IN RE: BRIAN KEITH CHARLES AMY LYNN CHARLES  CASE NO.  04-70204  ORDER ADV. NO.  04-7017

 UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:
BRIAN KEITH CHARLES AMY LYNN CHARLES	CASE NO.  04-70204
PHAEDRA SPRADLIN, trustee	PLAINTIFF
VS.	ADV. NO.  04-7017
GREGORY PAUL STUMP and GENEVA DAWN STUMP	DEFENDANTS

          OR DER

This adversary proceeding is before the court following trial on August 24, 2004.  (See Document # 27.)  Prior to trial the parties filed joint exhibits (Document # 22).

FINDINGS OF FACT:

On July 28, 1999 Gregory Paul Stump and Geneva Dawn Stump (“the Stumps”) executed a deed of conveyance titled “General Warranty Deed with Lien” to the debtor Brian Keith Charles (“Charles”) and Jamie Keene (“Keene”).  (Joint Exhibit 3, Document # 22).  The conveyance was “for and in consideration of the sum of $180,000, secured by a promissory note of even date hereof, payable pursuant to said note, the last payment being due and payable on or before October 1, 2009, and other good and valuable consideration, receipt of which is hereby acknowledged.”  A paragraph in the body of the deed reads, “A LIEN is hereby retained on the above described property to secure the unpaid purchase price.”  The deed, signed by the Stumps, is followed by Certificate of Consideration which says in pertinent part, “We, the undersigned, hereby certify pursuant to KRS Chapter 382, [sic] that the above stated consideration in the amount of $180,000 is true, correct and full consideration paid for the property herein conveyed” and is signed by both the sellers and the purchasers.  Their signatures are followed by notary entries which state that the deed was “acknowledged” by the Stumps, as grantors, and that the Certificate of Consideration was “subscribed and sworn to” by the Stumps, as the grantors, and by Charles and Keene, as the grantees.  The deed was recorded that same day.

Also dated July 28, 1999 is “Promissory Note” signed by Charles and Keene which states that they promise to pay the Stumps $150,000 plus interest in monthly installments of $1,665.31 beginning October 1, 1999  “until paid, the last payment being due on September 1, 2009.”  (Joint Exhibit 2, Document # 22).

In addition, the Stumps and Phelps BP Mart, Inc., as the sellers, and Charles, Keene, and their wives, as the purchasers, entered into “Contract of Sale and Purchase of Business Assets,” dated July 28, 1999, for the purchase of personalty and the real estate described in the deed referenced above.  In paragraph 2(b) of that contract, designated PAYMENT OF PURCHASE PRICE, Purchasers were to pay $150,000 in equal monthly installments of $1,665.31 “beginning October 1, 1999 and ending in September 1, 2009.”  (Joint Exhibit 5, Document # 22). 

On March 1, 2004 Brian Keith Charles and Amy Lynn Charles filed a petition for relief under chapter 7 and listed the July 28, 1999 transaction on Schedule G, Executory Contracts and Unexpired Leases.  (Joint Exhibit 1, Document # 22).  On April 28, 2004 the Stumps filed a proof of claim, alleging that they have a secured claim in the amount of $100,483.73 based on “Note and lien retained on purchase of real estate.”  Attached to their Proof of Claim is a copy of the July 28, 1999 Promissory Note and General Warranty Deed with Lien.  (Joint Exhibit 4, Document # 22).

Citing 11 U.S.C. § 544 in her complaint, the plaintiff-trustee seeks to avoid the Stumps’ lien on the real property as unperfected against the trustee as a hypothetical bona fide purchaser and/ or a hypothetical judicial lien creditor, alleging that the deed fails to properly retain a lien on the property and that acknowledgment in the deed is deficient under Kentucky law.  (Document # 1).  Essentially, the trustee asserts that under Kentucky law the deed was an unrecordable instrument which therefore did not give constructive or inquiry notice to the trustee so may be avoided.  The Stumps respond, in essence, that the discrepancies between the deed and promissory note as to the amount of the debt ($180,000 and $150,000) and the date of final payment (October 1, 2009 and September 1, 2009) were scrivener’s errors and that under Kentucky law a deed, including one with a vendor’s lien, does not have to be signed by the purchaser with the signature then acknowleged by a notary.

CONCLUSIONS OF LAW:

11 U.S.C. § 544(a) provides:

The trustee shall have, as of the commencement of the case, and without any regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by– (1) [a judicial lien creditor] or (2) [ a bona fide purchaser].

 

Thus, the Bankruptcy Code creates the status, but state law defines that status.  Stated another way, if a hypothetical judicial lien creditor or bona fide purchaser, as defined by state law, can avoid an obligation of the debtor, then the trustee may avoid that obligation.

Kentucky Practice Series, Methods of Practice (3d ed. 1989) is helpful for its summary of Kentucky law.  Volume 3, Section 10.5, Real Estate Transactions, Requisites of a Valid Deed, provides in part:

Generally speaking, it is essential to every deed of conveyance that there be a grantor, a grantee and a thing granted, and that the instrument pass a present interest and be based on good and valuable consideration.  A “general warranty deed” must not only be in writing in proper form and signed by the grantor, but he must acknowledge it before an officer who must make and sign the official certificate, and it must then be delivered to the grantee before it becomes effective.  (emphasis added)

3 ROBERT W. KEATS ET AL., KENTUCKY PRACTICE SERIES, METHODS OF PRACTICE § 10.5 (3d ed. 1989)

Sixteen “generally recognized parts and provisos of a deed” are listed with some discussion of each.  Signatures, number 8, referencing Kentucky’s statute of frauds Kentucky Revised Statute (“KRS”) 371.010(6), provides that the grantor’s signature is essential to the validity of the deed.  Acknowledgment or Attestation, number 9, provides that the grantor’s signature must be acknowledged according to law, KRS 382.130(1), (2).  Recordation, number 11, states that an unrecorded deed is good as between the parties to the deed but an unrecorded deed is invalid as to a purchaser for valuable consideration without notice.  Purchase Money Mortgage/ Vendor’s Lien, number 14, provides:

When some person or institution other than the seller finances a real estate purchase it is the normal practice for the purchaser to execute a note secured by a mortgage upon the land.  No mention of the financing needs to be made in the deed.  However, when the seller is to be paid in installments he has the option of taking a mortgage or of reciting the terms of the debt in the deed itself.  Should he fail to do either, the seller forfeits his right to a lien upon the land against subsequent bona fide creditors and purchasers.    

 Referenced here is KRS 382.070, No lien unless unpaid consideration stated.[1]  A Consideration Certificate, statement of consideration or market value, also is required.  It must be notarized and signed by the grantor and the grantee.  KRS 382.135.

Kentucky law regarding conveyances and encumbrances further provides in KRS 382.270 that instruments are not valid against purchasers or creditors unless they are recorded.[2]  Lastly, KRS 382.330 provides that an instrument is not to be recorded unless the date of maturity for any indebtedness is shown.[3]