Anderson v. Holt et al
Filing
32
ORDER that the decision of the Bankruptcy Court be affirmed. Signed by Honorable Timothy M Cain on 3/29/2012. (gpre, )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION
In Re:
Lee Holt Judd,
Debtor(s).
Robert F. Anderson, Trustee,
Appellant,
vs.
SUNTRUST MORTGAGE, INC., and
EMC Mortgage Corporation, as
Servicer for Citibank, N.A., as Trustee
for Certificateholders of Bear Stearns
Asset Backed Securities Trust
2007-SD-3, Asset Backed Securities
Series 2007-SD3,
Appellees.
I.
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Civil Action No. 6:11-00291-TMC
OPINION and ORDER
INTRODUCTION
Robert F. Anderson (Trustee) filed this appeal of an Order of the Bankruptcy
Court granting judgment in favor of SunTrust Mortgage, Inc. (SunTrust), and EMC
Mortgage Corporation (EMC), hereinafter collectively referred to as "Lenders." For the
reasons set forth herein, the court affirms the judgment of the Bankruptcy Court.
II.
FACTUAL AND PROCEDUAL HISTORY
The underlying facts of this case are not in dispute. Therefore, the court adopts
the undisputed factual findings of the Order of the Bankruptcy Court, which are
summarized herein.
This lawsuit began with the Trustee's efforts to recover real estate and the
proceeds thereof. The real estate in question was acquired by Lee Holt Judd ("Debtor")
by Warranty Deed dated February 1, 2005. The realty is described as Unit 603 of
Mariner's Club, Lot 3, Block 6, Key Largo North, 97501 Overseas Highway, Key Largo,
FL 33037 ("Unit 603"). The deed was recorded on or about March 3, 2005 in the
Official Records of Monroe County, Florida, in Book 2090 at Page 957.1
Lenders claim an interest in Unit 603 and/or its proceeds.
At the time the
Adversary Proceeding was filed in Bankruptcy Court, John T. Holt ("Debtor's father")
also claimed an interest in that property.
On or about February 10, 2005, to finance the acquisition of Unit 603, the Debtor
and Sarepta P. Wilson borrowed $744,800.00 from American Home Mortgage
Acceptance, Inc., evidenced by a note and mortgage granting a lien on Unit 603. The
mortgage was recorded on March 3, 2005, at Book 2090 at Page 959.
On or about February 10, 2005, to further finance the acquisition of Unit 603, the
Debtor and Wilson borrowed an additional $93,100.00 from American Home Mortgage,
evidenced by a note and mortgage granting a lien on Unit 603. That obligation was
expressly subordinate to the mortgage above, and it was recorded on March 3, 2005, in
Book 2090 at Page 983.
On or about March 24, 2005, the Debtor executed a Mortgage on Unit 603 to
secure a note in the amount of $200,000.00 in favor of Lillian S. Maresch and a
separate mortgage on Unit 603 to secure a note of $198,000.00 in favor of Van and
Sarepta P. Wilson. Both the Maresch and Wilson mortgages describe the collateral as
1
All further references to the recording of documents shall indicate recordation in the
Official Records of Monroe County, Florida.
"Unit 603 of MARINER'S CLUB as shown on the site plan attached as Exhibit 'B' to the
Declaration of Covenants, Conditions and Restrictions for Mariner's Club recorded in
Official Record Book 1659, Page 1982, more particularly described as Lot 4, Block 7,
Key Largo North." Both were recorded on November 2, 2005, in Book 2162 at Page
636 and Book 2162 at Page 640 respectively.2
On or about March 22, 2006, a Judgment in the amount of $475,962.18 was
entered in favor of Marin Reed and Mary Reed against the Debtor. The Judgment was
recorded on March 30, 2006, in Book 2197 at Page 539 and on April 20, 2006, in Book
2202 at Page 1083.
On April 27, 2006, the Debtor executed a Warranty Deed conveying Unit 603 to
Debtor's father.
Debtor's father financed the acquisition by, among other things,
borrowing $910,000.00 from SunTrust, evidenced by a note and mortgage dated April
27, 2006, subsequently assigned to EMC (the "EMC Mortgage"). Debtor's father also
borrowed an additional $260,000.00 from Defendant SunTrust, evidenced by a note and
mortgage dated April 27, 2006 (the "SunTrust Mortgage").
Before the Debtor filed bankruptcy, Comprehensive Title Company collected the
proceeds of the loans to Debtor's father from SunTrust Mortgage and EMC Mortgage
that he used to finance the purchase of Unit 603 from the Debtor.
On May 4, 2006, at 3:55 P.M., Debtor filed for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the District of
South Carolina.
2
Unit 603 is actually Lot 3, Block 6, Key Largo North. However, there is no dispute that,
despite the discrepancy in the Lot and Block Numbers in the legal description of the
property, the Maresch and Wilson mortgages constituted valid liens upon the subject
property.
The Deed from the Debtor to Debtor's father, and his EMC Mortgage and
SunTrust Mortgage had not been recorded at the time the bankruptcy case was filed.
Although the loans from the EMC and SunTrust Mortgages had been funded, the
proceeds of the sale of Unit 603 had not yet been fully disbursed to satisfy perfected
encumbrances on the title and no releases or satisfactions had been filed.
On May 4, 2006, at 3:55 P.M., the date and time of the initiation of bankruptcy
proceedings by Debtor in South Carolina, a review of the public property records in
Florida would reveal that the Debtor owned Unit 603, and that the following appeared in
the chain of title:
the $744,800.00 Mortgage, the $93,100.00 Mortgage, and the
$475,962.18 Judgment. The public records would also reflect the mortgages to Wilson
and Maresch.
Also on May 4, 2006,3 Comprehensive Title forwarded to Regent Bank's Wire
Department a request to transfer funds from the loan to the Debtor's father (secured by
the EMC Mortgage and the SunTrust Mortgage granted on Unit 603) to an account at
BB&T, Greenville, South Carolina, on account of the Maresch Mortgage and the Wilson
Mortgage and the funds were wired on that day as requested.
On May 5, 2006, Comprehensive Title forwarded to Regent's Banks Wire
Department a request to transfer funds in the amount of $788,607.52 to an account at
JP Morgan Chase to satisfy the $744,800.00 Mortgage given by the Debtor, and the
funds were wired on that day as a result.
