Court Opinion

ID: 3045071
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:15:31.400294+00
Date Added: 2024-06-11T12:45:09.345991
License: Public Domain

United States Bankruptcy Appellate Panel
                       FOR THE EIGHTH CIRCUIT
                            _______________
                                No. 07-6056
                             ________________

In re:                                *
                                      *
Michael Frances Stradtmann and        *
Deddra Faye Stradtmann                *
                                      *
       Debtors.                       *
                                      *
Ameriquest Mortgage Company,          *
                                      *
       Plaintiff - Appellant          *
                                      *
v.                                    *
                                      *
Michael Frances Stradtmann, Jane      *
Roe Stradtmann, Deddra Faye           *   Appeal from the United States
Stradtmann, and John Doe,             *   Bankruptcy Court for the District
                                      *   of Minnesota
       Defendants,                    *
                                      *
Dorraine Ann Larison, as Trustee of   *
the Bankruptcy Estate of Michael F.   *
Stradtmann and Deddra Faye            *
Stradtmann; United States of America, *
Internal Revenue Service,             *
                                      *
       Defendants - Appellees         *
                                      *
State of Minnesota, Department of     *
Revenue; James A. Franklin, doing     *
business as Franklin Outdoor          *
Advertising Company; Jane Doe;        *
John Roe; Fresh Start Capital, LLC,   *
                                      *
       Defendants.                    *
                                        _____
                               Submitted: June 18, 2008
                                 Filed: June 30, 2008
                                         _____

Before SCHERMER, MAHONEY and VENTERS, Bankruptcy Judges.
                            _____

VENTERS, Bankruptcy Judge.

       Ameriquest Mortgage Company (“Ameriquest”) appeals the bankruptcy court’s
order avoiding Ameriquest’s purported mortgage on the Debtors’ homestead.1 For the
reasons set forth below, we affirm the judgment of the bankruptcy court.2

                           I. STANDARD OF REVIEW
         We review the bankruptcy court’s grant of summary judgment de novo,
applying the same standard used by the bankruptcy court and viewing the evidence
in the light most favorable to the non-movant, Ameriquest.3 Summary judgment is
appropriate if the record shows that there is no genuine issue as to any material fact
and that the moving party is entitled to judgment as a matter of law.4

      1
        The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the
District of Minnesota.
      2
          We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b).
      3
        Ries v. Wintz Properties, Inc. (In re Wintz Cos.), 230 B.R. 848, 857 (B.A.P.
8th Cir. 1999) (citing Peter v. Wedl, 155 F.3d 992, 996 (8th Cir. 1998)).
      4
        Fed. R. Civ. P. 56(c), made applicable in bankruptcy cases by Fed. R.
Bankr. P. 7056; Williams v. Marlar (In re Marlar), 252 B.R. 743, 750 (B.A.P. 8th
Cir. 2000) (citing Dulany v. Carnahan, 132 F.3d 1234, 1237 (8th Cir. 1997)).
                                           2
                               II. BACKGROUND
      The facts are straightforward and undisputed.

       On May 7, 2004, the Debtors executed and delivered to Ameriquest a mortgage
(“Mortgage”) to secure a $183,000 promissory note in favor of Ameriquest. The
Debtors and Ameriquest intended for the Mortgage to encumber the Debtors’
homestead in Stearns County, Minnesota. The Mortgage correctly stated the common
address of the Debtors’ homestead as 830 Chinook Avenue Southwest, Avon,
Minnesota, but the legal description in the Mortgage described an entirely different
piece of property – one that the Debtors had previously owned but had lost as a result
of a previous foreclosure. Ameriquest recorded the Mortgage containing the incorrect
legal description on May 20, 2004.

      On October 28, 2004, the Internal Revenue Service (“I.R.S.”) filed with the
Stearns County Recorder of Deeds three notices of tax lien.

      On May 16, 2005, the Debtors filed for protection under Chapter 7 of the
Bankruptcy Code. Dorraine Ann Larison was appointed as the trustee of the Debtors’
bankruptcy estate.

