In re: Gruseck v.

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to
6th Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 08b0007n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: GRUSECK & SON, INC., )
)
Debtor. )
______________________________________ )
)
L. CRAIG KENDRICK, Trustee, )
)
Plaintiff - Appellant, ) No. 06-8091
)
v. )
)
CIT SMALL BUSINESS LENDING CORP., )
)
Defendant - Appellee. )
______________________________________ )
Appeal from the United States Bankruptcy Court
for the Eastern District of Kentucky, at Covington.
Case No. 06-20076, Adversary Case No. 06-2078.
Argued: May 2, 2007
Decided and Filed: April 16, 2008
Before: AUG, PARSONS, and WHIPPLE, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Debra S. Pleatman, ZIEGLER & SCHNEIDER, P.S.C., Covington, Kentucky, for
Appellant. John P. Brice II, WYATT, TARRANT & COMBS, LLP, Lexington, Kentucky, for
Appellee. ON BRIEF: Debra S. Pleatman, ZIEGLER & SCHNEIDER, P.S.C., Covington,
Kentucky, for Appellant. John P. Brice II, WYATT, TARRANT & COMBS, LLP, Lexington,
Kentucky, for Appellee.
____________________
OPINION
____________________
J. VINCENT AUG., JR., Bankruptcy Appellate Panel Judge. This is yet another case in
which a bankruptcy trustee seeks to avoid a mortgage on the basis that the language in the certificate
of acknowledgment is defective. The Appellant, L. Craig Kendrick, Trustee (“Trustee”), appeals the
bankruptcy court’s Order and Judgment granting the motion for summary judgment of Appellee CIT
Small Business Lending Corp. (“CIT”) and denying the Trustee’s motion for summary judgment.
The bankruptcy court determined that the certificate of acknowledgment in a mortgage transferring
a security interest in real estate to CIT substantially complied with the requirements of Kentucky
Revised Statute § 423.130. As a result of this finding, the court concluded that CIT’s interest in the
real estate is superior to the Trustee’s interest.
I. ISSUES ON APPEAL
This appeal raises the following issues:
1. Does the language in the mortgage’s certificate of acknowledgment substantially
comply with Kentucky Revised Statutes Chapter 423 so that the Trustee had constructive notice of
the mortgage?
2. If not, does amended Kentucky Revised Statute § 382.270 apply retroactively such
that the certificate of acknowledgment provided constructive notice to the Trustee?
3. If the certificate of acknowledgment does not provide constructive notice, does the
notice provided by CIT’s recording of its Notice of Lis Pendens defeat the Trustee’s claimed position
as a bona fide purchaser under 11 U.S.C. § 544(a)(3)?
4. Did CIT’s recording of its Notice of Lis Pendens during the preference period
constitute a transfer, subject to avoidance as a preference?
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Eastern District of Kentucky has authorized appeals to the
Bankruptcy Appellate Panel (“BAP”). The order on appeal is final and may be appealed as of right.
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28 U.S.C. § 158(a)(1). None of the parties have timely elected to have this appeal heard by the
district court. 28 U.S.C. § 158(c)(1).
A bankruptcy court’s grant of summary judgment is reviewed de novo. Int’l Union v.
Cummins, Inc., 434 F.3d 478, 483 (6th Cir. 2006). Under a de novo standard of review, the
reviewing court decides an issue independently of, and without deference to, the trial court’s
determination. Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (B.A.P.
6th Cir. 2001).
III. FACTS
The following facts are not in dispute. On May 6, 2002, the debtor Gruseck & Son, Inc.
(“Debtor”), acting through its President, Lester Arnold Gruseck, executed a note and mortgage in
favor of CIT in the principal amount of $879,000. The mortgage was recorded on May 20, 2002,
in the Boone County Clerk’s Office at Burlington, Kentucky. The mortgage contains the following
signatures and certificate of acknowledgment:
Dated this 6th day of May, 2002.
EACH GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS
OF THIS MORTGAGE, AND EACH GRANTOR AGREES TO ITS TERMS.
GRANTOR: GRUSECK & SON, INC.
By: /s/ Lester Arnold Gruseck
LESTER ARNOLD GRUSECK, President
State of Kentucky )
) SS
County of Boone )
I, a notary public in and for the state and county aforesaid, do hereby certify that on
this 6th day of May, 2002, there appeared before me LESTER ARNOLD GRUSECK,
President of GRUSECK & SON, INC. who executed and delivered the foregoing mortgage.
