MEMORANDUM OPINION ON MOTIONS FOR SUMMARY JUDGMENT
I. Introduction
Chapter 7 trustees William Todd Drown and Clyde Hardesty (“Trustees”) seek to bring various parcels of real property located in Ohio into the respective estates of the debtors in the above-captioned cases (“Debtors”) free and clear of mortgages the Debtors granted on the properties pri- or to the filing of their bankruptcy petitions. The Trustees contend that the deeds from the grantors (“Grantors”) to the Debtors were defectively executed, that as a result the Debtors did not obtain title to the properties, and that the mortgages therefore are avoidable or void under 11 U.S.C. § 544(a). The adversary proceedings include (a) quiet title actions against the Grantors and (b) actions against the holders of the mortgages as well as Mortgage Electronic Registration Systems, Inc. (“MERS”) (collectively, “Mortgagees”)
1
based on the Trustees’
The Trustees are seeking summary judgment against the Mortgagees based on the purported defects in the execution of the deeds. 2 The Mortgagees do not concede that the deeds were defectively executed, but have agreed that the Court may presume them so for purposes of summary judgment. Assuming without deciding that the deeds were defectively executed, the Court concludes that, as a matter of Ohio law, (1) the Grantors conveyed equitable interests in the properties to the Debtors, (2) the Debtors granted liens on their equitable interests in the properties to the Mortgagees, (3) the Mortgagees obtained interests in the properties from the Debtors and (4) the interests obtained by the Mortgagees were perfected through the proper execution and recording of the mortgages. Under Ohio law, no one — including judicial lien holders and bona fide purchasers — can avoid or otherwise take free of perfected interests in real property. Thus, the Court concludes that the Trustees cannot prevail solely because of defects, if any, in the execution of the deeds.
II. Jurisdiction
The Court has jurisdiction to hear and determine these consolidated adversary proceedings pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. These are core proceedings. See 28 U.S.C. § 157(b)(2)(E).
III. Procedural Background
While participating in pre-trial conferences, the Trustees and the Mortgagees identified the legal issue of whether a trustee may avoid a mortgage on real property based solely on a defect in the execution of the deed by which the property was conveyed to a debtor (“Defective Deed Issue”). Because this legal issue is common to each of the adversary proceedings, the Court advised the litigants that, in the interest of judicial economy, it intended to consolidate the proceedings for the purposes of jointly conducting a hearing and ruling on the Defective Deed Issue. No party in interest objected to the proposed consolidation. By an order entered on January 21, 2009, the Court established a briefing schedule and set a date for oral argument. 3
On March 17, 2009, the Trustees filed motions seeking summary judgment on the Defective Deed Issue. Certain of the Mortgagees — America's Wholesale Lender (“AWL”), Countrywide Home Loans, Inc. (“Countrywide”), MERS and Wells Fargo Bank, N.A. (“Wells Fargo”) — also filed cross-motions for summary judgment. After the other adversary proceedings were consolidated, one of the Mortgagees, Op
On May 12, 2009, Judges Caldwell, Hoffman and Preston heard oral argument on the Defective Deed Issue. Present at the oral argument were the following attorneys: William Todd Drown (“Drown”) and Nancy Willis for the Trustees; Amelia Bower for Aurora Loan Services, LLC (“Aurora”), Charter One Bank, N.A. (“Charter One”), Colony Mortgage Corp. (“Colony”), Option One and Wells Fargo; Maria Guthrie for AWL, Countrywide, MERS and the Small Business Administration (“SBA”); Michelle Polly-Murphy for AWL, MERS and Wells Fargo; Stephen Santangelo for Irwin Union Bank and Trust Company; and Brittany Griggs for AWL, Countrywide and MERS.
Following oral argument, each of the parties identified above, as well as Citi-mortgage, Inc. (“Citimortgage”) — an inter-venor in Adv. Pro. No. 07-2915 along with MERS 4 — filed post-hearing briefs even though the Court had taken the matter under advisement without establishing a post-hearing briefing schedule. 5 In their initial post-hearing brief, the Trustees for the first time argued that the mortgages were recorded outside their chain of title— as hypothetical bona fide purchasers of the properties' — and that the Trustees therefore lacked constructive notice of the Mortgagees’ interests. See Doc. 36 in Adv. Pro. No. 08-2085 at 14-16. Because the Trustees had not previously made this argument, the Court entered orders in the various adversary proceedings providing the Mortgagees until August 5, 2009 to file briefs addressing the argument and the Trustees until August 15, 2009 to file their reply briefs.