On May 5, 2006, Comprehensive Title Company forwarded to Regent Bank's
Wire Department a request to transfer funds in the amount of $97,088.65 to an account
3
The Bankruptcy Court, from the record provided, was unable to determine the time of
any of the wire transfers.
at Chase Bank of Texas, N.A. to satisfy the $93,100.00 Mortgage given by the Debtor
and the funds were wired on that day as a result.
On June 8, 2006, documents were recorded on the public record in Monroe
County, Florida, in the following order at 1:06 P.M.: (a) 2006 Deed from Debtor to
Debtor's father in Book 2215 at Page 203; (b) EMC Mortgage in Book 2215 at Page
205; (c) SunTrust Mortgage in Book 2215 at Page 229.
Also on June 8, 2006, the following documents were recorded, all also indicating
that the time of recordation was 1:06 P.M.: (a) a Partial Release of Mortgage dated
April 27, 2006 in Book 2215 at Page 253, releasing Unit 603 from the Maresch
mortgage; (b) a Partial Release of Mortgage dated May 3, 2006 in Book 2215 at Page
254, releasing Unit 603 from the Wilson mortgage; (c) a Partial Release of Lien dated
May 2, 2006 in Book 2215 at Page 202, releasing Unit 603 from the judgment.
On June 12, 2006, in Book 2215 at Page 2212, the Mortgage Release,
Satisfaction and Discharge dated June 5, 2006, satisfying the $744,800.00 Mortgage
was recorded.
On June 21, 2006, in Book 2218 at Page 394, the Satisfaction of Mortgage dated
June 8, 2006, satisfying the $93,100.00 Mortgage was recorded. It is stipulated that
neither EMC nor SunTrust had actual knowledge of the Debtor's bankruptcy petition
filed in South Carolina before the foregoing transactions occurred.
Proof of the Debtor's filing of a bankruptcy petition in South Carolina was not filed
in Florida until March 6, 2007, in Book 2277 at Page 388.
The bankruptcy case was converted to Chapter 7 on or about May 3, 2007. On
January 29, 2008, the Trustee filed an adversary proceeding seeking recovery of money
and/or property under two separate theories of recovery from three different
Defendants. The Complaint alleges that the deed to Debtor's father was a transfer
made less than one year prior to the filing of the petition with the intent to hinder, delay
and defraud creditors, and is thus a voidable and fraudulent transfer pursuant to 11
U.S.C. § 548 (labeled in the Complaint as Trustee's "First Cause of Action (John T.
Holt)"). The Complaint further seeks recovery against all Defendants separately under
§ 544(a)(3) (labeled in the Complaint as Trustee's "Second Cause of Action (John T.
Hold and SunTrust Mortgage, Inc."), alleging that the deed to Debtor's father, and the
EMC Mortgage and the SunTrust Mortgage given by Debtor's father, were unrecorded
at the time the bankruptcy case was filed. The Complaint asks for judgment against
Debtor's father and separately against Defendants EMC and SunTrust by finding that
their interests in Unit 603 are voidable by the Trustee pursuant to 11 U.S.C. § 544(a)(3)
because at the time of the commencement of the bankruptcy case, the unrecorded
deed to the Debtor's father and his mortgages to EMC and SunTrust were subordinate
to the rights of a hypothetical bona fide purchaser of Unit 603.
On March 13, 2008, the Bankruptcy Court entered a default judgment in the
adversary proceeding in favor of the Trustee against Debtor's father on the first and
second causes of action. That judgment provided that "the Deed to John T. Holt as
described in the Complaint is hereby declared void." This left only the remaining cause
of action against Lenders brought pursuant to 11 U.S.C. § 544(a)(3).
The EMC Mortgage and the SunTrust Mortgage granted by Debtor's father
relating to Unit 603 have not been satisfied and remain of record as filed.
On or about August 29, 2008, the Trustee, as owner of the Property, after entry
of that default judgment, sold the Property for $417,500.00. This Bankruptcy Court's
order approving the sale of Unit 603 free and clear of liens provided that:
The liens of SunTrust and EMC shall attach to the net proceeds of the
sale in the same manner as they were attached to the real property sold.
The net proceeds of the sale shall be placed in a separate interest-bearing
certificate of deposit and held by the Trustee pending resolution of
Adversary Proceeding: 08-80012, Anderson v. Holt, et al. The Trustee
shall not make any disbursements from the net proceeds without a further
order from this Court.
The Trustee is currently holding $391,336.78 and Lenders claim that they are
entitled to these funds as a result of the notes and mortgages granted by Debtor's father
pre-petition and recorded, along with the deed from Debtor to Debtor's father, recorded
post-petition. The amount owed by Debtor's father as a result of the loans evidenced by
the EMC and/or SunTrust Mortgages exceeds the amount held by the Trustee. During
the pendency of the adversarial proceedings in the Bankruptcy Court, Lenders and
Trustee filed cross motions for summary judgment.
The Trustee asserted that any
interests these Defendants claim in the sale proceeds of Unit 603 are voidable under 11
U.S.C. § 544(a)(3) and requested summary judgment on these facts.
EMC and
SunTrust argued that as a matter of law, summary judgment in favor of the Trustee
pursuant to § 544(a)(3)4 is not warranted, and they instead asked the Bankruptcy Court
for summary judgment on their defenses to the Trustee's § 544(a)(3) action, which
include defenses found in § 550 and applicable law.
Trustee argued that Lenders’ interest in the subject real property was
subordinate to Trustee's interest by reason of § 544(a)(3) and Florida Sta. § 695.01(a).
4
Further references to the United States Bankruptcy Code will be by Section Number
only.
Lenders raised several defenses, among them, that Trustee's status as a hypothetical
bona fide purchaser was defeated by Trustee's constructive notice of the SunTrust and
EMC Mortgages by reason of the unsatisfied liens filed of record in Florida as of the
date of the filing of the bankruptcy case.
The Bankruptcy Court granted summary judgment in favor of Lenders, holding
that under Florida law, the existence of record of the unsatisfied liens provided notice to
a subsequent purchaser (in this instance, the Trustee, as a hypothetical bona fide
purchaser as provided by 11 U.S.C. § 544) which should cause such purchaser to
"inquire to the point of finality about the status of the encumbrances of record and any
related facts".
