IN RE: TROY A. BLANCHARD & HEATHER J. BLANCHARD, Dеbtors. LARRY H. LIEBZEIT, Trustee in Bankruptcy, Plaintiff-Appellant, v. INTERCITY STATE BANK, FSB, BENJAMIN R. HOFFMAN & DEBRA R. HOFFMAN, Defendants-Appellees.
No. 15-1970
United States Court of Appeals For the Seventh Circuit
ARGUED OCTOBER 30, 2015 — DECIDED APRIL 14, 2016
Before POSNER, RIPPLE, and HAMILTON, Circuit Judges.
Appeal from the United States District Court for the Eastern District of Wisconsin. No. 14-C-1527 — Rudolph T. Randa, Judge.
HAMILTON,
I. Factual and Procedural Background
In 2010, Troy and Heather Blanchard agreed to sell a residential property in Marathon County, Wisconsin, to Benjamin and Debra Hoffman. The Hoffmans paid the Blanchards $30,000 up front, and the Blanchards agreed to obtain a mortgage loan in their own name with the property as collateral. The rest of the purchase price for the land contract was to be due on September 1, 2015, but thе Hoffmans
As agreed, the Blanchards then obtained a mortgage on the property from Intercity State Bank. In exchange for a loan of a little more than $142,000, the Blanchards agreed to “mortgage, convey, assign, grant a security interest in and warrant” the property to the bank. This mortgage included a lien on “all privileges, hereditaments, easements and appurtenances, all rents, leases, issues and profits, all claims, awards and payments made as a result of the exercise of the right of eminent domain, all existing and future improvements and all goods that are or are to become fixtures.” The bank also obtained an Assignment of Leases and Rents as collateral for the mortgage loan but mistakenly neglected to obtain an Assignment of Land Contract. The bank recorded its mortgage and the Assignment of Leases and Rents in the county land records in 2011.
In 2014, the Blanchards filed for bankruptcy protection. The bankruptcy court appointed a trustee, plaintiff Liеbzeit, who filed this adversary proceeding against Intercity State Bank. The trustee seeks to use his strong-arm powers under
The trustee argues that a mortgage can attach a lien only to real property, that the Blanchards had sold their interеst in the real property under the land contract, and that their interest as vendors in a land contract was personal property that was not subject to a mortgage or any other lien. The trustee concludes that the bank never attached a lien to that personal property, so the unencumbered interest should be available to unsecured creditors.
The bank and the trustee both moved for summary judgment. The bankruptcy court granted summary judgment for the bank. The court found first that the bank had notice of thе land contract and that its interest was subordinate to that of the Hoffmans under the contract. That conclusion was clearly correct and is not challenged on appeal. As between the bank and the trustee, the court found that the Blanchards’ rights as vendors under the contract should be treated as an interest in real property that was properly subject to the bank’s mortgage. The bankruptcy court also found that the mortgage was properly recorded and could not be avoided, and thus took priority over the trustee’s effort to avoid the bank’s lien.
On appeal by the trustee, the district court affirmed the bankruptcy court but based on different reasoning. The district court found that the Blanchards’ interest as vendors under a land contract—the right to receive payments and bare legal title held as security in case of the vendees’ default—was personal property rather than real property under Wisconsin law. The district court then found it was both necessary and appropriate to rеform the mortgage to be secured by a personal-property interest in the land contract payments rather than a real-property interest in the land. The district court found that
The trustee has appealed. The bankruptcy court’s decision was a final judgment in the adversary action, so we have appellate jurisdiction.
II. Analysis
The trustee argues that the bank does not have a valid lien on the payments to the Blanchards under the land contract. From the premises that the mortgage could attach a lien only to real property and that the Blanchards’ interest under the land contract is only personal property, he concludes that the mortgage as written attached a lien to nothing. He argues further that the district court acted contrary to our decision in In re Duckworth, 776 F.3d 453 (7th Cir. 2014), by reforming the mortgage to apply to personal property. The trustee also argues that the bank failed to record its mortgage properly so as to give the trustee constructive notice of its lien on the payments under the land contract. Under the trustee’s argument, the payments to the Blanchards under the land contract should be available to pay their unsecured creditors rather than the bank.
We disagree with the trustee’s premises and conclusion. We first determine that the Blanchards’ interest as vendors under a land contract both could secure the bank’s mortgage loan as a matter of law and did so as a matter of fact. Then we determine that the bank properly recorded its mortgage in the county land records. Because the mortgage was properly recorded, the bankruptcy trustee may not use his strong-arm powers to avoid the bank’s mortgage lien on the Blanchards’ interest as vendors under a land contract. Finally, because there was no need to reform the mortgage, our reasoning in Duckworth does not apply here.
