Opinion
BANKRUPTCY NO.: 5-02-01353, ADVERSARY NO: 5-02-00271A
October 6, 2003
Nature of Proceeding: Trustee's Motion for Reconsideration (Doc. 12A).
OPINION
Drafted with the assistance of Wendy E. Morris, Law Clerk.
The Trustee presented this Court with a Motion for Reconsideration of an Order dated June 17, 2003, granting judgment in favor of the Plaintiff, Patricia Huntley. For the reasons provided herein, the Motion is denied.
Background
The Trustee's Motion arises out of Plaintiff's Complaint seeking the release of funds held by the Trustee. Debtor and Plaintiff were divorced under the laws of the State of New York in 1994. A stipulation and consent agreement, requiring Debtor to waive all rights in the marital residence located in Chemung County, New York, and execute a quit claim deed in favor of Plaintiff, survived the divorce decree and was referenced therein. Debtor however did not execute the quit claim deed until after he filed for bankruptcy. The decree also required a copy of the judgment to be filed with the Family Court and the New York Chemung County Clerk's Office.
Plaintiff sold the property sometime after Debtor filed his bankruptcy petition and the Trustee is currently holding the sale proceeds in escrow.
Prior to the hearing held on June 17, 2003, the Trustee argued in his Answer to Plaintiff's Complaint that the sale proceeds constituted property of Debtor's estate and that the recording of a divorce stipulation and consent in the County Clerk's Office did not constitute a filing in the Registry of Deeds Office. During the hearing, neither party was familiar with the State of New York's statutory provisions nor case law concerning property rights arising out of divorce proceedings. Although testimony was not presented, both parties entered various joint exhibits into evidence. Seeing how this Court was not provided with a concrete reason why the Commonwealth of Pennsylvania's interpretation on property rights arising out of a divorce decree are contrary to that of the State of New York, judgment was entered in favor of the Plaintiff and against the Trustee.
Six (6) joint exhibits were admitted into evidence:
1. 1987 Deed to Debtor and Plaintiff
2. 1994 filed Divorce Decree and Stipulation and Consent Agreement
3. 2002 Debtor's Quit Claim Deed to Plaintiff
4. 2002 Deed from Plaintiff to Timothy J. Hills
5. Seller's Closing Statement
6. Check in the amount of $10,952.17 made payable to the Trustee.
After reviewing New York's applicable law and its courts' interpretation, the arguments contained in the Trustee's Motion for Reconsideration fail to sway the Court's previous ruling.
Discussion
A motion to reconsider is appropriate when the court has obviously misapprehended a party's position or the facts or applicable law, or when the party produces new evidence that could not have been obtained through the exercise of due diligence. Anderson v. United Auto Workers, 738 F. Supp. 441, 442 (D. Kan. 1990); Taliaferro v. City of Kansas City, 128 F.R.D. 675, 677 (D. Kan. 1989). An improper use of the motion to reconsider 'can waste judicial resources and obstruct the efficient administration of justice.' United States ex rel. Houck v. Folding Carton Administration Committee, 121 F.R.D. 69, 71 (N.D. Ill. 1988). Thus, a party who fails to present his strongest case in the first instance generally has no right to raise new theories or arguments in a motion to reconsider. Renfro v. City of Emporia, 732 F. Supp. 1116, 1117 (D. Kan. 1990); Butler v. Sentry Insurance, 640 F. Supp. 806, 812 (N.D. Ill. 1986).
Fidelity State Bank v. Oles, 130 B.R. 578, 581 (D. Kan. 1991).
The Trustee's present Motion for Reconsideration lacks any reference to applicable case law and rests solely on Section 235 of New York's Domestic Relation Law, which limits public access to filings in divorce proceedings for one hundred (100) years, to advance his position that, as a hypothetical lien creditor, he is precluded from obtaining notice or knowledge of a transfer of title and therefore should have a superior interest in the property.
It is important that the Court initially note that as of the date Debtor filed his bankruptcy petition, the marital residence only became property of Debtor's estate "to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." 11 U.S.C. § 541(d). It is well established that the extent and validity of property rights are defined by state law. See Butner v. United States, 440 U.S. 48, 55 (1979). Pursuant to New York law, Debtor and Plaintiff's divorce decree defined the respected interests in the marital residence.See N.Y. Dom. Rel. § 234. Plaintiff's 100% equitable interest in the home vested by way of the filed divorce decree and referenced stipulation agreement. As of the petition date, Debtor held only bare legal title to the property and the Trustee can only take to the extent of his interest. See Roshan v. Nouri (In re Nouri), Adv. 5-02-00090A, slip op. at 4-6 (Bankr. M.D. Pa. filed August 1, 2003); Hazelton v. Hazelton (In re Hazelton), Adv. 5-02-00035A, slip op. at 7 (Bankr. M.D. Pa. filed August 1, 2003). Plaintiff's equitable interest in the marital residence did not become property of Debtor's bankruptcy estate.
However, whether the Trustee, acting as a bona fide purchaser, has the power to draw Plaintiff's equitable interest back into Debtor's bankruptcy estate involves a separate issue.
Section 544 of the Bankruptcy Code ("Code") provides, in relevant part:
(a) The trustee shall have, as of the commencement of the case, and without any regard to any knowledge of the trustee or 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 or real property . . . from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists [and has perfected such transfer].
