By order of the Bank ruptcy Appe llate Panel, the prec edential effec t of this decision is l imited to the case and parties pursuant to 6 th C i r
. B A P L B R 8 0 1 3 -1 (b). S

ee a l s o 6 th C i r
. B

A P L B R 8 0 1 0 -1 (c).
F ile Nam e: 08b0007n.06
BA NK RU P TC Y A P P ELLA TE P AN EL OF THE SI XT H C IR CU IT
I n re: GRUSECK & SON, I NC.,
Debtor.

______________________________________ L . CRAI G KEND RI CK, Trustee,

Pla int if f - Ap pe lla

nt,

v. CI T SMAL LBU SI

NESS L ENDI

NG CORP.,
Def endant - Appellee

.

______________________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) No. 06-8091

Appea l from the United States B ankruptc y Court for the E astern D istrict of Kentuc ky , at Covington. Case No. 06- 20076, Adver sary Case No. 06- 2078. Argued: May

2, 2007
Dec ided and F iled: April 16, 2008
B e fo re : A UG , PA RSO NS, and WHI PPL E, B ank

ru ptc y Ap pe llate Pane l Judg e s.

____________________ CO UN SEL
ARG UED: Debr a S. Pleatman, Z I EGL ER & SCHNEI DER, P.S.C ., Covington, Ke n tucky , for Appellant. John P . Br ice I I , WYATT, TARR AN T & C OM BS, L L P, L exington, Kentucky , for Appellee

. O N B RI E F: Debr a S. Pleatman, Z I EGL ER & SCHNEI DE R , P.S.C ., Covington, Kentucky , for Appe llant. J ohn P

. Br i ce I I , WYATT, TARRANT & COMBS, L L P, L exington, Kentucky , for Appe llee.- 2- ____________________ OP IN ION

____________________ J. VI NC EN T A UG ., JR., B ank ru ptc y Ap pe llate Pane l Judg e . T his is ye t ano the r c a se in wh ic h a ba nk ru ptc y tr us te e se e ks to av oid a mor tg a g e on the ba sis that th e langua g e in t he c e rt if ic a te of ac knowledg ment is defec tive. The Appe llant, L . CraigKendr ick, Trustee (“Tr ustee” ), appe als the b an kr u p t c y c o u rt ’ s O r d e r an d J u d g m e n tg r an t i n g t h e m o t i o nf o r s u m m ar y j u d g m e n to f

Ap p e l l e e C IT Sma ll B us ine ss L end ingCor p. (“ CI T” ) a

nd de nyingthe Tr

us te e ’s mot ion

fo r s umm ary

jud g me nt. The ba nkruptcy court de termined that the c ertificate of a cknowledg ment in a mortg ag e tra

nsfer ring

a sec urity interest in re al estate to CI T substantially complied wi th the require ments of Kentuc ky Revised Statute § 423.130. As a result of t his finding , the court conclude d that CI T’s intere st in the

rea l estate is superior

to the Trustee ’s intere st.

I. ISSU ES ON AP P EAL
Th is a pp e a l r a ise s th e fo llo wi ngiss ue s: 1. Do e s th e langua g e in t he mor tg a g e ’s c e rt if

icate of a c kn ow le dg me nt s ub sta

nti a lly comply with Kentucky Revised Statutes Chapte r 423 so that the Trustee had construc tive notice of the mortg ag e? 2. I f not , does ame nded Ke ntucky Revised Statute § 382.270 apply retroa ctively

such that the ce rtificate of ac knowledg ment provided c onstructive notice to the T rustee? 3. I f the c ertifica

te of ac knowledg ment does not provide c onstructive notice, doe s the notice provide d by

CI T’s re cordingof its Notice of L is Pendens defeat the Trustee ’s claimed positi on as a bona fide purc haser

under 11 U .S.C. § 544(a)(3) ? 4. Did CI T’s re cordin g of its Notice of L is Pendens during the pre fer ence period constitute a transf

er, subjec t to avoidance as a pr efe renc e?
II. JU RI SDI CT ION AND STANDARD OF RE VI EW
Th e B ank ru ptc y Ap pe llate Pane l of the Sixth Cir c uit ha s juri sd ic tio n to de c ide thi s a pp e a l. The United States District Court for the Eastern District of Ke ntucky has authorized appe als to the B ank ru ptc y Ap pe llate Pane l ( “ B AP” ). Th e or de r o n a pp e a l is fi na l and

may be a pp e a le d a s o f r ig ht.- 3-

28 U.S.C. § 158(a)(1) . None of the par ties have timely

elec ted to have this appe al hea rd by the district court. 28 U.S.C. § 158(c)( 1).
A b an k ruptcy

court’s g rant of summar y judgme nt is reviewe d de novo. I n t’ l U nion v. Cummins, Inc. , 434 F.3d 4 7 8 , 483 (6th Cir. 2006). Under a de novo sta

ndard of revie w, the revie wing court de cides an issue independe ntly of, and w ithout defere nce to, the tr ial court’s deter mination. Tre ini

sh v . No rwe

st B an k Mi nn ., N.A . (

In rePe ria nd

ri) , 26 6 B .R. 65 1, 65 3 ( B .A .P. 6th Cir. 2001).