(Dkt. No. 7-6, at 13).
The Bankruptcy Court also ruled that "the
Trustee's rights as a hypothetical bona fide purchaser of real property cannot exist when
there are matters of record that put a purchaser on constructive notice that further
inquiry is required." (Dkt. No. 7-6, at 10,11). The Bankruptcy Court determined that, as
a matter of law, Trustee could not avail himself of the status of a bona fide purchaser by
reason of the existence of the unsatisfied mortgage liens of record. In ruling that, under
Florida law, such constructive notice prevented Trustee from using his strong-arm
powers to avoid Lender's mortgage liens, the Bankruptcy Court did not reach the merits
of the remaining arguments of the parties.
Trustee appealed the Bankruptcy Court's order to the United States District
Court. By order dated August 10, 2010, United States Judge Henry F. Floyd reversed
the order of the Bankruptcy Court, finding that the Florida courts had not yet adopted
the constructive notice provisions of Georgia law relied upon by the Bankruptcy Court
and as interpreted by the Court of Appeals of the Eleventh Circuit in Gordon v.
NovaStar Mortgage, Inc. (In re Hedrick), 524 F.3d 1175, 1183 (11th Cir. 2008), which
cited Rossville Fed. Sav. & Loan Ass'n v. Chase Manhattan Bank, 154 S.E. 2d 243 (Ga.
1967) for the proposition that an unreleased lien of record places a purchaser of real
property on notice, eliminating the possibility that a bona fide purchaser could take title
to same free of the interests from the unreleased lien. In holding that the grant of
summary judgment in favor of Lenders was improper, the District Court directed that the
case be remanded to the Bankruptcy Court to "consider the parties' other contentions in
the first instance." (Case No. 6:09-cv-02540, Dkt. No. 18, at 9).
On remand, the Bankruptcy Court considered the remaining arguments of the
parties in their respective motions for summary judgment. The court denied Trustee's
motion for summary judgment, rejecting the argument that Lenders must meet the
requirements for equitable subrogation under both state law as well as Section 509 of
the U.S. Bankruptcy Code. The Bankruptcy Court concluded that Trustee could not
avoid the mortgage liens of Lenders because under Florida law, the Trustee's status as
a bona fide purchaser (“BFP”) for value was subject to Lender's equitable subrogation
claims under state law. The Bankruptcy Court granted Lenders’ Motions for Summary
Judgment pursuant to the defenses set forth 11 U.S.C. §§ 550 (b) and (e), and denied
Lenders’ Motion for Summary Judgment on the defense of conventional subrogation.
This appeal followed. The court heard arguments on February 14, 2012.
III.
STANDARD OF REVIEW
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 158 (a) and
Federal Rule of Bankruptcy Procedure 8002. The parties have jointly stipulated the
underlying facts in this case. Accordingly, this court reviews the Bankruptcy Court's
findings of law under a de novo standard of review. Mason & Dixon Lines, Inc. v. First
Nat’l Bank of Boston, 86 B.R. 476 (M.D.N.C. 1988); aff'd, 883 F.2d (4th Cir. 1989).
Rule 56, Fed. R. Civ. P. applies in adversary proceedings in the Bankruptcy
Court. Fed. R. Bankr. P. 7056. Summary judgment is appropriate only where there is
no genuine issue as to any material fact, and the moving party is entitled to judgment as
a matter of law. Fed. R. Civ. P. 56 (a). If the moving party sufficiently supports its
motion for summary judgment, the nonmoving party must demonstrate "that there are
genuine issues of material fact." Emmett v. Johnson, 532 F.3d 291, 297 (4th Cir. 2008).
See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
IV. ISSUES PRESENTED
The parties agree that the following issues are presented for review by this court
under the stipulated facts in this case:
1.
Whether the mortgages of real estate given to Lenders herein, which were
not recorded at the time of the filing of bankruptcy proceedings, are good and
effectual against the Trustee in Bankruptcy standing as a bona fide purchaser
of real estate?5
2.
Whether Lenders are required to meet the requirements of § 509 of the
Bankruptcy Code to subrogate to other claims against the Debtor?
3.
Whether Lenders
subrogation?
have
met
the
requirements
for
conventional
4.
Whether Lenders have met the requirements for equitable subrogation?
5.
Whether Lenders are entitled to the protections of § 550 (b) of the
Bankruptcy Code?
6.
Whether Lenders are entitled to the protections of § 550 (e) of the
Bankruptcy Code?
5
This question involves the ultimate issue in this case, and, as such, will be addressed
in the conclusion section of this order.
7.
Whether this court should affirm the Bankruptcy Court's second Summary
Judgment Order on the grounds therein?
8.
Whether this court should affirm the second Summary Judgment Order on
the additional sustaining ground that the Bankruptcy Court erred in holding
that Lender's mortgages were not entitled to conventional subrogation under
Florida law?6
V. DISCUSSION AND ANALYSIS
A.
Are Lenders required to meet the requirements of § 509 of the
Bankruptcy Code to subrogate to other claims against the Debtor?
Trustee argues that § 509 of the United States Bankruptcy Code alone controls
the equitable subrogation claims of Lenders.
Section 509 provides as follows:
(a) Except as provided in subsection (b) or (c) of this section,
an entity that is liable with the debtor on, or that has
secured, a claim of a creditor against the debtor, and that
pays such claim, is subrogated to the rights of such
creditor to the extent of such payment (emphasis added).
(b) Such entity is not subrogated to the rights of such
creditor to the extent that—
(1) a claim of such entity for reimbursement or
contribution on account of such payment of such
creditor's claim is—
(A) allowed under section 502 of this title;
(B) disallowed other than under section 502 (e) of this
title; or
(C) subordinated under section 510 of this title; or
(2) as between the debtor and such entity, such entity
received the consideration for the claim held by such
creditor.
6
Questions 3 and 8 are essentially the same.
(c) The court shall subordinate to the claim of a creditor
and for the benefit of such creditor an allowed claim, by
way of subrogation under this section, or for
reimbursement or contribution, of an entity that is liable
with the debtor on, or that has secured, such creditor's
claim, until such creditor's claim is paid in full, either
through payments under this title or otherwise.
