Case Title: Mortgage Lenders Network, USA v. Sensenich

Citation: 177 Vt. 592, 2004 VT 107A, 873 A.2d 892

Docket Number: 

State: vermont

Court: Vermont Supreme Court

Date: 2004-11-09T00:00:00Z

Document:
Mortgage Lenders Network, USA v. Sensenich (2002-564); 177 Vt. 592;
873 A.2d 892

2004 VT 107A

[Filed 09-Nov-2004]

                                 ENTRY ORDER

                                2004 VT 107A

                       SUPREME COURT DOCKET NO. 02-564

                             OCTOBER TERM, 2003

  Mortgage Lenders Network, USA 	}	
                                        }
       v.	                        }	Original Jurisdiction
                                        }	
  Jan Sensenich, Trustee, and	        }
  Stanley and Susan Potter	        }                                     

       ¶  1.  The United States Court of Appeals for the Second Circuit has
  certified to this Court the following question: "Where a recorded mortgage
  was not witnessed, does the filing of a foreclosure complaint suffice under
  Vermont law to give subsequent purchasers constructive notice of that
  mortgage and thereby make it valid and binding on subsequent purchasers?" 
  In re Potter, 313 F.3d 93, 96-97 (2d Cir. 2002).  Because answering this
  question would result in our providing an advisory opinion regarding a
  hypothetical situation that does not correspond to the facts of this case,
  we reformulate the certified question as follows: "Where a recorded
  mortgage was not witnessed, does the recording of a foreclosure complaint
  and the subsequent issuance of a foreclosure decree based on that
  complaint, without timely appeal, suffice under Vermont law to give
  purchasers constructive notice of that mortgage and therefore make the
  mortgage and foreclosure decree valid and binding on subsequent
  purchasers?"  See V.R.A.P. 14(b) ("The Vermont Court may reformulate a
  question of law certified to it.").  We answer the reformulated question in
  the affirmative.

       ¶  2.  The facts relevant to the certified question are undisputed. 
  On December 10, 1998, Stanley and Susan Potter executed a mortgage deed to
  plaintiff Mortgage Lenders Network, USA (MLN).  Although the mortgage deed
  was acknowledged, the Potters' signatures were not witnessed as required by
  27 V.S.A. § 341(a) before the statute was amended in 2004.  See 2003, No.
  150 (Adj. Sess.), § 5.   The defective deed was then recorded in the land
  records.  On January 24, 2000, MLN initiated a foreclosure action against
  the Potters in superior court and recorded a copy of the foreclosure
  complaint in the Rutland City land records.  The superior court issued a
  judgment order and decree of foreclosure in favor of MLN on March 31, 2000. 
   
       ¶  3.  On May 22, 2000, presumably before the statutory period of
  redemption established by 12 V.S.A. § 4528 had run, (FN1) the Potters filed
  for protection under chapter 13 of the federal bankruptcy code.  The state
  court foreclosure action was automatically stayed pursuant to 11 U.S.C. §
  362(a) (1993).  Thereafter, the chapter 13 trustee initiated this action in
  federal court seeking to avoid the mortgage under the bankruptcy code's
  so-called strong-arm clause, 11 U.S.C. § 544(a)(3) (1993), which gives the
  bankruptcy trustee the power to, "without regard to any knowledge of the
  trustee or any other creditor, . . . avoid any transfer of property of the
  debtor or obligation of the debtor that is voidable by . . . a bona fide
  purchaser of real property."  The United States Bankruptcy Court for the
  District of Vermont granted the trustee's summary judgment motion to avoid
  the mortgage.  The United States District Court for the District of Vermont
  affirmed.  On appeal, the Second Circuit Court of Appeals certified to this
  Court the question of whether the filing of a foreclosure complaint gives
  subsequent purchasers constructive notice of a deficiently witnessed
  mortgage, thereby making it valid and binding on those purchasers.  This
  certified question asks more than it needs to, however, because, in this
  case, not only did the mortgagee record the foreclosure complaint but the
  superior court also issued a foreclosure decree based on that complaint. 
  We may not provide advisory opinions, and thus we reformulate the question
  as indicated above.