III . F AC TS The followingfac t s ar e n o t i n d i spute. On May 6, 2002, the debtor G rusec k & Son, Inc. (“ De bto r” ), a c tin g thr ou g h it s Pr e sid e nt, L e ste r A rn old Gr us e c k, e xec ute d a

no te and mort g a g e in favor of CI T in the principal a

mount of $879,000. The mortg ag e wa s rec orded o n May 20, 2002, in the Boone County

Clerk’s Of

fice at Bur lington, Kentucky

. The mortg ag e contains the following sig natur e s and

c e rt if ic a te of a c kn ow le dg me nt:
Dated this 6th d ay

of May , 2 002.
EACH GRANTOR ACK N O WLEDGES HAVI NG READ ALL THE P ROVI SIO NS OF T HIS MORT GA GE , A ND E AC H GR AN TOR AG RE ES T O ITS T ERMS.
GRANTOR: GRUSECK & SON, INC

. By: / s /Le s t e r

Ar no l d Gr us e c k L E S TER A R N O L D G R

U S E C K, P re si de nt
State of Kentucky )

) SS Cou nty of B oon e )
I , a notary public in and for the state and coun ty aforesaid, do hereby

certify that o n th is 6 thd ay

o f May, 2002 , t he re a

pp eare d be fo re m e L E S TER A R N O L D G R

U S E C K, Preside nt of GR

US EC K & SO N, INC . who executed an d d eliv ered the fo reg oingm ortg ag e. My com m ission expires: J une 2, 2004

. /s / [ S ig na ture is il le g ib le ] No t a ry Pub l i c , S t a t e at La r ge, K e nt uc ky (Appe llant’s App. at 20.)- 4-

On Novembe r 22, 2005, CI T rec orded a Notice of L is Pendens in the Boone County Clerk’s Offic e. The notice wa s proper ly ac k n o wl edg ed and r efe rre d to a fore closure a ction CI T had

commence d i n Bo o n e County Circuit Court to enforce its mortgag e, which w as identified in an attache d exhibi t.
On Fe bruar

y 16, 2006, Debtor f

iled a petition for r elief unde r Chapter 7 of the B ankruptc y Code. L

. Craig Kendr ick was appointed the Chapter 7 Trustee and ini tiated t he pre sent adve rsar y proce eding . The Tr

ustee a l l eged in the c omplaint that the acknowle dg ment in the mortg ag e wa s defe ctive, that the de fec tive ac k n owledg ment rende red the instrument invalid ag ainst a bona f ide purc ha se r u

nd e r 11 U. S.C. § 544 (a ), that the re c or din g of the No tic e of L is Pe nd e ns fo r t

he be ne fi t

o f C I T within ninety

day s of the filing of De btor’s bankr uptcy petition, while the debtor wa s insolvent, w as on acc ount of an a ntece dent debt, and that the rec ording allowed CI T to rec eive more than it would have rec eived in a C hapter 7 had the Notice not been rec orded. The Trustee’s pr ay er for r elief soug ht a dec laration that the m o rt gage was avoidable as a pref ere ntial transfe r under

11 U.S.C. § 547 and an orde r pre servingthe bene fits of the lien for the bankr uptcy estate.
Th e p ar t i es filed c ross motions for summary judgme nt. The Trustee argued that CI T’s mortg ag e conta ined a de fec tive cer tificate of

acknow ledg ment and, as suc h, di d n o t provide const ru ct i v e n o t i ce to the T rustee. T he Truste e, ther efor e, ar g ued that he obta ined the status of a bona fide purcha ser under § 544(a) (3). Although he acknow ledg ed that the Notice of L is Pendens

serve d to perfe ct CI T’s mortg ag e and thus ope rate d to pr ovide notice of the mortg ag e, the Tr

ustee al s o ar gu edt h at b ec au s e t h e n o t i ce wa s fi l edwi t h i nn i n et y d ay s o f t h e D eb t o r’ s b an krup t cy fi l i n g, the mor tg a g e wa s avo ida

ble a s a pr e fe re nti a l tr ans fe r. I n r e sp on se , CI T a rgue d th a t th e c e rt if

ic a te of ac knowledg ment substantially compl i ed wi t h the Kentuc ky statutes and, ther efor e, provide d constructive notice to the Trustee. I t further argued that even if defe ctive, construc tive notice wa s pr ov ide d in

a c c or da nc e wi th a n ame ndme nt t o th e Ke ntu c ky Re vis e d Stat ute s, e ff e c tiv e a ft e r t

he date Debtor f iled its petition, providing that mortg ag es pre viously rec orded pr ovide construc tive kn o w l e d g e o f

t h e i r c o n t e n t s e v e ni f

t h e y c o n t a i na d e f e c t i v e a c kn o w l e d g m e n t

. A n d f i n a l l y , C IT argued that the Notice of L is Pendens did not constitut e a tr ansfe r avoida ble as a pref ere nce.
After oral a rgument on the motions, the bankruptcy court ruled fr o m t he benc h that the langua g e in t

he c e rt if ic a te of a c kn ow le dg me nt at iss ue su bs tanti a lly c omp lie d with the re qu ir e me ntsBe cause the Debtor filed its bankruptcy

petition afte r October 17, 2005, the c ase is g overne d 1 by the B ank

ru ptc y Ab us e Pr e ve nti on

and Con sume r P ro te c tio n A c t of 20 05 (“ B APC PA” ). Al l statut or y re fe re nc e s are to t

he po st- B APC PA ve rs ion of the B ank ru ptc y Cod e , 1 1 U .S. C. § § 1 01 to 1330 (2005), unless other wise spec ifically

noted.

- 5- of the Ke ntucky

statutes and that C I T h el d a valid mortg ag e ag ainst Debtor’ s proper ty . On October 23, 2006, the cour

t entere d its Order and J udg ment to that eff ect, gr anting CI T’s m otion and de nyingthe Tr

us te e ’s mot ion

fo r s umm ary

jud g me nt.
Th e Tr us te e fi le d th is t ime ly

a pp e a l.

