Opinion
Case No. 18-57565 Adv. Pro. No. 19-2012
2019-09-30
IN RE: Jeffrey A. HORN and Dena A. Horn, Debtors. Clyde Hardesty, Plaintiff, v. Danny K. Horn, Sr., et al., Defendants.
Larry J. McClatchey, Stephanie P. Union, Columbus, OH, for Plaintiff. G. Drew Rolston, G. Drew Rolston Atty. LLC, Logan, OH, for Defendants. Jeffrey A. Horn, Langsville, OH, pro se. Dena A. Horn, Langsville, OH, pro se.
Larry J. McClatchey, Stephanie P. Union, Columbus, OH, for Plaintiff.
G. Drew Rolston, G. Drew Rolston Atty. LLC, Logan, OH, for Defendants.
Jeffrey A. Horn, Langsville, OH, pro se.
Dena A. Horn, Langsville, OH, pro se.
OPINION AND ORDER GRANTING TRUSTEE'S MOTION FOR SUMMARY JUDGMENT AGAINST DANNY K. HORN, SR.
John E. Hoffman, Jr., United States Bankruptcy Judge
I. Introduction
This matter is before the Court on the motion for summary judgment (the "Motion") (Doc. 16) filed by Clyde Hardesty, the plaintiff in this adversary proceeding and Chapter 7 trustee in the underlying bankruptcy case (the "Trustee"), against Danny Horn, Sr. Mr. Horn is the father of debtor Jeffrey Horn and father-in-law of debtor Dena Horn (together with Jeffrey Horn, the "Debtors"). As of November 30, 2018 when the Debtors filed their Chapter 7 bankruptcy petition (the "Petition Date"), Mr. Horn possessed an unrecorded deed to the real estate located at 8916 State Route 60, McConnelsville, Ohio 43756 (the "Property"), which the Debtors had transferred to him prior to the Petition Date. By this adversary proceeding, the Trustee seeks to exercise his "strong-arm" powers under § 544(a)(3) of the Bankruptcy Code to bring the Property into the Debtors' Chapter 7 estate and sell it for the benefit of their unsecured creditors. Having obtained default judgments against the other defendants, the Trustee now seeks summary judgment against Mr. Horn. For the reasons stated below, the Motion is granted.
For purposes of this Motion, the Court will accept Mr. Horn's facts as set forth in his response (the "Response") (Doc. 22) as true and construe all inferences in the light most favorable to him. Cox v. Ky. Dep't of Transp. , 53 F.3d 146, 150 (6th Cir. 1995) ; Branham v. May , 428 F. Supp. 2d 668, 671 (E.D. Ky. 2006). But as the Trustee points out in his reply (Doc. 23), the parties do not dispute the material facts.
Seeking to avoid bankruptcy, the Debtors asked to borrow money from Mr. Horn. Resp. at 3. Because Mr. Horn, a disabled veteran of the Vietnam Era, did not have enough money to loan them the amount they needed, he instead offered to convey the Property to the Debtors so they could use it as collateral to obtain a loan. Id. at 2–3, 6. He did so in September 2017. A year passed and, having determined to proceed with a bankruptcy filing, the Debtors signed the deed back over to Mr. Horn on September 11, 2018 (the "Transfer"). Id. at 3.
Just under a week later, on September 17, Mr. Horn took the executed deed to the offices of the Morgan County engineer, auditor, and treasurer. Id. at 3–4. There, he paid off the back real estate taxes due on the Property and obtained an endorsement from the engineer and auditor approving the legal description and confirming compliance with section 319.202 of the Ohio Revised Code. Id. at 4, 14–18. Mr. Horn at the time was using a walker and was "not in good shape"; a woman at the auditor's office helped him get to the treasurer's office. Id. at 4. After paying the taxes and obtaining the stamps, Mr. Horn believed he had done all he needed to do and was "just glad [he] made it [back] to his truck." Id. The deed, however, was not recorded. Id. ("In the ordeal the last [step] of recording ... was not done."). After discovering that the deed had not been recorded during that trip in September, Mr. Horn had it recorded on February 4, 2019—over three months after the Petition Date. Id. at 4, 14.
"The auditor shall indorse each conveyance on its face to indicate the amount of the conveyance fee and compliance with this section .... The auditor shall retain the original copy of the statement of value, forward to the tax commissioner one copy on which shall be noted the most recent assessed value of the property, and furnish one copy to the grantee or the grantee's representative." Ohio Rev. Code Ann. § 319.202 (West).