       On August 4, 2006, Ameriquest sought relief from the automatic stay in the
Debtors’ bankruptcy case to commence a state-court action to reform the Mortgage
to replace the incorrect legal description with the legal description of the property the
Debtors had intended to encumber. Notably, Ameriquest represented in its motion
that:

      Ameriquest is not adequately protected because it cannot foreclose its
      interest. Debtors remain in default, which has not been disputed. Indeed,
      this Court has already granted relief from stay for Ameriquest to
      foreclose the Mortgage. But such a foreclosure cannot occur because of
      the legal description attached to the Mortgage. These circumstances

                                           3
      entitle Ameriquest to relief from the automatic stay in order to
      commence an action to reform the Mortgage.5

The bankruptcy court granted Ameriquest relief from the stay to proceed with its state
court action, but the Trustee promptly removed the action to the bankruptcy court and
filed a counterclaim seeking to avoid Ameriquest’s apparently defective Mortgage
under 11 U.S.C. § 544. The I.R.S. also filed a counterclaim, seeking a determination
that the tax liens it recorded on October 28, 2004, are superior to the Mortgage.

       On July 25, 2007, the bankruptcy court held a hearing on the competing
motions for summary judgment filed by Ameriquest, the Trustee, and the I.R.S. At
the conclusion of the hearing, the Bankruptcy Court orally ruled that Ameriquest’s
Mortgage was avoidable under § 544; that the interest avoided was preserved for the
benefit of the estate, to be administered by the Trustee; and that the I.R.S.’s tax liens
were superior to the interests of the Trustee. Accordingly, the bankruptcy court
denied Ameriquest’s motion for summary judgment and granted the Trustee’s and the
I.R.S.’s motions for partial summary judgment. Ameriquest timely appealed.6

      5
        In re Stradtmann, Case No. 05-43229, Bankr. D. Minn., Docket No. 20 at
pp. 1-2 (emphasis added).
      6
         In this appeal, neither the Trustee nor Ameriquest has challenged the
bankruptcy court’s ruling that the I.R.S.’s liens are superior to the Mortgage based
on the “choateness” doctrine. (Essentially, under this doctrine, another lien cannot
compete with a federal tax lien unless the competing lien is capable of being
summarily enforced, i.e., “choate.”) Despite the absence of an explicit challenge to
this ruling, we find that the bankruptcy court ruling on this issue is correct and
should be affirmed. See Samco Mortgage Corp. v. Keehn, et al, 721 F. Supp. 1209
(D. Wyo. 1989) (finding that I.R.S. tax lien trumped a mortgage that was filed
before the I.R.S. lien was filed but that contained an erroneous legal description in
need of reformation).
                                           4
                                   III. DISCUSSION
       The analysis in this case closely tracks the analysis applied in Lindquist v.
Household Industrial Finance Co. (In re Vondall),7 a case decided by the bankruptcy
court for the District of Minnesota in 2006, affirmed by the Bankruptcy Appellate
Panel in 2007, and affirmed again by the Eighth Circuit Court of Appeals in June
2008. It is due to the similarity of this case to Vondall that we (with the consent of the
parties) withheld ruling on this case until the Court of Appeals ruled on the Vondall
appeal. As the parties might have expected, the summary affirmance of Vondall
supports the affirmance of the bankruptcy court in this case.

      The Trustee’s counterclaim to Ameriquest’s mortgage reformation action seeks
to avoid Ameriquest’s mortgage under 11 U.C.C. § 544(a)(3). Section 544(a)(3)
provides that “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 voidable by . . . a bona fide purchaser of real property . . . whether or
not such a purchaser exists.” The rights and definition of a bona fide purchaser are
determined by state law.8

     Under Minnesota law, a bona fide purchaser of real property may avoid prior
conveyances that have not been recorded in accordance with the law.9 A bona fide

      7
        2008 WL 2264608 (8th Cir. June 4, 2008), aff’g 364 B.R. 668 (B.A.P. 8th
Cir. 2007), aff’g 352 B.R. 193 (Bankr. D. Minn. 2006) (“Vondall”).
      8
          In re Marlar, 252 B.R. 743, 752 (B.A.P. 8th Cir.2000).
      9
        Minn. Stat. § 507.34 (“Every conveyance of real estate shall be recorded in
the office of the county recorder of the county where such real estate is situated,
and every such conveyance not so recorded shall be void as against any subsequent
purchaser in good faith and for a valuable consideration for the same real estate, or
any part thereof, whose conveyance is first duly recorded.”).
                                            5
purchaser is one who in good faith pays value for an interest in property without
actual, constructive, or implied notice of the inconsistent, outstanding rights of
others.10 Section 544 specifically excludes from consideration a trustee’s actual notice
of a creditor’s interest, so the determination of whether a trustee qualifies as a bona
fide purchaser turns on whether there is constructive or implied notice of the creditor’s
interest. In this case, the Mortgage did not provide either constructive or implied
notice of Ameriquest’s interest in the Debtors’ homestead.