IV . D ISC USS ION
Th e B ank ru ptc y Ap pe llate Pane l f

or the Sixth C ir c uit

ha s re c e ntl y de c ide d s e ve ra l a pp e a ls analy zing whethe r mortg ag es we re defec tive under Kentucky statutes. Eac h appea l has some nuanc e that sets it apart fr om the others. Simi larly , this appeal ha s its own nuances, but the state ment of the fede ral a nd state law involved a

nd burdens of

proof a nd persua sion outli ned below a re the same a s set forth in our prior dec isions. See MG In v s. , I nc . v . J oh ns on ( In reCoc an ou

gh e r) , 378 B.R. 518 (B .A .P. 6th

Cir . 2 00 7) ; Selec t P ortfoli o Servs., Inc. v. Burden ( In re Trujillo) , 3 78 B .R. 52 6 ( B .A .P. 6th Cir . 2 00 7) ; W

ilson v

. CIT Group/Cons umer Fin. Inc . ( In re W ilson) , 3 78 B .R. 41 6 ( B .A .P. 6th Cir. 2007) (unpublished table de cision); and Ke nd ric k v
. De uts c heBa nk

Nat ’l Tru st C o. ( In re St. Cla ir) , 380 B.R. 478 (B .A.P. 6th Ci r. 2008). A. CIT’s Mortgage In strum ent Did Not Provide Constru ctive N otice to the Trustee.
Pu rs uant to section 544 of the B ankruptc y Code, the Trustee is considere d a bona f ide 1 purcha ser of

the Debtor ’s re al estate and may there fore avoid ce rtain oblig ations place d on the proper ty that are voidable under state law. See, e .g., Rogan v. Bank One, Nat’l Assoc. (

In re Cook) , 45 7 F .3 d 5 61 , 5 66 (6 th C ir . 2 00 6) . K e ntu c ky law g ov e rn s th e qu e sti on of whe ther CI T’ s se c ur ity interests ar e super ior to the Trustee ’s intere sts i n t h e Debtor’s rea l estate. Id . I t does not matter whether the Trustee persona lly

knew of the mortgage

. “R at h er, the inquiry focuse s on whether

a bona fide purcha se r would have notice” unde r Ke ntucky law. Thacker v . United Cos. Lending Corp. , 256 B.R. 724, 728 (W.D. Ky . 2000).The short for m acknowle dg ment for a

corpor ation is se t f

orth in subse ction (2) of Kentucky 2 Revised Statute § 423.160: 42 3. 16 0 Sho r t fo r m s o f ac knowle dgm e nt (continued...)

- 6- Under Kentucky

law, a r ecor ded but def

ective mortg ag e does not put a bona fide purcha ser
on constructive or

inquiry notice. See R ogan v. Am.’ s W holesale Lender d/b/a Countrywide Home L o a ns, Inc. (

In re Vanc e) , 9 9 F e d. Ap px. 2 5, 27 (6 th C ir . 2 00 4) ; State Street Bank & Trust Co. v. Hec k’s, I nc. , 963 S.W .2d 626, 630 (Ky . 1998). The T rustee h as the burde n of showingthat the mortg ag e wa s improperly executed. Simon v. Firs t Union Mort. Corp. (I n re Burnham) , 2 31 B .R. 270 (B ankr. N .D. Ohio 1999). The followingKe n t u ck y s t atutes ar e applica ble to our dete rmination of the validity of the

c e rt if ic a te of a c kn owl edg me nt. Th e fi rs t of the se to b e e xami ne d is Ke ntu c ky Re vis e d St a tut e § 4 23 .1 30 :
42 3. 13 0 C e r ti fic at e of pe r so n t aki ng a c knowle dgm e nt Th e pe rs on

takin g an a c kn ow le dg me nt s ha ll c e rt if y that: (1) The person a cknowledg ing a ppear ed bef

ore him and acknow ledg ed he executed the instrument; and (2) The person a cknowledg ing w as known to the person taking the ac knowledg ment or that the pe rson taking t he ac knowledg ment had satisfa ctory evidenc e that the pe rs on a c kn ow le dg ingwa s the pe rs on de sc ri be d in

and wh o e xec ute d th e ins tr

ume nt.
Acc ording ly , § 423.130 require s the n o t ary to cer tify three things: (i) that the person sig ning appea red be fore the notary ; (ii) that the per son signingacknow ledg ed executingthe instrument; and (i ii) that the pe rs on sig nin g is kno wn to the no tary or pr ov ide d s a tis fa c tor

y e vid e nc e of

his ide nti ty t o t h e n o t ar

y. Concerning the form of the acknow ledg ment, Kentucky Revised Statute § 423.140 provides

a s f oll ow s:
42 3. 14 0 R e c og nit ion of c e r ti fic at e of ac knowle dgm e nt Th e fo rm of a c e rt if icate of a c kn ow le dg me nt u se d b y a pe rs on wh os e a uth or ity is rec og nized under KRS 423.110 shall be ac cepte d in this st ate if: (1) The cer

tificate is in a f

orm presc ribed by

the laws or r egulations of this state; 2(...continued) 2 The forms of acknowledg ment set forth in this section m ay be used and are sufficie nt for their respe ctive purpose s under a ny law of this s tate. The forms shall be known as “Statutory

Short Forms of Acknowledg ment” and may be refer red to by that name. The a uthorization of the forms in this section does not prec lude the use of other forms.

