Opinion
No. 13-99-12030 MA, Adversary No. 03-1269 M.
September 16, 2004
Bill Gordon, Albuquerque, NM, Attorney for Debtors.
David Cowan, Annette DeBois, Albuquerque, NM, Attorney for Chapter 13 Trustee.
MEMORANDUM
THIS MATTER is before the Court on the Motion for Summary Judgment filed by the Chapter 13 Trustee. The Chapter 13 Trustee also submitted a brief in support of the Motion for Summary Judgment. Defendant David Cowan, pro se, filed a response. Plaintiffs Robert Goodwin and Connie Goodwin filed this adversary proceeding against Defendant David Cowan seeking the following: 1) a determination that a UCC-1 financing statement purporting to create a lien against real property is null and void; and 2) a determination that an unacknowledged mortgage recorded against certain real property is null and void. In his answer to Plaintiffs' Complaint for Declaratory Judgment Voiding UCC Lien Under State Law and Determining the Amount Due on a Mortgage Lien ("Complaint"), Defendant conceded that the UCC-1 financing statement was inadequate to secure real property. (See Answer, Docket #5). The Chapter 13 Trustee was later substituted in this adversary proceeding as the real party in interest. See Order Substituting Kelley Skehen as Real Party in Interest (Docket # 14).
The Motion for Summary Judgment cites section 544 of the bankruptcy code concerning trustee avoidance powers, and requests summary judgment determining that the mortgage at issue in this adversary proceeding is null and void because it was not properly acknowledged as required by New Mexico statute. Defendant Cowan asserts that the unacknowledged mortgage is nevertheless valid. See Defendant's Memorandum in Response to Motion for Summary Judgment. Given the procedural history of this adversary proceeding, the Court will treat the Chapter 13 Trustee's Motion for Summary Judgment as a request for judgment as a matter of law on the issue of whether the mortgage is avoidable pursuant to 11 U.S.C. § 544. For the reasons set forth below, the Court finds as a matter of law that the mortgage is avoidable in accordance with 11 U.S.C. § 544 and applicable state law. Summary judgment will, therefore, be granted in favor of the Chapter 13 Trustee.
Chapter 13 debtors generally are not entitled to evoke the trustee's avoiding powers under 11 U.S.C. § 544; but Chapter 13 Trustees can. See In re Redditt, 146 B.R. 693, 700 (Bankr.S.D.Miss. 1992) (holding that chapter 13 debtor does not have the avoidance powers conferred on trustees pursuant to § 544); See also, In re Lucero, 199 B.R 742, 744-745 (Bankr.D.N.M. 1996), rev'd on other grounds, 203 B.R. 322 (10th Cir. BAP 1996) (holding that the Chapter 13 trustee has strong arm powers under 11 U.S.C. § 544, but a chapter 13 debtor does not). But see In re Richardson, 311 B.R. 302 (Bankr.S.D.Fla. 2004) (holding that a chapter 13 debtor has standing to exercise the avoidance powers of a chapter 13 trustee under § 544).
DISCUSSION
Summary judgment is appropriate when there is no dispute over genuine material facts, and the moving party is entitled to judgment as a matter of law. Rule 56, Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7056, Fed.R.Bankr.P. Plaintiff and Defendant agree that the mortgage at issue was not acknowledged in accordance with New Mexico statutory requirements, but that nevertheless, it was recorded in the real property records. Therefore, there is no genuine issue of material fact. Application of the law to the undisputed facts law will determine whether the Chapter 13 trustee is entitled to summary judgment.
Section 544 of the Bankruptcy Code confers upon the trustee the rights of a hypothetical bona fide purchaser of real property without knowledge. 11 U.S.C. § 544(a)(3); Crowder v. Crowder (In re Crowder), 225 B.R. 794, 796 (Bankr.D.N.M. 1998) ("The trustee assumes the position of a hypothetical bona fide purchaser and is entitled to avoid any transfer a bona fide purchaser could avoid."). The statute provides, in relevant part, that
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 property of the debtor or any obligation incurred by the debtor 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 th case, whether or not such a purchaser exists.11 U.S.C. § 544(a)(3).