Trustee contends that Lenders were not liable with Debtor on "a claim of a
creditor against the debtor" because neither was liable with Debtor to the pre-existing
lien holders and therefore cannot meet the requirements of § 509. Trustee argues that
§ 509 controls the equitable subrogation claims of persons or entities who are not codebtors, and that since the Bankruptcy Code has a detailed section regarding
subrogation, the state law of subrogation is not applicable.
Lenders take the opposite view, adopted by the Bankruptcy Court in its order,
that the language of § 509 and its title ("Claims of codebtors") indicate the provision is
not applicable to the facts of this case. Section 509 allows a co-obligor who pays, after
the filing of the bankruptcy petition, a claim for which the debtor is primarily liable, to be
subrogated to the rights of the creditor that the co-obligor has paid. It is undisputed that
here, Lenders were not co-obligors on the mortgages and judgment which had priority
over Trustee as BFP.
Under the facts presented in this case, and in light of the
available Fourth Circuit authority discussed more fully below, this court agrees with the
proposition that § 509 does not control the equitable subrogation claims of persons who
are not co-debtors and does not pre-empt state law as it applies to the doctrine of
equitable subrogation.
As noted by the Bankruptcy Court, Trustee cites cases from various jurisdictions
supporting Trustee's position.
While arguably persuasive, these cases are not
controlling under the Eleventh Circuit or Florida state law. In In re Celotex Corp., 472
F.3d 1318 (11th Cir. 2006) cited by Trustee and referenced in the order of the
Bankruptcy Court, the court considered alternative claims for equitable subrogation
under § 509 as well as Florida state law claims.
Another case cited by Trustee is In re Fiesole Trading Co., 315 B.R. 198 (Bankr.
D. Mass. 2004), which acknowledges a split of authority on this issue and notes that
"[m]any courts have noted that the requirements of §509 are distinguishable from those
of equitable subrogation, but have held or implied that either theory may provide a basis
for subrogation in a bankruptcy case…." Id. at 203.
Additionally, this issue has been addressed by the Bankruptcy Court in this
district. In In re Houston, 409 B.R. 799, 808 (Bankr. D.S.C. 2009), the court, citing
McAllister Towing v. Ambassador Factors (In Re Topgallant Lines, Inc.) 154 B.R. 368,
382 (S.D. Ga. 1993), aff'd, 20 F.3d 1175 (11th Cir. 1994), held that the inclusion of
subrogation under § 509 of the Bankruptcy Code does not preempt state subrogation
law. The court found that:
"[t]he majority and better rule is that both subrogation under § 509 and
equitable subrogation under state law are available in bankruptcy
proceedings. That the Bankruptcy Code codifies one type of subrogation
should not stand as a bar to subrogation in other contexts, absent a clear
congressional intent. This is especially so in an area such as property
law, traditionally occupied by the states." 409 B.R. at 808.
The court finds that the Bankruptcy Court was correct in its ruling that Lenders
are not required to meet the requirements for equitable subrogation under § 509 of the
Bankruptcy Code.
B.
Have Lenders met the requirements for Equitable Subrogation under
Florida Law?
Trustee asserts the status of a bona fide purchaser of real property without
knowledge as of the commencement of the bankruptcy case pursuant to § 544(a)(3) of
the United States Bankruptcy Code, which provides as follows:
(a)
The 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 the debtor or any
obligation that is voidable by....
(3) a bona fide purchaser of real property, other than fixtures, from
the debtor, against whom applicable law permits such transfer to be
perfected, that obtains the status of a bona fide purchaser and has
perfected such transfer at the time of the commencement of the case,
whether or not such a purchaser exists.
The applicable Florida recording statute is set forth in Fla. Stat. § 695.01 (1),
which provides as follows:
(1)
No conveyance, transfer, or mortgage of real property, or of any
interest therein, nor any lease for a term of 1 year or longer, shall be
good and effectual in law or equity against creditors or subsequent
purchasers for a valuable consideration and without notice, unless the
same be recorded according to law; nor shall any such instrument
made or executed by virtue of any power of attorney be good or
effectual in law or in equity against creditors or subsequent purchasers
for a valuable consideration and without notice unless the power of
attorney be recorded before the accruing of the right of such creditor or
subsequent purchaser.
Trustee contends that by reason of his status under §544(a)(3) as a bona fide
purchaser, under the Florida recording statute, Trustee has priority over the mortgages
of Lenders, which were not recorded until after Debtor filed her bankruptcy petition in
South Carolina.
Lenders assert that the Florida recording statute is not the end of the inquiry, and
that the cases cited by Trustee are not controlling under the facts of this case, because
none of them involved a subrogation fact pattern in which a loan was used to satisfy a
perfected, pre-bankruptcy petition lien which was still of record and to which the lender
could subrogate, such that Trustee relies, in essence, upon claims for equitable liens,
not equitable subrogation.
The parties agree that a Trustee's interest in property is determined by 11 U.S.C.
§ 544(a)(3), which provides that a trustee enjoys the status of a bona fide purchaser
without actual knowledge of any outstanding claim, lien or equity, without regard to the
actual knowledge or notice of any actual creditor or trustee. In re Chateau Royale, 6
B.R. 8, 10 (Bank. N.D. Fla. 1980); Crestar Bank v. Neal (In re Kitchin Equip. Co. of
Virginia, Inc.), 960 F.2d 1242, 1245 (4th Cir. 1992). As noted above, Trustee argues
that since the Bankruptcy Code has a detailed section regarding subrogation, the state
law of subrogation is not applicable. However, the extent of a trustee's rights as a bona
fide purchaser is a matter of state property law. Am. Indus. Leasing Co. v. Searles (In
re Ludlum Enters., Inc.), 510 F.2d 996 (5th Cir. 1975). See Havee v. Belk, 775 F.2d
1209, 1218 (4th Cir. 1985) (holding that while 11 U.S.C. § 544 "gives the Trustee the
status of a hypothetical lien creditor, the exercise of such power and its extent are
governed entirely by state law"), (cited in McCormick v. Macky, 2012 WL 414667, at * 4.