. . . . (2) F or a c orporation: State of __________ County of __________ The for eg oing instrument was ac knowledg ed bef ore me this (date) by

(name of office r or ag ent, title of office r or ag ent) of (name of cor poration ac knowledg ing) a (state or place of incorpor ation) cor poration, on beha lf of the c orporation. (S ig natur e of

pe rs on takin g a c kn ow le dg me nt) (Title or ra

nk) ( S e r i a l nu mb e r , i f

an y) As noted in the statute, th e s h ort form is mere ly a “sa fe ha

rbor” that has bee n deter mined as su ff ic ie nt f or its purp os e un de r t

he laws of

Ke ntu c ky

and do e s not pr e c lud e the us e of oth e r f or ms. Ky . Rev. St. Ann. § 423.160.

- 7- (2) The cer

tificate is in a f

orm presc ribed by the l aws or regulations applicable in the place in which the ac knowledg ment is taken; or (3) The cer

tificate c ontains the words “ a c k n o w ledg ed bef

ore me ,” or the ir substantial e qu iva le nt. Kentucky Revised Statute § 423.150 define s the words “ acknow ledg ed bef ore me ” as fo llo ws :
42 3. 15 0 C e r ti fic at e of ac knowle dgm e nt The wor ds “ac knowledg ed bef ore me ” mea

n: (1 ) That the person ac knowledg ing a ppear ed bef

ore the person takingthe a c kn ow le dg me nt; (2 ) T hat he a c kn ow le dg e d h e e xec ute d th e ins tr ume nt; (3) That, in the case of:

. . . .- 8- (b) A corporation, the officer or ag ent acknowledg ed he held t he position or title set forth in the instrument and ce rtificate , he sig ned the instrument on beha lf of the cor poration by

proper authority , and the instrument was the act of the cor poration for the pur

pose there in stated; [and]

. . . . (4) That the person takingthe ac knowledg ment either knew or had satisfa ctory evidenc e that the pe rson ac knowledg ing was t he person named in the instrument or cer tificate. Subsections (1), (2) and (4) of Ke ntucky Revised Statute § 423.150 provide that by using the words “a cknowledg ed bef ore me ,” the notar

y is certify ing r ece ipt of the information re quired by Kentucky Revised Statute § 423.130. Secti o n 4 23.140(3) pr ovides that the ce rtificate of acknow ledg ment is in acce ptable for m if it contains the words “‘ acknow ledg ed bef ore me ,’ or

the ir substantial

equivalent .” Ky

. Rev. Stat. Ann. § 423.140(3) (empha sis a dded). See also Dunlap v

. Com mo nwe alt

h Cm ty . B an k

( In re Ph e lps

) , 341 B.R. 848, 853 (B ankr. W.D. Ky . 2006) (“ [U] nder either a statutory standpoint or a ca s e l aw standpoint, the standa rd to be used in de termining the sufficie ncy

of an acknow ledg ment is whether the acknow ledg ment substantially complies with the statutory require ments.”) Subsection (3) of K entucky Revised Statute § 423.150 sets o u t the meaningof the wor ds

“ a c kn ow le dg e d b e fo re me ” wh e n u se d b y an in div idu a l si g nin g on

be ha lf of va ri ou s e nti tie s. With respe ct to a per son signing o n behalf of a c orporation, § 423.150(3)(b) indicates that the words “ac knowledg ed bef

ore me ” advise the public that the per son signingacknow ledg ed that: (1) he holds the position or titl e set for th in the cer

tificate; (2) he sig ned on beha lf of the c orporation; (3) he had the authority

to sign on behalf of t he corporation; and (4) his signingwas the a ct of the c orporation itself. Kentucky

does not requir e tec hnical complianc e with its notar y s ta tu te , b ut m e r e ly

substantial compliance . As explained in Hack worth v. Flinchum , 475 S.W .2d 140 (Ky . 1972), al b ei t in the

c on te xt of an a c kn ow le dg me nt i n a

wi ll r e nunc iatio n:
I n the a bs e nc e of a mand a tor

y statut e su

bs tanti a l rathe r tha

n li te ra l c omp lia

nc e wi th the fo rm or re qu ir e me nts la id d ow n in the statut e is a ll that is e sse nti a l to the va lid ity of a c e rt if ic a te of a c kn ow le dg me nt. Th is i s sa id t o b e tr ue e ve n th ou g h th e statut e presc ribes that ac knowledg ments “must” be substantially in the form

p r e s c r ibe d. The g ener al policy

of t he law is to construe ce rtificate s of ac knowledg ment liberally and- 9-

to u ph old the m if the y are in sub sta nti a l com pli anc e wi th the statut or

y re qu ir e me nts as to form a

nd content, even though they may fall short of literal c onformity there to, or c on tain c le ri c a l e rr or s, or

be oth e rw ise su

bje c t to me re ly

te c hn ic a l ob

je c tio ns
. Al tho ug h wo rd s n ot i n th e sta tute ar e us e d in pla c e of o the rs, or wor ds of a sta tute are omitted, if the meaning of the words used is the same or they represe nt thesame facts, or if the omission of a word or w ords is immaterial or can be supplied by reasonable construction of the whole instrument, the a cknowledgment will be sufficient

. Ha c k wor th , 475 S.W .2d at 142 (quoting 1 Am. J ur. 2d Ac k no wle dg me nts § 40 (now revised at § 31)) (empha sis added).

