Malloy, III v. Mid-Continent Casualty Company
08-01019 | Bankr. N.D. Okla | Oct 14, 2008
Case 08-01019-R Document 40 Filed in USBC ND/OK on 10/14/08 Page 1 of 26
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OKLAHOMA Filed / Docketed
October 14, 2008
IN RE: )
)
DAVID GENE MARKLE, ) Case No. 08-10109-R
) Chapter 7
Debtor. )
PATRICK J. MALLOY III, )
TRUSTEE, )
)
Plaintiff, )
)
vs. ) Adv. No. 08-01019-R
)
MID-CONTINENT CASUALTY COMPANY, )
OKLAHOMA SURETY COMPANY, )
AND PARKING BUILDERS, L.L.C., )
)
Defendants. )
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S
MOTION FOR PARTIAL SUMMARY JUDGMENT
Before the Court is the Plaintiff's Motion for Partial Summary Judgment and Brief in
Support Thereof (Adv. Doc. 23) (“Trustee's Motion”) filed on June 13, 2008, by Plaintiff
Patrick J. Malloy III, Trustee for the Bankruptcy Estate of David Gene Markle (the
“Trustee”); Defendant’s Response to Plaintiff's Motion for Partial Summary Judgment (Adv.
Doc. 34) (“Response”), filed on July 10, 2008, by Defendant Mid-Continent Casualty
Company (“Mid-Con”); and Plaintiff’s Brief in Reply to Mid-Continent Casualty Company's
Case 08-01019-R Document 40 Filed in USBC ND/OK on 10/14/08 Page 2 of 26
Response to Plaintiff's Motion for Partial Summary Judgment (Adv. Doc. 38) (“Reply”), filed
on July 28, 2008, by the Trustee.
I. Jurisdiction
The Court has jurisdiction of this “core” proceeding by virtue of 28 U.S.C. §§ 1334,
157(a), and 157(b)(2)(A), (B), (F), and (K) and Local Civil Rule 84.1(a) of the United States
District Court for the Northern District of Oklahoma.
II. Summary of the Parties’ Contentions
On March 27, 2008, the Trustee filed the First Amended Complaint (Adv. Doc. 5) (the
“Complaint”) seeking declaratory judgment to determine the validity of Mid-Con’s purported
liens on two parcels of real property.1 The crux of the parties’ dispute involves interpretation
of a document titled “General Application and Agreement of Indemnity - Contractors Form”
dated July 18, 2005, that was signed by David G. Markle (the “Debtor”) and his wife, Robin
T. Markle (“Ms. Markle”) (collectively, “the Markles”), on September 20, 2005. The Trustee
attached a copy of this document (the “Agreement”) to his Complaint and to the Trustee's
Motion. Mid-Con contends that the Agreement created liens in its favor on two parcels of
real property that were owned by the Markles at the time they signed the Agreement. In the
Complaint, the Trustee contends for a variety of reasons that the Agreement did not create
liens in Mid-Con's favor on either parcel of real property.
1
The Trustee also included a “Claim for Marshalling” in the Complaint. That claim
is not addressed in the Trustee’s Motion.
2
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In the Trustee's Motion, the Trustee argues that summary judgment is appropriate
because the undisputed facts establish that there are a number of defects in the Agreement
and in Mid-Con’s actions in attempting to create and perfect its liens on the two properties
at issue.
First, the Trustee contends that because the Agreement did not contain the addresses
and property descriptions of any real property when the Markles executed the Agreement,
no liens were granted by the Markles on any of their properties at the time they executed the
Agreement. Second, the Trustee contends that the clause in the Agreement that authorizes
Mid-Con, as attorney-in-fact, to amend the Agreement to add descriptions for properties
subject to liens in its favor is overbroad and thus ineffective. Third, the Trustee contends that
even if the Agreement authorized Mid-Con to add property descriptions and record the
Agreement as a lien at some point after execution, at the time Mid-Con did so in August of
2006, the Markles no longer held title to the properties at issue, and any attempt to establish
liens thereon was ineffective. Finally, the Trustee contends that any subsequent
reconveyances of the properties back to the Debtor, which might have allowed the liens to
attach to “after-acquired” property, occurred within ninety days of the Debtor's bankruptcy
petition, and therefore such liens are avoidable as preferential transfers pursuant to Section
547 of the Bankruptcy Code.
In its Response, Mid-Con contends that notwithstanding the lack of property
descriptions in the Agreement at the time the Markles executed the Ageement in September
2005, liens were created on both parcels of real property at that time. In the alternative, Mid-
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Con contends that the grant of authority allowing Mid-Con to act as the Markles’ attorney-in-
fact was valid and that Mid-Con exercised that authority by supplementing the Agreement
with property descriptions and recording the Agreement on August 29, 2006. Mid-Con also
contends that because the transfers of real property by the Markles after they executed the
Agreement but before the Agreement was recorded in August 2006 were fraudulent and thus
void, liens in its favor were created on August 29, 2006. Since August 29, 2006, is more than
ninety days prior to the date of the Debtor's bankruptcy, Mid-Con argues that the liens are
not avoidable by the Trustee pursuant to Section 547 of the Bankruptcy Code. Finally, Mid-
Con contends that the Tulsa County District Court has determined that Mid-Con’s lien on
one of the tracts is valid and that the Judgment to that effect is binding on this Court.
III. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates that there is “no
genuine issue as to any material fact” and that it is “entitled to a judgment as a matter of
law.” Fed. R. Civ. P. 56(c), made applicable to this proceeding by Bankruptcy Rule 7056.
