Bank of America v. Gilchrist et al

Filing 18

MEMORANDUM OPINION & ORDER - The decision of the Bankruptcy Court is REVERSED & this matter is REMANDED to the Bankruptcy Court, which should apply its calculations under 11 U.S.C. §522(f) in a manner consistent with this ruling. Signed by Judge Jennifer B Coffman on 01/25/2012.(RJD)cc: COR,USBC

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
CASE NO. 11-CV-00092-JBC
ON APPEAL FROM U.S. BANKRUPTCY COURT
BANKRUPTCY CASE NO. 09-52235
ADVERSARY NO. 10-5005
IN RE:
JOHN I. GILCHRIST & MARY J. GILCHRIST
Debtors
JOHN I. GILCHRIST & MARY J. GILCHRIST,

PLAINTIFF/APPELLANTS,

vs.
UNITED BANK & TRUST COMPANY,
VERSAILLES, KY,

DEFENDANT/THIRD-PARTY
PLAINTIFF/APPELLEE,

vs.
BANK OF AMERICA,

THIRD-PARTY
DEFENDANT/ APPELLANT.
MEMORANDUM OPINION AND ORDER
**********

This matter is before the court on the Gilchrists’ and Bank of America’s
appeals of the Bankruptcy Court’s judgment granting United Bank’s motion to alter
and amend the prior judgment and denying the Gilchrists’ and Bank of America’s
motions for summary judgment. For the reasons discussed below, the Bankruptcy
Court’s holding will be reversed, and this matter will be remanded to that court.

1

In 1995, when he was single, John Gilchrist purchased two lots at Rocky
Fork Estates in Garrard County, Kentucky. He built his current home (the
“Residence”) on one of the lots and sold the other. In 1996, John and Mary
Gilchrist were married at the Residence and have lived there ever since.
In 2006 Mary Gilchrist executed a promissory note in favor of a predecessor
in interest to Bank of America in the principal amount of $256,000 (“the BOA
Loan”). On page 2 of the Mortgage securing the BOA Loan (the “Mortgage”), in
the definition section, the “Borrower” is defined only as Mary Gilchrist – the name
of John Gilchrist does not appear. On page 15, Mary Gilchrist affixed her signature
on a line directly above her typewritten name and the word “Borrower.” John
Gilchrist affixed his signature on page 15 of the Mortgage on a line above the word
“Borrower.” The signatures of Mary and John Gilchrist were authenticated by a
notary public. Mary initialed the bottom right hand corner of each page of the
Mortgage, and John initialed every page except 13, 14, and 15. John Gilchrist did
not execute the Note secured by the mortgage.
In January 2008 United Bank and Trust Company (“United”) obtained a
judgment against the Gilchrists and others in litigation involving unrelated real
property in Jessamine County, Kentucky, for approximately $470,000. After
United foreclosed on the unrelated real property, United was still owed
approximately $150,000. In October 2008 United recorded a Notice of Judgment
Lien on Real Estate under KRS 426.070 in the Garrard County Clerk’s Office,
intending to encumber any real estate owned by the Gilchrists in Garrard County.
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In March 2009, United filed an action in Garrard County Circuit Court to foreclose
on its judgment lien. In July 2009, the Gilchrists filed a petition under Chapter 7 of
the United States Bankruptcy Code, listing their Residence as having a fair market
value of $215,000 and stating their intention to claim an exemption in the
Residence pursuant to 11 U.S.C. §522(d)(1). The Gilchrists listed BOA and United
Bank as secured creditors.
In January 2010 the Gilchrists filed this adversary proceeding to avoid
United Bank’s judgment lien pursuant to 11 U.S.C. §522(f). In its answer to the
Gilchrists’ complaint, United Bank claimed that BOA’s Mortgage was improperly
executed and that United Bank’s judgment lien has priority on the Residence.
Then, with proper standing, United Bank filed a third-party complaint against BOA,
asserting that BOA’s recorded Mortgage is invalid and that United Bank’s judgment
lien has priority over the Mortgage.1
At first the United States Bankruptcy Court for the Eastern District of
Kentucky granted the Gilchrists’ motion for summary judgment, finding that BOA’s
Mortgage was invalid as to John Gilchrist but valid as to Mary Gilchrist’s dower
interest. The court concluded that United Bank’s judgment lien could be avoided
pursuant to 11 U.S.C. § 522(f) because the lien impaired Mary’s homestead
exemption. R.1-2 at 2.