IY. Arguments of the Parties
A. Arguments Based on § 544(a)
In support of their request for summary judgment, the Trustees rely on § 544(a), which states:
(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 property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial hen on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(3) a bona fide purchaser of real property, other than fixtures, from the debt- or, against whom applicable law permitssuch 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.
11 U.S.C. § 544(a).
In their complaints, the Trustees relied exclusively on § 544(a)(3) and attempted to add § 544(a)(1) as a ground for avoidance only in their replies in support of their motions for summary judgment. In the interest of judicial economy and because the Mortgagees will not be prejudiced by the Court’s considering each of the Trustees’ arguments, however, this Memorandum Opinion covers both of the subsections of § 544(a) on which the Trustees rely— § 544(a)(1) and (3) — as well as § 544(a)(2).
As the Court will now outline, the legal arguments put forth by the Trustees are hardly a model of clarity or consistency. Initially, the Trustees sought to avoid the mortgages as hypothetical bona fide purchasers and, in the alternative, as subsequent bona fide purchasers. Along these lines, the Trustees stated in their motions for summary judgment that their “strong-arm powers allow them to avoid transfers of real property as hypothetical bona fide purchasers or, alternatively, as subsequent bona fide purchasers from the debtor pursuant to 11 U.S.C. § 544(a)(3).” Doc. 29 in Adv. Pro. No. 08-2085 at 3. Similarly, Drown stated during oral argument: ‘Tour Honors are very aware of the trustee’s strong-arm powers, which allow him to avoid the transfers of real property as a hypothetical bona-fide purchaser or, alternatively, as a subsequent bona-fide purchaser from the debtor pursuant to 11 U.S.C. 544(a)(3)_” Transcript of May 12, 2009 hearing (“Transcript”) at 13:24-14:3. The distinction Drown appeared to be making between hypothetical bona fide purchasers and subsequent bona fide purchasers was curious because “the trustee hypothetically purchases the debtor’s property at the commencement of the bankruptcy case,” Gregory v. Ocwen Fed. Bank (In re Biggs), 377 F.3d 515, 517 (6th Cir.2004), and § 544(a)(3) governs only prepetition, not postpetition, transfers. 6 Under § 544(a)(3), therefore, a trustee will always be a subsequent bona fide purchaser; there is no distinction between a hypothetical bona fide purchaser and a subsequent bona fide purchaser in the context of § 544(a)(3).
As discussed below in Part IV.B, the Trustees have taken the position that the mortgages did not effectuate transfers of property interests — more specifically, lien interests — from the Debtors. Thus, the Trustees also have taken the position that § 544(a)(3) “confer[s] on the trustee two powers: the [transfer] avoidance powers (‘may avoid’) and the ‘status’ powers (‘rights and powers of).” Doc. 41 in Adv. Pro. No. 08-2085 at
7
n. 2. Although trustees clearly have “status” powers in addition to the power to avoid transfers under § 544(a)(1) and (2),
7
a split of authority exists on the issue of whether trustees
The Mortgagees argue that § 544(a)(3) does not apply in these adversary proceedings because the deeds did not effectuate transfers from the Debtors, but instead effectuated transfers from the Grantors. See Doc. 37 in Adv. Pro. No. 08-2085 at 10; Doc. 27 in Adv. Pro. No. 08-2158 at 8. The pending motions for summary judgment, however, seek judgment on the Trustees’ attempt to negate the transfers effectuated by the mortgages, not the transfers effectuated by the deeds. And, as the Court will discuss in Part V.B.3 below, the mortgages effectuated transfers of interests— lien interests in the properties — from the Debtors. Thus, even if the Court’s assumption — that a transfer from a debtor is not a prerequisite to the applicability of § 544(a)(3) — is incorrect, the subsection nonetheless would apply here.