A fact is “material” if, under the applicable substantive law, it is “essential to the proper
disposition of the claim.” Wright ex rel. Trust Co. of Kansas v. Abbott Labs., Inc., 259 F.3d
1226, 1231-32 (10th Cir. 2001), citing Adler v. Wal-Mart Stores, Inc., 144 F.3d 664" date_filed="1998-05-18" court="10th Cir." case_name="Adler v. Wal-Mart Stores, Inc.">144 F.3d 664, 670 (10th
Cir. 1998). An issue of fact is “genuine” if “there is sufficient evidence on each side so that
a rational trier of fact could resolve the issue either way.” Adler, 144 F.3d 664" date_filed="1998-05-18" court="10th Cir." case_name="Adler v. Wal-Mart Stores, Inc.">144 F.3d at 670, citing
Anderson v. Liberty Lobby, Inc., 477 U.S. 242" date_filed="1986-06-25" court="SCOTUS" case_name="Anderson v. Liberty Lobby, Inc.">477 U.S. 242, 248 (1986).
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The moving party bears the initial burden of demonstrating an absence of a genuine
issue of material fact and entitlement to judgment as a matter of law. See Spaulding v.
United Transp. Union, 279 F.3d 901" date_filed="2002-02-05" court="10th Cir." case_name="James Spaulding v. United Transportation Union">279 F.3d 901, 904 (10th Cir. 2002), citing Celotex Corp. v. Catrett,
477 U.S. 317" date_filed="1986-06-25" court="SCOTUS" case_name="Celotex Corp. v. Catrett, Administratrix of the Estate of Catrett">477 U.S. 317, 322-23 (1986). When the movant has the burden of proof, “the movant must
establish every element of its claim . . . by sufficient, competent evidence to set forth a prima
facie case.” In re Ribozyme Pharmaceuticals, Inc. Securities Litigation, 209 F. Supp. 2d
1106, 1111 (D.Colo. 2002) (footnote omitted).
Once the movant has met its initial burden, the burden shifts to the non-moving party
to “set forth specific facts showing that there is a genuine issue for trial.” Spaulding, 279
F.3d at 904, citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574" date_filed="1986-03-26" court="SCOTUS" case_name="Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation">475 U.S. 574, 587
(1986); Liberty Lobby, 477 U.S. 242" date_filed="1986-06-25" court="SCOTUS" case_name="Anderson v. Liberty Lobby, Inc.">477 U.S. at 248. The non-moving party may not simply rest upon
its pleadings to satisfy its burden. See Liberty Lobby, 477 U.S. 242" date_filed="1986-06-25" court="SCOTUS" case_name="Anderson v. Liberty Lobby, Inc.">477 U.S. at 256. Rather, the non-
moving party must “set forth specific facts that would be admissible in evidence in the event
of trial from which a rational trier of fact could find for the non-movant.” Mitchell v. City
of Moore, 218 F.3d 1190" date_filed="2000-07-11" court="10th Cir." case_name="Mitchell v. City of Moore">218 F.3d 1190, 1197 (10th Cir. 2000), quoting Adler, 144 F.3d 664" date_filed="1998-05-18" court="10th Cir." case_name="Adler v. Wal-Mart Stores, Inc.">144 F.3d at 671. To
accomplish this, the facts “must be identified by reference to an affidavit, a deposition
transcript or a specific exhibit incorporated therein.” Adams v. American Guarantee and
Liability Ins. Co., 233 F.3d 1242" date_filed="2000-12-01" court="10th Cir." case_name="Adams v. America Guarantee & Liability Insurance">233 F.3d 1242, 1246 (10th Cir. 2000) (quotations and citation omitted).
“[A]t the summary judgment stage the judge’s function is not . . . to weigh the
evidence and determine the truth of the matter but to determine whether there is a genuine
issue for trial.” Liberty Lobby, 477 U.S. 242" date_filed="1986-06-25" court="SCOTUS" case_name="Anderson v. Liberty Lobby, Inc.">477 U.S. at 249. Reasonable inferences that may be made
5
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from the proffered evidentiary record should be drawn in favor of the non-moving party. See
Adams, 233 F.3d 1242" date_filed="2000-12-01" court="10th Cir." case_name="Adams v. America Guarantee & Liability Insurance">233 F.3d at 1246. However, “[i]f the [non-moving party’s] evidence is merely
colorable or is not significantly probative, summary judgment may be granted.” Liberty
Lobby, 477 U.S. 242" date_filed="1986-06-25" court="SCOTUS" case_name="Anderson v. Liberty Lobby, Inc.">477 U.S. at 249-50 (citations omitted). “Where the record taken as a whole could not
lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for
trial.’” Matsushita, 475 U.S. 574" date_filed="1986-03-26" court="SCOTUS" case_name="Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation">475 U.S. at 587. Conversely, even where a movant’s facts are
undisputed, if two reasonable factfinders could reach different conclusions or “ultimate
inferences” from the undisputed facts, summary judgment is not warranted. See Luckett v.
Bethlehem Steel Corp., 618 F.2d 1373" date_filed="1980-03-21" court="10th Cir." case_name="Bill Luckett v. Bethlehem Steel Corporation">618 F.2d 1373, 1382 (10th Cir. 1980).
IV. Record on Summary Judgment
Rule 56(c) provides that summary judgment may be rendered “if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact[.]” Fed. R. Civ. P. 56(c).