A. The Bank’s Mortgage
We hold first that the bank’s mortgage validly attached a lien to the Blanchards’ interest as vendors under a land contract. Wisconsin law has long recognized that it is possible to mortgage a vendor’s interest under a land contract. See First National Bank of Stevens Point v. Chafee, 73 N.W. 318, 320 (Wis. 1897) (holding that a mortgagee of a land contract vendor had priority over an eаrlier unrecorded assignment of the land contract vendor’s interest). The general consensus is in accord with that point of Wisconsin law. Grant S. Nelson et al., 1 Real Estate Finance Law § 3:37 (6th ed. 2014) (“The vendor’s interest in an installment land contract is clearly mortgageable.”); Baxter Dunaway, 2 Law of Distressed Real Estate § 14:35 (2015) (“The vendor’s interest in an installment land contract is mortgageable and is subject to judgments by creditors of the vendor.”); see also, e.g.,
That seems clear enough, but the wrinkle that gives the trustee an argument is that Wisconsin courts have also said in other statutory contexts that a vendor’s interest in a land contract should be treated as personal property rather than real property. See City of Milwaukee v. Greenberg, 471 N.W.2d 33, 39 (Wis. 1991) (applying doctrine of equitable conversion, ven-dor was not liable for cost of razing condemned building; vendor held not to be “owner” under applicable statute on liability for government’s cost of razing); Mueller v. Novelty Dye Works, 78 N.W.2d 881, 884 (Wis. 1956) (creditor of vendor could not impose judgment lien on real property subject to land contract). If the vendor’s interest is treated as personal propеrty, it would be odd to attach a lien to it by a real estate mortgage.
Wisconsin courts have historically “found the question of whether a land contract vendor or vendee ‘owns’ property under a statute to be troublesome.” Greenberg, 471 N.W.2d at 37–39 (surveying cases). Under Wisconsin’s doctrine of equitable conversion, a land contract buyer obtains equitable title to the property, which includes “all the incidents of a real ownership.” Id. at 36, quoting John Norton Pomeroy, A Treatise on Equity Jurisprudence, § 368, at 687 (4th ed. 1918). This leaves the vendor with “bare lеgal title” to the property as security for the unpaid portion of the purchase price. Greenberg, 471 N.W.2d at 36–37. The sometimes metaphysical difference between personal property and an interest in real property has fostered the controversy in this case.
Based on the 1897 decision in First National Bank v. Chafee, which was not overruled or modified by these later decisions dealing with different statutes and different purposes, and based on the general rule under the common law, we conclude that the Blanchards’ interest as vendors under the land contraсt was a proper subject of a mortgage to secure the bank’s loan to them.
Consistent with First National Bank v. Chafee, the language of the mortgage here is broad enough to encompass a land contract vendor’s interest as collateral, even without a specific mention of a land contract. The best reading of the mortgage is that it was secured by the Blanchards’ interest as land contract vendors, the entire interest they possessed in the land when the mortgage was executed. The mortgage included “all privileges, hereditaments, easements and appurtenances, all rents, leases, issues and profits, all claims, awards and payments made as a result of the exercise of the right of eminent domain, all existing and future improvements and all goods that are or are to become fixtures.” Black’s Law Dictionary defines “rents, issues, and profits” as “The total income or profit arising from the ownership or possession of property.” Rents, Issues, and Profits, Black’s Law Dictionary (10th ed. 2014). This language was broad enough to grant the bank a lien оn the land contract payments, which are included in the Blanchards’ “total income” arising from their ownership of bare legal title in the land.
We thus agree with the bankruptcy court that the bank’s mortgage “remains a valid lien on the [Blanchards’] interest in the property.” The Blanchards validly mortgaged the (limited) “rights in the real property” that they retained as land contract
B. Recording
We also agree with the bankruptcy court that the bank perfected its lien by recording its mortgage in the county land records rather than by filing with the Department of Financial Institutions under Wisconsin’s enactment of Article 9 of the Uniform Commercial Code, which governs secured transactions.
Wisconsin’s land recording statute applies to “every transaction by which any interest in land is created, aliened, mortgaged, assigned or may be otherwise affected in law or in equity.”
In re Hoeppner, 49 B.R. 124 (Bankr. E.D. Wis. 1985), provides persuasive guidance on this point of Wisconsin law. In Hoeppner, the court held that an assignment of a land contract vendor’s interest was perfected when it was recorded in the county land records. Id. at 127–28. The court rejected the need to record an assignment of a land contract vendor’s interest under Wisconsin Statutes Chаpter 409, Wisconsin’s enactment of Article 9 of the Uniform Commercial Code. Despite being deemed “personal property” for many purposes, a land contract vendor’s interest is also “an interest in or a lien on real estate,” the transfer of which was excluded from the scope of UCC Article 9 at the time. Hoeppner, 49 B.R. at 127 (internal quotation marks omitted). The court explained: “The goal of the filing system is to make known to the public whatever outstanding security interests exist in the property of debtors.” Id. The court continued: “Parties tracing the history of a title in land are not expected to examine” the UCC records and should be able to rely on the county land records. Id. The court declined to interpret Chapter 409 as excluding the land contract itself from its
The trustee argues that Hoeppner is no longer a reliable guide to Wisconsin law on this point because Wisconsin adopted Revised UCC Article 9 in 2001. Scholars assert that Revised Article 9 includes within its scope transfers of a land contract vendor’s interest. See Nelson, supra, § 3:37; Dale A. Whitman, Transfers by Vendors of Interests in Installmеnt Land Contracts: The Impact of Revised Article 9 of the Uniform Commercial Code, 38 Real Property Probate & Trust Journal 421, 427 (2003). Under former Article 9, a land contract vendor’s interest was deemed a “general intangible,” and creation of a lien on it was to be perfected by UCC filing. Whitman, supra, at 429. Revised Article 9 transferred a mortgage on a land contract vendor’s interest to the category of “accounts.” Under Revised Article 9, an “account” includes “a right to payment of a monetary obligation … for property that has been or is to be sold … .”
