UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

BRADLEY K. RHORER

LISA A. RHORER

DEBTORS CASE NO. 02-51102

 

J. JAMES ROGAN, TRUSTEE PLAINTIFF


VS. ADV. NO. 02-5424


CIT GROUP/CONSUMER FINANCE, INC. DEFENDANT

MEMORANDUM OPINION

This matter comes before the court on cross-motions for summary judgment by the parties and the responses thereto. The trustee filed this proceeding seeking to have his interest in certain real property declared superior to the defendant's mortgage lien on the property, and to avoid the mortgage lien. This court has jurisdiction of this matter pursuant to 28 U.S.C.  1334(b); it is a core proceeding pursuant to 28 U.S.C.  157(b)(2)(K).

The trustee's complaint states that the debtors herein granted the defendant a mortgage in certain real property in Madison County, Kentucky on July 27, 2001. The mortgage was recorded in the Madison County Clerk's Office on August 7, 2001. The complaint alleges that the mortgage's certificate of acknowledgement is defective in that it does not state the names of the mortgagors. The complaint further alleges that the mortgage was not properly acknowledged according to KRS 423.130 and KRS 423.150, that it was therefore not a recordable mortgage, that it should not have been lodged for record pursuant to KRS 382.270, and that it did not give the trustee actual notice. The complaint does not allege that the mortgage does not give the trustee inquiry notice. KRS 382.270 provides in pertinent part that

[n]o 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.

The complaint further alleges that the trustee's interest as a bona fide purchaser ("BFP") pursuant to 11 U.S.C.  544(a)(3) is superior to the defendant's mortgage interest. The complaint asks for an order declaring the defendant's mortgage to be void, and avoiding and preserving it for the benefit of the estate.

With the filing of the bankruptcy herein, the trustee, by virtue of  544(a)(3), acquired the rights of a BFP of real property, whether or not one existed, and without regard to any actual knowledge of the trustee, as to any property of the debtor. State law governs who may be a bona fide purchaser. Owens-Ames-Kimball Co. v. Michigan Lithographing Co. (In re Michigan Lithographing Co.), 997 F.2d 1158, 1159 (6th Cir. 1993).

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 Corp. 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, 412, 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."

The issue of notice has been addressed most recently in State Street Bank & Trust Co. v. Heck's, Inc., 963 S.W.2d 626, 630, Ky. (1998), wherein the Kentucky Supreme Court interpreted the phrase "without notice thereof" in KRS 382.270 to include in its meaning:

without actual knowledge of the existence of a mortgage, either unrecorded or improperly recorded, or knowledge of such facts as would lead a reasonably prudent person under like circumstances to inquire into the matter and discover the existence of the mortgage.

In Thacker v. United Companies Lending Corp., 256 B.R. 724, 729 (W.D. Ky. 2000), the district court in addressing the question of an improperly recorded mortgage stated that actual or inquiry notice must be based on something other than the improperly recorded mortgage itself. Absent factors apart from the mortgage that provided notice, a BFP would prevail under the Thacker reasoning.

The United States District Court for the Eastern District of Kentucky considered a matter on appeal remarkably similar to the one here in America's Wholesale Lender d/b/a Countrywide Home Loans, Inc. v. J. James Rogan, Trustee (In re Vance), Case No. 02-390 (E.D. Ky. November 25, 2002). There the court determined that the certificate of acknowledgement was insufficient pursuant to KRS 423.130, and that the mortgage had not been acknowledged or proved according to law. The court went on to rule, however, that Kentucky law as set out in State Street Bank, supra, would deem such an unrecordable mortgage to provide inquiry, if not actual, notice of its existence. The court disagreed with the Thacker court's interpretation of State Street Bank to require that actual or inquiry notice be established by factors independent of the mortgage. The trustee has appealed the Vance decision to the Sixth Circuit Court of Appeals.

Under the reasoning in either Thacker or Vance, however, the question here is whether the trustee can establish that he had neither actual nor inquiry notice of the defendant's mortgage, thereby providing him with BFP status. The court concludes that the subject mortgage was sufficient, pursuant to Vance, to put parties on inquiry notice. Under the reasoning of State Street Bank, supra, any reasonably prudent person, including the trustee, would be put on inquiry notice of the existence of the mortgage and would have a duty to investigate the status of the subject property. The trustee therefore cannot attain BFP status, and he cannot avoid the mortgage pursuant to 11 U.S.C.  544(a)(3).

The defendant devotes much of its argument to the proposition that the subject acknowledgement is sufficient under Kentucky law to make the mortgage properly recordable. In view of its decision in regard to the trustee's BFP status, the court declines to address this contention, and in any event, the Vance court has ruled that a similarly configured acknowledgment was insufficient. The court sees no reason not to follow Vance in this regard. It is therefore the opinion of this court that there is no genuine issue as to any material fact, that the defendant should have judgment as a matter of law, and that the trustee's motion for summary judgment should be overruled. An order in conformity with this opinion will be entered separately.

Copies to:

Laura Kincheloe, Esq.

Douglas T. Logsdon, Esq.