In addition, a court may consider in ruling on a summary judgment motion any materials
which would be admissible at trial. See Cinocca v. Baxter Laboratories, Inc., 400 F. Supp.
527, 529 (E.D. Okla. 1975)(citation omitted). “As a general rule, documents which are
submitted in support of a Motion for Summary Judgment must be authenticated by an
affidavit. However, uncertified documents may be considered by the Court if not
challenged.” Id. at 530 (citation omitted). Neither party has objected to or challenged the
admissibility of the other party's exhibits. Accordingly, the Court finds that the exhibits
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submitted with both parties’ pleadings, as well as the undisputed facts stated in the Complaint
and the Answer, should be considered.
The following material facts are uncontested and are supported by the record:
1. Debtor owned 51% of Parking Builders, L.L.C. (“PB”), a company in the
business of constructing parking garages. See Trustee's Motion at 2-3, ¶¶ 1-2,
and Exh. C; Response at 1-2, ¶¶ 1-2.
2. PB's business of constructing parking garages requires that it be bonded. In
order for PB to obtain bonds, the Markles executed the “General Application
and Agreement of Indemnity - Contractors Form” (defined above as the
“Agreement”) with Mid-Con and Oklahoma Surety Company.2 In the
Agreement, the Markles (and others) agreed to indemnify Mid-Con against any
losses or payments on PB’s bonds. The Agreement was dated July 18, 2005,
and executed by the Markles on September 20, 2005. See Trustee's Motion at
2-3, ¶ 2,and Exh. D; Response at 2-3, ¶ 2.
3. The Agreement contains the following clauses:
6. Attorney-In-Fact
Each of the Undersigned hereby irrevocably nominates, constitutes, appoints
and designates [Mid-Con] or any person or persons designated by [Mid-Con]
as his attorney-in-fact with the right to exercise all of his rights assigned,
transferred, pledged, and set over to [Mid-Con] by this Agreement, and in his
2
Neither Oklahoma Surety Company nor PB filed Answers or otherwise responded
to the Trustee’s Complaint in this adversary proceeding. Oklahoma Surety has also filed a
disclaimer of any interest in one of the subject properties in the main bankruptcy case. See
Main Case Doc. 98. The Trustee’s Motion expressly limits the relief it seeks to Mid-Con’s
interests in the subject properties. See Trustee’s Motion at 1.
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name to execute and deliver any and all additional or other assignments,
instruments or documents deemed necessary or desirable by [Mid-Con] (i) to
vest in [Mid-Con] absolute title to any and all monies, property and rights
hereby assigned, and (ii) to provide the protection and rights to [Mid-Con]
contemplated by all of the provisions of this Agreement.
***
14. Real Estate Lien and Waiver of Homestead Right
The Undersigned waive(s), so far as their respective obligations under this
Agreement are concerned, all rights to claim any of their property (real or
personal), including their respective homesteads, as exempt from levy,
execution or sale or other legal process under the laws of any state, territory
or possession of the United States. Each of the Undersigned appoints any
officer of [Mid-Con] as attorney-in-fact with full authority to fill in the legal
description of any real property in which they have an interest at any time; this
authority to continue until [Mid-Con]'s liability under any such Bond or Bonds
shall have wholly terminated. Upon the occurrence of an event of default as
described in paragraph 5 above, this instrument shall be filed as a Lien against
any real property described below to the same extent as if the property had
been conveyed and transferred under the laws of any state, territory or
possession.
See Trustee's Motion at 2-3, ¶ 2, and Exh. D; Response at 2-3, ¶ 2.
4. At the time the Markles executed the Agreement on September 20, 2005, the
space designated in paragraph 14 of the Agreement for property addresses and
legal descriptions was blank. See Trustee’s Motion at 3, ¶ 3; the Answer of
Mid-Continent Casualty Company (Doc. 17) (“Answer”) at 2, ¶ 5.
5. At the time the Markles executed the Agreement, the Markles jointly owned
two pieces of real property. The addresses of these properties are 10428
South 121st Street East, Bixby, Oklahoma 74008 (the “Farm”) and 3713 South
Orange Circle, Broken Arrow, Oklahoma 74011 (the “Home”). See Trustee’s
Motion at 3, ¶ 4; Response at 3,¶ 4, Exh. 2, and Exh. 18.
8
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6. The Agreement does not contain any provision that restricts the Markles from
transferring or disposing of any real property that they owned at the time the
Agreement was executed. See Trustee's Motion at 3-4, ¶ 5 and Exh. D;
Response at 3-4, ¶ 5.
7. On January 20, 2006, the David G. Markle Revocable Trust u/d/t 01/20/2006
(“Trust”) was created under the laws of the State of Oklahoma. The trust
document and attachments name the Debtor as the primary beneficiary with
additional contingent and/or remainder beneficiaries. See Response at 3-4, ¶
5 and Exh. 4; Reply at 3-4, ¶ 5 and Exh. F.
8. On January 24, 2006, Markle Holdings L.L.C., a limited liability company
organized under the laws of the State of Oklahoma, was created. See
Response, Exh. 13; Reply at 4, ¶ 6 n. 1, and Exh. B and C.
9. The Debtor was copied on a letter dated February 16, 2006, from PCL
Construction Services, Inc. (“PCL”) to PB. By virtue of that letter, the Debtor
was notified of PCL's alleged problems with PB's services as a subcontractor
on a construction project in Florida. Subsequent letters from PCL dated
March 16, 2006, and March 17, 2006, also detailed deficiencies with PB's
9
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services, which deficiencies are disputed by PB.3 See Response at 3-4, ¶ 5,
Exh. 5, 6, and 7; Reply at 3-4, ¶ 5.
