Brandon v. GMAC Mortgage, LLC

Filing 10

ORDER re 1 Bankruptcy Appeal filed by Christy L. Brandon. The Bankruptcy Court's decision and order dated May 24, 2012, is AFFIRMED. Signed by Judge Donald W. Molloy on 10/25/2012. (NOS, )

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MONTANA

MISSOULA DIVISION

CHRISTY L. BRANDON, Chapter 7
Trustee for Estate of Muriel J. Simmons,
Plaintiff!Appellant

vs.
GMAC MORTGAGE LLC; MOUNTAIN
WEST BANK N.A.; DOUGLAS W.
KIKKERT; MILODRAGOVICH, DALE,
STEINBRENNER & NYGREN P.C.; and
MURIEL J. SIMMONS
Defendants/Appellees.

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CV 12-99-M-DWM

ORDER

FILED

OCT 2 52012
CIedc. u.s DiItricI Coun
DImc:t Of IiIIonlllna
Miaeoula

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Christy Brandon, the bankruptcy trustee for the estate of Muriel Simmons,
appeals the Bankruptcy Court's decision in this case. The Bankruptcy Court
concluded that the trust indenture for Simmons's real property should be construed
as a mortgage under Montana Code Annotated § 71-1-321. Brandon argues that
the trust indenture should not be construed as a mortgage under Amsterdam

Lumber v. Dyksterhouse, 586 P.2d 705 (Mont. 1978) and Earls v. Chase Bank of
Texas, N.A., 59 P.3d 364 (Mont. 2002). Brandon's argument fails, though, and the
Bankruptcy Court is affirmed for the reasons set forth below.

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BACKGROUND

The Bankruptcy Court entered a detailed account of the facts in this case,
and the parties do not dispute that account. The facts are restated here only when
necessary to explain the decision.
Simmons filed her Chapter 7 bankruptcy petition on September 30, 2011.
Brandon is the Chapter 7 trustee. The bankruptcy estate includes a 77 acre piece of
real property that includes a home, barn, outbuildings, and extra building site.
GMAC and Mountain West Bank claim security interests in this property through
trust indentures. Both trust indentures are intended to be trust indentures under
Montana's Small Tract Financing Act, Mont. Code Ann. §§ 71-1-301 to
71-1-32l.
While the parties intended the trust indentures would be subject to Small
Tract Financing Act, the Bankruptcy Court concluded that they were not because
the size of the real property at issue-77 acres--exceeds the Act's 40-acre limit.
See Mont. Code Ann. §§ 71-1-302,71-1-304. Since the property exceeds the 40­

acre limit, the Bankruptcy Court construed it as a mortgage not subject to the Act's
provisions.
STANDARD

The Bankruptcy Court's factual findings are reviewed for clear error, and its
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legal conclusions are reviewed de novo. In re Eber, 687 F.3d 1123, 1126 (9th Cir.

2012).
ANALYSIS

The question here is whether the Bankruptcy Court correctly concluded that
the trust indenture should be construed as a mortgage under Montana Code
Annotated § 71-1-321. Its analysis is correct.
Montana Code Annotated § 71-1-321 provides:
The Small Tract Financing Act of Montana does not invalidate or
preclude the use in this state of instruments, sometimes denominated
deeds of trust, trust deeds, or trust indentures, which are not executed
in conformity with this part, but in which a conveyance for security
purposes is made to a trustee or trustees for the benefit of one or more
lenders. Such instruments are considered to be mortgages and are
subject to all laws relating to mortgages on real property. Every such
instrument, recorded as prescribed by law, from the time it is filed for
record is constructive notice ofits contents to subsequent purchasers and
encumbrancers.
(Emphasis added).
The Bankruptcy Court found the language of the statute is clear-trust
indentures are "considered to be mortgages" ifthey are "not executed in
conformity with [the Small Tract Financing Act]." Consequently the trust
indenture must be construed as a mortgage because the property exceeds the size
limitation in the Small Tract Financing Act.