(4th Cir. 2012) (When determining whether a trustee can avoid a lien created before the
bankruptcy petition is filed, his right to avoid is determined by whether, under state law,
a bona fide purchaser of the property would have taken the property subject to the lien.
If the bona fide purchaser would not have taken it subject to the lien, then neither would
the Trustee.)). See also Schlossberg v. Barney, 380 F.3d 174 (4th Cir. 2004) (" A
bankruptcy trustee…has the rights of a judicial lien creditor or bona fide purchaser, both
of which can only assert the rights granted them under state law"). For purposes of
state law questions, the parties agree that Florida law governs this case.
In this case, it is undisputed that the deed from Debtor to her father and the
purchase money mortgages executed by Debtor's father in favor of Lenders were not
recorded in Florida until after the date Debtor filed her petition for bankruptcy in South
Carolina.
There is also no dispute that the payments made by Lenders to the
preexisting lienholders satisfied the entire debt on the subject property as shown by the
release and satisfaction of all preexisting mortgages and the judgment lien.
A strict reading of Florida's recording statute would indicate that since Lender's
mortgages were not filed of record at the time the bankruptcy petition was initiated,
Trustee, assuming the position of a bona fide purchaser pursuant to § 544(a)(3), would
prevail, taking priority over such mortgages. While this may be an attractive analysis, it
is not the end of the story.
A review of Florida case law reveals that the Florida appellate courts have
recognized and applied the doctrine of equitable subrogation to allow a subsequent
lender, who has satisfied an existing mortgage lien, to assume the priority position of
such lien it has satisfied, notwithstanding the provisions of the Florida recording statute.
Equitable subrogation is a remedy in equity and its application has been debated
in several Florida opinions. Generally, subrogation is "[t]he substitution of one party for
another whose debt the party pays, entitling the paying party to rights, remedies, or
securities that would otherwise belong to the debtor. Black's Law Dictionary 1440 (7th
ed. 1999). See also Aurora Loan Servs., LLC v. Senchuk, 36 So. 3d 716 (Fla. App. 1
Dist. 2010).
In Fed. Land Bank of Columbia v. Godwin, 145 So. 883 Fla. (1933), the Florida
Supreme Court applied the doctrine of equitable subrogation to give priority to a new
mortgage over an intervening lien placed on record after a first mortgage but prior to the
mortgage at issue. In Godwin, the Mortgagors executed a mortgage in favor of First
National Bank of Perry on July 13, 1926. Mortgagors executed a second mortgage to
Alderman secured by the same real property on September 6, 1926. On December 30,
1927, Mortgagors executed another mortgage to First National to secure the renewal of
extension of the first mortgage and extension of additional sums. On August 28, 1928,
mortgagors executed another mortgage to the Federal Land Bank of Columbia, which
subsequently brought suit to foreclose its mortgage. Federal Land Bank of Columbia
sought to subrogate its mortgage lien to that of First National Bank of Perry under the
doctrine of equitable subrogation. The court held that the mortgage of December 30,
1927, which was after the date of the mortgage given to Alderman, was given as a
"renewal or extension" of the first mortgage given to First National Bank of Perry, giving
it priority over the Alderman mortgage. 145 So. at 885. The court acknowledged that
the loan from Federal Land Bank of Columbia "would not have been made except for
assurance" that it would constitute a valid first lien and stated that "[t]he rule is
academic that one who makes a loan to discharge a first mortgage, pursuant to an
agreement with the mortgagor that he shall have a first mortgage on the same lands to
secure it, the lendor will be subrogated to the rights of the first mortgagee,
notwithstanding there is at the time a second mortgage of which he (the lendor) is
ignorant." 145 So. at 885.
In discussing the application of the doctrine of equitable subrogation, the Florida
Supreme Court opined that the doctrine "does not arise from statute or custom, but is
peculiarly a creation of equity, grounded on the proposition of doing justice to the parties
without regard to form. It rests on the maxim that no one shall be enriched by another's
loss, and may be invoked when and where justice demands its application." 145 So. at
885. The court went on to state that "[b]ottomed on this premise, it follows that under
our system of jurisprudence there is no limit to the circumstances that may arise in
which this doctrine may be applied." (emphasis added). Following this line of analysis,
the Florida Supreme Court has continued to expand the liberal application of the
doctrine of equitable subrogation.
In Fed. Land Bank of Columbia v. Dekle, 148 So. 756 (Fla. 1933), Federal Land
Bank of Columbia provided funds for the payoff of a first mortgage with the intent of
replacing same with its own mortgage which would constitute a first lien on real property
owned by the mortgagor. The bank was unaware of a second mortgage to Dekle which
had been recorded prior to its own.
The Florida Supreme Court, citing Godwin,
reversed the lower court which had issued a decree in favor of Dekle by granting her
mortgage priority over that of the bank.
In so doing, the court addressed its prior
decision in Boley v. Daniel, 72 So. 644 (Fla. 1916), which had rejected the application of
equitable and conventional subrogation to grant similar relief to a volunteer.
In Brannon v. Hills, 149 So. 556 (Fla. 1933), the Supreme Court of Florida again
solidified the principle of equitable subrogation in Florida jurisprudence. In Brannon, the
mortgagor obtained a loan from Brannon, secured by a mortgage. The proceeds of the
loan were used to satisfy a first mortgage on real property. Brannon's mortgage was
later determined to be unenforceable because the mortgagor was married and had not
obtained the consent of her spouse to mortgage the property, a violation of Florida law
at the time. The court allowed Brannon to subrogate to the rights of the first mortgagee
whose mortgage had been paid off by Brannon, thereby giving Brannon priority lien
status over the subsequent mortgage. Citing Godwin and Dekle, the court held:
[T]his court has definitely aligned itself with the prevailing rule now
generally obtaining in the United States to the effect that one who loans
money on a defective mortgage for the purpose of discharging a prior valid
mortgage on the same property, where it is made to appear that the
money is to be used for that purpose, is ordinarily entitled to subrogation
to the rights of the prior mortgage.