My commission expires: June 2, 2004.
/s/ [Signature is illegible]
Notary Public, State at Large, Kentucky
(Appellant’s App. at 20.)
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On November 22, 2005, CIT recorded a Notice of Lis Pendens in the Boone County Clerk’s
Office. The notice was properly acknowledged and referred to a foreclosure action CIT had
commenced in Boone County Circuit Court to enforce its mortgage, which was identified in an
attached exhibit.
On February 16, 2006, Debtor filed a petition for relief under Chapter 7 of the Bankruptcy
Code. L. Craig Kendrick was appointed the Chapter 7 Trustee and initiated the present adversary
proceeding. The Trustee alleged in the complaint that the acknowledgment in the mortgage was
defective, that the defective acknowledgment rendered the instrument invalid against a bona fide
purchaser under 11 U.S.C. § 544(a), that the recording of the Notice of Lis Pendens for the benefit
of CIT within ninety days of the filing of Debtor’s bankruptcy petition, while the debtor was
insolvent, was on account of an antecedent debt, and that the recording allowed CIT to receive more
than it would have received in a Chapter 7 had the Notice not been recorded. The Trustee’s prayer
for relief sought a declaration that the mortgage was avoidable as a preferential transfer under 11
U.S.C. § 547 and an order preserving the benefits of the lien for the bankruptcy estate.
The parties filed cross motions for summary judgment. The Trustee argued that CIT’s
mortgage contained a defective certificate of acknowledgment and, as such, did not provide
constructive notice to the Trustee. The Trustee, therefore, argued that he obtained the status of a
bona fide purchaser under § 544(a)(3). Although he acknowledged that the Notice of Lis Pendens
served to perfect CIT’s mortgage and thus operated to provide notice of the mortgage, the Trustee
also argued that because the notice was filed within ninety days of the Debtor’s bankruptcy filing,
the mortgage was avoidable as a preferential transfer. In response, CIT argued that the certificate
of acknowledgment substantially complied with the Kentucky statutes and, therefore, provided
constructive notice to the Trustee. It further argued that even if defective, constructive notice was
provided in accordance with an amendment to the Kentucky Revised Statutes, effective after the date
Debtor filed its petition, providing that mortgages previously recorded provide constructive
knowledge of their contents even if they contain a defective acknowledgment. And finally, CIT
argued that the Notice of Lis Pendens did not constitute a transfer avoidable as a preference.
After oral argument on the motions, the bankruptcy court ruled from the bench that the
language in the certificate of acknowledgment at issue substantially complied with the requirements
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of the Kentucky statutes and that CIT held a valid mortgage against Debtor’s property. On
October 23, 2006, the court entered its Order and Judgment to that effect, granting CIT’s motion and
denying the Trustee’s motion for summary judgment.
The Trustee filed this timely appeal.
IV. DISCUSSION
The Bankruptcy Appellate Panel for the Sixth Circuit has recently decided several appeals
analyzing whether mortgages were defective under Kentucky statutes. Each appeal has some nuance
that sets it apart from the others. Similarly, this appeal has its own nuances, but the statement of the
federal and state law involved and burdens of proof and persuasion outlined below are the same as
set forth in our prior decisions. See MG Invs., Inc. v. Johnson (In re Cocanougher), 378 B.R. 518
(B.A.P. 6th Cir. 2007); Select Portfolio Servs., Inc. v. Burden (In re Trujillo), 378 B.R. 526 (B.A.P.
6th Cir. 2007); Wilson v. CIT Group/Consumer Fin. Inc. (In re Wilson), 378 B.R. 416 (B.A.P. 6th
Cir. 2007) (unpublished table decision); and Kendrick v. Deutsche Bank Nat’l Trust Co. (In re St.
Clair), 380 B.R. 478 (B.A.P. 6th Cir. 2008).
A. CIT’s Mortgage Instrument Did Not Provide Constructive Notice to the Trustee.
Pursuant to section 544 of the Bankruptcy Code,1 the Trustee is considered a bona fide
purchaser of the Debtor’s real estate and may therefore avoid certain obligations placed on the
property that are voidable under state law. See, e.g., Rogan v. Bank One, Nat’l Assoc. (In re Cook),
457 F.3d 561, 566 (6th Cir. 2006). Kentucky law governs the question of whether CIT’s security
interests are superior to the Trustee’s interests in the Debtor’s real estate. Id. It does not matter
whether the Trustee personally knew of the mortgage. “Rather, the inquiry focuses on whether a
bona fide purchaser would have notice” under Kentucky law. Thacker v. United Cos. Lending Corp.,
256 B.R. 724, 728 (W.D. Ky. 2000).
1
Because the Debtor filed its bankruptcy petition after October 17, 2005, the case is governed
by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). All
statutory references are to the post-BAPCPA version of the Bankruptcy Code, 11 U.S.C. §§ 101 to
1330 (2005), unless otherwise specifically noted.