B. Arguments Based on the Interests of the Debtors and the Mortgagees
The Trustees initially took the position that the deeds conveyed equitable interests in the properties to the Debtors.
See
Doc. 29 in Adv. Pro. No. 08-2085 at 9 (“From the 1820s to the present date, the Supreme Court of Ohio has held in numerous deed cases that
a defectively executed deed does not convey legal title but is treated as an equitable interest in the property or as an agreement to convey the property.”
(emphasis in original)). In their reply in support of summary judgment, the Trustees reiterated the position that the Debtors “acquired equitable interests in the real properties under the defec
The Trustees’ arguments concerning the Debtors’ ability to grant mortgages on the properties also have been hopelessly muddled and inconsistent. Initially, they argued that a party lacking legal title to real property is unable to encumber the property. See Doc. 29 in Adv. Pro. No. 08-2085 at 18 (“[I]f a debtor failed to obtain legal title to the real property because of a defective deed, the debtor could not encumber the property by mortgage, and any attempt to do so would be null and void as a matter of law.”). They later retreated from their position, stating instead that the Debtors “could only encumber their equitable interests in the properties.” Doc. 32 in Adv. Pro. No. 08-2085 at 5. Yet, in a post-hearing brief, the Trustees flip-flopped again, arguing that “if the interest obtained by the debtors is a cause of action in contract or a vendee’s lien ... [then] neither of these interests is an interest in property and therefore could not be mortgaged.” Doc. 36 in Adv. Pro. No. 08-2085 at 8-9. In the alternative, the Trustees argued that, even if the Court were to hold that the Debtors had obtained equitable interests in the properties by virtue of the deeds and could mortgage those interests, the Mortgagees received only equitable mortgages on the property that would be inferior to the Trustees’ equitable interests. See id. at 14 (“The Trustees have asked the Court to quiet title as part of the relief sought in these adversary proceedings. Because the Trustees have the potential to perfect their equitable interests and ‘call in’ the legal estate, the Trustees’ equitable interests in the property are superior to those of Defendants.”). In short, the Trustees’ arguments with respect to the nature of the Debtors’ interests in the properties and, in turn, the extent of the Mortgagees’ interests, have been maddeningly inconsistent and difficult to decipher.
The Trustees also expressed conflicting views regarding the Mortgagees’ interests during oral argument, seesawing from the position that the mortgages “don’t create any interest,” Transcript at 18:9, to the position that the Mortgagees “may have an equitable interest” in the real property, id. at 18:19, back to the position that “even though the defendants’ mortgages are properly recorded, there’s no interest that’s been conveyed to them.” Id. at 19:9-11. On the one hand, the Trustees argued that the Debtors could not have created liens on their equitable interests when they granted the mortgages, see id. at 19:1-8; on the other hand, they argued that each of the mortgages “operates only to create a lien upon the mortgagor’s equitable interest and is, therefore, an equitable mortgage.” Id. at 42:9-11.
In response to the Trustees’ various arguments based on the interests of the Debtors and the Mortgagees, certain
C. Arguments Based on the Chain of Title
The Trustees propounded a new argument in their initial post-hearing brief— that they should prevail because the mortgages were recorded outside of the chain of title of a bona fide purchaser. As discussed below in Part V.B.3.f.ii, the Trustees developed this argument in their second post-hearing brief. Disputing the chain-of-title argument, the Mortgagees contend that, because the mortgages themselves were properly executed and recorded, the mortgages provided the Trustees with constructive notice of the Mortgagees’ interests. 9
V. Legal Analysis
A. Summary Judgment is Appropriate.
Under Fed.R.Civ.P. 56(c), made applicable in these adversary proceedings by Fed. R. Bankr.P. 7056, summary judgment is appropriate where “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c)(2);
see also Novak v. MetroHealth Med. Ctr.,
During oral argument, the Trustees— despite having consented to the consolidation of these adversary proceedings for the purpose of summary judgment and despite having filed summary judgment motions— questioned whether it was procedurally proper for the Court to grant summary judgment. See Transcript at 6:1-5 (“If [the Trustees lose and] we took it up on appeal, there would have been no underlying determination by the Court as to whether or not we had defective deeds to begin with and we’re concerned that this might then be an advisory opinion.”). The Court disagreed with the suggestion that its opinion would be advisory, see id. 8:19-10:2, and the Trustees did not pursue their position further during oral argument or in their post-hearing briefs.