The court went on to clarify that:
The holding of Boley v. Daniel, 72 Fla. 121, 72 So. 644, L. R. A. 1917A,
734, has not been considered by us, in the two cases recently decided, as
having been intended to announce a ruling contra. Boley v. Daniel, supra,
related to payments by 'volunteers' pure and simple. In cases like those
recently decided by us, as above stated, our holding has been that a
person advancing money on an apparently good and sufficient new
mortgage, to pay off an incumbrance which the money was being obtained
to pay off, and which was used for the purpose, is not to be regarded as
such a mere 'volunteer' as to preclude the right of subrogation, in cases
where the new security given for the loan used to pay off the old
incumbrance, turns out to be void after having been represented by the
giver of it as being good at the time of its rendition. As has been well put in
the able opinion of Mr. Justice Terrell in Federal Land Bank v. Godwin,
supra, subrogation having been greatly expanded in this country as an
equitable doctrine, 'may be employed to relieve from fraud or mistake'
where it works no injustice to the rights of innocent third parties.
149 So. at 556, 557.
Florida's test for equitable subrogation has five parts. See Dade Cnty. Sch. Bd. v.
Radio Station WQBA, 731 So. 2d 638, 646 (Fla. 1999). A discussion of these "tests"
and their application to the facts of this case is appropriate.
First, the subrogee (Lenders herein) must have made the payment to protect his
or her own interest. This was done in this case, as the funds disbursed by Lenders to
the preexisting lienholders paid off the entire debt on the subject property, as is shown
by the satisfaction and/or release of record of all preexisting mortgages and the
judgment lien. The purpose was to give SunTrust a first lien on the subject property. It
is undisputed that SunTrust used the proceeds of its loans to pay off the American
Home Mortgages, which held first and second priority lien status upon the subject real
property at the time of the filing of the bankruptcy petition in South Carolina and to
obtain releases of the property from the other liens.
Second, it must be shown that the subrogee did not act as a volunteer.
In
arguing that under the facts of this case, Lenders occupy the status of a "volunteer,"
thereby precluding them from equitable subrogation, Trustee relies upon Boley. This
reliance is misplaced. As previously noted, in Brannon, the Florida Supreme Court
specifically addressed its prior opinion in Boley to specifically provide that a party who
disburses funds to satisfy an existing mortgage of priority status and who receives a
mortgage with the intent and purpose of taking the same priority status is not a
"volunteer" and is equitably subrogated to the priority of the preexisting mortgage.
Third, it must be shown that the subrogee was not primarily liable on the debt.
There is no argument that Lenders, as third parties, were not liable on the prior
mortgages which were satisfied from the loan proceeds secured by the mortgages given
to Lenders.
Fourth, the subrogee must pay off the entire preexisting debt. Again, in this
instance, Lenders expended the entire proceeds of the loans given to the owner of the
property to pay off the existing first and second mortgage and to obtain a full and
complete release of the property from the Maresch and Wilson mortgages as well as the
judgment lien, which had attached to the property.
Finally, it must be shown that subrogation would not work any injustice on the
rights of a third party.
Trustee argues that application of the doctrine of equitable
subrogation will prejudice his rights as a hypothetical bona fide purchaser because his
interests will be subject to Lender's liens that were not of record at the time of
commencement of the bankruptcy proceedings in South Carolina (i.e. the time of the
hypothetical purchase). However, it is undisputed that at the time of the hypothetical
purchase, the preexisting mortgages and judgment liens were of record and did have
priority status over that of the BFP.
As noted by Lenders in their brief, allowing
subrogation does not prejudice Trustee's purchase rights or expectations; it merely
changes the identity of the lienholders. Trustee is in the exact same position he would
have been in had Lenders not made the loans to satisfy the prior liens. Accordingly,
Trustee suffers no prejudice by allowing equitable subrogation in this instance.
To hold otherwise would result in a windfall in favor of the Trustee, who would
enjoy the benefits of the satisfaction and release of the property from the four
mortgages and judgment lien which had priority over his status as BFP but bear no
responsibility for such liens. Under Florida law, the doctrine of equitable distribution is
recognized as one "founded on established principles of equity to prevent an unjust
forfeiture, on the one hand, and a windfall amounting to unjust enrichment on the other."
Radison Properties, Inc. v. Flamingo Groves, Inc., 767 So. 2d 587 (Fla. Dist. Ct. App.
2000).
Trustee also argues that Lender's negligence or lack of diligence in failing to
timely record their mortgages precludes relief under equitable subrogation. However, in
Suntrust Bank v. Riverside Nat’l Bank of Florida, 792 So. 2d 1222 (Fla. Dist. Ct. App.
2001), the Florida Fourth District Court of Appeal, citing Godwin, held that a bank's
negligence in failing to discover the existence of a mortgage filed of record prior to
bank's mortgage which was given in connection with a loan used to satisfy a first
mortgage, would not preclude bank from the benefit of the doctrine of equitable
subrogation. The court determined that "it is clear from the opinion of Godwin equitable
subrogation will be applied to relieve negligence, where the position of the original junior
lienors will be no worse than before the first mortgage was satisfied." 792 So. 2d at
1224, 1225.
In propounding the opposite view, Trustee cites to the case of Picker Fin. Group,
LLC v. Horizon Bank, 293 B.R. 253 (M.D. Fla. 2003). In Picker, Borrower obtained a
loan from American Bank secured by a UCC lien on certain property.
Borrower
subsequently obtained a second loan from Picker and gave him a second lien on the
same property. Thereafter, Borrower obtained a third loan from Horizon Bank (Horizon)
and gave Horizon a lien on the same property. Horizon had obtained a UCC search,
which disclosed the existence of the Picker lien, but failed to review the search results
prior to making the loan to Borrower and satisfying the lien of American Bank. The
Bankruptcy Court concluded that under Florida law, Horizon was entitled to be equitably
subrogated to the lien of American Bank pursuant to the doctrine of equitable
subrogation.
On appeal, the United States District Court for the Middle District of Florida
acknowledged that under Florida law, the principles of equitable subrogation apply to
both real and personal property, but concluded that under Boley, Horizon was precluded
from utilizing the doctrine due to its negligence in failing to review the results of the
records search and because Horizon had constructive notice of Picker's intervening
UCC lien. While the Picker court correctly noted that Boley had not been expressly
overruled, it is the opinion of this court that to apply the Picker court's reading of Boley
to the instant case would result in the misapplication of Florida law under the facts here
for the following reasons.