       Constructive notice of a mortgage arises as a presumption of law from the
existence of a properly recorded instrument.11 A mortgage containing a defective
legal description does not provide constructive notice to subsequent purchasers unless
the subject property can be determined with reasonable certainty12 or the defect is
apparent on the face of the mortgage.13 A facial defect is apparent if it renders the
legal description “impossible” and it can be cured in only one way.14 An apparent

      10
        See Chergosky v. Crosstown Bell, Inc., 463 N.W.2d 522, 524 (Minn.
1990); Miller v. Hennen, 438 N.W.2d 366, 370 (Minn. 1989).
      11
        Chaney v. Minneapolis Community Development Agency, 641 N.W.2d
328, 333 (Minn. Ct. App. 2002).
      12
         Bailey, et al., v. Galpin, 41 N.W. 1054, 1055-56 (Minn. 1889) (“[W]here
the deed or record, in addition to a correct or sufficient description, contains false
particulars, the rule is, if there are certain particulars once sufficiently ascertained,
which designate the thing intended to be granted, the addition of a circumstance,
false or mistaken, will not vitiate the grant.”) (citations omitted).
      13
         In re Vondall, 352 B.R. at 198 (citing Howard, McRoberts & Murray v.
Starry, 382 N.W.2d 293, 296 (Minn. Ct. App. 1986)).
      14
         Id. at 198 (declining to find that a legal description was apparent where the
defect in the mortgage – an apparently non-existent lot designation – could also be
attributed to incorrect block or plat designation); Bank of Ada v. Gullikson, 66
N.W. 131, 132(Minn. 1896) (holding that a mortgage containing a nonsensical
addition designation did not provide constructive notice to subsequent judgment
                                            6
defect also gives rise to implied notice which charges a person with notice of
everything he could have learned by further inquiry into the circumstances.15

       Ameriquest argues that the defect in the Mortgage is apparent because the legal
description conflicts with the tax identification number and the common address noted
on the mortgage.16 However, under Vondall, a conflict between a tax identification
number and a legal description is not considered apparent.17 “[I]f there is nothing on
the face of a mortgage to alert a purchaser that the property description is defective,
then there is nothing on the face of the mortgage to trigger a duty of further inquiry
(to determine whether a legal description conflicts with the tax identification
number).”18 Here, there was nothing on the face of the Mortgage to alert a purchaser
that the property description was defective. To the contrary, the property description
in the Mortgage did not contain any defects. It may have described an entirely
different piece of property, but the description itself was complete and accurate.

      Ameriquest attempts to distinguish Vondall on the basis that the mortgage in
Vondall did not contain a common address, whereas the mortgage here does. The
attempted distinction fails. An address is no more immutable than a tax identification
number and, more important, the rationale the Vondall Panel used to analyze conflicts

creditors because it was impossible to tell from the face of the mortgage whether
the legal description misstated the plat, block, or addition).
      15
           See Miller v. Hennen, 438 N.W.2d 366, 369 (Minn. 1989).
      16
         The record suggests that the tax identification number noted in the
Mortgage no longer corresponds to the Debtors’ homestead; however, for purposes
of our de novo review of the parties’ motions for summary judgment, we will
assume that the tax identification number corresponds to the Debtors’ homestead.
      17
           In re Vondall, 364 B.R. at 672-673.
      18
           Id.
                                           7
between a legal description and a tax identification number applies with equal force
to conflicts between a legal description and a common address. If there is nothing in
the property description to trigger a duty of further inquiry, then a conflict between
the legal description and the common address is not apparent, and therefore does not
trigger constructive or implied notice.

      In the absence of an apparent defect on the face of Ameriquest’s Mortgage, the
Trustee had neither constructive nor implied notice of the Mortgage. Therefore, it is
avoidable under § 544.

       Ameriquest also argues that notice of its Mortgage should be imparted to the
Trustee because the Mortgage was “properly” recorded in, and discoverable by a
search of, the grantor-grantee index or the tract index. This argument, which was also
made (and rejected) in Vondall, fails to appreciate that notice of Ameriquest’s interest
in one piece of property – i.e., the Debtors’ homestead – does not arise from the
existence of a defective mortgage purporting to encumber an entirely different parcel
of property. It is simply not enough that a person searching the Stearns County real
estate record indices (grantor-grantee or tract) would find a mortgage between the
Debtors and Ameriquest. Unless there is an apparent error on the face of the
Mortgage, the only notice given is that the Debtors granted Ameriquest a mortgage
on property they no longer owned.

                               IV. CONCLUSION
      For the reasons stated above, we affirm the decision of the bankruptcy court
granting partial summary judgment in favor of the Trustee and the Internal Revenue
Service.

                                           8