III. Legal Analysis
A. Jurisdiction
The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A), (O). The Court has the constitutional authority to enter a final judgment in this adversary proceeding, as the claims at issue "arise under" the Bankruptcy Code and "stem[ ] from the bankruptcy itself." Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ; see also DeGiacomo v. Traverse (In re Traverse) , 485 B.R. 815, 819 (1st Cir. BAP 2013), rev'd on other grounds , 753 F.3d 19 (1st Cir. 2014) (affirming the Bankruptcy Appellate Panel's holding that a bankruptcy court has the authority to enter a final order on a strong-arm claim); Jones v. Wells Fargo Bank, N.A. (In re Jones) , 573 B.R. 665, 669 (Bankr. N.D. Tex. 2017) ; Tibble v. Wells Fargo Bank, N.A. (In re Hudson) , 455 B.R. 648, 657 (Bankr. W.D. Mich. 2011).
B. Summary Judgment Standard
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) (made applicable in this adversary proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure ). "On a motion for summary judgment, facts must be viewed in the light most favorable to the nonmoving party only if there is a genuine dispute as to those facts." Ricci v. DeStefano , 557 U.S. 557, 586, 129 S.Ct. 2658, 174 L.Ed.2d 490 (2009) (internal quotation marks omitted).
C. Avoidance Under § 544(a)(3)
The Trustee seeks to avoid the Transfer of the Property by wielding "[o]ne of the most powerful weapons in a bankruptcy trustee's arsenal": his strong-arm power under § 544(a)(3). Drown v. Wells Fargo Bank, N.A. (In re Scott) , 424 B.R. 315, 327 (Bankr. S.D. Ohio 2010) (quoting Taxel v. Chase Manhattan Bank, USA, N.A. (In re Deuel) , 361 B.R. 509, 511 (9th Cir. BAP 2006), aff'd , 594 F.3d 1073 (9th Cir. 2010) ), aff'd , No. 2:10-CV-272, 2011 WL 1188434 (S.D. Ohio Mar. 29, 2011). With the strong-arm power, the trustee has "the rights and powers of a judicial lien creditor or a bona fide purchaser of real property" and can "avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable" by such a creditor or bona fide purchaser. Craig v. Seymour (In re Crabtree) , 871 F.2d 36, 37 (6th Cir. 1989).
Under § 544(a)(3), a trustee steps into the shoes of a bona fide purchaser of the real property who has perfected the transfer at the time the bankruptcy case is filed. 11 U.S.C. § 544(a)(3). In order words, "the trustee hypothetically purchases the debtor's property at the commencement of the bankruptcy case, then determines whether [the property] is subject to any valid prior interests." In re Biggs, 377 F.3d 515, 517 (6th Cir. 2004) ; see also Geygan v. World Savs. Bank, FSB (In re Nolan) , 383 B.R. 391, 397 (6th Cir. BAP 2008) ("The legal fiction created by [ § 544(a) ] assumes a transfer from the debtor to a bona fide purchaser on the date of filing. The trustee is then clothed with whatever legal rights the bona fide purchaser would possess." (internal quotation marks omitted)). The rights a bona fide purchaser would possess are determined with reference to state law—here, the law of Ohio.
A bona fide purchaser is "one who takes in good faith, for value, and without actual or constructive notice of any defect." Terlecky v. Beneficial Ohio (In re Key) , 292 B.R. 879, 883 (Bankr. S.D. Ohio 2003) (citing Shaker Corlett Land Co. v. City of Cleveland , 139 Ohio St. 536, 41 N.E.2d 243 (1942) ). In applying § 544(a)(3) to the undisputed facts of this case, it does not matter whether the Trustee had actual knowledge of the challenged transfer, because "only constructive notice matters in the bankruptcy context." Harker v. PNC Mortg. Co. (In re Oakes) , 565 B.R. 616, 621 (Bankr. S.D. Ohio 2017), aff'd , 581 B.R. 500 (6th Cir. BAP 2018), aff'd , 917 F.3d 523 (6th Cir. 2019) ; see also 11 U.S.C. § 544(a) (providing that the trustee will have bona fide purchaser status "without regard to any knowledge of the trustee"); Treinish v. Norwest Bank. Minn., N.A. (In re Periandri) , 266 B.R. 651, 655 (6th Cir. BAP 2001) ("[ Section 544(a)'s] ‘knowledge of the trustee’ is a reference to actual knowledge."). The Trustee's status as a bona fide purchaser accordingly is subject to Ohio's law governing constructive notice. Watkins v. Watkins , 922 F.2d 1513, 1514 (10th Cir. 1991) ; accord Periandri , 266 B.R. at 655 (quoting Watkins ); Brown Family Farms, Inc. v. Brown (In re Brown Family Farms, Inc.) , 80 B.R. 404, 408 (Bankr. N.D. Ohio 1987), aff'd , 872 F.2d 139 (6th Cir. 1989).