10. On March 28, 2006, a general warranty deed transferring the Markles’ interest
in the Farm to Markle Holdings L.L.C. was recorded. See Trustee's Motion
at 3-4, ¶ 5 and Exh. E; Response at 3-4, ¶ 5.
11. On March 28, 2006, a general warranty deed transferring an undivided one-
half of the Markles’ joint interest in the Home to the Trust was recorded. See
Trustee's Motion at 3-4, ¶ 5 and Exh. F; Response at 3-4, ¶ 5.
12. On or about August 29, 2006, an agent of Mid-Con inserted street addresses
purporting to identify the Farm and the Home in the blank space in paragraph
14 of the Agreement and attached legal descriptions of the Farm and the Home
to the Agreement. The Agreement, with these modifications, was recorded
with the Tulsa County Clerk on August 29, 2006. See Trustee’s Motion at 4,
¶ 6; Response at 4-5, ¶ 6.
13. On December 18, 2007, Mid-Con recorded a Notice of Lis Pendens in the
Tulsa County real estate records indicating that Mid-Con had commenced
proceedings to foreclose a lien on the Home. The Notice of Lis Pendens
3
Paragraph 5 of the Agreement lists six possible categories of “events in default,”
including: “[a]ny abandonment, forfeiture, or breach of, or failure, refusal or inability to
perform, any contract covered by a Bond or any Bond liability;” and “[t]he failure, delay,
refusal or inability of [PB] to pay bills or other indebtedness incurred in, or in connection
with, the performance of any contract covered by a Bond.” Agreement, ¶ 5.
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names both the Markles and the Trust as third-party defendants. See
Response at 5, ¶ 11, and Exh. 11.
14. On January 17, 2008, a quit claim deed reconveying the Trust’s interest in the
Home back to the Debtor was recorded. See Trustee's Motion at 4, ¶ 7, and
Exh. G.
15. On January 21, 2008, the Debtor filed a voluntary petition for relief under
Chapter 7 of the Bankruptcy Code.
16. On February 5, 2008, the Markles, the Trust, Markle Development Interests,
L.L.C., Tulsa Development Acres, L.L.C., Markle Development Investments,
L.L.C., Horse Farm, L.L.C., and Markle Holdings, L.L.C., conveyed their
interests, if any, in the Farm to the Trustee. The quit claim deed evidencing
this conveyance was recorded on February 11, 2008. See Trustee’s Motion
at 4, ¶ 10; Response at 5, ¶ 10, and Exh. 1.
17. On February 29, 2008, Markle Development Interests, L.L.C. and Horse Farm,
L.L.C., executed another quit claim deed conveying their interests, if any, in
the Farm to the Trustee. That deed was recorded on March 3, 2008. See
Reply at 4, ¶ 8, and Exh. E.
18. On March 17, 2008, the Debtor conveyed his interest in the Home to the
Trustee by quit claim deed.4 That deed was recorded on May 6, 2008. See
4
Although the actual date of the quit claim deed is March 17, 2006, this appears to
be a typographical error. In the deed, the property is transferred to the Trustee of a
(continued...)
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Trustee’s Motion at 4, ¶ 11; Response at 5, ¶ 11; Reply at 4-5, ¶ 9, and Exh.
D.
V. Conclusions of law
A. The Agreement
The operative document for determining the rights of the parties in this proceeding
is the Agreement. The Agreement describes the rights and obligations of each party and
establishes when and how liens in Mid-Con's favor may be created.
Paragraph 6 of the Agreement, titled “Attorney-In-Fact,” authorizes Mid-Con (or its
appointed agent) to act “as [the Markles’] attorney-in-fact with the right to exercise all of [the
Markles’] rights assigned, transferred, pledged, and set over to [Mid-Con] by this Agreement,
and in [the Markles’] name to execute and deliver any and all additional or other
assignments, instruments or documents deemed necessary or desirable by [Mid-Con] . . . .”
Agreement at ¶ 6 (emphasis added). This grant of authority does not authorize Mid-Con to
act on behalf of the Debtor in his capacity as Trustee of the Trust, or as the sole member or
manager of a limited liability company.
Paragraph 14 of the Agreement, titled “Real Estate Lien and Waiver of Homestead
Right,” states that “[u]pon the occurrence of an event of default as described in paragraph 5
above, this instrument shall be filed as a Lien against any real property described below to
4
(...continued)
bankruptcy estate that did not exist until January 21, 2008, the notary date is May 2, 2008,
and the deed was recorded on May 6, 2008. Additionally, no party has argued that this quit
claim deed was actually executed in 2006.
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the same extent as if the property had been conveyed and transferred under the laws of any
state, territory or possession.” Agreement at ¶ 14 (emphasis added). This is the only
provision in the Agreement concerning liens. Thus, by its own terms, the Agreement
requires that an event of default must occur before Mid-Con is authorized to record a lien
against any of the Markles’ property. The Debtor was copied on three letters indicating that
there were problems with one of PB’s projects. For purposes of this Motion, construing the
facts and inferences in favor of the non-movant Mid-Con, the Court will assume that the
conditions described in the letters constituted an “event in default” under paragraph 5 of the
Agreement.
