Court Opinion

ID: 622607
Source: CourtListenerOpinion
Date Created: 2012-02-11 01:01:23+00
Date Added: 2024-06-11T17:51:01.445388
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
             FOR THE FOURTH CIRCUIT

In Re: JOHN G. MCCORMICK,              
                        Debtor.

SUNTRUST BANK, N.A.,
                Plaintiff-Appellant,
                v.
MARC MACKY; MARYANN MACKY,
               Plaintiffs-Appellees,       No. 10-2027
                v.
JOHN A. NORTHEN, Trustee,
               Defendant-Appellee,
               and
MICHAEL D. WEST, Bankruptcy
Administrator,
                  Party-in-Interest.
                                       
       Appeal from the United States District Court
 for the Middle District of North Carolina, at Greensboro.
          Thomas D. Schroeder, District Judge.
                  (1:09-cv-00924-TDS)

                 Argued: December 7, 2011

                Decided: February 10, 2012
2                     IN RE MCCORMICK
    Before NIEMEYER, AGEE, and WYNN, Circuit Judges.

Affirmed by published opinion. Judge Niemeyer wrote the
opinion, in which Judge Agee and Judge Wynn joined.

                         COUNSEL

ARGUED: Christopher Charles Finan, ROBERSON,
HAWORTH & REESE, High Point, North Carolina, for
Appellant. David Rooks, III, NORTHEN BLUE, LLP, Chapel
Hill, North Carolina; Robert Nelson Maitland, II, MAIT-
LAND LAW FIRM, Chapel Hill, North Carolina, for Appel-
lees. ON BRIEF: Joseph Jude Vonnegut, HUTCHENS,
SENTER & BRITTON, Fayetteville, North Carolina, for
Appellant.

                         OPINION

NIEMEYER, Circuit Judge:

  In this bankruptcy case, in which John McCormick is the
debtor, SunTrust Bank, N.A., filed a proof of claim for repay-
ment of a loan that it claimed was secured by a deed of trust
on two contiguous parcels of McCormick’s real property in
Orange County, North Carolina, known as "Tract I" and
"Tract II." The Trustee commenced this action under 11
U.S.C. § 544(a)(3) to avoid the lien on Tract I because the
deed of trust, while recorded on the official recordation index
of Orange County as to Tract II, was not so recorded as to
Tract I.

  SunTrust contended that even though the recordation was
deficient, the Trustee was imputed with constructive knowl-
                      IN RE MCCORMICK                        3
edge of the lien on Tract I because either (1) he had construc-
tive knowledge of the deed of trust that was properly recorded
as to Tract II, which by its terms also created a lien on Tract
I; or (2) the deed of trust was recorded in an unofficial index
in Orange County and a careful and prudent title examiner
would have found the lien on Tract I in that index.

   The bankruptcy court rejected SunTrust’s arguments and
ordered SunTrust’s lien on Tract I avoided under § 544(a)(3),
and the district court affirmed. We too affirm. Because the
Trustee’s status vis-a-vis the title of Tract I is, under
§ 544(a)(3), that of a bona fide purchaser under North Caro-
lina law, the Trustee is only imputed with the notice that
would be imputed to a bona fide purchaser of Tract I under
North Carolina law. And North Carolina law allows a pur-
chaser to rely exclusively on the official recordation index of
the county to discover liens, regardless of what other inde-
pendent knowledge that purchaser might have.

                               I

   In 1994, John McCormick and his wife acquired two con-
tiguous parcels of real property in Orange County, North
Carolina—"Tract I," consisting of six lots, and "Tract II,"
consisting of two lots. The deed for both tracts was properly
recorded on January 5, 1995, on the PIN (parcel identifier
number) index in Orange County. The PIN index, which is the
County’s official real property recording index, was adopted
by Orange County in 1983 as the official index in lieu of its
previous grantor/grantee index system used by the County
before 1983. Under the PIN index system, each parcel of real
property in the county is given a unique "parcel identifier
number," which is then used as the basis for recording all
instruments relating to that parcel. Orange County continued
to use the traditional grantor/grantee index system, but it did
so only as an unofficial index on which to record instruments
on an interim basis for the period between when the instru-
4                      IN RE MCCORMICK
ment is offered for recordation and when its recordation on
the PIN index is certified, usually a few days.