Ohio law provides:
All deeds ... shall be recorded in the office of the county recorder of the county in which the premises are situated. Until so recorded or filed for record, they are fraudulent[ ] insofar as they relate to a subsequent bona fide purchaser having, at the time of purchase, no knowledge of the existence of that
In the Response, Mr. Horn asks whether "it look[s] like [he] tried to Fraud [sic] anybody." Resp. at 4. But the use of the word "fraudulent" in the statute does not mean that the parties intended to defraud anyone—rather, the transfer is merely deemed fraudulent. Cf. Daneman v. Stanley (In re Stanley) , 384 B.R. 788, 804 (Bankr. S.D. Ohio 2008) (noting that for certain constructive fraud statutes "the purpose of the Transfer and the Debtor's intent are irrelevant").
former deed, land contract, or instrument.
Ohio Rev. Code Ann. § 5301.25 (West). In other words, although "[a] deed does not have to be recorded to pass title[,] ... an unrecorded deed is unenforceable against a subsequent bona fide purchaser for value without actual knowledge." In re Estate of Dinsio , 159 Ohio App.3d 98, 823 N.E.2d 43, 47 (2004). A trustee, as a hypothetical bona fide purchaser, is therefore provided with "constructive notice of properly ... recorded real-estate instruments only, not of ... unrecorded ones." Scott , 424 B.R. at 328 (citing Simon v. Chase Manhattan Bank (In re Zaptocky) , 250 F.3d 1020, 1027 (6th Cir. 2001) ).
As of the Petition Date, Mr. Horn was merely the holder of an unrecorded deed. As between the Debtors and himself, Mr. Horn was the proper owner of the Property. Dinsio , 823 N.E.2d at 47. But because that deed was unrecorded as of the Petition Date, as between Mr. Horn and the Trustee, the Trustee as a hypothetical bona fide purchaser prevails. Gunner v. Muhammad (In re Silver) , 270 B.R. 219, 220 (Bankr. S.D. Ohio 2001).
The fact that Mr. Horn transferred the title to the Debtors so they could obtain financing does not matter for purposes of § 544(a)(3). Nor does the fact that he attempted to have the deed recorded. Like Mr. Horn, the defendant in Silver had transferred his property to the debtor for the sole purpose of helping the debtor obtain financing, and when the financing fell through, the debtor transferred the property back to the defendant. Silver , 270 B.R. at 220. Due to an error, however, the deed transferring the property back to the defendant was never recorded. Id. Despite this, the bankruptcy court held that the trustee was entitled to avoid the transfer, noting that "[t]he lack of such recording and the trustee's status as a bona fide purchaser of real property, without regard to any knowledge under 11 U.S.C. § 544(a)(3), compel[ed] that result." Id.
Similarly, in Brown Family Farms , the defendants, who had received a deed from the debtor prepetition, paid a conveyance tax and had the tax records of the county auditor updated to reflect the transfer. Brown Family Farms , 80 B.R. at 407. The defendants argued that the trustee was unable to avoid the transfer under § 544(a)(3) because the transfer card filed with the county auditor's office gave the trustee constructive notice of the transfer, thereby negating the trustee's status as a hypothetical bona fide purchaser. Id. at 408. The court disagreed:
The transfer card is ... insufficient to provide notice to the Trustee of the Defendant's interest in the property. The recording of a deed operates as notice to all subsequent purchasers, or lienors, of its existence and contents. The policy behind the recording statute is to provide the best and most easily accessible evidence of the status of title. The transfer cards in the office of the Auditor cannot act as a shadow recording system. Such a holding would be in derogation of the recording statutes. Purchasers are entitled to rely on the official records. This is the "trade-off" for a purchaser being chargeable with notice of the recitals and disclosures contained in instruments in the chain of title. There is no statutory requirement for a purchaser to check the records of the County Auditor, and this Court will not create one.
Id. at 409 (citation omitted). As in Brown Family Farms , the approval that Mr. Horn obtained from the auditor's office for the conveyance is insufficient to put the Trustee on constructive notice of the Transfer. For this reason, the Trustee retains his status as a bona fide purchaser and may avoid the Transfer under § 544(a)(3). The Court is certainly not unsympathetic to Mr. Horn, who simply transferred the Property in an effort to help his son and daughter-in-law dig out of a financial hole. And it is sensitive to the harsh results that can flow from a bankruptcy trustee's exercise of § 544(a)'s strong-arm powers in factual scenarios like these. But the Court is bound to follow the law, just as the Trustee is bound to fulfill his fiduciary duty to administer estate assets for the benefit of unsecured creditors. Unfortunately for Mr. Horn, the result here is that the Trustee is entitled to avoid Mr. Horn's unrecorded interest and sell the Property.
IV. Conclusion
For the reasons stated above, the Trustee is entitled to summary judgment and the Motion is therefore GRANTED . The Court will enter a separate judgment entry in favor of the Trustee and against Mr. Horn avoiding the Transfer of the Property and authorizing the Trustee to sell the property free and clear of any interest of Mr. Horn.
The Trustee will still need to seek authorization in the Debtors' main bankruptcy case to sell the Property, providing appropriate notice to all creditors and parties in interest in accordance with Federal Rule of Bankruptcy Procedure 2002(a)(2).