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On appeal, Brandon argues that the parties intended to execute the trust
indenture under the Small Tract Financing Act and, therefore, the trust indenture
was "executed in conformity" with the Act. 1 (See Brandon's Reply Br., doc. 9 at

8.) She also argues that "[t]he correct characterization of the lenders' instruments,
therefore, is that they are defective, statutory trust indentures." (ld. at 7.)
The argument misses the mark. The trust indentures are "defective"
precisely because they were not executed in conformity with the Act. Good
intentions to comply with a statute do not mean that the instrument actually
complies.
The trust indenture does not conform with the Act. The Act authorizes trust
indentures in lieu of mortgages only for estates that are 40 acres or less. Mont.
Code Ann. §§ 71-1-302, 71-1-304. The undisputed facts show that the trust
indenture here encompasses an estate that is 77 acres. This means the trust
indenture does not conform with the Act, regardless ofthe parties' intent.
The Legislature contemplated these kinds of circumstances and since the
trust indenture does not conform with the Act, the balance of Section 71-1-321
applies. Thus, the trust indenture is "considered to be [a] mortgager ] and [is]
Brandon does not argue that the trust indentures are void or should be
rescinded under a theory of mutual mistake of fact. See generally Kruzich v. Old
Republic Ins. Co., 188 P.3d 983 (Mont. 2008).
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subject to all laws relating to mortgages on real property." Mont. Code Ann. §
71-1-321.
In Amsterdam Lumber, 586 P.2d 705, the Montana Supreme Court held that
a trust indenture for a tract that exceed the statutoI)' size limit was not a statutoI)'
trust indenture covered by the Act. Id at 705. Nor was it construed as a mortgage,
since it did not meet the definition under the Act. Id. Instead, the Court held that
the trust indenture must be treated as an equitable mortgage and enforced between
the parties as an equitable lien. Id at 710-11. The Court further held that "the lien
of such defective trust indenture is subordinate to the claims of subsequent
encumbrancers and ofjudgment creditors who extended credit subsequent to the
date of the instrument, without actual knowledge ofthe existence of the
indenture." Id
While the Supreme Court's holding in Amsterdam Lumber stands in
contradistinction to Section 71-1-321, the statute was enacted after Amsterdam
Lumber. Under Amsterdam Lumber, a trust indenture that does not confonn with
the Act is treated merely as an equitable mortgage. But, under Section 71-1-321,
the non-confonning trust indenture is treated as a statutoI)' mortgage "subject to
all laws relating to mortgages on real property."
Because Section 71-1-321 was enacted after Amsterdam Lumber, the

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Montana Supreme Court would likely hold the statute controls. The Bankruptcy
Court correctly concluded that the trust indenture must be "considered to be [a]
mortgage[] and [is] subject to all laws relating to mortgages on real property."
Mont. Code Ann. § 71-1-321.
Nor does the Montana Supreme Court's decision in Earls, 59 P.3d 364,
have any impact here. Earls does not invalidate Section 71-1-321. In Earls the
Montana Supreme Court held that a trust indenture was void ab initio where the
lender failed to strictly comply with the statutes governing homestead exemptions.
That statute was repealed, and is inapposite here. The plain language of Section
71-1-321 states that trust indentures that do not comply with the Small Tract
Financing Act are "considered to be [a] mortgage[ ] and [is] subject to all laws
relating to mortgages on real property." Earls does not change that.
Finally, it is unnecessary to address the question of whether Section
71-1-321 creates a "safe harbor" for lenders. The statute is unambiguous, and
Brandon's remedy for any alleged "safe harbor" lies with the Legislature, not the
courts.
CONCLUSION

The Bankruptcy Court correctly concluded that the trust indenture here
should be construed as a mortgage under Montana Code Annotated § 71-1-321.
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IT IS ORDERED that the Bankruptcy Court's decision and order dated May
24,2012, is AFFIRMED.
Dated this ~""day of October 2012.

loy, District Judge
istrict Court

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