   In 1999, the McCormicks borrowed $178,275 from Central
Carolina Bank and Trust Company (later merged into Sun-
Trust Bank, N.A.) (herein, "SunTrust"), and they secured the
loan with a deed of trust given as to both Tracts I and II.
When submitted for recordation, however, the deed of trust
included only the PIN number of Tract II and not the PIN
number for Tract I. Accordingly, it was recorded only on the
PIN index against Tract II.

   In 2004, John McCormick borrowed $60,000 from Marc
and Maryann Macky, and he secured that loan with a deed of
trust on four lots (lots 1, 4, 5, and 6) in Tract I. That deed of
trust was properly recorded on the PIN index in Orange
County.

   McCormick was placed into involuntary bankruptcy in
August 2006, and John Northen was appointed Trustee of the
bankruptcy estate. In administering the estate, Northen sold
all of the lots in Tract I and transferred the liens recorded
against Tract I to Tract I’s proceeds of sale. He thereafter
commenced this adversary proceeding under 11 U.S.C.
§ 544(a)(3) to avoid SunTrust’s 1999 lien claimed by Sun-
Trust against the proceeds, because the lien against Tract I
had not been properly recorded on the PIN index and, as the
parties agreed, a search of the PIN index as to Tract I on the
date of the bankruptcy petition would not have disclosed the
existence of SunTrust’s 1999 deed of trust on Tract I. The
Mackys, whose lien for $60,000 was created in 2004 (after
SunTrust’s 1999 lien), supported the Trustee’s position,
which would benefit the Mackys’ lien by avoiding SunTrust’s
prior but improperly recorded lien.

  In response to the Trustee’s motion for summary judgment,
SunTrust argued that even though its 1999 deed of trust was
not recorded on the PIN index against Tract I, "a competent
                       IN RE MCCORMICK                          5
title searcher, upon examining the deed of trust for Tract II,
would have discovered Tract I as a result of such examina-
tion," because the text of the deed of trust created liens on
both Tracts I and II. SunTrust also argued that a search of the
unofficial grantor/grantee index would have "revealed the
existence of the SunTrust Deed of Trust as a lien against both
Tracts I and II."

    The bankruptcy court rejected SunTrust’s arguments,
observing that North Carolina is a "pure race" jurisdiction
such that "the first to record an interest in land holds an inter-
est superior to all other purchasers for value, regardless of
actual or constructive notice as to any unrecorded convey-
ances." The court concluded that North Carolina’s "Indexing
Statutes indicate a legislative intent to require that when a
county has adopted a PIN index as its official index, an instru-
ment must be indexed in such an official index in order to be
registered." Thus, "where, as is the case in Orange County, a
county has implemented a PIN index that complies with the
requirements of N.C. Gen. Stat. § 161-22.2, such a PIN index
is the only index that is required by statute to be maintained.
. . . [T]he result is that when a county adopts a PIN index as
its official index, an instrument must be indexed as provided
for in N.C. Gen. Stat. § 161-22.2 in order to be registered."
Accordingly, based on N.C. Gen. Stat. § 47-20(a) and 11
U.S.C. § 544(a), the court avoided SunTrust’s lien against
Tract I.

  On appeal, the district court affirmed for substantially the
same reasons given by the bankruptcy court, entering judg-
ment dated August 6, 2010, in favor of the Trustee and the
Mackys. This appeal followed.

                                II

  SunTrust acknowledges that its 1999 deed of trust on Tract
I was not recorded against Tract I on the PIN index as of
August 2006, when the bankruptcy petition was filed. It also
6                      IN RE MCCORMICK
acknowledges that the PIN index was the official index on
which to record real property instruments in Orange County,
and that a title search of Tract I in the PIN index in August
2006 would not have disclosed its deed of trust. It argues
nonetheless that the Trustee cannot avoid its 1999 lien on
Tract I, relying on two facts: (1) the deed of trust was
recorded on the PIN index in connection with Tract II, and
anyone searching the title to Tract II would have seen the
deed of trust, which, by its terms, creates a lien also on Tract
I; and (2) the deed of trust was recorded in the grantor/grantee
index, and the lien on Tract I would have been discovered by
a search of that index. Accordingly, it contends that a bona
fide purchaser would have had constructive notice of its lien
on Tract I, and the Trustee, who stands in the shoes of a bona
fide purchaser, would have been imputed with the same
notice.