In applying this statute, bankruptcy courts must look to state law to determine the trustee's rights as hypothetical bona fide purchaser. Crowder, 225 B.R. at 796; In re Periandri, 266 B.R. 651, 655 (6th Cir. BAP 2001) (". . . state law determines the extent of the trustee's rights under § 544(a)(3).") (citations omitted) . However, actual knowledge, as opposed to constructive knowledge, is not relevant to the analysis. 11 U.S.C. § 544(a); Crowder, 225 B.R. at 796 (noting that "[t]his power arises regardless of any actual knowledge the trustee . . . has of the transfer.") (citation omitted); In re Haviaras, 266 B.R. 792, 795 (N.D.Ohio 2001) ("Whether the trustee has actual knowledge of the mortgage is irrelevant.").
Section 14-8-4 of the New Mexico Statutes addresses the requirements for recording of documents. It provides, in relevant part, that
Any instrument of writing, duly acknowledged and certified, may be filed an recorded. Any instrument of writing, not duly acknowledged and certified may not be filed and recorded, nor considered of record, though so entered;
NMSA 1978 § 14-8-4 (Rep. Pamp. 2003) (emphasis added).
The mortgage at issue was not acknowledged, but it was recorded in the real property records. New Mexico courts have found that an unacknowledged document is nevertheless valid as between the parties to the document. See, e.g., Baker v. Baker, 90 N.M. 38, 40, n. 1, 559 P.2d 415, 417 n. 1 (1977); Vorenberg v. Bosserman, 17 N.M. 433, 440, 130 P. 438 (1913). In Baker v. Baker, 90 N.M. 38, 40, n. 1, 559 P.2d 415 (1977), the New Mexico Supreme Court noted that "The general rule is that an unacknowledged deed is binding between the parties thereto, their heirs and representatives, and persons having actual knowledge of the instrument." However, "actual knowledge" of the instrument does not invalidate the trustee's avoiding powers under 11 U.S.C. § 544. See Crowder and Haviaras, supra. Thus the Court is left with the unequivocal language of the New Mexico statute providing that an unacknowledged document may not be "considered of record, though so entered." NMSA 1978 § 14-8-4 (Rep.Pamp. 2003); see also Vorenberg v. Bosserman, 17 N.M. 433, 440, 130 P. 438 (1913) (interpreting earlier statute providing "that an instrument not duly acknowledged shall not be . . . considered of record, though so entered" to mean that an unacknowledged mortgage "was not entitled to record and, under prevailing doctrine, gave no constructive notice.").
More recent New Mexico case law appears to affirm this interpretation. In Garrett Bldg. Centers, Inc. v. Hale, 95 N.M. 450, 453, 623 P.2d 570, 573 (1981), a case involving an unacknowledged, but recorded mechanic's lien, the New Mexico Supreme Court noted in dicta that, while "[t]he filing of the lien served to place the owner of the property to be charged on notice of the lienor's claim[,] [s]ubsequent purchasers and other parties in interest were not affected because the lien was not considered of record, even though filed." Similarly, in New Mexico Properties, Inc. v. Lennox Industries, Inc., 95 N.M. 64, 65, 618 P.2d 1228, 1229 (1980), a case relied upon by the court in Hale, the court concluded that the lienholders were "left with all remedies available to a creditor, including foreclosure of liens, except as against persons whose rights rest upon the absence of a record in the office of the county clerk establishing a prior claim against the lands that are subject to the lien." (emphasis added). The New Mexico Supreme Court found the language of Section 14-8-4 clear and explicit. Id. "Absent a valid acknowledgment, an instrument may not be treated as a recorded instrument." Id. Because, under Section 14-8-4, the unackowledged mortgage is not entitled to be treated of record, though it was recorded, it cannot serve as constructive notice to a subsequent, bona fide purchaser. Thus, the trustee, who stands in the position of a hypothetical bona fide purchaser, is not bound by the unacknowledged, but recorded mortgage. In other words, Defendant's mortgage is not valid in the face of the trustee's avoidance powers.
Based on the foregoing, the Court finds that there is no genuine issue of material fact, and the Chapter 13 Trustee is entitled to summary judgment as a matter of law. An appropriate judgment will be entered.