BAC Home Loans Servicing, L.P. v. Johnson

Filing 7

MEMORANDUM OPINION & ORDER: Bankruptcy court's determination is AFFIRMED. Signed by Judge Joseph M. Hood on 08/16/2011.(RJD)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON
IN RE:
PALMER CROUCH and
ESTIL MAE CROUCH

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BAC HOME LOANS
SERVICING, L.P.,
Appellant/Defendant,
v.
ANNA C. JOHNSON,
TRUSTEE,
Appellee/Plaintiff.
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Civil Action No. 5:10-332-JMH
Bankruptcy Court No. 09-52931

MEMORANDUM OPINION AND ORDER

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This matter is before the Court on BAC Home Loans Servicing,
L.P.’s appeal of the June 30, 2010 Judgment, and August 13, 2010,
Order denying Defendant’s Motion to Alter, Amend or Vacate the
Judgment entered by Bankruptcy Judge Tracey N. Wise, United States
Bankruptcy Judge for the Eastern District of Kentucky. Pursuant to
BAP

Local

Rule

8001-3,

Defendant/Appellant

BAC

Home

Loans

Servicing, L.P. (“BAC” or “Appellant”) elected to have the appeal
heard by this Court rather than the Bankruptcy Appellate Panel for
the United States Court of Appeals for the Sixth Circuit.

BAC

filed a brief [Record No. 4], to which Appellee Anna C. Johnson,
Trustee (“Trustee” or “Appellee”) filed a response brief [Record
No. 5], and the BAC replied [Record No. 6].
ripe for review.

This matter is now

Factual and Procedural Background
The debtors, Palmer and Estill Mae Crouch, filed a Chapter 7
bankruptcy petition on or about September 11, 2009.

Trustee filed

an adversary proceeding to avoid BAC’s mortgage to the extent it
purports to encumber the interest of Estill Mae Crouch (“Debtor
Wife”) in real property located at 114 E. Main Street, Owingsville,
Kentucky (the “Property”) on the basis that Debtor Wife was not
named or identified as a mortgagor or borrower in the body of the
mortgage, although she did execute the mortgage.
After both parties’ motions for summary judgment were fully
briefed and argued, the Bankruptcy Court determined that the
mortgage

in

question

was

not

valid

as

to

the

Debtor

Wife.

Consequently, the Trustee, as a hypothetical bona fide purchaser of
real property from the debtors and as a hypothetical lien creditor
of the debtors pursuant to 11 U.S.C. § 544(a)(1), (2), has superior
title to the subject property and may avoid any interest that BAC
may have in the Debtor Wife’s interest in the property.

The court

determined that BAC only had an unperfected lien as to the Debtor
Wife’s interest, and that interest was avoided and preserved for
the estate.

Trustee was entitled to judgment against BAC in the

about of $33,964.32, which represents half of the amount of BAC’s
debt secured by the mortgage at issue, pursuant to 11 U.S.C. § 550.
Following the Court’s denial of BAC’s Motion to Alter Amend or
Vacate

Judgment,

BAC

timely

appealed

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the

Bankruptcy

Court’s

decision to this Court pursuant to BAP Local Rule 8001-3.
The facts are not in dispute. The Crouches purchased 114 East
Main Street, Owingsville, Kentucky, on or about June 9, 2000, as
evidenced by a deed on record in Deed Book 194, Page 211 of the
Bath County Clerk’s office.
The Crouches borrowed the sum of $66,801.97 from Citizens Bank
and secured the repayment of that loan with a mortgage, recorded in
Mortgage Book 109, Page 683 in the Bath County Clerk’s office, to
purchase the property.

On August 17, 2000, Palmer J. Crouch and

Estil M. Crouch granted SunTrust Mortgage, Inc., a mortgage to
secure a loan in the amount of $67,500.00.

That mortgage is

recorded in Mortgage Book 111, Page 143, in the Bath County Clerk’s
office.

The proceeds of the SunTrust loan were used to pay off the

Citizens Bank loan. By assignment of Mortgage or Deed of Trust
dated June 21, 2002, SunTrust assigned its note and mortgage to
Mortgage Electronic Registration Systems, Inc. This assignment was
recorded on June 28, 2002, and is recorded in Mortgage Book 127,
Page 107, in the Bath County Clerk’s office.
On or about August 30, 2002, America’s Wholesale Lender loaned
$71,500 to Debtor Palmer Crouch, as evidenced by a mortgage
recorded on September 5, 2002, in Mortgage Book 128, page 505, in
the Bath County Clerk’s Office (“First Mortgage”).

The First

Mortgage defines “Borrower” as “Palmer Crouch” only. Each page of
the mortgage was initialed solely by “PC.” There are no references

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to Debtor Wife in the body of the mortgage.