-5-
Under Kentucky law, a recorded but defective mortgage does not put a bona fide purchaser
on constructive or inquiry notice. See Rogan v. Am.’s Wholesale Lender d/b/a Countrywide Home
Loans, Inc. (In re Vance), 99 Fed. Appx. 25, 27 (6th Cir. 2004); State Street Bank & Trust Co. v.
Heck’s, Inc., 963 S.W.2d 626, 630 (Ky. 1998). The Trustee has the burden of showing that the
mortgage was improperly executed. Simon v. First Union Mort. Corp. (In re Burnham), 231 B.R.
270 (Bankr. N.D. Ohio 1999).
The following Kentucky statutes are applicable to our determination of the validity of the
certificate of acknowledgment. The first of these to be examined is Kentucky Revised Statute
§ 423.130:
423.130 Certificate of person taking acknowledgment
The person taking an acknowledgment shall certify that:
(1) The person acknowledging appeared before him and acknowledged he executed
the instrument; and
(2) The person acknowledging was known to the person taking the acknowledgment
or that the person taking the acknowledgment had satisfactory evidence that the
person acknowledging was the person described in and who executed the instrument.
Accordingly, § 423.130 requires the notary to certify three things: (i) that the person signing
appeared before the notary; (ii) that the person signing acknowledged executing the instrument; and
(iii) that the person signing is known to the notary or provided satisfactory evidence of his identity
to the notary.
Concerning the form of the acknowledgment, Kentucky Revised Statute § 423.140 provides
as follows:
423.140 Recognition of certificate of acknowledgment
The form of a certificate of acknowledgment used by a person whose authority is
recognized under KRS 423.110 shall be accepted in this state if:
(1) The certificate is in a form prescribed by the laws or regulations of this state;2
2
The short form acknowledgment for a corporation is set forth in subsection (2) of Kentucky
Revised Statute § 423.160:
423.160 Short forms of acknowledgment
(continued...)
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(2) The certificate is in a form prescribed by the laws or regulations applicable in the
place in which the acknowledgment is taken; or
(3) The certificate contains the words “acknowledged before me,” or their substantial
equivalent.
Kentucky Revised Statute § 423.150 defines the words “acknowledged before me” as
follows:
423.150 Certificate of acknowledgment
The words “acknowledged before me” mean:
(1) That the person acknowledging appeared before the person taking the
acknowledgment;
(2) That he acknowledged he executed the instrument;
(3) That, in the case of:
....
2
(...continued)
The forms of acknowledgment set forth in this section may be used and are sufficient
for their respective purposes under any law of this state. The forms shall be known
as “Statutory Short Forms of Acknowledgment” and may be referred to by that name.
The authorization of the forms in this section does not preclude the use of other
forms.
....
(2) For a corporation:
State of __________
County of __________
The foregoing instrument was acknowledged before me this (date) by (name of
officer or agent, title of officer or agent) of (name of corporation acknowledging) a
(state or place of incorporation) corporation, on behalf of the corporation.
(Signature of person taking acknowledgment)
(Title or rank)
(Serial number, if any)
As noted in the statute, the short form is merely a “safe harbor” that has been determined as
sufficient for its purpose under the laws of Kentucky and does not preclude the use of other forms.
Ky. Rev. St. Ann. § 423.160.
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(b) A corporation, the officer or agent acknowledged he held the position or
title set forth in the instrument and certificate, he signed the instrument on behalf of
the corporation by proper authority, and the instrument was the act of the corporation
for the purpose therein stated; [and]
....
(4) That the person taking the acknowledgment either knew or had satisfactory
evidence that the person acknowledging was the person named in the instrument or
certificate.