   The Trustee agrees that he stands in the shoes of a bona
fide purchaser at the time the bankruptcy petition was filed.
But he argues that a bona fide purchaser of Tract I at that time
would not have purchased Tract I subject to SunTrust’s 1999
lien, regardless of the knowledge imputed to the purchaser,
because the lien was not recorded in the official recordation
index in Orange County—the PIN index.

   The Trustee’s authority to avoid liens arises from 11 U.S.C.
§ 544(a)(3), which provides:

    The trustee shall have, as of the commencement of
    the case, and without regard to any knowledge of the
    trustee or of any creditor, the rights and powers of,
    or may avoid any transfer of property of the debtor
    or any obligation incurred by the debtor that is void-
    able by—

                              ***

    (3)   a bona fide purchaser of real property . . . from
          the debtor, against whom applicable law per-
                        IN RE MCCORMICK                          7
          mits such transfer to be perfected, that obtains
          the status of a bona fide purchaser and has per-
          fected such transfer at the time of the com-
          mencement of the case, whether or not such a
          purchaser exists.

(Emphasis added). Thus, when determining whether a Trustee
can avoid a lien created before the bankruptcy petition was
filed, the Trustee’s actual knowledge of the lien is irrelevant.
His right to avoid is determined by whether, under state law,
a bona fide purchaser of the property would have taken the
property subject to the lien. If a bona fide purchaser would not
have taken it subject to the lien, then neither would the
Trustee. See Havee v. Belk, 775 F.2d 1209, 1218 (4th Cir.
1985) (explaining that 11 U.S.C. § 544 "gives the Trustee the
status of a hypothetical lien creditor . . . but . . . his exercise
of such power and its extent are governed entirely by the
applicable state law"). In this case, therefore, the Trustee’s
right to avoid SunTrust’s lien on Tract I turns on whether a
bona fide purchaser of Tract I in August 2006 would, under
North Carolina law, have acquired the property free of the
lien.

   North Carolina law has established a precise recording sys-
tem on which purchasers of real property can rely when
searching for the existence of prior liens. If a prior lien is not
properly recorded in accordance with the system, then the
purchaser can count on taking property as if no lien exists,
even though the purchaser may have knowledge that an ear-
lier lien had been created. See Hill v. Pinelawn Mem’l Park,
Inc., 282 S.E.2d 779, 782 (N.C. 1981). Manifesting this
understanding, North Carolina law provides categorically that
"instruments registered in the office of the register of deeds
shall have priority based on the order of registration as deter-
mined by the time of registration." N.C. Gen. Stat. § 47-20(a).
The North Carolina Supreme Court has articulated the full
implication of the rule, as well as its rationale, as follows:
8                      IN RE MCCORMICK
    The purpose of [the recording statute] is to enable
    intending purchasers and encumbrancers to rely with
    safety on the public record concerning the status of
    land titles. It serves to provide constructive notice of
    claims to real property. It has been characterized as
    a pure race statute. Where a grantor conveys the
    same property to two different purchasers, the first
    purchaser to record his deed wins the race to the
    Register of Deeds’ office and thereby defeats the
    other’s claim to the property, even if he has actual
    notice of the conveyance to the other purchaser.
    Thus, in order to protect himself against the possibil-
    ity that his grantor has conveyed the same property
    to another, a purchaser must examine the public reg-
    istry. If he finds no record of such, even if he knows
    there has been a prior conveyance, he may record
    his deed with the assurance that his title will prevail.

Hill, 282 S.E.2d at 782 (emphasis added) (citations and inter-
nal quotation marks omitted). In short, the recordation of real
property instruments in North Carolina on the appropriate
recording index is a "cook-book" process that, when followed,
gives the only enforceable notice to subsequent purchasers of
the instrument, thereby assuring such purchasers that the sta-
tus of title is as appears on the index, regardless of that pur-
chasers’ knowledge about matters not appearing on the index.