However, Debtor Wife

did sign the last page of the First Mortgage above a line labeled
“Borrower.”

The legal description incorporated by reference into

the mortgage is titled “Property Description for Palmer Crouch and
Estill Crouch, his wife.” “Successor in Interest of Borrower” is
defined in the mortgage as “any party that has taken title to the
Property,

whether

or

not

that

party

has

assumed

Borrower’s

obligations under the Note and/or this Security Instrument.”
Palmer

Crouch

and

Debtor

Wife

executed

a

Truth

in

Both

Lending

Disclosure Statement representing that they were “giving a security
interest into property located at: 114 E. Main Street, Owingsville,
Kentucky.” BAC holds the note and mortgage which is the subject of
this appeal by virtue of the Assignment of Mortgage recorded in
Mortgage Book 184, page 345, in the Bath County Clerk’s Office.
Subsequently, on February 10, 2004, the Crouches granted
Contrywide Home Loans, Inc. another mortgage against the property
to secure the repayment of a loan in the amount of $30,000 (“Second
Mortgage”), recorded in the Bath County Clerk’s Office at Mortgage
Book 143, Page 85.

This mortgage specifically names both Palmer

Crouch and Estil Crouch as “Mortgagor(s).” It is signed by both of
the

Crouches

and

the

notary

acknowledged their execution.

certificate

indicates

that

each

The Second Mortgage contains the

following language:
(g) PRIOR MORTGAGE. If the provisions of this paragraph
are completed, this Mortgage is subject and subordinate
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to a prior mortgage dated 8/30/02 and given by us to
Countrywide Home Loans, Inc. as mortgage in the original
amount of $71,500.00.
BAC argues that the Bankruptcy Judge erred by granting Summary
Judgment in favor of the Trustee because (1) Debtor Wife is
sufficiently identified in the mortgage and related documents to
grant a lien against her interest in the Property and (2) the
Second Mortgage clearly provides notice to third parties, including
the Trustee, and the Second Mortgage clearly indicated that Debtor
Wife ratified, confirmed and gave effect to her first Mortgage
grant to BAC.

Trustee argues that Kentucky law does not recognize

a valid lien on the subject property where the borrower is not
identified or named in the body of the mortgage.
STANDARD OF REVIEW
District courts have jurisdiction to hear appeals from final
judgments, orders and decrees of bankruptcy judges. See 28 U.S.C.
§ 158(a)(1). The bankruptcy court’s initial factual finding are
reviewed by the district court for clear error.

Brinley v. LPP

Mortgage, LTD. (In re Brinley), 403 F.3d 415, 418 (6th Cir. 2005)
(citing Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547,
548 (6th Cir. 1998)).

The bankruptcy court’s conclusions of law

are reviewed de novo.

B-Line, LLC v. Wingerter (In re Wingerter),

594 F.3d 931, 935-6 (6th Cir. 2010) (citing Behlke v. Eisen (In re
Behlke), 358 F.3d 429, 433 (6th Cir. 2004)).
This matter was decided by the bankruptcy court on summary
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judgment, which, pursuant to Fed. R. Bankr. P. 7056, uses the
standard set forth in Fed. R. Civ. P. 56.

Accordingly, summary

judgment is proper "if the movant shows that there is no genuine
dispute as to any material fact and that the movant is entitled to
judgment as a matter of law."

Fed. R. Civ. P. 56(a).

The moving

party bears the initial burden to show the absence of a genuine
issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317,

323 (1986).
Both parties agree that there are no genuine issues of
material fact. Therefore, the Court must determine de novo whether
the bankruptcy court erred in its analysis of the law.
ANALYSIS
I.

Because Debtor Wife is not named in the mortgage for the
mortgage to effectively encumber her interest in the property.
Debtor Wife is not named as a “Borrower” within the body of

the mortgage.

BAC argues, however, that the fact that she signed

the document on a line indicating that she is a “Borrower,” that
the source of title identifies her as an owner, and that she is
identified as Palmer Crouch’s wife in the legal description, mean
that she is “named” in the mortgage.

In further support of its

argument, BAC notes that Debtor Wife falls within the definition of
a Successor in Interest under the terms of the mortgage and that
she is identified by other documentation, such as the Truth in
Lending form and Notice of Right to Recession.

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When viewed

together, BAC argues, these separate references to Debtor Wife are
sufficient to create a presumption that she granted a lien against
the property by signing the mortgage.

At the very least, BAC

argues that her identification creates an ambiguity which should be
resolved “against the grantor, and so as to uphold the grant.”
[BAC Brief, Record No. 4, at p. 7(quoting Main v. Ray, 57 S.W. 7,
8 (1900))].
Debtor Wife’s interest is not encumbered by the First Mortgage
under Kentucky law, which controls in this instance. Rogan v. Bank
One, N.A. (In Re Cook), 452 F.3d 651 (6th Cir. 2006).