Subsections (1), (2) and (4) of Kentucky Revised Statute § 423.150 provide that by using the
words “acknowledged before me,” the notary is certifying receipt of the information required by
Kentucky Revised Statute § 423.130. Section 423.140(3) provides that the certificate of
acknowledgment is in acceptable form if it contains the words “‘acknowledged before me,’ or their
substantial equivalent.” Ky. Rev. Stat. Ann. § 423.140(3) (emphasis added). See also Dunlap v.
Commonwealth Cmty. Bank (In re Phelps), 341 B.R. 848, 853 (Bankr. W.D. Ky. 2006) (“[U]nder
either a statutory standpoint or a case law standpoint, the standard to be used in determining the
sufficiency of an acknowledgment is whether the acknowledgment substantially complies with the
statutory requirements.”)
Subsection (3) of Kentucky Revised Statute § 423.150 sets out the meaning of the words
“acknowledged before me” when used by an individual signing on behalf of various entities. With
respect to a person signing on behalf of a corporation, § 423.150(3)(b) indicates that the words
“acknowledged before me” advise the public that the person signing acknowledged that: (1) he holds
the position or title set forth in the certificate; (2) he signed on behalf of the corporation; (3) he had
the authority to sign on behalf of the corporation; and (4) his signing was the act of the corporation
itself.
Kentucky does not require technical compliance with its notary statute, but merely substantial
compliance. As explained in Hackworth v. Flinchum, 475 S.W.2d 140 (Ky. 1972), albeit in the
context of an acknowledgment in a will renunciation:
In the absence of a mandatory statute substantial rather than literal compliance with
the form or requirements laid down in the statute is all that is essential to the validity
of a certificate of acknowledgment. This is said to be true even though the statute
prescribes that acknowledgments “must” be substantially in the form prescribed. The
general policy of the law is to construe certificates of acknowledgment liberally and
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to uphold them if they are in substantial compliance with the statutory requirements
as to form and content, even though they may fall short of literal conformity thereto,
or contain clerical errors, or be otherwise subject to merely technical objections.
Although words not in the statute are used in place of others, or words of a statute
are omitted, if the meaning of the words used is the same or they represent the same
facts, or if the omission of a word or words is immaterial or can be supplied by
reasonable construction of the whole instrument, the acknowledgment will be
sufficient.
Hackworth, 475 S.W.2d at 142 (quoting 1 Am. Jur. 2d Acknowledgments § 40 (now revised at § 31))
(emphasis added).
In this case, the certificate of acknowledgment does not contain the words “acknowledged
before me,” so as to include all of the representations set forth in the definition of that phrase found
in Kentucky Revised Statute § 423.150. Nevertheless, the mortgage document itself clearly indicates
that Lester Arnold Gruseck signed as President on behalf of Gruseck & Son, Inc. The
acknowledgment language indicates that Lester Arnold Gruseck was indeed the person who appeared
before the notary, that he executed the mortgage for the purposes stated therein, that he is the
President of the Debtor corporation, and that he signed the mortgage on behalf of the corporation.
Thus, the only remaining material representations included in § 423.150’s definition of
“acknowledged before me” that are not readily apparent from the notary clause are that Gruseck had
the authority to sign on behalf of the corporation, which generally involves a resolution by the board
of directors, and that his signing was an act of the corporation. While the latter requirement may be
inferred from the fact that the corporation is listed as Grantor and Gruseck signed on behalf of the
Grantor as president, nothing in the acknowledgment supplies the required representation that the
corporation had authorized this action. Nor can this omission be supplied by a reasonable
construction of the whole instrument. Accordingly, the acknowledgment does not substantially
comply with the Kentucky statutes in that it fails to establish that Gruseck “signed the instrument
on behalf of the corporation by proper authority” as required by Kentucky Revised Statute
§ 423.150(3)(b) (emphasis supplied). The decision of the bankruptcy court is reversed as to this
issue.
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B. The Amendment to Kentucky Revised Statute § 382.270 cannot be applied retroactively
to divest the Trustee of vested rights.
CIT argues that even if its mortgage was defectively acknowledged, the 2006 amendment to
Kentucky Revised Statute § 382.270 applies retroactively such that the Trustee is charged with
constructive notice of the mortgage.3 Debtor’s petition was filed on February 16, 2006, while the
amendment to the statute did not become effective until July 12, 2006. The Bankruptcy Appellate
Panel for the Sixth Circuit has already determined the issue as to the retroactive application of
Kentucky Revised Statute § 382.270 against a bankruptcy trustee where a debtor’s petition was filed
prior to the effective date of the amendment to the statute. As stated in Trujillo,
The Supremacy Clause of the United States Constitution precludes retroactive
application of § 382.270. The Debtor filed his bankruptcy petition before the
effective date of the amended statute. Under federal law, a trustee’s rights as a bona
fide purchaser are fixed as of commencement of the bankruptcy case. See 11 U.S.C.