1

The Gilchrists and BOA claim that the Bankruptcy Court erred in holding that United had standing
to avoid or challenge the validity of BOA’s Mortgage. However, United is merely asserting its claim
to priority as to its interest in John Gilchrist’s property. United is not trying to avoid BOA’s
mortgage; it is arguing that there is no mortgage.

3

Upon United’s motion to alter and amend, the court concluded that it had
erred in deciding that the Mortgage was valid as to Mary’s dower interest in the
Property. The court held that, while inchoate dower cannot be mortgaged, it may
serve as the basis of a claimed homestead exemption because, under federal
bankruptcy law, a debtor's inchoate dower interest is considered property of the
bankruptcy estate pursuant to 11 U.S.C. § 541(a). Id. at 9. After performing the
requisite calculations under § 522(f), the court determined that United Bank’s
judgment did not impair John Gilchrist’s exemption, but did impair Mary Gilchrist’s
exemption. Thus, the lien could be avoided as to Mary’s interest in the property,
but not as to John’s. The Gilchrists and Bank of America appealed.
Kentucky law requires that a mortgagor be identified in the body of the
mortgage. Shaver v. Ellis, 11 S.W.2d 949, 952 (Ky. 1928); Stephens v. Perkins
273 S.W. 545 (Ky. 1925). “[I]t is fundamentally necessary that a conveyance
should use the specific names of its grantors in the body of the instrument in order
to pass valid title out of such grantors.” Christian v. Johnson, 556 S.W.2d 172
(Ky. App. 1977) (quoting Whitaker v. Langdon, 195 S.W. 2d 285, 188 (Ky. 1946).
The Mortgage in the present case is not a model of clarity. But, taken as a
whole, the Mortgage does identify the property in question, the interest in the
property that is encumbered by the Mortgage, and John Gilchrist as a co-signor.
The Bankruptcy Court erred in holding that the mortgage at issue is invalid as to
John Gilchrist.

4

On page two, the Mortgage defines “Security Instrument” as “this document
. . . together with all Riders to this document.” R. 8-1. On page three of the
Mortgage, “Exhibit A” was specifically referenced and “made a part” of the
Mortgage. Id. Exhibit A was attached to the Mortgage and consisted of a
description of the property being mortgaged: “Being the same property acquired by
John I. Gilchrist, a single person, by deed dated July 7, 1995.” Id. Thus, John
Gilchrist’s name was specifically included, by incorporation, in the body of the
Mortgage.
Under the terms of the Mortgage, John Gilchrist is a co-signer. “[A]ny
Borrower who co-signs this Security Instrument but does not execute the Note (a
‘co-signer’): (a) is co-signing this Security Instrument only to mortgage, grant and
convey the co-signers interest in the Property under the terms of this Security
Agreement.” R.8-1 at ¶13. John Gilchrist co-signed the Mortgage but did not
execute the Note. It is undisputed that Gilchrist’s intention was to encumber his
interest in the Property. That intention is clear from the four corners of the
Mortgage, and he is specifically named and identified in the body of the Mortgage
in compliance with Kentucky law.
United cites BAC Home Loans Servicing, LP v. Johnson (In re Crouch),
claiming it is dispositive of the present case. 2011 U.S. Dist. LEXIS 91867. The
facts in Johnson are indeed quite similar to those in the present case, except that
in Johnson, the name of the co-signor is not included in the description of the
property being mortgaged. In the present case, John Gilchrist’s name is included in
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the description of the property in question in “Exhibit A,” which was incorporated
into the body of the Mortgage. This is a significant distinction.
Given its findings on the issue of the validity of the Mortgage as to John
Gilchrist’s interest in the Property, the court does not need to consider the issues
of whether BOA’s mortgage is valid pursuant to the doctrine of equitable
subrogation, or whether liens may properly attach to a dower interest.
Accordingly, IT IS ORDERED that the decision of the Bankruptcy Court is
REVERSED and this matter is REMANDED to the Bankruptcy Court, which should
apply its calculations under 11 U.S.C. §522(f) in a manner consistent with this
ruling.

Signed on January 25, 2012

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