I n this c ase, the cer

tificate of acknow ledg ment does not contain the wor ds “ac knowledg ed befor e me,” so as to include all of the repr esentations set forth in the definition of t hat phrase found in Kentucky

Revised Statute § 423.150. Neve rtheless, the mortg ag e docume nt itself c le a r ly in d ic ates t h at L ester A rnold Gruse ck sig ned as Pre sident on behalf of Grusec k & Son, Inc. The acknow ledg ment lang uag e in d ic a te s th a t L e s te r Ar n o ld G rusec k was indee d the per son who appe are d befor e the notar

y , that he executed the mortg ag e for the purposes s t at ed t h er ei n, that he is the President of the D ebtor c orporation, and that he sig ned the mortg ag e on beha lf of the c orporation. Thus, the only

rema ining mate rial re prese ntations included in § 42 3

. 1 5 0 ’s definition of “ac knowledg ed bef

ore me ” that are not rea dily appar ent from the not ary clause are that Grusec k had the authority

to sign on be half of the corpor ation, which g ener ally involves a re solution by the boar d of direc tors, and that his signing was an act of the cor poration. While the latter re quirement may be inferr ed fr om the fac t that the corporation i s listed as Grantor and Grusec k signe d on behalf of the Gra ntor as pre sident, nothing in the a cknowledg ment supplies the require d repr esentation that the

cor po ratio n h a d a

uth or ize d th is a c tio n. No r c an th is o mis sio n b e su pp lie d b y a re a so na ble

c on struction o f t

he wh ole ins tr

ume nt. Ac c or din g ly , th e a c kn ow le dg me nt d oe s n ot s ub sta nti a lly comply with the Kentucky

statutes in th at i t fails t o establish that Grusec k “sig ned the instrument

o nb e h a l f o f t h e c o r p o r a t i o nb y pr op e r a uth or ity ” a s requ ir ed by Ke ntu c ky

Re vis e d St a tut e § 4 23 .1 50 (3 )( b) (emph a sis su pp lie d) . T he de c isi on

of the ba nk ru ptc y c ourt is r e ve rs e d a s to thi s issue.Am e nd e d K e ntu c ky Re vis e d St a tut e § 3 82 .2 70 pr ov ide s in re le va nt p art a s f oll ow s: 3 No dee d or dee d of trust or m o rt gage convey ing a leg al or e quitable title to real pr op e rt y sh a ll be lod g e d fo r re c or d and , thu s, va lid a g a ins t a purc ha se r f or a va lua ble consideration, without not ice ther eof, or ag ainst cre ditors, until s uch deed or mortg ag e is ac knowledg ed or pr oved accor ding to law. Howeve r, i f a deed or deed of trus t or mor tg a g e c on ve yinga

le g a l or e qu ita ble tit le to r e a l pr op e rt

y is n ot s o acknow ledg ed or pr oved ac cordingto law, but is or has bee n, prior to J uly 12, 2006, otherwise lodg ed for rec ord, such dee d or dee d of trust or mortg ag e conve ying a leg al or equitable title to real prope rty or cr eating a mortg ag e lien on rea l pr operty shall be d e e m e d t o b e v a l i d l y l o d g e d f o r r e c o r d f

o r p u r p o s e s o f K R S C h a

p t e r 38 2, a nda ll interested pa

rties shall be on c onstructive notice of the contents ther eof.

- 10- B. T he Amend ment t o Ke ntucky

Re v ise d St

atu te § 3 82.2 70

c anno t be

ap pli e d re tro ac tiv e ly to divest the Trustee of ve sted rights
. CI T argue s that e ve n if its mor tg a g e wa s de fe c tiv e ly

a c kn ow le dg e d, the 20 06 ame ndme nt t o Ke ntu c ky Re vis e d St a tut e § 382 .2 70 a pp lie s r e tr oa c tiv e ly

su c h th a t th e Tr

us te e is c ha

rg e d w ith constructive notice of the mortg ag e. Debtor’ s petition was filed on F ebrua ry 16, 2006, while the 3

a me ndme nt to the statut e did no t bec ome e ff e c tiv e un til July 12 , 2 00 6. Th e B ank ru ptc y Ap pe llate Panel for the S i x t h C ircuit has alr eady deter mined the issue as to the re troac tive application of Kentucky Revised Statute § 382.270 ag ainst a bankruptcy trustee where a debtor ’s petition was filed prior to the ef

fec tive date of

the amendme nt to the statute. As stated in Tru jil lo , The Suprema cy

Cla u s e o f th e Un it e d

St a te s Co n s ti tution pre cludes re troac tive application of § 382.270. The Debtor f iled h i s b an kruptcy

petition before the eff ective date of the a

mended statute. U nder fede ral law, a trustee’ s rig hts as a bona fide purcha ser are fix ed as of commence ment of the ba nkruptcy case
. See11 U. S.C. § 544(a) (3). Ame nded § 382.270 may not be applied r etroa ctively in t h i s case as such application would be in conflict with the fe dera l bankr u p tcy statute. In re Ha sti ng s, 35 3 B .R. a t 52 0; c

f. U nite d S tates v . Craft

, 53 5 U. S. 27 4, 28 8- 89 , 12 2 S. Ct. 1414, 1426, 152 L . Ed. 2d 437 (2002) ( applying the Supremac y Clause and concludingthat debtor’s inter est in enti reties pr operty constituted “prope rty ” or “rig hts to property ” under the fed er al t ax lien statute, notwithstanding the f act that such prope rty

was not subject to levy

under state law).
In re Tru jil lo , 378 B.R. at 537.- 11-

As the cre ditors did in Tru jil lo , CI T c ite s Me o l i v. C i t i co r p T r u s t B a n k (In r e O

s w a l t ), 444 F

. 3 d 5 2 4 ( 6 t h C i r
. 2 0 0 6 ) , i ns u p p o rto f i t s ar g u m e n t t h a t § 3 8 2

. 2 7 0 s h o u l d b e a p p l i e d r e t r o a c t i v e l y. Howeve r, Os wal t

is d ist inguis ha

ble fr om t he pr e se nt a

pp e a l.