§ 544(a)(3). Amended § 382.270 may not be applied retroactively in this case as
such application would be in conflict with the federal bankruptcy statute. In re
Hastings, 353 B.R. at 520; cf. United States v. Craft, 535 U.S. 274, 288-89, 122 S.
Ct. 1414, 1426, 152 L. Ed. 2d 437 (2002) (applying the Supremacy Clause and
concluding that debtor’s interest in entireties property constituted “property” or
“rights to property” under the federal tax lien statute, notwithstanding the fact that
such property was not subject to levy under state law).
In re Trujillo, 378 B.R. at 537.
3
Amended Kentucky Revised Statute § 382.270 provides in relevant part as follows:
No deed or deed of trust or mortgage conveying a legal or equitable title to real
property shall be lodged for record and, thus, valid against a purchaser for a valuable
consideration, without notice thereof, or against creditors, until such deed or
mortgage is acknowledged or proved according to law. However, if a deed or deed
of trust or mortgage conveying a legal or equitable title to real property is not so
acknowledged or proved according to law, but is or has been, prior to July 12, 2006,
otherwise lodged for record, such deed or deed of trust or mortgage conveying a legal
or equitable title to real property or creating a mortgage lien on real property shall be
deemed to be validly lodged for record for purposes of KRS Chapter 382, and all
interested parties shall be on constructive notice of the contents thereof.
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As the creditors did in Trujillo, CIT cites Meoli v. Citicorp Trust Bank (In re Oswalt), 444
F.3d 524 (6th Cir. 2006), in support of its argument that § 382.270 should be applied retroactively.
However, Oswalt is distinguishable from the present appeal.
In Oswalt, the Sixth Circuit addressed the issue of retroactivity of a Michigan statute
dealing with the perfection of security interests in mobile homes. The court
recognized that its decision in Boyd v. Chase Manhattan Mortgage Corp. (In re
Kroskie), 315 F.3d 644 (6th Cir. 2003), had created chaos in the Michigan mobile
home financing market. Prior to Kroskie, the Michigan Mobile Home Commission
Act (“MHCA”) provided a method for perfecting security interests in mobile homes
by noting liens on titles; however, creditors also perfected such security interests by
recording traditional mortgages. In Kroskie, the court held that the MHCA provided
the exclusive means of perfecting mobile home security interests under Michigan
law. Shortly thereafter, in order to “undo the effect of the [Kroskie] decision,” the
Michigan legislature amended the MHCA, specifying that creditors could perfect
security interests in mobile homes by recording traditional mortgage liens. Oswalt,
444 F.3d at 527. The Michigan legislature also added language that the amendment
applies retroactively. Because “the amendment’s language and the circumstances
under which it was enacted indicate that the Michigan legislature intended it to
clarify the perfection procedures,” the Sixth Circuit concluded in Oswalt that the
amendment must be applied retroactively. Id. at 528. Unlike the situation in Oswalt,
there is no indication that the Kentucky legislature intended to clarify previous law.
Rather, the language of the amendment clearly provides for a change in the law
regarding when a party is put on constructive notice of a deed or mortgage.
In re Trujillo, 378 B.R. at 538-39.
For the reasons explained in Trujillo, § 382.270 may not be applied retroactively so as to
divest the Trustee of his vested rights as a bona fide purchaser. This conclusion is consistent with
Kentucky case law providing that a statutory amendment should only be applied retroactively if the
statute in question serves to facilitate a remedy and if no vested rights are impaired. See In re
Trujillo, 378 B.R. at 538 (quoting Ky. Ins. Guar. Ass’n v. Jeffers, 13 S.W.3d 606, 610 (Ky. 2000)).
C. The notice provided by CIT recording its Notice of Lis Pendens defeats the Trustee’s
claimed position as a bona fide purchaser under 11 U.S.C. § 544(a)(3).