In order for a lien created by the Agreement to attach to any real property, the
Agreement must also describe the property to be encumbered by the lien. It is undisputed
that at the time the Markles executed the Agreement, no real property was described in
paragraph 14 of the Agreement. While Mid-Con may have been authorized to supplement
the Agreement with the real property addresses and legal descriptions of the Farm and the
Home and to record the Agreement with the Tulsa County Clerk as early as February 16,
2006, it is undisputed that Mid-Con waited until August 29, 2006 to do so. To determine the
legal effect of the Agreement, the Court must consider the status of the title to the Farm and
the Home on August 29, 2006, and thereafter.
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1. The Farm
The Markles purchased the Farm sometime in 1997. It is undisputed that at the time
the Markles executed the Agreement in September of 2005, they held legal title to the Farm.
On January 27, 2006, however, the Markles transferred all of their interest in the Farm to
Markle Holdings, L.L.C. by warranty deed. After that date, they no longer held legal title
to the property. See 16 O.S. §19.5 When the transfer was recorded on March 28, 2006, Mid-
Con had constructive notice that the Markles no longer held title to the Farm. See 16 O.S.
§16.6
The Agreement authorized the attorney-in-fact to “fill in the legal description of any
real property in which [the Markles] have an interest at any time.” Agreement at ¶ 14
(emphasis added). On August 29, 2006, when the attorney-in-fact, acting on behalf of Mid-
Con, inserted the address of the Farm in paragraph 14 of the Agreement, attached a legal
description of the Farm to the Agreement, and then recorded the Agreement, neither of the
5
“A warranty deed made in substantial compliance with the provisions of this chapter,
shall convey to the grantee, his heirs or assigns, the whole interest of the grantor in the
premises described, and shall be deemed a covenant on the part of the grantor, that at the time
of making the deed he is legally seized of an indefeasible estate in fee simple of the premises
and has good right and full power to convey the same; that the same is clear of all
encumbrances and liens, and that he warrants to the grantee, his heirs and assigns, the quiet
and peaceable possession thereof, and will defend the title thereto against all persons who
may lawfully claim the same, and the covenants and warranty shall be obligatory and binding
upon any such grantor, his heirs and personal representatives as if written at length in such
deed.” 16 O.S. §19 (emphasis added).
6
“Every conveyance of real property acknowledged or approved, certified and
recorded as prescribed by law from the time it is filed with the register of deeds for record
is constructive notice of the contents thereof to subsequent purchasers, mortgagees,
encumbrancers or creditors.” 16 O.S. §16 (emphasis added).
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Markles owned an interest in the Farm. By recording the Agreement as a lien against
property not owned by the Markles, Mid-Con exceeded its authority under the Agreement.
Moreover, a mortgagor cannot give a valid mortgage in property in which it has no interest.
See Ladder Energy Co. v. Intrust Bank, N.A., 1996 OK CIV APP 126" date_filed="1996-10-18" court="Okla. Civ. App." case_name="Ladder Energy Co. v. Intrust Bank, N.A.">1996 OK CIV APP 126, 931 P.2d 83, 85,
citing Linton v. Citizens State Bank, 1961 OK 114" date_filed="1961-05-16" court="Okla." case_name="Linton v. Citizens State Bank">1961 OK 114, 361 P.2d. 1071, 1074 (“[The bank] was
subject to the elementary rules that a mortgagor cannot give a mortgage on property which
he does not own, and that it is the duty of the mortgagee to see that the mortgagor has good
title to the property which he undertakes to mortgage.”) Therefore, unless the Markles’
conveyance of the Farm to Markle Holdings, L.L.C. was void, the Farm was not encumbered
by any lien in favor of Mid-Con.
On February 11, 2008, the Debtor, acting on behalf of Markle Holdings, L.L.C., and
other subsequent grantees, transferred the Farm to the Trustee, and the Farm became property
of the Debtor's bankruptcy estate. No lien in favor of Mid-Con could have attached to the
Farm after the Debtor filed his bankruptcy petition because Section 362(a)(4) of the
Bankruptcy Code prohibits “any act to create, perfect, or enforce any lien against property
of the estate.” See also Section 552(a) of the Bankruptcy Code (“property acquired by the
estate . . . is not subject to any lien resulting from a security agreement entered into by the
debtor before commencement of the case.”)
2. The Home
The Markles purchased the Home in 1993. It is undisputed that at the time the
Markles executed the Agreement in September of 2005, they held legal title to the Home.
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On March 17, 2006, the Markles transferred one-half of their joint interest in the Home to
the Trust by warranty deed. When the deed was recorded on March 28, 2006, Mid-Con had
constructive notice of the transfer of an undivided one-half of the property to the Trust and
the fact that the Markles only retained an undivided one-half interest in the Home. See 16
O.S. §16.
a. The Undivided One-Half Interest Retained by the Markles
Even assuming that an event of default as defined in paragraph 5 of the Agreement
occurred on or about February 16, 2006, it is undisputed that Mid-Con waited until August
29, 2006 to complete the property descriptions in the Agreement and record the Agreement.
Prior to the time that Mid-Con supplemented the Agreement by adding property descriptions,
no lien could attach to any real property. On August 29, 2006, when the attorney-in-fact,
acting on behalf of Mid-Con, completed the blank address lines, attached a property
description of the Home to the Agreement, and recorded the Agreement, the Markles only
owned an undivided one-half interest in the Home. Pursuant to terms of the Agreement, the
attorney-in-fact is authorized to “fill in the legal description of any real property in which
[the Markles] have an interest at any time.” (Agreement at ¶ 14) (emphasis added). It is
“fundamental that a party may not mortgage an interest in property greater than that which
it owns.” Ladder Energy Co. v. Intrust Bank, N.A., 1996 OK CIV APP 126" date_filed="1996-10-18" court="Okla. Civ. App." case_name="Ladder Energy Co. v. Intrust Bank, N.A.">1996 OK CIV APP 126, 931 P.2d 83,
85. When the Agreement was recorded, Mid-Con’s lien attached to the undivided one-half
interest in the Home held by the Markles.