I n Os wal t, the Sixth Cir c uit a dd re sse d th e iss ue of

re tr oa c tiv ity

of a Mic hig an s tatut e dealingwith the perf

ec t i o n o f sec urity

interests in mobile homes. The c ourt rec og nized that its decision in Bo y d v . Ch as e Ma nh att

an Mo rtg age Cor p. ( In re Kroskie), 31 5 F.3 d 644 (6 th C ir . 2 00 3) , h a d c re a te d c ha os in t he Mic hig an mo bil e home financ ing ma

rket. Prior to Kroskie, the Michig an Mobile Home Commission Act (“ MHCA”) pr ovided a method f or per fec ting se curity

interests i n mobile homes by noting liens on titles; however , cre ditors a lso perfe cted suc h secur ity interests by rec ording traditional mortg ag es. I n Kroskie, the cour t held that the MHCA provided the e xc lu s iv e me an s o f

p e r f e c ti n g mo b il e h o me s e c u r it y inte r e s ts u n d e r

M ic h ig an law. S hortly

there afte r, in order

to “undo the ef

fec t of the [Kroskie] decision,” the Michig an leg islature ame nded the MHCA, sp ec i fy i ng that cre ditors could perf ect secur ity interests in mobile home s by rec ording traditional mortg ag e liens. Os wal t, 444 F.3d at 527. The Michig an leg islature also added lang uag e that the amendme nt applies re troac tively . Be cause “the am endment’s langua g e and the circ umstances un de r whic h it

wa s e na c te d in di cat e tha t th e Mic hig an le g isl a tur e int e nd e d it to clar ify the per fec tion procedur es,” the Six th Ci rcuit concluded in Os wal t that the amendment must be a

pplied retroa ctively

. Id. at 528. Unlike the situation in Os wal t, there is no indication that the Kentucky leg islature intended to c larify previous law. Rather, the la

ng uag e of the amendment c lear ly pro v i d es for a cha

ng e in the law reg ardingwhen a

party is put on constructive notice of a dee d or mortg ag e.
In re Tru jil lo , 378 B.R. at 538- 39.
For the re as o n s ex plained in Tru jil lo , § 38 2. 27 0 ma

y no t be a pp lie d r e tr oa c tiv e ly

so a s to div e st the Tr

us te e of his ve ste d ri g hts a s a bo na fi de purc ha se r. Th is c on c lus ion is c on sis te nt w ith Kentucky case law providing that a statutory amendment should only

be applied r etroa ctively

if the statute in question serve s to facilitate a reme dy and if no ve sted rig hts are impair ed. Se e In re Tru jil lo , 3 7 8 B. R

. at 5 3 8 (q u o t i n g Ky . I ns . G ua r. As s’ n v . J

e ffe rs , 13 S.W .3d 606, 610 (Ky . 2000)).
C. The noti ce prov ided by CIT rec ording i ts Notice of Lis Pe ndens defeats the Trustee’s claim ed position as a bon a fide purchaser under 11 U.S.C. § 544(a)(3).
L is p e nd e ns is d e fi ne d a s “ [a] n oti c e , r e c or de d i n th e chai n of tit le to r e a l pr op e rt y , . . . to

warn all p e rs on s th a t c e rt a in p ro pe rt y is t he su bje c t matte r o f l iti g a tio n, and that any int e re sts acquir ed duringthe pende ncy of the suit are subject to its outcome.” Gree ne v. M cFar l a nd , 43 S.W. 3d 25 8, 26 0 ( Ky . 2 00 1) (a lte ratio ns in o ri g ina l) . T he Tr us te e a g re e s th a t th e No tic e of L is- 12-

P en d en s , fi l edp ri o r t o t h e D eb t o r’ s b an krup t cy fi l i n g, p ro v i d edco n s t ru ct i v e n o t i ce o f t h e m o rt gage
n o twithstanding the mortg ag e’s de fec tive acknow ledg ment. The B ankruptc y Appellate Pane l for the Six th Circuit held in Tre ini sh v . No rwe

st B an k Mi nn ., N.A . (

In re Pe ria nd

ri) , 266 B.R. 651 (B .A.P. 6th Cir. 2001), t hat constructive notice provided by a li s pendens f iling pre cluded a

trustee fro m avo idi nga

de fe c tiv e mor

tg a g e un de r § 54 4( a )( 3) . Wh ile Pe ria nd ric on c e rn e d O hio ’s lis pendens statute, we fi n d that Kentucky law is in acc ord. Se e Cum be rla nd Lum be r Co . v . F

irs t & Farmers Bank of Somerset , 83 8 S.W. 2d 40 3, 40 5 ( Ky . App . 1 99 2) (“ [O]ne wh o a c qu ir e s a n in te re st in property , whether

by purcha se, lien or other encumbr ance , afte r the filingof a lis pende ns notice, take s th a t in te re st s ub

je c t to the re su lts of the lit ig a tio n. Ac tua l kn ow le dg e of the pe nd inga c tio n is

no t nec e ssa

ry to bin d th e pe nd e nte lit e purc ha se r. ” ); Johnson v. CIT Group/Consumer Fin. Inc. ( In re Franklin) , No. 05-5110, 2006 WL 3876501, *3 (B ankr. E.D . Ky . J an. 25, 2006) ( Despite de fec tive

mor tg a g e , p ro pe rl y

e xec ute d a

nd re c or de d li s p e nd e ns no tice pro vid e d c on str uc tiv e no tic e to subsequent purc haser s a

n d c reditors includingbankruptc y trustee, suff

icient to defe at trustee’ s status as bona f ide purc haser

without notice and pre clude avoidance of def ective mor

tga g e under § 544.)