       ¶  4.  Pursuant to the bankruptcy code's strong-arm clause, the
  trustee, as a fictional bona fide purchaser, is deemed to have no actual
  knowledge of the debtor's previous transactions. See McCannon v. Marston,
  679 F.2d 13, 17 (3d Cir. 1982) (recognizing that Congress' intent in
  enacting strong-arm provision was "to disregard the trustee's knowledge of
  the debtor's previous transactions with various claimants").  Under Vermont
  law, if the only fact evidencing a prior mortgage on a property is the
  recording of a defective mortgage deed, a subsequent purchaser without
  actual knowledge of that defective deed would take free and clear of the
  mortgagee's interest.  See Morrill v. Morrill, 53 Vt. 74, 78 (1880)
  (holding that defectively executed mortgage is not constructive notice to
  subsequent purchasers or attaching creditors).  It does not necessarily
  follow, however, that the filing of a foreclosure complaint pursuant to 12
  V.S.A. § 4523(b) would not provide constructive notice of an equitable
  mortgage claim to subsequent purchasers, including the bankruptcy trustee. 
  But we need not reach that precise question, given the facts of this case. 
  Rather, we need decide only whether the trustee, acting as a bona fide
  purchaser under the powers conferred by the bankruptcy code, may avoid a
  mortgage that has been foreclosed by decree after the foreclosure complaint
  was recorded in the town land records pursuant to § 4523(b).

       ¶  5.  Section 4523(b) provides that the filing of a foreclosure
  complaint "shall be sufficient notice of the pendency of the action to all
  persons who acquire any interest or lien on the mortgaged premises between
  the dates of filing the copy of foreclosure and the recording of the final
  judgment in the proceedings."  The trustee argues, and the federal courts
  agreed, that this sentence merely provides notice of the pendency of a
  foreclosure action-i.e., notice that someone is claiming the existence of a
  valid mortgage-but does not serve as constructive notice that there is a
  valid mortgage on the property.  We do not reach that question because, in
  this case, the superior court issued an unappealed foreclosure decree based
  on a foreclosure complaint recorded pursuant to § 4523(b).  The next
  sentence of § 4523(b) provides: 

    Without further notice or service, those persons [who acquire any
    interest in the mortgaged premises between the time of the filing
    of the foreclosure complaint and the recording of the final
    judgment] shall be bound by the judgment entered in the cause and
    be foreclosed from all rights or equity in the premises as
    completely as though they had been parties in the original action.

  In other words, once the foreclosure complaint is recorded, no further
  notice is required to make interested parties subject to any forthcoming
  decree.  Rather, persons with an interest in the subject property are on
  inquiry notice as to what became of the complaint.
        
       ¶  6.    While one could argue that recording a foreclosure
  complaint gives no greater notice of the validity of the mortgage against
  third parties than recording the mortgage itself, one cannot reasonably
  argue, given the language of § 4523(b), that the issuance of an unappealed
  foreclosure decree based on a recorded foreclosure complaint provides no
  inquiry notice of the mortgage's validity.  The whole point of the decree
  is to determine the validity of the mortgage and to eliminate the interest
  in the property of third parties-like bona fide purchasers.  We decline to
  hold, in essence, that a judicial final judgment as to the validity of a
  mortgage does not put a subsequent purchaser on inquiry notice concerning
  the mortgage's validity.

       ¶  7.  Moreover, we reject the trustee's apparent position that there
  was no final judgment in this case because the redemption period had not
  run.  The foreclosure decree is a final judgment, even though it creates a
  right to redeem.  See V.R.C.P. 80.1(g); Cattle Investors Mgmt. Corp. v.
  Poutre, 148 Vt. 508, 509, 535 A.2d 787, 788 (1987) (defendant's argument
  that judgment did not become absolute until redemption period ran was
  "without either support or reason").  We recognize that a debtor's interest
  in property is determined by state law, and that, in Vermont, a debtor
  retains an interest in the property until the period of redemption is over. 
  Compare In re Donahue,