The Florida Supreme Court, in Boley, did not utilize constructive notice to deny
the application of the doctrine of equitable subrogation, but rather denied the lender the
use of the doctrine because it determined he was, in essence, a volunteer.
This
remains the law in Florida. Further, as noted by Lenders in their brief, in Boley, the
lender was denied the application of the doctrine of conventional, not equitable
subrogation. See Auora, 36 So.3d 716 (holding that the court in Picker misread Boley
and holding that record notice does not preclude equitable subrogation).
The Auora court, in addressing the opinion of the U. S. District Court in Picker
noted that:
"regardless of the Picker decision, the trial court was required to follow
Suntrust, as it was a controlling decision of a district court in Florida.
Pardo v. State, 596 So.2d 665, 666 (Fla.1992) (finding that in the absence
of inter-district conflict or contrary precedent for the supreme court, the
decision of a district court of appeal is binding throughout Florida); see
also Roland v. Fla. East Coast Ry., LLC, 873 So.2d 1271, 1275 n. 5 (Fla.
3d DCA 2004) (holding the Florida appellate courts are not bound by
federal precedent which is persuasive, not binding, authority) (citations
omitted). As such, for these reasons, the trial court erred in granting
summary judgment based on its interpretation of Boley as barring the
application of equitable subrogation where a refinancing lender had
constructive notice of a second lien holder." 36 So. 3d at 720.
Under the stipulated facts of this case, it is undisputed that the four mortgages of
record, as well as the judgment lien, had priority status as liens attaching to the subject
real property superior to the interest of Trustee as hypothetical BFP at the time Debtor
filed her bankruptcy petition. It is also undisputed that the loans made by Lenders and
secured by the mortgages at issue in this case were made prior to the filing of the
bankruptcy petition in South Carolina and that the proceeds of such loans were used to
satisfy the American Home mortgages and to obtain a release of the subject real
property from the other mortgages and the judgment lien. Hence, under the doctrine of
equitable subrogation, as adopted by the Florida appellate courts, and as applied to the
facts of this case, the position of the Trustee will be no worse than before such
preexisting liens were satisfied.
Accordingly, this court finds that the Bankruptcy Court was correct in granting
summary judgment in favor of Lenders on the issue of equitable subrogation.
C. Are Lenders are entitled to the protections of §§ 550 (b) and (e) of the
Bankruptcy Code?
Trustee argues that the Bankruptcy Court erred in failing to grant summary
judgment in his favor under Sections 550 (b) and (e).
1.
Section 550 (b)
The Bankruptcy Code provides a trustee in bankruptcy certain "avoidance
powers" which allow the trustee to set aside certain transactions entered into by the
debtor prior to the filing of the bankruptcy petition. Section 550 (a) provides as follows:
(a)
Except as otherwise provided in this section, to the extent
that
a
transfer
is
avoided
under
section
544,545,547,548,549,553 (b), or 724 (a) of this title, the trustee
may recover, for the benefit of the estate, the property
transferred, or, if the court so orders, the value of such property,
from---(1) the initial transferee of such transfer or the entity for
whose benefit such transfer was made; or
(2) the immediate or mediate transferee of such initial
transferee.
11 U.S.C. § 550 (a). However, § 550 also places limitations upon a trustee's powers of
recovery. Section 550 (b) states that:
(b)
The Trustee may not recover under section (a) (2) of this
section from---(1) A transferee that takes for value, including satisfaction
or securing of a present or antecedent debt, in good
faith and without knowledge of the void-ability of the
transfer avoided; or
(2) Any immediate or mediate good faith transferee of
such transferee. 11 U.S.C. § 550 (b).
Accordingly, § 550 (b) provides a defense for a subsequent transferee who can
meet the following three elements: 1) the transferee provided value in exchange for the
transfer; 2) the transferee entered into the transaction in good faith; and 3) the
transferee entered into the transaction without knowledge as to the void-ability of the
avoided transfer. SunTrust and EMC meet this test. First, SunTrust made a loan to and
secured a purchase money mortgage from Debtor's father for the purchase of the
subject property. SunTrust and EMC exchanged value in the assignment of the note
and mortgage securing same. As to the second prong of the test, SunTrust advanced
funds for the purchase of the property, and there is no evidence that SunTrust or EMC
had any relationship with Debtor, the owner of the property, prior to the conveyance to
Holt. There is no evidence of fraud or bad faith on the part of Lenders. Third, it is
stipulated that neither SunTrust nor EMC had any actual knowledge of any pending
bankruptcy proceeding involving Debtor.
There is no indication that Lenders were
aware of the void-ability of the transfer. Hence, Lenders satisfy the three requirements
set forth in § 550(b).
Further, as noted by Lenders in their brief, Trustee does not dispute that
Lenders satisfy the requirements of §§ 550 (b) or 550 (e) insofar as they require a
showing that SunTrust gave value in good faith and without knowledge of the voidability
of the transfer. Rather, Trustee argues that § 550 was not triggered because he never
sought recovery of the property, citing the case of Suhar v. Burns (In re Burns), 322
F.3d 421 (6th Cir. 2003). However, unlike the situation in Burns, in this case, the
subject real property was not "property of the estate" at the time of filing of the
bankruptcy petition.
Debtor had already deeded the subject property to her father, Mr. Holt, prior to
filing her bankruptcy petition. Additionally, SunTrust advanced funds to Debtor's father,
Mr. Holt, for the purpose of purchasing the real estate in exchange for a mortgage on
the property. SunTrust and EMC then exchanged value in the assignment of the note
and mortgage securing same. There is no dispute that SunTrust and EMC received the
transfer in good faith and no evidence in the record that they were aware of any defects
in the transfer of the property from Debtor to Mr. Holt. SunTrust merely loaned funds to
Holt for the purchase of the property. As the execution of the deed from Debtor to Holt,
as well as the giving of the mortgage and assignment, took place a week before the
filing of the bankruptcy petition and approximately one year before notice of Debtor's
bankruptcy proceedings was filed in the public records of Monroe County, Florida,
Lenders were unaware of the bankruptcy proceeding at the time of the transfer and
loan.