Lis pendens is defined as “[a] notice, recorded in the chain of title to real property, . . . to
warn all persons that certain property is the subject matter of litigation, and that any interests
acquired during the pendency of the suit are subject to its outcome.” Greene v. McFarland, 43
S.W.3d 258, 260 (Ky. 2001) (alterations in original). The Trustee agrees that the Notice of Lis
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Pendens, filed prior to the Debtor’s bankruptcy filing, provided constructive notice of the mortgage
notwithstanding the mortgage’s defective acknowledgment. The Bankruptcy Appellate Panel for
the Sixth Circuit held in Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651
(B.A.P. 6th Cir. 2001), that constructive notice provided by a lis pendens filing precluded a trustee
from avoiding a defective mortgage under § 544(a)(3). While Periandri concerned Ohio’s lis
pendens statute, we find that Kentucky law is in accord. See Cumberland Lumber Co. v. First &
Farmers Bank of Somerset, 838 S.W.2d 403, 405 (Ky. App. 1992) (“[O]ne who acquires an interest
in property, whether by purchase, lien or other encumbrance, after the filing of a lis pendens notice,
takes that interest subject to the results of the litigation. Actual knowledge of the pending action is
not necessary to bind the pendente lite purchaser.”); Johnson v. CIT Group/Consumer Fin. Inc. (In
re Franklin), No. 05-5110, 2006 WL 3876501, *3 (Bankr. E.D. Ky. Jan. 25, 2006) (Despite defective
mortgage, properly executed and recorded lis pendens notice provided constructive notice to
subsequent purchasers and creditors including bankruptcy trustee, sufficient to defeat trustee’s status
as bona fide purchaser without notice and preclude avoidance of defective mortgage under § 544.).
Accordingly, CIT’s interest in the Debtor’s property is superior to that of the Trustee with the status
of a bona fide purchaser under 11 U.S.C. § 544(c)(3).
D. Because the mortgage given to CIT by the Debtor is deemed for preference purposes
to have been granted upon perfection, and because perfection occurred upon CIT’s recording of
its Notice of Lis Pendens during the preference period, the transfer is subject to avoidance as a
preferential transfer.
Because the bankruptcy court in this case held that the certificate of acknowledgment in the
mortgage was not defective, the court denied the Trustee’s motion for summary judgment, without
considering the merits of the Trustee’s preferential transfer claim. In light of our determination that
the mortgage was in fact defective, but that nonetheless the filing of the Notice of Lis Pendens during
the preference period served to protect the mortgage from avoidance under § 544(a)(3), the
preference question is now relevant.
The Trustee asserts that his ability to avoid CIT’s mortgage as preferential is purely a matter
of law, capable of determination by this Panel. According to the Trustee, because the recording of
CIT’s lis pendens notice was the first instrument of record capable of cutting off a bona fide
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purchaser’s ability to achieve a position superior to CIT’s, and because the Notice of Lis Pendens
was recorded within the 90 days preceding the filing of the bankruptcy petition, the Trustee may
avoid CIT’s mortgage as a preferential transfer. CIT’s response is that the filing of the Notice of Lis
Pendens was not a transfer, but merely a unilateral act on its part to give notice of the pending
foreclosure in accordance with state statutes. In support of this proposition, CIT cites the definition
of transfer set forth in 11 U.S.C. § 101(54)4 and argues that the filing of a lis pendens meets none
of these definitions. CIT also cites the case of Strong v. First Nationwide Mtg. Corp., 959 S.W.2d
785 (Ky. App. 1998), wherein the court noted that the filing of a lis pendens notice does not create
a lien under Kentucky law.
In one respect CIT is correct: the transfer of Debtor’s real property took place when the
Debtor gave CIT a mortgage on the property on May 6, 2002. Nonetheless, for purposes of § 547
of the Bankruptcy Code, a transfer is deemed to have been made at the time the transfer is perfected,
if perfection takes place more than 30 days after its creation, which it did in this case because the
initial recording was defective. See 11 U.S.C. § 547(e)(2)(B)5; see also Waldschmidt v. Mid-State
4
The term “transfer” means—
(A) The creation of a lien;
(B) the retention of title as a security interest;
(C) the foreclosure of a debtor’s equity of redemption; or
(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary,
of disposing of or parting with—
(i) property;
(ii) an interest in property.
11 U.S.C. § 101(54).
5
11 U.S.C. § 547(e)(2)(A) and (B) provides:
For the purposes of this section, except as provided in paragraph (3) of this sub-
section, a transfer is made–
(A) at the time such transfer takes effect between the transferor and the transferee,
if such transfer is perfected at, or within 30 days after, such time, except as provided
in subsection (c)(3)(B); [or]
(B) at the time such transfer is perfected, if such transfer is perfected after such 30
(continued...)