The initial position maintained by the Trustees in this regard — that the Court’s opinion would be merely advisory — was incorrect. The parties have consented to the Court’s assuming for the purposes of summary judgment that the deeds were defectively executed.
10
Thus, the Defec
Under Sixth Circuit law, it also is of no moment that certain of the Mortgagees did not file cross-motions for summary judgment or that no party filed a motion for summary judgment in Adv. Pro. No. 09-2087.
See K.E. Res., Ltd. v. BMO Fin. Inc. (In re Century Offshore Mgmt. Corp.),
These standards are satisfied here. First, the parties received advance notice of — and consented to — the Court’s ruling on the Defective Deed Issue on summary judgment. Second, the parties participated in oral argument and fully briefed the Defective Deed Issue by filing briefs both before and after the oral argument. Third, although disputes exist regarding other issues, the parties concede that there are no disputed material facts bearing on the Defective Deed Issue.
B. Defective Execution of the Deeds Does Not Provide a Basis for Avoidance of the Mortgages.
1. Section 544(a)
In relying on § 544(a), the Trustees are attempting to wield the strong-arm power, which is “[o]ne of the most powerful weapons in a bankruptcy trustee’s arsenal[J”
Taxel v. Chase Manhattan Bank, USA, N.A. (In re Deuel),
Section 544(a)(1) grants each of the Trustees “the status of a hypothetical lien creditor who is deemed to have perfected his interest as of the date of the filing of the bankruptcy petition[,]”
Rogan v. Bank One, N.A. (In re Cook),
Under § 544(a)(2), the trustee has the rights and powers of an unsatisfied execution creditor, a hypothetical “creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debt- or that is returned unsatisfied at such time....” 11 U.S.C. § 544(a)(2). A creditor obtaining such an execution could not use it to avoid or otherwise obtain priority over prior perfected mortgages.
See Fundex Capital Corp. v. Balaber-Strauss (In re Tampa Chain Co.),
Likewise, the holder of a mortgage that is perfected as of the petition date will prevail over a trustee qua hypothetical bona fide purchaser. Under § 544(a)(3), a trustee has the status of “a bona fide purchaser of real property ... from the debtor ... that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the ease....” 11 U.S.C. § 544(a)(3). Under this section, “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.”
Biggs,
Despite its scope and reach, the strong-arm power “ ‘does not clothe a trustee with [the] protective mantle [of a bona fide purchaser] if there was no way, under the applicable state law, that anyone could attain the status of a bona fide purchaser.’ ”
Treinish v. Norwest Bank Minnesota, N.A. (In re Periandri),
As discussed below, neither bona fide purchasers, unsatisfied execution creditors nor holders of judicial liens take free of perfected interests in real property under Ohio law. The Mortgagees, therefore, will withstand the attacks the Trustees are mounting from their positions as bona fide purchasers and holders of judicial liens if the mortgages are perfected. That the mortgages can withstand such attacks if they are perfected makes sense because “[t]he purpose of the strong arm clause is to cut off unperfected security interests, secret liens and undisclosed prepetition claims against the debtor’s property as of the commencement of the case.”
Canney v. Merchants Bank (In re Canney),
2. Ohio Law
Applicable state law governs questions not directly addressed by the Bankruptcy Code.
See Reinhardt v. Vanderbilt Mortgage & Fin., Inc. (In re Reinhardt),
Certain provisions of the Ohio Revised Code are relevant to the outcome here. In applying statutory law, the Court notes “the restricted relationship a federal court has in applying a state statute when that statute has been the subject of interpretation and application by the state’s highest court.”
Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc.),
3. Application of Ohio Law
The Trustees have woven their arguments based on Ohio law into a knot of nearly Gordian proportions. Unwinding the knot will be a somewhat lengthy, intricate process. Lest the reader get caught in the strands as the knot unwinds, the Court will preface its analysis with a synopsis. In short — notwithstanding the fact that the Mortgagees’ liens encumber equitable, rather than legal, interests (i.e., the Debtors’ equitable interests in the properties) — the Mortgagees must prevail because their mortgages were perfected by proper execution and recording under Ohio law.
a. The Grantors Conveyed Equitable Interests in the Properties to the Debtors.
In applying Ohio law, the Court must first define the Debtors’ rights under the deeds, which the Court is presuming for the purposes of summary judgment to be defective. The position initially taken by the Trustees with respect to each Debtor’s interest in the real property is correct — a defectively executed deed conveys “an equitable interest in the property” to the grantee.
Basil v. Vincello,
b. The Debtors Granted Mortgages on Their Equitable Interests in the Properties.
Next, the Court must determine the Debtors’ ability — which the Trustees have questioned — to grant mortgages on their equitable interests in the properties. There is no provision of the Ohio Revised Code that prohibits owners of interests in real property — whether the interests arose via defective deeds or otherwise — to grant mortgages on the property merely because their interests in the property are equitable. To the contrary, under Ohio law, persons such as the Debtors who hold equitable interests in real property may grant mortgages on the property even if they do not hold the legal title.
See Albright v. Meredith,
c. It Is Unclear Under Ohio Law Whether a Mortgage Encumbering an Equitable Interest Is an Equitable Mortgage or a Legal Mortgage on an Equitable Interest.
The Trustees contend that a mortgage on an equitable interest is an equita
In support of their position, the Trustees rely on
Allemania Loan & Bldg. Co. No. 2 v. Frantzreb,
It is true, as contended by counsel for defendants, that the mortgages were executed according to law. But it does not follow that, as against the company holding the legal title, they created legal liens. Since the mortgagor has never held the legal title, the mortgages operated only to create a lien upon his equitable interest. The controversy is between the company and the mortgagees, and the superiority of right incident to the legal title is with the former.
Id.
at 498. In other words, in
Allemania
the Ohio Supreme Court held that properly executed mortgages did not create legal liens against the owner of the legal title where that owner had not received all of the payments due it under a land installment contract. In a similar decision on which the Trustees rely,
Thornton v. Guckiean & Co.,
d. The Mortgagees’ Interests Were Perfected Through Properly Executed and Recorded Mortgages.
The next issue is perfection. “Ohio has two different systems for perfecting interests in real property: the general (or traditional) recording laws and the land registration laws (also referred to as the Torrens System).”
Bavely v. Huntington Nat’l Bank (In re Cowan),
As discussed above, it is unclear whether the Trustees’ position that a mortgage on an equitable interest is an equitable mortgage is correct under Ohio law. Even if the position is correct, however, it would not win the day for the Trustees because an equitable interest can be recorded and perfected under Ohio law. In support of their argument to the contrary, the Trustees rely on
Churchill v. Little,
Likewise, the current version of the Ohio Revised Code in no way restricts the application of Ohio’s recording act to legal interests. As noted above, Ohio Revised Code § 5301.01 governs the execution and acknowledgment of any “deed, mortgage, land contract ... or lease of any interest in real property.” Ohio Rev.Code Ann. § 5301.01 (emphasis added). In addition, Ohio Revised Code § 5301.25 states:
All deeds, land contracts ... and instruments of writing properly executed for the conveyance or encumbrances of lands, tenements, or hereditaments ... 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 former deed, land contract, or instrument.
Ohio Rev.Code Ann. § 5301.25(A). Thus, there is nothing in § 5301.01, § 5301.25(A) or any other provision of the Ohio Revised Code that suggests that properly executed mortgages on equitable interests are ineligible to be perfected by proper recording.
e. The Trustees Cannot Prevail as Unsatisfied Execution Creditors or Holders of Judicial Liens.
The general rule in Ohio with respect to judicial lien holders is as follows:
[T]he interest of a person to whom a judgment debtor has conveyed real estate before the attachment of the judgment or execution lien is preferred to the interest of the judgment creditor, unless such priority is affected by the provisions of recording statutes, or statutes relating to fraudulent conveyances, or the conveyance is void for other reasons, or the grantee is estopped from asserting his claim as against the judgment creditors.