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b. The Undivided One-Half Interest Transferred to the Trust
Mid-Con argues that by recording the Agreement, its lien also attached to the
undivided one-half interest in the Home held by the Trust. Unless the Markles’ transfer of
an undivided one-half interest in the Home to the Trust was void, Mid-Con’s lien could not
have attached to that interest for the same reasons that Mid-Con's lien did not attach to the
Farm. See supra pp. 14-15.
The Trust that held the one-half interest in the Home included a spendthrift provision.
Under Oklahoma law, a spendthrift provision in a self-settled trust is not enforceable. See
60 O.S. § 175.25(H).7 Since the Debtor had named himself as the primary beneficiary of the
Trust, the Debtor's interest in the Trust was alienable and subject to Mid-Con's efforts to
satisfy the obligations of the Debtor. Id. Pursuant to 60 O.S. § 175.25(I), in order for a
creditor to use trust assets to satisfy the obligations of a trust beneficiary, the creditor must
take legal action in a court of competent jurisdiction and name the beneficiary as a defendant
in the action. Further, “[t]he trustee shall not be required to recognize any of the obligations
[of the beneficiary] or to withhold any income from the beneficiary until said trustee has been
served with a summons or garnishment summons.” Id. In order for Mid-Con to satisfy the
obligations of the Debtor from assets of the Trust, Mid-Con was obligated to follow the
statute and serve notice on the trustee of the Trust by summons. When Mid-Con commenced
its foreclosure proceeding against the Home and named the Debtor, Ms. Markle, and the
7
“Nothing in this act shall authorize a person to create a spendthrift trust or other
inalienable interest for his own benefit. The interest of the trustor as a beneficiary of any trust
shall be freely alienable and subject to the claims of his creditors.” 60 O.S. 175.25(H).
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Trust as defendants, it may have given the required notice to the Trust. When Mid-Con
recorded a Notice of Lis Pendens against the Home on December 18, 2007, it put all potential
transferees of the Home on notice of the foreclosure action as of that date.
The Trustee contends that regardless of whether Mid-Con’s lien attached to the
Trust’s undivided one-half interest in the Home on December 18, 2007, when Mid-Con
recorded its Notice of Lis Pendens against the Home, or on January 17, 2008, when the
property was reconveyed to the Debtor from the Trust, the attachment of the lien is avoidable
as a preferential transfer. Pursuant to Section 547(b) of the Bankruptcy Code “a transfer is
avoidable if it: (1) is of an interest of the debtor in property; (2) is for the benefit of a
creditor; (3) is made for or on account of an antecedent debt owed by the debtor before the
transfer was made; (4) is made while the debtor is insolvent; (5) is made on or within ninety
days before the date the bankruptcy petition was filed; and (6) allows the creditor to receive
more than the creditor would otherwise be entitled to receive from the bankruptcy estate.”
Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190" date_filed="2002-12-30" court="10th Cir." case_name="Bailey v. Big Sky Motors, Ltd.">314 F.3d 1190, 1196 (10th Cir. 2002). “The
burden is on the Trustee to prove his prima facie case, see § 547(g). And, since the Trustee
is the movant for summary judgment, the burden is on him to show that he is entitled to
18
Case 08-01019-R Document 40 Filed in USBC ND/OK on 10/14/08 Page 19 of 26
judgment without trial.” Kirtley v. Consol. Nutrition, L.C. (In re Freeny), 187 B.R. 711" date_filed="1995-10-10" court="Bankr. N.D. Okla" case_name="Kirtley v. Consolidated Nutrition, L.C. (In Re Freeny)">187 B.R. 711, 715
(Bankr. N.D.Okla., 1995).8
It is undisputed that Mid-Con is a creditor seeking payment of an antecedent debt.
Pursuant to Section 547(f) of the Bankruptcy Code, the Debtor is presumed to be insolvent
during the ninety days prior to the filing of the bankruptcy. It is undisputed that unsecured
creditors will not receive full satisfaction of their claims in the underlying bankruptcy case.
Mid-Con’s conversion of an unsecured debt into secured debt by attachment of a lien against
an interest in the Home would ensure that Mid-Con would receive more than it would have
received absent the attachment of the lien. Thus, five of the six elements required to show
the avoidability of the Mid-Con’s lien have been established.
However, the Trustee has failed to present a prima facie case for avoidability because
he has not provided undisputed evidence to establish that Mid-Con’s purported lien attached
to an undivided one-half interest in the Home within ninety days of the bankruptcy. In
particular, the Trustee failed to submit evidence to establish that the foreclosure action was
commenced by Mid-Con against the Trust within the ninety-day period. Although the Notice
of Lis Pendens was recorded on December 18, 2007, there is no evidence regarding the date
the foreclosure action against the Markles’ interest in property owned by the Trust was filed,
nor evidence of when or if the trustee of the Trust was served. Taking all inferences in a
8
Section 547(g) provides, “[f]or the purposes of this section, the trustee has the
burden of proving the avoidability of a transfer under subsection (b) of this section, and the
creditor or party in interest against whom recovery or avoidance is sought has the burden of
proving the nonavoidability of a transfer under subsection (c) of this section.” 11 U.S.C. §
547(g).
