IN RE:  MONTY RAY STAGNOLI     CASE NO. 06-60434 ADVERSARY NO. 06-6111  motion for summary judgment SECURITY INTEREST JUDICIAL LIEN CREDITOR

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LONDON DIVISION

IN RE:

MONTY RAY STAGNOLI                                                                 CASE NO. 06-60434

BETSY ANN STAGNOLI

DEBTORS

JAMES R. WESTENHOEFER, TRUSTEE                                                       PLAINTIFF

VS.                                                                                          ADVERSARY NO. 06-6111

COUNTRYWIDE HOME LOANS, INC., ET AL.                                         DEFENDANTS

FINDINGS OF FACT, CONCLUSIONS OF LAW

AND ORDER

          This matter is before the court on the motion for summary judgment (Doc. 28) and memorandum in support filed by the Plaintiff Trustee James R. Westenhoefer (“Trustee”). In his motion, the Trustee seeks to avoid a security interest granted by the Debtors Monty Ray and Betsy Ann Stagnoli to Defendant Countrywide Home Loans, Inc. (“Countrywide”) in a 1995 Fleetwood Stoneridge Doublewide manufactured home. Asserting rights as a judicial lien creditor afforded by 11 U.S.C. 544(a)(1), Trustee claims that his interest is superior to that of Countrywide’s unperfected security interest and that Countrywide’s lien should be avoided and the value of same preserved for the benefit of the bankruptcy estate. Countrywide’s response (Doc. 37) is that it does not claim a security interest against the manufactured home in question, but rather a mortgage lien against the real estate, including the manufactured home as part of the realty, which is not avoidable and is prior and superior to the Trustee’s interest.

          The court has reviewed the Trustee’s motion and memorandum, as well as Countrywide’s response and trial brief (Doc. 39). The parties submit by Agreed Order (Doc. 42) that the matter may be considered for final disposition on the record as if it had been tried before the court and that there is no dispute as to the facts. On January 9, 2007, the court conducted a hearing on the subject motion and has fully considered the arguments of legal counsel, along with the parties’ written arguments. The court has jurisdiction of this matter pursuant to 28 U.S.C. 1334(b); this is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(K). Accordingly, being sufficiently advised, the court HEREBY MAKES THE FOLLOWING FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER:

Findings of Fact

          1. On October 2, 2001, the debtors borrowed $64,800 from Countrywide, pledging as security for the loan their 1995 Fleetwood Stoneridge Double-wide manufactured home, VIN TNFLR27AB092015R, and real property located at Route 1, Box 4711, Monticello, Wayne County, Kentucky.

          2. Before the loan transaction with Countrywide, the Debtor’s manufactured home was subject to a security interest in favor of North American Mortgage Company as reflected by the certificate of title issued for the manufactured home dated February 2, 1999.

          3. The February 2, 1999 certificate of title was the title existing as of the date the Debtors filed their Chapter 7 bankruptcy petition on August 2, 1006, although the loan secured by the lien to North American Mortgage Company had been paid prior to the Debtors’ filing.

          4. The Debtors executed a mortgage dated October 2, 2001 to secure the loan from Countrywide, which mortgage was recorded on October 11, 2001 in the office of the Wayne County Clerk.

          5. On October 2, 2001, Debtors also executed an Affidavit of Conversion to Real Estate, describing therein the 1995 Fleetwood manufactured home and indicating an intent to permanently affix the manufactured home to the Wayne County real estate. The Affidavit of Conversion was not recorded in the Wayne County Clerk’s office prior to the filing of the Debtors’ Chapter 7 petition.

          6. A duplicate certificate of title for the 1995 Fleetwood manufactured home was issued post-petition on August 29, 2006. The duplicate title contains a handwritten note that the manufactured home was converted to real estate, and that the lien of North American Mortgage was released, on September 18, 2006. The Affidavit of Conversion was ultimately recorded in the Wayne County Clerk’s Office on September 18, 2006.

          7. On September 5, 2006, Trustee initiated this Adversary Proceeding seeking to avoid the claimed interest of Countrywide in the Debtors’ manufactured home under 11 U.S.C. 544(a) and recover same for the benefit of the bankruptcy estate.

          8. The parties agreed that no issues of fact existed for the court’s determination and to submit the matter on briefs for summary decision.

Conclusions of Law

          Federal Rule of Civil Procedure 56(c), made applicable in bankruptcy by BR 7056, provides that summary judgment is appropriate and “shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” The parties hereto agree that there is no genuine issue as to any material fact. The court likewise concurs that the matter is ripe for summary disposition pursuant to BR 7056.

          11 U.S.C. Section 544(a) provides that

[t]he trustee shall have, as of the commencement of the case, and without 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 creditor that extends credit to the debtor at the time of the commencement of the case, and at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists....

Trustee does not dispute that Countrywide holds a valid and properly recorded mortgage as to the Debtors’ real estate. However, pursuant to section 544(a)(1), Trustee asserts a superior interest in the Debtors’ manufactured home, charging that Countrywide does not hold a perfected lien in the manufactured home according to applicable state law.