   North Carolina authorizes counties in North Carolina to
select one of two methods for indexing real property
instruments—either the traditional "grantor/grantee index"
system or the PIN index system. N.C. Gen. Stat. § 161-22(a),
161-22.2(a). Section 161-22.2(a) provides that the PIN index
system, if selected, would be "[i]n lieu of" the grantor/grantee
index system, such that either one or the other index would be
the official recordation index, but not both.

  In 1983, Orange County elected to adopt the PIN index sys-
tem in lieu of the grantor/grantee index, and by county ordi-
                           IN RE MCCORMICK                                9
nance, the Register of Deeds in Orange County is instructed
"not [to] accept for registration any . . . instrument containing
a description of the real property affected by the instrument
unless the parcel identifier numbers of all parcels affected
have been assigned and written on the instrument by the
County Land Records Office." Orange County, N.C., Code of
Ordinances § 22.2(b). In practice, Orange County has retained
the grantor/grantee index as an unofficial index to be used for
the few days between when an instrument is offered for recor-
dation and when the certificate of registration on the PIN
index issues. But the official index remains the PIN index.*

   In this case, McCormick borrowed $178,275 in 1999 from
SunTrust, giving SunTrust a deed of trust creating a lien on
both Tracts I and II. At the time of recordation, however, only
the parcel identifier number for Tract II was placed on the
instrument, and accordingly it was recorded on the PIN index
only against Tract II. The 1999 deed of trust did not appear
in the PIN index chain of title for Tract I.

   SunTrust argues nonetheless that because the Trustee is
imputed with notice of the status of title with respect to all
real property in the bankruptcy estate and both Tract I and
Tract II were part of the bankruptcy estate, he had construc-
tive notice that the deed of trust created a lien on both Tract
I and Tract II, even though recorded only against Tract II. It
asserts, "The Trustee is incapable of claiming entitlement to
the status of a [bona fide purchaser] under 11 U.S.C. § 544(a)
as to Tract I because his duty to have examined title to Tract
II (as of the Petition Date) would admittedly have revealed the

   *While we have not found a North Carolina case addressing precisely
the interplay between a PIN index as the official index and a grant-
or/grantee index as the unofficial index, especially when an instrument is
recorded only on the unofficial index, North Carolina law likewise does
not provide a mechanism by which we could certify the question to North
Carolina’s Supreme Court, unlike the law in the other States in the circuit.
See MLC Automotive, LLC v. Town of Southern Pines, 532 F.3d 269, 284
(4th Cir. 2008).
10                     IN RE MCCORMICK
existence of the SunTrust deed of trust and, thus, its valid lien
upon both Tracts I and II." In making this argument, however,
SunTrust blurs the distinction between the notice given by a
properly recorded lien and notice derived from other sources.
It also bypasses the limitation that a trustee’s notice is limited
to that imputed to a bona fide purchaser.

   First, under § 544, the Trustee is imputed with only the
knowledge imputable to a bona fide purchaser, "without
regard to any knowledge of the trustee." 11 U.S.C.
§ 544(a)(3) (emphasis added). Accordingly, SunTrust’s
efforts to impute knowledge to the Trustee of its 1999 lien
through his role as Trustee of the bankruptcy estate must fail
except to the extent that a bona fide purchaser is imputed with
knowledge.

   Second, a bona fide purchaser of Tract I would have no rea-
son to examine the title to Tract II, as might the Trustee, and
thus cannot be imputed with knowledge of the status of title
other than as appears with respect to Tract I. And as the par-
ties agree, a search of title as to Tract I would not have dis-
closed the SunTrust lien.

   Third and most importantly, the simple knowledge of the
deed of trust’s application to Tract I is irrelevant under North
Carolina law. Under North Carolina law, a person seeking to
encumber property with an enforceable lien must record the
lien against that property in the official index such that a pur-
chaser looking at that index would discover the lien. As the
North Carolina courts have pointed out, a purchaser looking
at that index can rely on the fact that no lien exists as to the
parcel if it does not appear on the index, even "if [the pur-
chaser] has actual notice" of the lien. See Hill, 282 S.E.2d at
782. A lien becomes enforceable against a purchaser only by
recording the lien against the property on the official index,
not by imputing knowledge to the purchaser through some
other source or mechanism. See Turner v. Glenn, 18 S.E.2d
197, 201 (N.C. 1942) ("[I]t has become axiomatic with us that
                       IN RE MCCORMICK                       11
no notice, however full and formal, will take the place of reg-
istration" (internal quotation marks omitted)). Indeed, under
North Carolina law, compliance with North Carolina’s real
property recording system is the only way to provide con-
structive notice of a lien to subsequent purchasers. See Cuth-
rell v. Camden Cnty., 118 S.E.2d 601, 603 (N.C. 1961) ("In
order for a recordation to be effective as notice there must be
a substantial compliance with the indexing statutes").