Absent a contrary federal provision, a trustee's rights as a bona fide purchaser under 11 U.S.C. § 544 are determined by state law.See McKenzie v. Irving Trust Co., 323 U.S. 365, 371 (1945); see also In re Rodriguez, 261 B.R. 92, 94 (E.D.N.Y. 2001). Concerning the rights of a bona fide purchaser of real estate in New York, Section 291 of New York's Real Property Law states that "[e]very [conveyance of real property] not so recorded is void as against any person who subsequently purchases . . . the same real property . . . in good faith and for valuable consideration." N.Y. Real Prop. § 291.
Constructive notice of Plaintiff's equitable interest under New York law can defeat the Trustee's status as a bona fide purchaser under Section 544. See McCannon v. Marston, 679 F.2d 13, 16-17 (3d Cir. 1982); see also Wonder-Bowl Prop. v. Kim (In re Kim), 161 B.R. 831, 835 (B.A.P. 9th Cir. 1993);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); Wilson v. Parson (In re Unitas, Inc.), 77 B.R. 541 (Bankr. N.D.Tex. 1987).
Based on the various joint exhibits, the Court is convinced that the Trustee had constructive notice of Plaintiff's equitable interest in the marital residence.
As stated previously, New York courts can act within their discretion and reallocate property rights during a divorce proceeding. See N.Y. Dom. Rel. § 234. However, as pointed out by the Trustee, N.Y. Dom. Rel. § 235 prohibits public access to documents filed in divorce proceedings for a period of one hundred (100) years. See N.Y. Dom. Rel. § 235. A judgment entered during a divorce proceeding which modifies property rights is therefore insufficient under N.Y. Real Prop. § 291 to put a third party — such as a bona fide purchaser — on notice that the title holder(s)' property interests have changed. See Tompkins County Trust Co. v. Talandis, 690 N.Y.S.2d 330, 332 (N.Y.App.Div. 1999) (holding that entry of a judgment of divorce does not provide constructive notice of a property interest).
However, the public access restriction imposed by N.Y. Dom. Rel. § 235 is easily overcome by Section 234 of the same law. Section 234 provides that a copy of a judgment, order or decree in an action for divorce affecting title to real property "shall be recorded in the office of the recording officer of the county in which such property is situated, as provided in section two hundred ninety-seven-b of the real property law." N.Y. Dom. Rel. § 234.
Section 297-b of New York's Real Property Law provides, in relevant part:
When a judgment, final order or decree is rendered by a New York state court of record . . . affecting title to . . . real property, a copy of such judgment, order or decree, duly certified by the clerk of the court wherein said judgment was rendered, may be recorded in the office of the recording officer of the county in which such property is situated. . . .
N.Y. Real Prop. § 297-b.
Accordingly, a subsequent bona fide purchaser under N.Y. Real Prop. § 291 is put on constructive notice that the rights of the record title holder(s) have been modified once the judgment is recorded with the officer of the county's recording officer pursuant to N.Y. Dom. Rel. § 234 and Real Prop. § 297-b. See Talandis, 690 N.Y.S.2d at 332 (citations omitted); Robin v. Robin, 527 N.Y.S.2d 470, 472 (N.Y.App.Div. 1988). An unrecorded divorce decree is not capable of blocking claims against the property until recorded.
In the present case, Plaintiff only needs to show that the judgment was recorded according to New York law in order to defeat the Trustee's claim as a bona fide purchaser under 11 U.S.C. § 544. Accord Anderson v. Conine (In re Robertson), 203 F.3d 855 (5th Cir. 2000); Phillips v. Chandler, 215 B.R. 684 (E.D. Va. 1997);Jones v. Marchman (In re Marchman), 268 B.R. 859 (Bankr. M.D. Ala. 2001); Smith v. Smith (In re Smith), 123 B.R. 856 (Bankr. D. Neb. 1990).
Debtor and Plaintiff's divorce decree and consent and stipulation agreement were both properly recorded on January 31, 1994 with the Chemung County Clerk's Office pursuant to N.Y. Real Prop. § 297-b and N.Y. Dom. Rel. § 234 and each bears a time filed stamp from the Clerk's office. See Joint Exhibit 2. The Trustee can not turn a blind eye and ignore the fact that he was charged with constructive notice of Plaintiff's property interest when Debtor filed his petition on April 3, 2002. See Stefansky, 754 N.Y.S.2d at 56 (court held that "the intended purchaser must be presumed to have investigated the title, and to have examined every deed or instrument properly recorded, and to have known every fact disclosed or to which an inquiry suggested by the record would have led.") (citations omitted).
According to the official internet website for Chemung County Government, the Chemung County Clerk's Office is responsible for recording and maintaining records of judgments, mortgages, deeds and other matters. See http://www.chemungcounty.com.
Based on New York law, the Trustee received constructive notice of Plaintiff's equitable interest in the marital residence on the date Debtor's case commenced and he can not act as a bona fide purchaser under 11 U.S.C. § 544. The Trustee's Motion for Reconsideration is denied.
An Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that the Trustee's Motion for Reconsideration filed June 24, 2003 is denied.