Trustee initiated an action to recover the property, which was accomplished, and
the same was sold pursuant to an order of the Bankruptcy Court. The provisions of §
550 were therefore triggered. Debtor's father, as grantee in the deed from Debtor, was
the "initial transferee" described in § 550(a)(1); SunTrust was an "immediate transferee"
of such initial transferee as described in § 550(a)(2), since the recordation of its
mortgages could not take place until after the conveyance by Debtor to her father.
As noted by the Bankruptcy Judge in her opinion, it is not required that the value
referenced in § 550(b) be reasonably equivalent value, but rather, it must be
"consideration sufficient to support a simple contract, analogous to the 'value' required
under state law to achieve the status of a bona fide purchaser for value." See Collier on
Bankruptcy, at ¶ 550.03 (1). Whether one acts in good faith is determined by "whether
the grantee knew or should have known that he was not trading normally but that on the
contrary, the purpose of the trade, as far as the debtor was concerned, was the
defrauding of his creditors." Id. at ¶ 550.03 (2).
Trustee, in his supplemental brief, cites the cases of In re Coleman, 426 F.3d
719 (4th Cir. 2005), and In re Nieves, 648 F3d 232 (4th Cir. 2011), for the proposition
that the defenses afforded by § 550 do not apply in this case. In Coleman, a debtor in
possession of property encumbered by two deeds of trust sought to avoid the deeds
pursuant to § 544. Thus, in Coleman, the debtor already owned the property, making
recovery of the same by the Trustee unnecessary after avoidance of the liens. Here,
Debtor conveyed the real property to her father. Lenders financed this purchase, with
the notes being secured by mortgages. The loan proceeds were disbursed to satisfy
and obtain releases of several liens of record on the date of filing of the bankruptcy
petition. The Trustee was therefore required to initiate recovery proceedings to return
the property to the estate, which was accomplished through the filing of adversary
proceedings, which called into play the § 550 defenses.
Nieves involved a situation whereby a lender, who held a mortgage on property
which had been the subject of several fraudulent transfers, attempted to invoke the
defenses set forth in § 550. The court determined that the lender had acted in bad faith
by ignoring several problems in the chain of title as well as other issues which should
have caused lender to stop and think prior to entering into the transaction. In that case,
Nieves transferred the subject property to his brother for no consideration and thereafter
filed for bankruptcy shortly thereafter. The brother then conveyed the property to an
LLC owned by a friend of Nieves and himself by a deed which was not properly
notarized. Further, the LLC was not a legal entity at the time, its charter having been
forfeited to the state. The LLC thereafter obtained a loan from Capital City using the
property as collateral utilizing a defectively executed deed of trust. Capital City did not
request any financial information concerning the LLC prior to granting the loan, or obtain
a credit report. Although Capital City did receive a certificate of good standing as to the
LLC, it made no effort to obtain an updated certificate when the loan was made one
month later. By this time, the LLC's charter had again expired.
When Capital City later attempted to invoke the defense set forth in § 550, the
Bankruptcy Court found that while Capital City, as a mediate transferee, received the
transfer from First Financial for value, it had failed to demonstrate good faith in entering
the transaction because it disregarded open and obvious red flags surrounding the
chain of title, such that any diligence on the part of the lender would have revealed
numerous problems with the transaction. Here, the parties have stipulated that neither
of the Lenders had actual knowledge of Debtor's bankruptcy Petition filed in South
Carolina before their transaction took place.
2.
Section 550 (e)
§ 550 (e) provides as follows:
(1)
A good faith transferee from whom the trustee may recover
under subsection (a) of this section has a lien on the property
recovered to secure the lesser of—
(A)
the cost, to such transferee, of any improvements
made after the transfer, less the amount of any profit
realized by or accruing to such transferee from such
property; and
(B)
any increase in the value of such property as a result
of such improvement, of the property transferred.
11 U.S.C. 550 (e) (1).
Lenders' mortgages improved the property within the meaning of § 550(e)(1).
"Improvement" includes "payment of any debt secured by a lien on such property that is
superior or equal to the rights of the trustee…" U.S.C. § 550(e)(2)(D). The proceeds of
the Suntrust mortgages were utilized to improve the value of the property by satisfying
the debt secured by the prior mortgages and judgment lien.
Lenders satisfy the
requirements of § §550(e)(1)(B) and 550(e)(2)(D) because the proceeds of the loan to
Debtor's father were used to satisfy the pre-petition liens on the subject real estate in
Florida, which took priority over the rights of Trustee as a hypothetical BFP.
It is stipulated that Lenders disbursed funds from the loan to Debtor's father that
satisfied the four mortgages that were recorded prior to the filing of the bankruptcy
petition, as well as a judgment lien of record which attached to the subject property. In
fact, the amount of the mortgage and judgment liens was greater than the value of the
property.
Accordingly, by obtaining satisfactions and releases of these pre-existing
liens, Lenders improved the value of the property.
Accordingly, the Bankruptcy Court was correct in ruling that Lenders were
entitled to summary judgment as to the defenses provided by §§ 550 (b) and (e).
D.
Have Lenders met the requirements for conventional subrogation?
The Bankruptcy Court denied Lenders' motion for summary judgment as to the
defense of Conventional Subrogation. Having determined that the Bankruptcy Court
was correct in granting summary judgment in favor of Lenders on the grounds set forth
above, it is unnecessary for the court to address this issue.7
VI.
CONCLUSION
Lenders are entitled to the protections of §§ 550 (b) and (e) of the Bankruptcy
Code. As Lenders were not co-obligors of the Debtor, Lenders are not required to meet
the requirements of § 509 of the Bankruptcy Code. The mortgages and real estate
given to Lenders herein, although not recorded at the time of the filing of the bankruptcy
proceedings, are good and effectual against the Trustee in Bankruptcy standing as a
7
Before the Bankruptcy Court, Trustee also asserted the provisions of 11 U.S.C. § 548
(c) regarding fraudulent transfers. However, Trustee abandoned this argument, which
was not raised on appeal to this court.
bona fide purchaser of real estate, as Lenders meet the requirements for equitable
subrogation under Florida law.
Wherefore, based on the foregoing discussion and analysis, it is the judgment of
this court that the decision of the Bankruptcy Court be affirmed.
IT IS SO ORDERED.
s/Timothy M. Cain
United States District Judge
March 29, 2012
Greenville, South Carolina
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