   Because a bona fide purchaser of Tract I would not, at the
time of the bankruptcy petition, be imputed with knowledge
of SunTrust’s 1999 lien because it did not appear on the PIN
index for Tract I, the purchaser would not have taken the
property from the debtor subject to a preexisting lien not so
recorded, even if the purchaser had knowledge of the lien.
Because the Trustee simply stands in the same shoes as the
bona fide purchaser, he likewise is not imputed with knowl-
edge of SunTrust’s prior lien on Tract I.

    SunTrust argues that in any event its deed of trust substan-
tially complied with North Carolina’s indexing system in that
SunTrust recorded its lien "in the proper county, with the
proper legal descriptions, was properly indexed as to both
Tracts I and II under Orange County’s grantor/grantee index,
and was properly indexed under the PIN system as to Tract
II. Additionally, the legal description for both Tracts I and II
appear on the same page of the SunTrust deed of trust." It
maintains that any careful and prudent title examiner would
have discovered its lien on Tract I, either by examining the
title to Tract II or by looking at the grantor/grantee index.

   While North Carolina recognizes substantial compliance
with a recording requirement, see Cuthrell, 118 S.E.2d at 603,
SunTrust cannot demonstrate that it substantially complied, or
complied to any extent, with Orange County’s requirement to
record its lien on Tract I in the PIN index. That requirement
demands that a deed of trust, to be effective against a parcel
of real property, be recorded in the PIN index for that parcel.
12                     IN RE MCCORMICK
Concededly, SunTrust never recorded the deed of trust in any
manner on the PIN index for Tract I.

   North Carolina law is clear that when a county elects to use
a PIN index system, it does so "[i]n lieu of" the grant-
or/grantee index system, N.C. Gen. Stat. § 161-22.2(a), and
upon doing so that index becomes "the official real property
index" for the county, id. § 161-22.2(e). We would effectively
be laying waste to North Carolina’s recordation system if we
were to conclude that recording a deed of trust on some unof-
ficial index, not the official index, amounted to substantial
compliance or that recording a deed of trust with respect to
the wrong parcel substantially complied with the recordation
requirements. As the North Carolina Supreme Court has
explained, "It is necessary in the progress of society, under
modern conditions, that there be one place where purchasers
may look and find the status of title to land." Turner, 18
S.E.2d at 200-01 (emphasis added). And SunTrust did not
record its lien at all in that "one place," much less in substan-
tial compliance with the requirements.

   Finally, SunTrust devotes a substantial effort to making the
distinct argument that any careful and prudent title examiner
would have discovered SunTrust’s lien, and therefore the
Trustee should be imputed with knowledge of what would
have been discovered. This argument, however, still gains
SunTrust no advantage. Again, the test under North Carolina
law is not whether a bona fide purchaser had knowledge of a
lien or whether the trustee in bankruptcy is imputed with
knowledge of a lien. Rather, the test is whether the lien was
recorded on the official index, and this test gives no effect to
the knowledge of the bona fide purchaser or the Trustee
acquired from some source other than the official index. See
Hill, 282 S.E.2d at 782.

   At bottom, we conclude that because a bona fide purchaser
of Tract I in August 2006, when the bankruptcy petition was
filed, would not be charged with notice of SunTrust’s 1999
                      IN RE MCCORMICK                      13
lien based on an examination of the PIN index in Orange
County, the Trustee likewise is not imputed with such knowl-
edge. Therefore, the Trustee was properly allowed to avoid
the lien under 11 U.S.C. § 544(a)(3). The judgment of the dis-
trict court is

                                                 AFFIRMED.