. Acc ording ly , CI T’s intere st in the Debtor’s pr operty is superior to that of the Trustee with the status of a bona fide purc haser

under 11 U .S.C. § 544(c)(3)

. D. Because the mor tgage given to CIT by the Debtor i s deemed for pr efe rence purposes to have bee n granted upon perfe ction, and because pe rfec tion occurred upon CIT’s recording of its No tic eof Li

s Pe nde ns durin

g th epre fe re nc epe rio d, the

tra nsf e r is sub je c t to av oid

anc eas a pre fe re ntia l trans

fe r.
Be cause the bankr

uptcy court in this case held that the ce rtificate of acknowledg ment in the mortg ag e was not de fec tive, the court denied the Trustee ’s motion for summary judgme nt, without consideringthe merits of the Trustee’ s pref ere ntial transfe r claim. I n light of our deter mination that the mortg ag e wa s in f

act defe ctive, but that none theless the filing of the Notice of L is Pende ns during the pre fer ence period ser ved to prote ct t h e mortg ag e fr om avoidance under § 544( a)( 3), the pref ere nce que stion is now relevant.
The Tr ustee a sserts that his ability to avoid C I T’s m ortg ag e as pref ere ntial is purely

a matter of law, capa

ble of deter

mination by

this P anel. Ac cordingto the Trustee , beca use the re cordingof CI T’s lis pendens n otice wa s the first instrument of re cord c apable of cutting off a bona fideThe ter m “transf er” means— 4 (A) T he cr eation of a

lien; (B ) t he re te nti on

of tit le a s a se c ur ity int e re st; (C) the for eclosure of a de btor’s equity of re demption; or ( D ) e a c h m o d e , d i r e c t o r i n d i r e c t , a b s o l u t e o r c o n d i t i o n a l , v o l u n t ar y o r i n v o l u n t ar

y, of disposing of

or par ting with— ( i ) p r o p e rt y; ( i i ) ani n t e r e s ti np r o p e rt y. 11 U.S.C. § 101(54). 11 U. S.C. § 5 47 (e )( 2) (A ) a nd (B ) p ro vid e s: 5 For the purposes of

this sectio n , ex ce p t as provided in pa rag raph ( 3) of this subsection, a tra

nsfer is made– (A) a t the time such transfer t ak es effect be tween the transfe ror a nd the transf

ere e, if such tra nsfer is perf ecte d at, or within 30 day s afte r, such time, except as pr ovided in subsection (c) (3)( B) ; [ or] (B ) at the time such tr ansfe r is perf ec t ed , if such tra

nsfer is perfe cted a fter suc h 30

(continued...)

- 13- purcha ser’ s ability

to achieve a position superior to CI T’s, and be cause the Notice of L is Pendens

was re corde d within the 90 day s p rec edingthe filing of the ba nkruptcy petition, the Trustee ma

y
a vo id C I T’ s mo rt g a g e a s a pr e fe re nti a l tr ans fe r. CI T’ s r e sp on se is t hat th e fi lin g of

the No tic e of

L is Pendens wa s not a transfe r, but mere ly a unilater al ac t on its part to give notic e o f t h e pending fore closure in a ccor dance with state statutes. In support of this proposition, C I T cites the de finition of transf er se t forth in 11 U.S.C. § 101(54) and ar g ues that the filing of a lis pendens me ets none 4 of these definitions. CI T also cites the ca se of Strong v. First Nat ionwide Mtg. Corp. , 959 S.W .2d 78 5 ( Ky . App . 1 99 8) , w he re in t he c ourt no te d th a t the fi lin g of a lis pe nd e ns no tic e do e s n ot c re a te a lien under

Kentucky

law.

I n one re spect CI T is corre ct: the transf er of Debtor’ s rea l property

took place when the Debtor g ave CI T a mortgag e on the prope rty on May 6, 2002. Nonethele ss, for purpose s of § 547 of the B ank ru ptc y Cod e , a tr ans fe r i s deem ed to have be en made at t he ti me t he transfer is perfe cted, if perf ection take s place more than 30 da y s after its creation, which it d i d i n t h i s case beca use the initial rec ording was de fec tive. See 11 U. S.C. § 5 47 (e )( 2) (B ) ; se e als o W ald sc hm idt v . M id- Sta te 5(...continued) 5 day s[.] For the purposes of

this section— 6 (A) a transfe r of rea l pr operty other than fix tures, but inc luding the interest of a seller or purcha ser under a contra ct for the sale of rea l pr operty , is pe rfe cted when a bona fi de purc ha se r o f s uc h p ro pe rt y fr om the de bto r a g a ins t w ho m a pp lic a ble law p e rm its su c h tr ans fe r t o b e pe rf

e c te d cann ot ac qu ir e an inte re st that is su pe ri or to t he int e re st of the tra nsfer ee[.] 11 U.S.C. § 547(e)(1)

.