Scholars argue that Revised Article 9 also alleviates a need to record separately a transfer of a land contract vendor’s legal title in the county land records when the right to payment is transferred. See Whitman, supra, at 427; Nelson, supra, § 3:37. Revised Article 9 specifies: “Perfection of a security interest in a right to payment or performance also perfеcts a security interest in a security interest, mortgage, or other lien on personal or real property securing the right.”
There may be a problem with this argument since a land contract vendor’s interest is legal title to the property and not a “security interest, mortgage, or other lien on … real property,” as Wisconsin Statutes
But we do not need to decide in this case whether, under Wisconsin law, UCC filing is now one effective way to perfect a mortgage on a land contract vendor’s interest. What we must decide is only whether recording in the county land records remains one effective way to perfect a mortgage on a land contract vendor’s interest. Our answer is yes. Revised Article 9 might make it unnecessary to record a mortgage on a land contract vendor’s interest in the county land records, as it is possible that UCC filing would be sufficient. But that does not mean that recording in the county land records is not also effective. We see nothing in Revised Article 9 that restricts the scope of Wisconsin’s land recording statute, which applies broadly to “every transaction by which any interest in land is created, aliened, mortgaged, assigned or may be otherwise affected in law or in equity.”
There are additional indications that recording in the county land records remains effective. Scholars acknowledge that a prudent mortgagee may want to record in the county land records as well as filing under the UCC. Nelson, supra, § 3:37 (“Even though such a recording is unnecessary and irrelevant under Article 9, recording in the real estate records is important and desirable” for several reasons); Whitman, supra, at 428 (noting that “recording in the real estate records may be desirable for other reasons, but it is not essential to perfection”). Other provisions of Revised Article 9 also hint at the continuing validity of recording in the county land records. For example, Wisconsin Statutes
There has been no signal from the Wisconsin legislature or courts that recording in the county land records is not effective. There are also powerful pragmatic and policy reasons to continue treating recording in the county land records as effective. As one scholar noted, in practice it “makes no sense” to require UCC filing when a mortgage lender might have no notice of a land contract’s existence since land contracts are often not recorded. Nelson, supra, § 3:37. It would be “manifestly unfair” to hold a mortgage lender to the requirement that it record under the UCC if it does not know that a land contract is involved. Id. The goal of a recording or filing system is to provide “adequate public notice” of liens and seсurity interests. Hoeppner, 49 B.R. at 127. It should not “create a windfall for a bankruptcy
In short, by adopting Revised UCC Article 9 while leaving intact the broad land recording statute,
C. The Trustee’s Strong-Arm Powers
The trustee’s interest in the land contract payments cannot take priority over the bank’s earlier recorded mortgage interest. Under
Section 544(a)(3) provides similar powers, giving the trustee the position of a “bona fide purchaser of real property” from the debtor as of the commencement of the bankruptcy case. Standing in for a bona fide purchaser, the trustee would not be able to take priority over the bank’s earlier-recorded mortgage. See
D. Reformation
The trustee argues that our precedеnts allow a bankruptcy trustee to use his strong-arm powers based on the face of an erroneous document providing a security interest, and that courts may not reform the document to give another party priority over the trustee. He argues that the district court thus erred by reforming the mortgage to make the land contract vendors’ interest the collateral. The trustee relies on In re Duckworth, in which we held that parol evidence could not be used against a bankruptcy trustee to reform a security agreement that incorrectly identified the secured debt. 776 F.3d 453, 455 (7th Cir. 2014). In Duckworth, the creditor had no security interest in the collateral that could take priority over the bankruptcy trustee using his strong-arm powers. Stepping into the shoes of a subsequent judicial lien creditor under
Reformation is not necessary to protect the bank’s priority in this case. In this respect, we agree with the bankruptcy court. A land contract vendor’s interest can secure a mortgage loan, as it did here. Since Wisconsin law recognizes mortgages on a vendor’s interest in a land contract, there was no need to reform the mortgage to include a lien on “personalty.” Duckworth and Martin Grinding do not apply.
AFFIRMED.