.C. '544 (a), acquired the rights of a judgment lien creditor and of a bona fide purchaser ("BFP") of real property, whether or not one existed, as to any property of the debtor. The Sixth Circuit Court of Appeals has held in In re Michigan Lithographing Co., 997 F.2d 1158, 1159 (1993) that state law governs who may be a bona fide purchaser.

The Kentucky Court of Appeals has held that a purchaser of real property who purchased before a party with a competing interest had recorded his deed was a bona fide purchaser. Kentucky River Coal Corporation et al. v. Culton, 124 S.W.2d 82, 84, Ky. (1938). The Court of Appeals in Glass v. Gutman, 268 S.W.2d 410, Ky. (1954), also stated that "[i]t is a well-known rule of law that a bona fide purchaser of land without notice of an equity in favor of a third person is not affected thereby." At page 412. In the within matter, as regards any alleged transfer of the Clay County property from the debtor to DCC, not only was there no deed recorded, there was no deed at all. As between the plaintiff and the trustee, then, if this was the property of the debtor on the date of the filing of the petition, the trustee's position may well be superior. Because of the limited scope of the issues briefed regarding this motion for summary judgment, the Court is not in a position to rule presently on the actual ownership of the property in question.

The facts before the Court do not demonstrate to the Court that there is no genuine issue as to any material fact and certainly not that the plaintiff is entitled to judgment as a matter of law. The plaintiff's Motion for Summary Judgment should therefore be overruled. An order in conformity with this opinion will be entered separately.


By the Court -







Copies to:


Leslie Rosenbaum, Esq.

Robert P. Hammons, Esq.

Gary Napier, Esq.

John T. Aubrey, Esq.

Barry M. Helton, Esq.

Maxie Higgason, Esq., Trustee