“[C]ourts

interpreting Kentucky law have found that a mortgage signed and
acknowledged by a person not named or sufficiently identified in
the body of the mortgage is ineffective and does not create a valid
lien against the person’s land.” Rogan v. Fifth Third Mortgage Co.
(In re Rowe), –B.R.–, 2011 WL 2507822,

*4 (B.A.P. 6th Cir. June

24, 2011) (citing Deins’ Adm’r v. Gibbs, 78 S.W.2d 346 (Ky. 1935)).
“A conveyance signed and acknowledged by a person, not named in the
body of the instrument as a grantor, is ineffectual and passes no
title as to that person.”
(Ky. 1957).

Rowe v. Bird, 304 S.W.2d 775, 777-78

“It is the law of this state that a deed, and for the

same reason a mortgage, is not valid as to one who is not named or
identified in some way as grantor or mortgagor, although he may
sign and acknowledge the instrument.”

Goodrum’s Guardian v.

Kelsey, 50 S.W.2d 932, 934 (Ky. 1932).

Kentucky law is well-

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settled on this issue, and the Court sees no basis to depart from
precedent here.
BAC also argues, relying heavily on Shaver v. Ellis, 11 S.W.2d
949 (Ky. 1928), that Mrs. Couch was sufficiently identified in the
mortgage so as to grant an interest. In Shaver, a widow and “her
heirs” were named in the granting clause of the deed.

The Shaver

court noted that the heirs were named in the body of the deed, and
“[w]hile appellants are not named in the granting clause of that
deed, they are named in the body of it and referred to therein as
grantors,
conveyed.”

immediately

following

the

description

of

the

land

Id. at 192. Thus, in Shaver, the grantors were clearly

identified in the body of the instrument making the conveyance.
The Court held that the deed was valid.

By contrast, Mrs. Crouch

was not sufficiently identified as a Borrower in any way in the
granting clause or in the body of the mortgage.

While she was

referred to in some way, the identification was not sufficient
under Kentucky law.

See also Schlarman v. Chase Home Finance (In

re Padgitt), No. 07-21467, Adversary No. 07-2063, 2008 WL 4191517,
*2 (Bankr. E.D. Ky. Sept. 11, 2008).
II.

The Second Mortgage does not ratify the First Mortgage.
Appellant next argues that the Second Mortgage ratifies the

First, and, therefore, the First Mortgage is valid as to Mrs.
Crouch’s interest.

Specifically, BAC argues that the following

language contained in the Second Mortgage provides notice to third
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parties,

including

the

Trustee,

and

that

it

is

a

“clear

ratification” of the First Mortgage:
(g) PRIOR MORTGAGE. If the provisions of this paragraph
are completed, this Mortgage is subject and subordinate
to a prior mortgage dated 8/30/02 and given by us to
Countrywide Home Loans, Inc. as mortgage in the original
amount of $71,500.00 (the “Prior Mortgage”). We shall not
increase, amend or modify the Prior Mortgage without your
prior written consent and shall upon receipt of any
written notice from the holder of the Prior Mortgage
promptly deliver a copy of such notice to you. We shall
pay and perform all of our obligations under the Prior
Mortgage as and when required under the Prior Mortgage.
This Court agrees with the bankruptcy court’s reasoning on
this issue. The language referenced as part of the Second Mortgage
is part of the form language for the Second Mortgage and, while it
includes some specifics regarding the prior First Mortgage, it does
nothing to shore up or correct the deficiencies of the First
Mortgage.

BAC cites to several Kentucky cases, East Jellico Coal

Co. v. Jones, 132 S.W. 411 (1910), and Wabash Drilling Co. v.
Ellis, 20 S.W.2d 1002 (1929), in support of its argument. However,
these cases are distinguishable.

In East Jellico, the second

instrument executed by the parties clearly indicated their intent
to correct the prior instrument.

Additionally, in Wabash, the

second instrument specifically referenced and incorporated the
original defective lease document.

In both situations, the second

instrument’s terms clearly corrected the prior deficiencies.

By

contrast, the Second Mortgage in this instance was entered for a
wholly separate purpose.

The prior mortgage was not incorporated,

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adopted, amended or corrected in any way by the terms of the
second instrument.

Instead, the Second Mortgage merely referenced

the First to establish respective priority between the documents.
Thus, the Second Mortgage does no more than provide notice of the
First Mortgage, an instrument which is not enforceable against Mrs.
Crouch’s interest and does nothing to further BAC’s ability to
pursue any interest beyond that discussed above.
CONCLUSION
Accordingly, and for the foregoing reasons, IT IS ORDERED that
the bankruptcy court’s determination be, and the same hereby is
AFFIRMED.
On this the 16th day of August, 2011.

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