Basil,
Under § 544(a)(2), the trustee has the rights and powers of an unsatisfied execution creditor. “An execution may be returned wholly unsatisfied after a levy has been made ... for many reasons, as where the property is covered by mortgage .... ”
Wild v. Apple,
f. The Trustees Cannot Prevail as Bona Fide Purchasers.
Under Ohio law, “a ‘bona fide purchaser’ is one who acquires legal title to real estate for valuable consideration, in good faith, and without knowledge or notice of another’s equitable interest in that property.”
Bergholtz Coal Holding Co. v. Dunning,
i. The Trustees’ Equitable-Mortgage Argument
The Trustees contend that mortgages on equitable interests are equitable mortgages. See Doc. 41 in Adv. Pro. No. 08-2085. Even if the Court were to accept the validity of this premise, it does not follow that the Trustees must prevail. For the reasons explained above, the Trustees had constructive notice of the Mortgagees’ interests and therefore cannot avoid or otherwise negate those interests.
In support of their equitable-mortgage argument, the Trustees rely on the familiar aphorism that a bird that walks, swims and quacks like a duck must be a duck,
see id.
at 7 n. 3, concluding that because some equitable mortgages (defectively executed mortgages) do not provide constructive notice, anything that might be called an equitable mortgage does not provide constructive notice. But this is a non sequitur. The Court must look to “the true substance of what is involved,
ie.,
to put it as a variation on [the Trustees’] popular theme — if something does not look like a duck, and does not quack like a duck, calling it a duck does not make it one.”
In re Am. Tissue, Inc.,
The Trustees attempt to buttress their equitable-mortgage argument by citing in-apposite decisions rendered by Ohio and bankruptcy courts. For example, they rely on
Bloom v. Haggle,
From among the bankruptcy courts, the Trustees cite
Hunter v. Bank of New York (In re Anderson),
Moreover, if, as here, “such a recorded mortgage would give constructive notice to third parties under Ohio law, then the bankruptcy trustee cannot set aside the mortgage.”
Bunn,
In their post-hearing briefs, the Trustees made one final argument for why they did not have constructive notice of the Mortgagees’ interests despite the recording of the mortgages. The Trustees’ chain-of-title argument is as follows:
The underlying assumption in a title search is that one does not search a person’s name in the index until that person receives title.... Ohio law provides that an encumbrance must be recorded within the purchaser’s chain of title in order for it to provide constructive notice to a subsequent bona fide purchaser....
The effect of a defective deed is that the link in the chain of title is broken, and anything that appears in the record after the missing link is outside the chain of title. Once the defective deed is ignored for purposes of constructive notice, one cannot be charged with constructive notice of the mortgage that “springs” from the defective deed....
[0]nce the defective deed upon which the mortgage is based is regarded a nullity, one could not be charged with constructive notice of any transaction, i.e., a mortgage, based on the defective deed.
See Doc. 41 in Adv. Pro. No. 08-2085 at 11, 15-16.
The Trustees concede that they were “unable to find any Ohio case directly addressing the issue [of] whether a recorded mortgage from a grantee of a defective deed is within the chain of title so as to provide constructive notice.”
Id.
at 11. The lack of any precedent from the courts of Ohio in support of the Trustees’ chain-of-title argument would be reason enough to reject it.