- 14- Homes, I nc. ( In re Pitman) , 843 F.2d 235, 238 (6 th Cir. 1988). Moreove r, ag ain for pur poses of § 547, a tra

nsfer of re al proper

ty is pe rfe cted when a bona fide purcha ser of such prope rty

can not acquir e an interest that is superior to the interest of the tra nsfer ee. See 11 U.S.C. § 547(e )(1) (A). 6 As we previously noted, CI T’s interest beca me superior to the interest of any po t en t i al b o n a fide p u rc h as er o f the prope rty when CI T rec orded its Notice of L is Pendens on November 22, 2005. Ac c or din g ly , und e r § 54 7( e )( 1) (A ), CI T’ s mo rt g a g e in t he De bto r’ s re a lty

wa s p e rf e c te d at th is p oint. Thus , e ve n th ou g h th e a c tua l tr ans fe r w a s th e c re a tio n o f t he mor tg a g e in 2 002, th e tr ansfe r i s de e me d to have oc c ur

re d, fo r pr e fe re nc e purp os e s, wh e n pe rf e c te d in Nov e mbe r 200 5. B e c a us e thi s
a c t to ok pla c e wi thi n th e pr e fe re nc e period, it i s c on sid e re d a tr ans fe r, su

bje c t to a vo ida

nc e a s a pref ere nce, assuming the other require d elements of a pref ere nce e x ist. See I

n re Lane , 980 F.2d 601 (9 th C ir . 1 99 2) (b e c a

us e the reco rdi ng of th e lis pe nd e ns op e ra te d to pe rf

e c t th e fi le r’ s in te re st

a g a ins t bona

fi de purc ha se rs , th e re c or din g wa s a tr a ns fe r u nd e r § 54 7( e )( 1) (A )) ; Rice v . First Ark. Valley Bank (

In re M ay) , 310 B.R. 405, 415 (B ankr. E.D. Ark. 2004) (the rec ording of lis pendens constituted a transf

er of an intere st for pre fer ence purposes unde r § 547).

T h e N in th Ci r c u it Court of Appea ls in Lane s p ec i fi ca l l y co n s i d er edan d

re j ec t edt h e a rgu ment raised by CI T in the i nstant case , that no transfe r took place beca use under state law the filing of

the lis pendens does not cr eate a lien. The court obser ved that “[i]tis the fac t of attainment of a supe rior interes t , n o t the cr eation of a lien or the re nderingof a judg ment, that cre ates a transfe r under

the Ba nkruptcy 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 consti tutes a transfer and when it is complete’ is a matter of fe dera l law.”)

.Debtor’ s insolvency at the time of the transfe r, that is, at the time the Notice of L is Pendens 7 wa s f ile d, is a lso an e le me nt o f t he Tr us te e ’s pr e fe re nc e c la im that w a s n ot a dmi tte d b y CI T i n it s answe r. Howe ver, the re is a statutory presumption that De btor was insolvent since the transfe r occur red w ithin ninety

day s befor e De btor filed its bankruptcy petition. See1 1 U

. S

. C

. § 5 4 7 ( f )

. C IT did not attempt to rebut that presumption in its re s p o n s e t o the Trustee ’s motion for summary jud g me nt.

- 15- Ba sed on the for eg oing, w e conc lude that CI T’s mortg ag e, which is de emed f or pre fer ence purp os e s to have be e n g ra nte d w hen perf

ecte d, is a

tr ans fe r o f p ro pe rt

y of the De bto r s ub

je c t to avoidanc e as a

pre fe re n ce. Nonetheless, the r ecor d does not establish all of the other require d

c omp on e nts of

a pr e feren c e , s pe c if

ic a lly that pa y me nt e na ble d CI T t o r e c e ive mor e tha n it wo uld have rec eived but for the tra nsfer

. See11 U.S.C. § 547(b)(3) a nd (5). This ele ment was not admitted by CI T in its answer a

nd it does not appea

r that the Tr

ustee submitt ed p ro of of this eleme nt, by aff idavit or otherwise , in connec t ion with his m otion of summary judgme nt. Acc ording ly , the

7 ba nk ru ptc y c ourt ’s de nia l of

the Tr us te e ’s mot ion fo r sum mary jud g me nt is re ve rs e d, and the c a se will be rema

nded for further consideration of the Trustee ’s pre fer ence claim, consistent with the

c on c lus ion s o f t

his Pane l.
V. CO NC LU SION

B e c a us e the c e rt if

ic a te of a c kn ow le dg me nt in the mor tg a g e a t iss ue did no t sub st anti a lly comply with K entucky Revised Statutes §§ 423.130 and 423.150, the mortg ag e wa s not perfe cted

un til No ve mbe r 2 2, 20 05 , th e date the No tic e of L is Pe nd e ns wa s f

ile d. Th is d a te wa s b e fo re the date D e b to r f il e d it s p e ti ti o nan d

p r o v id e d

th e T r u s te e w it hc o n s tr u c ti v e n o ti c e o f

th e mo rtg ag e. There fore , CI T held an e nforc eable secur it y i n t ere st at the commenc ement of the case . Howeve r, the sec urity

interest wa s perf

ecte d within ninety

day s of the De btor’s bank ru p t cy filing. The bankruptc y

court’s judg ment, there fore , is AFF I RMED to the ex tent that it adjudge d CI T to be the holder of a

valid mortg ag e lien ag ainst Debtor’ s rea l estate a nd REV E R S E D i n part a nd REMANDED f

or the bankruptc y court to a ddress the Trustee ’s motion for summary judgme nt on his pr e fe re nc e c la im.