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light most favorable to Mid-Con, the trustee of the Trust could have been served with a
summons or notice of the foreclosure more than ninety days prior to the bankruptcy.9 In
addition, neither the Trustee nor Mid-Con has provided the Court with argument and
authorities concerning the effect of 60 O.S. § 175.25(I) (i.e. does a lien asserted against trust
property for obligations of the trustor “attach” upon compliance with the statute, would such
a lien only attach when judgment is rendered, or is there ever a true “lien” against the trust
property?) Thus, the Court concludes that certain material facts required to determine the
status of Mid-Con’s claimed lien on the interest in the Home owned by the Trust, and thus
its avoidability, were not established by the Trustee. Because the Trustee failed to meet his
evidentiary burden concerning the avoidability of Mid-Con’s claimed lien, summary
judgment on the Trustee’s §547(b) claim is not appropriate on this record.10
9
The date of service of the summons on the trustee of the Trust is important because
pursuant to 60 O.S. § 175.25(I), service of the summons on the trustee of a self-settled
revocable trust triggers an obligation on behalf of the trustee to “recognize” obligations of
the creditors of the trustor/beneficiary.
10
On January 17, 2008, four days before the Debtor filed his Chapter 7 petition, the
Trust reconveyed its undivided one-half interest in the Home back to the Debtor. Pursuant
to the Agreement and Oklahoma law regarding liens on after-acquired property, Mid-Con’s
lien may have attached at that time since a lien attaches “from the time when the party
agreeing to give [the lien] acquires an interest in the thing to the extent of such interest.” 42
O.S. §8. See also 16 O.S. § 17. Mid-Con also asserted that the attachment of the lien would
relate back to either the date the Agreement was signed or the date it was recorded but failed
to provide any legal authority in support of those assertions. The Court has not reached these
issues since they are not ripe for determination until the status of the earlier foreclosure
proceeding is determined.
20
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B. Mid-Con’s Allegations that the Markles’ Transfers of the Farm and the Home
Were Void
Mid-Con argues that the Markles’ pre-petition transfers of the Farm and an undivided
one-half interest in the Home were fraudulent and void as to Mid-Con under Oklahoma law
and that Mid-Con’s lien attached to both properties at the time the Agreement was recorded
on August 29, 2006.
First, Mid-Con relies on statements made by the Trustee in the Complaint and in the
Trustee’s Motion that the post-petition transfer of the Farm to the Trustee was made “in lieu
of [Trustee]'s pursuit of a fraudulent transfer claim” to establish that the prior transfer of the
Farm was in fact fraudulent. See Complaint at 4, ¶ 11; Trustee's Motion at 2, ¶ 4. The
characterization of the transfer by the Debtor to the Trustee in the pleadings does not
constitute evidence of any fraudulent transfer by the Debtor, nor does it preclude the Trustee
from arguing that any prior transfer by the Debtor was not fraudulent. Mid-Con presented
no evidence to establish that any transfers were fraudulent or to indicate that there is any
inference to be made in its favor on this issue.
Mid-Con’s reliance on Wells v. Guaranty State Bank, 1916 OK 394" date_filed="1916-03-28" court="Okla." case_name="Wells v. Guauranty State Bank">1916 OK 394, 156 P. 896, for
the proposition that all of the Markles’ transfers were void is misplaced. In Wells, the court
found that fraudulent transfers were void based on “Section 1174, R.L. 1910,” an Oklahoma
statute that predates (and was superceded by) Oklahoma's Uniform Fraudulent Transfer Act
(24 O.S. §§ 112-23), which was adopted in 1986. Pursuant to 24 O.S. § 119, fraudulent
transfers are avoidable, not void, and in order to avoid a fraudulent transfer, legal action in
21
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an appropriate forum is required.11 Mid-Con failed to institute any legal action to avoid the
alleged fraudulent transfers pre-petition, and any right that Mid-Con had to avoid transfers
vested in the Trustee post-petition pursuant to Section 544(b) of the Bankruptcy Code. The
transfers have never been adjudicated as voidable. Accordingly, Mid-Con did not, and may
not now, avoid the Markles’ transfers of property to the Trust and to Markle Holdings, L.L.C.
Second, Mid-Con argues that the transfer of an undivided one-half interest in the
Home to the Trust was void pursuant to 60 O.S. § 175.25(H) because the Debtor had named
himself as the primary beneficiary of the revocable Trust. Although Section 175.25(H)
provides that a person is not authorized to create a spendthrift trust or other inalienable
interest for his own benefit and that the interest of the trustor as a beneficiary of any trust is
11
23 O.S. § 119 provides:
A. In an action for relief against a transfer or obligation pursuant to the
provisions of the Uniform Fraudulent Transfer Act, a creditor, subject to the
limitations of Section 9 of this act, may obtain:
1. Avoidance of the transfer or obligation to the extent necessary to
satisfy the creditor's claim; or
2. An attachment or other provisional remedy against the asset
transferred or other property of the transferee as provided for by law;
or
3. Subject to applicable principles of equity and in accordance with
applicable rules of civil procedure:
a. an injunction against further disposition by the debtor or a
transferee, or both, of the asset transferred or of other property,
or
b. appointment of a receiver to take charge of the asset transferred or of
other property of the transferee, or
c. any other relief the circumstances may require.