See Bunn,
Although decisions bearing on mortgage-avoidance issues in Ohio are frequently of nineteenth century vintage, the Court need look no further back in time than
Wayne Building & Loan Co. v. Yarborough,
Wayne filed an action for foreclosure and marshalling of liens, and the trial court ordered the sale of the property. On appeal, the Ohio court of appeals ranked the relative priority of the liens in the following order: (1) Wayne’s mortgage lien, (2) the mechanics’ liens, (3) Sauter’s mortgage lien and (4) the Lantzes’ vend-ees’ lien for their purchase price. The Lantzes, Sauter and a mechanic’s lienor, The Falls Lumber Company (“Falls Lumber”), appealed to the Ohio Supreme Court. See id. at 845. Falls Lumber challenged Wayne’s mortgage on several grounds. The Ohio Supreme Court reversed the court of appeals on a ground that is not relevant to the outcome of these adversary proceedings. In doing so, however, the Ohio Supreme Court also addressed an argument put forth by Falls Lumber that is relevant here. Falls Lumber argued that it did not have constructive notice of the version of the Wayne mortgage that was recorded prior to the time that its mechanic’s lien attached because the mortgage was recorded before the deed to Yarborough was recorded and therefore was outside of the chain of title of Falls Lumber. Id. at 852. Assuming for the sake of its decision that mechanics’ lienors are purchasers within the meaning of Ohio Revised Code § 5301.25, the Ohio Supreme Court rejected the chain-of-title argument:
[T]he mechanics’ lienors, even if purchasers, are not purchasers from one who appears of record to have the title, nor is there any question herein of unrecorded conveyances by the common grantor of all the parties (Yarbor-ough) ....
In the instant cases, it was specifically found that Yarborough contracted for labor and materials with the mechanics’ lienors as owner, and they, therefore, clearly claim through him. If they had checked [Yarborough’s] title, the first thing they would have found would have been his mortgage to Wayne. They would not have found a deed to Yarbor-ough, but surely that would not privilege them to ignore the mortgage.
... In the instant cases examination of the record by those knowing of and claiming through Yarborough would have furnished actual notice of the Wayne mortgage and, therefore, the record thereof is constructive notice as to such parties.
Id. at 852-54 (citations omitted) (emphasis added).
As discussed previously, as parties claiming to be bona fide purchasers under § 544(a)(3), the Trustees are deemed to have conducted title searches. In addition, under § 544(a)(3), the Trustees are hypothetical purchasers of real property “from” the Debtors. 11 U.S.C. § 544(a)(3).
See also Nolan,
VI. Conclusion
Despite all of the Trustees’ arguments to the contrary, the Court must conclude that the Trustees had constructive notice of the Mortgagees’ interests in the various parcels of real property. Accordingly, the Trustees’ status as hypothetical purchasers from the Debtors does not provide a basis for avoidance of the mortgages. For the foregoing reasons, the Court GRANTS summary judgment in favor of the Mortgagees and against the Trustees on the Defective Deed Issue.
IT IS SO ORDERED.
Notes
. The defined term "Mortgagees” includes MERS for convenience only. "MERS is simply a company created to track ownership interests in residential mortgages!.] [M]ort-gage lenders subscribe to MERS and agree to appoint MERS to act as their common agent on mortgages they register with the MERS system.”
Countrywide Home Loans, Inc. v.
. The Trustees are not currently seeking summary judgment against the Grantors.
. The Court derives its authority to issue this memorandum opinion from 28 U.S.C. § 132(c), under which the judicial power of the Court may be exercised by a single judge, "[ejxcept as otherwise provided by law, or rule or order of court....” 28 U.S.C. § 132(c).
See also Rhiel v. OhioHealth Corp. (In re Hunter),
. See Doc. 40 in Adv. Pro. No. 07-2915.
. On May 13, 2009, Aurora, Charter One, Citimortgage, Colony, MERS, Option One and Wells Fargo filed a combined supplemental brief. On May 16, 2009, the Trustees filed their initial supplemental brief. See Doc. 36 in Adv. Pro. No. 08-2085. On May 27, 2009, AWL, Countrywide, MERS and the SBA filed a supplemental brief. See Doc. 37 in Adv. Pro. No. 08-2085.
.
See Rieser v. Dinsmore & Shohl, LLP (In re Troutman Enters., Inc.),
.