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Homes, Inc. (In re Pitman), 843 F.2d 235, 238 (6th Cir. 1988). Moreover, again for purposes of
§ 547, a transfer of real property is perfected when a bona fide purchaser of such property can not
acquire an interest that is superior to the interest of the transferee. See 11 U.S.C. § 547(e)(1)(A).6
As we previously noted, CIT’s interest became superior to the interest of any potential bona fide
purchaser of the property when CIT recorded its Notice of Lis Pendens on November 22, 2005.
Accordingly, under § 547(e)(1)(A), CIT’s mortgage in the Debtor’s realty was perfected at this point.
Thus, even though the actual transfer was the creation of the mortgage in 2002, the transfer is
deemed to have occurred, for preference purposes, when perfected in November 2005. Because this
act took place within the preference period, it is considered a transfer, subject to avoidance as a
preference, assuming the other required elements of a preference exist. See In re Lane, 980 F.2d 601
(9th Cir. 1992) (because the recording of the lis pendens operated to perfect the filer’s interest
against bona fide purchasers, the recording was a transfer under § 547(e)(1)(A)); Rice v. First Ark.
Valley Bank (In re May), 310 B.R. 405, 415 (Bankr. E.D. Ark. 2004) (the recording of lis pendens
constituted a transfer of an interest for preference purposes under § 547).
The Ninth Circuit Court of Appeals in Lane specifically considered and rejected the argument
raised by CIT in the instant case, that no transfer took place because under state law the filing of the
lis pendens does not create a lien. The court observed that “[i]t is the fact of attainment of a superior
interest, not the creation of a lien or the rendering of a judgment, that creates a transfer under the
Bankruptcy Code . . . .” In re Lane, 980 F.2d at 606. See also Barnhill v. Johnson, 503 U.S. 393,
397, 112 S. Ct. 1386, 1389 (1992) (“‘What constitutes a transfer and when it is complete’ is a matter
of federal law.”).
5
(...continued)
days[.]
6
For the purposes of this section—
(A) a transfer of real property other than fixtures, but including the interest of a seller
or purchaser under a contract for the sale of real property, is perfected when a bona
fide purchaser of such property from the debtor against whom applicable law permits
such transfer to be perfected cannot acquire an interest that is superior to the interest
of the transferee[.]
11 U.S.C. § 547(e)(1).
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Based on the foregoing, we conclude that CIT’s mortgage, which is deemed for preference
purposes to have been granted when perfected, is a transfer of property of the Debtor subject to
avoidance as a preference. Nonetheless, the record does not establish all of the other required
components of a preference, specifically that payment enabled CIT to receive more than it would
have received but for the transfer. See 11 U.S.C. § 547(b)(3) and (5). This element was not admitted
by CIT in its answer and it does not appear that the Trustee submitted proof of this element, by
affidavit or otherwise, in connection with his motion of summary judgment.7 Accordingly, the
bankruptcy court’s denial of the Trustee’s motion for summary judgment is reversed, and the case
will be remanded for further consideration of the Trustee’s preference claim, consistent with the
conclusions of this Panel.
V. CONCLUSION
Because the certificate of acknowledgment in the mortgage at issue did not substantially
comply with Kentucky Revised Statutes §§ 423.130 and 423.150, the mortgage was not perfected
until November 22, 2005, the date the Notice of Lis Pendens was filed. This date was before the date
Debtor filed its petition and provided the Trustee with constructive notice of the mortgage.
Therefore, CIT held an enforceable security interest at the commencement of the case. However,
the security interest was perfected within ninety days of the Debtor’s bankruptcy filing. The
bankruptcy court’s judgment, therefore, is AFFIRMED to the extent that it adjudged CIT to be the
holder of a valid mortgage lien against Debtor’s real estate and REVERSED in part and
REMANDED for the bankruptcy court to address the Trustee’s motion for summary judgment on
his preference claim.
7
Debtor’s insolvency at the time of the transfer, that is, at the time the Notice of Lis Pendens
was filed, is also an element of the Trustee’s preference claim that was not admitted by CIT in its
answer. However, there is a statutory presumption that Debtor was insolvent since the transfer
occurred within ninety days before Debtor filed its bankruptcy petition. See 11 U.S.C. § 547(f). CIT
did not attempt to rebut that presumption in its response to the Trustee’s motion for summary
judgment.
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