          Although the parties hereto refer to the property in question as a “mobile home,” KRS 186.650 was amended in 1994 and now statutorily defines the property in question as “manufactured home.” A “manufactured home” is defined as

a structure, transportable in one (1) or more sections, which:

(a) Is eight (8) body feet or more in width and forth (40) body feet or more in length when in the traveling mode;

(b) Has three hundred twenty (320) or more square feet when erected on site;

(c) Is built on a permanent chassis;

(d) Is designed to be used as a dwelling, with or without a permanent foundation, when connected to the required utilities,

(e) Includes plumbing, heating, air-conditioning, and electrical systems; and

(f) May be used as a place of residence, business, profession, or trade by the owner, lessee or their assigns, and may consist of one (1) or more units that can be attached or joined together to comprise an integral unit of condominium structure.

KRS 186.650. An owner of a manufactured home as defined in KRS 186.650 shall apply for and obtain a certificate of title in his name. There is no dispute in this matter that a certificate of title was obtained by the Debtors for their manufactured home prior to their loan transaction with Countrywide. The certificate of title in effect as of the date of the bankruptcy filing was issued on February 2, 1999.

          KRS 186A.190(1) provides, with two (2) exceptions not applicable here, that the perfection and discharge of a security interest in any property for which has been issued a Kentucky certificate of title shall be by notation on the certificate of title. Again, it is uncontroverted that the certificate of title for the Debtors’ manufactured home in existence as of the date of the bankruptcy filing reflected an unreleased security interest, although not a security interest held by Countrywide.

          Further complicating Countrywide’s position is it’s contention that it does not claim a security interest in the Debtors’ manufactured home, as the home has somehow lost its character as personal property or a manufactured home. Rather, Countrywide asserts that the home has either become part of the real estate, and thereby subject to Countrywide’s valid real estate mortgage, or it is some sort of non-manufactured-home fixture. Countrywide’s argument wholly ignores the undisputable fact that, as of the date of the bankruptcy filing, there existed a certificate of title for the manufactured home which had not been surrendered and an unrecorded affidavit of conversion to real estate. The court is not persuaded by Countrywide’s argument that Kentucky’s version of Article 9 of the Uniform Commercial Code renders the manufactured home a fixture subject to Countrywide’s mortgage via KRS 355.9-502. Kentucky law already provides a method by which a manufactured home can be converted to real estate upon its permanent affixation to land, see KRS 186A.297, and the court is disinclined to find that Countrywide’s failure to comply with the requirements of KRS 186A.297 justifies creating an alternate method to convert manufactured homes to real estate via Kentucky’s Article 9.

          To properly convert a manufactured home to real estate, the owner must execute and file an affidavit of conversion to real estate with the county clerk of the county in which the real estate is located. KRS 186A.297(1) (emphasis added). Although the affidavit was executed pre-petition, it was not filed with or recorded by the Wayne County Clerk until after the bankruptcy was filed. “A filing of an affidavit of conversion to real estate and a surrender of a Kentucky certificate of title shall be deemed a conversion of the property as an improvement to the real estate upon which it is located.” KRS 186A.297(2). In this case, the executed affidavit of conversion was not filed nor was the then-existing certificate of title surrendered to the county clerk prior to the filing of the petition. Accordingly, the court finds that there was no effective conversion to real estate of the Debtors’ manufactured home and the manufactured home therefore retained its character as personal property as of the date the Debtors filed the herein petition.

          In the Eastern District of Kentucky, KRS 186A.190 “remains the sole means of perfecting a lien on a (non-attached) manufactured home.” PHH Mortgage Services v. Higgason, 345 B.R. 584 (E.D. Ky. 2006). Nothing on the certificate of title for the manufactured home in question here, as of the date of the Debtors’ bankruptcy petition, reveals a lien held by Countrywide. Absent such a lien noted on the certificate of title, Countrywide’s security interest in the Debtors’ mobile home is unperfected and therefore inferior to the interest of the Trustee in bankruptcy as a judicial lien creditor pursuant to 11 U.S.C. 544(a).

ORDER

          Based on the record in this proceeding and for the above-stated reasons, the court finds that while the interest of Countrywide in the Debtors’ real estate is properly perfected and therefore superior to the Trustee’s interest, Countrywide’s interest in the Debtors’ manufactured home was neither a perfected security interest under KRS 186A.190 nor subject to the validly recorded mortgage Countrywide holds as to the Debtors’ real estate as of the filing of the petition herein. Trustee, as a hypothetical judgment lien creditor pursuant to 11 U.S.C. 544(a)(1) is hereby awarded JUDGMENT, each party to bear their own costs and attorneys fees.

          This is a final and appealable judgment and there is no just cause for delay.

Copies to:

John p. Brice, Esq.

James R. Westenhoefer, Trustee, Esq.