See, e.g., Rieser v. Hayslip (In re Canyon Sys. Corp.),
. In Belisle, the issue was whether a trustee may use § 544(a)(3) to bring into the bankruptcy estate property that the debtor holds in constructive trust for victims of the debtor's fraud. In that case, a real estate entrepreneur had formed partnerships to raise money for the acquisition of a leasehold interest in a shopping center but, rather than purchasing the leasehold in the name of the partnerships, he used the partnerships’ funds to purchase the leasehold in his own name, and then dealt with the leased premises and its tenants as though he alone owned the leasehold. After the entrepreneur filed a bankruptcy petition, the trustee sought to bring the leasehold interest into the estate under § 544(a)(3) on the grounds that, under applicable nonbankrupt-cy law, ''[a] bona fide purchaser of the leasehold interest, without notice of the earlier claim [of the partners], would take ahead of a person [such as a partner] who has not recorded his entitlement.” Id. at 514. Among other things, the defrauded partners argued that § 544(a)(3) did not apply because the entrepreneur "did not transfer the ... leasehold, and there is therefore nothing for the Trustee to avoid.” Id. The Seventh Circuit held that § 544(a)(3) applies even when there is no transfer from the debtor for the trustee to avoid. See id. at 515 ("The statute mentions 'transfer' only in the sense of the hypothetical transfer that measures the trustee’s rights: if a hypothetical bona fide transferee from the debtor would come ahead of the 'true' owner's rights, then the trustee takes ahead of the true owner.”).
. The Mortgagees also argue that the doctrines of estoppel by deed and estoppel by mortgage preclude the Trustees from avoiding the mortgages. Given its rulings on the parties' other arguments, however, the Court need not address these estoppel-based arguments.
. The Trustees did not allege in their summary judgment motions that the mortgages granted by the Debtors were defectively executed. In their complaints, the Trustees alleged problems with the mortgages in only two of the adversary proceedings, but neither potential problem involves defective execution per se. In Adv. Pro. No. 07-2913, Drown
. Prior to May 1, 2002
(Basil
was issued before that date), Ohio law provided that "[t]he syllabus of a Supreme Court opinion states the controlling point or points of law decided in and necessarily arising from the facts of the specific case before the Court for adjudication.” Rule 1(B) of the Supreme Court of the Ohio Rules for the Reporting of Opinions (2001). The Sixth Circuit, however, has held that ”[a]lthough the Ohio Supreme Court lays down the law through the syllabus, [a court] may look to the body of the opinion for explication of that syllabus law.”
Hostetler v. Consol. Rail Corp.,
. Ohio Revised Code § 5301.01(A) states:
A deed, mortgage, land contract ... or lease of any interest in real property and a memorandum of trust ... shall be signed by the grantor, mortgagor, vendor, or lessor in the case of a deed, mortgage, land contract, or lease or shall be signed by the trustee in the case of a memorandum of trust. The signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor, or by the trustee, before a judge or clerk of a court of record in this state, or a county auditor, county engineer, notary public, or mayor, who shall certify the acknowledgment and subscribe the official’s name to the certificate of the acknowledgment.
Ohio Rev.Code Ann. § 5301.01(A) (West 2010).
. Ohio Revised Code § 5301.23(A) states:
All properly executed mortgages shall be recorded in the office of the county recorder of the county in which the mortgaged premises are situated and shall take effect at the time they are delivered to the recorder for record. If two or more mortgages pertaining to the same premises are presented for record on the same day, they shall take effect in the order of their presentation. The first mortgage presented shall be the first recorded, and the first mortgage recorded shall have preference.
Ohio Rev.Code Ann. § 5301.23(A).
.
See Drown v. Nat’l City Bank (In re Ingersoll),
. Section 4106 of the Ohio Revised Statutes (passed Mar. 19, 1887) governed the execution and acknowledgment of any “deed, mortgage, or lease of any estate or interest in real property....’’ 2 Bates Ann. Revised Statutes 2282 (W.H. Anderson Co. 1905). The annotations to section 4106 state that "[t]he section to which this note is appended has taken the place of the act of 1831, which is repealed in this revision.” Id. at 2282 n. The 1831 statute, Chapter 1365, Section 1 (passed Feb. 22, 1831), governed the execution and acknowledgment of "any deed, mortgage or other instrument of writing, by which any land, tenement or hereditament, shall be conveyed, or otherwise affected or incumbered in law....” 3 Curwen’s Revised Statutes 2448 (Curwen 1854).
. It appears to be the case in Ohio that ''[ujnder [an] equitable mortgage, [the mortgagees] obtain[ ] a right to foreclose upon the mortgagors' equitable interest if the mortgagors were in default.”
Thornton,