B. If a creditor has obtained a judgment on a claim against the debtor, the
creditor, if the court so orders, may levy execution on the asset transferred or
its proceeds.
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subject to the claims of his creditors, this section does not declare that a revocable trust with
a spendthrift provision is void.12
Third, Mid-Con argues that the transfer to the Trust was void because the Trust is
illusory. In order for this Court to find the Trust illusory under Oklahoma law, Mid-Con
must prove that the Trust was established solely for Markle's benefit as the
trustee/beneficiary. The existence of any other beneficiaries indicates that the Trust is not
illusory. See Limb v. Aldridge, 1999 OK CIV APP 31, 978 P.2d 365. In this case, it is
undisputed that the Trust named contingent beneficiaries.
Fourth, Mid-Con claims that any transfers between the Markles and any single
member L.L.C.'s were illusory. Mid-Con presented no legal basis for this argument, and the
record shows that the transfers from the Markles to Markle Holdings, L.L.C. occurred at a
time when Markle Holdings, L.L.C. was a legal entity authorized to hold title to real
property.13 The transfer from the Markles to the L.L.C. that was recorded on March 28,
2006, is facially valid. Again, any action by Mid-Con to “pierce the corporate veil” of any
12
The Trust document itself recognizes that the spendthrift provision in the Trust does
not apply to the Trustor, i.e., the Debtor. Response, Exh. 4, ¶ 5.6. A trust containing a
spendthrift provision that strictly complies with Oklahoma law cannot be void simply
because it contains a spendthrift provision.
13
A limited liability company may “[a]cquire by purchase or any other manner, take,
receive, own, hold, improve, and otherwise deal with any interest in real or personal property,
wherever located.” 18 O.S. §2003(5). See also 16 O.S. §14.1. Oklahoma law also treats the
L.L.C. property as distinct from the members property. See 16 O.S. §14.1. (“Specific
property owned by a limited liability company is not subject to execution on a claim,
judgment or lien against a member or manager of the company.”) See also 18 O.S. §2032.
23
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L.L.C. entity and avoid the transfers would have required some pre-petition legal action,
which Mid-Con has failed to establish.
C. Judgment of the Tulsa County District Court
Mid-Con also claims that the default judgment entered post-petition by a Tulsa
County District Court established the validity and priority of its liens on the Home. The
Trustee does not dispute the existence of that default judgment, which Mid-Con attached to
its Motion for Summary Judgment (Adv. Doc. 19) as Exh. 5, but does dispute its validity.
On March 4, 2008, this Court entered an agreed order between the Trustee and ABN Amro
Mortgage Group, Inc. modifying the stay on the Home to allow ABN Amro Mortgage Group,
Inc. to enforce its liens. (Main Case Doc. 58). Significantly, Mid-Con was not a party to
the motion requesting that the stay be modified and has never filed a motion to modify the
stay in the Debtor’s main bankruptcy case. On April 22, 2008, Mid-Con submitted and
received a default judgment from the Tulsa County District Court, purporting to establish the
validity and priority of Mid-Con's claimed lien against the estate’s interest in the Home. Mid-
Con failed to produce any evidence that the Trustee, the real party in interest in the
proceeding, was given notice of the motion for default judgment. No preclusive effect is
afforded to a judgment obtained against a party where prosecution violated the stay, because
such a judgment is void ab initio. See Ellis v. Consolidated Diesel Electric Corp., 894 F.2d
371 (10th Cir. 1990) (“It is well established that any action taken in violation of the stay is
void and without effect”). For purposes of establishing any issue regarding the lien of Mid-
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Con against the Home, the entry of the default judgment against the Debtor in Tulsa County
District Court on April 22, 2008, is void.
VI. Conclusion
For the reasons stated herein, the Trustee's Motion is granted in part and denied in
part.
A. The Farm
The Markles transferred all of their interest in the Farm to Markle Holdings, L.L.C.
prior to August 29, 2006, the date Mid-Con attempted to record and perfect a lien on the
Farm. Mid-Con failed to show that the transfer from the Markles to Markle Holdings, L.L.C.
was void. Since the Markles had no interest in the Farm when Mid-Con supplemented and
recorded the Agreement on August 29, 2006, no lien in favor of Mid-Con ever attached to
the Farm. The Trustee's Motion requesting summary judgment declaring that Mid-Con’s lien
never attached to the Farm is granted.
B. The Home
With regard to the undivided one-half interest in the Home that the Markles retained,
the undisputed facts support a finding that Mid-Con’s lien attached to that interest when it
recorded the Agreement on August 29, 2006. Because that date is more than ninety days
prior to the Debtor’s bankruptcy, Mid-Con’s lien is not avoidable by the Trustee under
Section 547(b) of the Bankruptcy Code. The Trustee’s request for summary judgment
declaring that Mid-Con’s lien on this undivided one-half interest in the Home either did not
attach or in the alternative was avoidable is denied.
25
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With regard to the undivided one-half interest in the Home that the Markles'
transferred to the Trust and which the Trust reconveyed to the Debtor, the record lacks
sufficient facts to allow the Court to determine whether the commencement of Mid-Con’s
state court foreclosure action against the Trust’s interest in the Home established a lien in
favor of Mid-Con under 60 O.S. § 175.25(I), and if it did, whether such a lien is avoidable
as a preference pursuant to Section 547(b) of the Bankruptcy Code. The Trustee’s request
for summary judgment declaring the parties rights on the Trust’s prior interest in the Home
is denied.
SO ORDERED this 14th day of October, 2008.
7067
26