Opinion
Case No. 08-32316 Adv. No. 11-3028
04-02-2012
In re: DANNY G. SHEELEY JACKIE L. SHEELEY, Debtors BANK OF NEW YORK, Plaintiff v. DANNY G. SHEELEY JACKIE L. SHEELEY, Defendant
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
_______________
Guy R. Humphrey
United States Bankruptcy Judge
Judge Humphrey
Decision Denying Bank of New York's Motion for Summary Judgment
I. Introduction
Through this adversary proceeding a lender seeks a declaratory judgment that, as the holder of a mortgage granted by the debtors, it has a valid first mortgage lien on the parcel of real property used by the debtors as their residence despite the fact that the mortgage lists the street address for the residence parcel but uses the metes and bounds legal description for an adjacent vacant parcel of property owned by the debtors. The lender also requests that the mortgage be reformed to correct the legal description from that of the vacant parcel to that of the residence parcel and to add the debtor wife's name to the granting clause. The court denies the lender's motion for summary judgment because it fails to establish as a matter of law either that the mortgage encumbers the residence parcel or that the lender is entitled to reformation of the mortgage. II. Stipulated Facts On February 28, 2003 Danny G. Sheeley, Jr. and Jackie L. Sheeley (the "Sheeleys") obtained title to real property commonly known as 2292 Ogden Road, Wilmington, Ohio 45117 (the "Residence Parcel") through a trustee deed. The deed was recorded in 2003 in the Clinton County Recorder's Office (the "Recorder's Office"). Agreed Stipulations (doc. 21, Exh. A). In July 2006 the Sheeleys executed a mortgage on the Residence Parcel in favor of Accredited Home Lenders, Inc. in the amount of $202,500 (the "Accredited Mortgage"), which was recorded in the Recorder's Office (Exh. B). Then on July 26, 2006 the Sheeleys obtained title to a vacant parcel of real property adjacent to the Residence Parcel (the "Vacant Parcel") through a general warranty deed, which was recorded in the Recorder's Office in August 2006 (Exh. C).
Unless otherwise noted, all references to exhibits were included within the Agreed Stipulations.
Later in 2006 the Sheeleys refinanced the Accredited Mortgage with Countrywide Bank, N.A. ("Countrywide"). On November 1, 2006 Danny Sheeley executed the following documents:
1) A note in favor of Countrywide in the amount of $208,800 (the "Note") which lists the address of the Residence Parcel (Exh. D);Jackie Sheeley signed the Notice of Right to Cancel, Owners Affidavit, Truth in Lending Disclosure Statement, Itemization of Amount Financed, and Notices Affidavit (Exhs. I, J, N and O).
2) A HUD-1 Settlement Statement, which stated on line 104, "Payoff First Mortgage to Accredited Home Lenders" in the amount of $206,449.71 (Exh. E); and
3) A Document Correction and Fees Agreement, Identity Affidavit, Truth in Lending Disclosure Statement, Uniform Residential Loan Application, Signature and Name Certification, New Loan Payment Form, Itemization of Amount Financed, and Notices Affidavit (Exhs. F - O).
In order to secure the Note, on November 1, 2006 the Sheeleys also executed a mortgage in favor of MERS, solely as nominee for Countrywide in the amount of $208,000 (the "Mortgage"), recorded in the Recorder's Office on November 9, 2006 (Exh. P). The granting clause of the Mortgage states as follows:
Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS the following described property located in the County of Clinton:This street address is the address by which the Residence Parcel is commonly known. However, the Exhibit A attached to the Mortgage contains the metes and bounds legal description of the Vacant Parcel and not that of the Residence Parcel. The Sheeleys admit that they intended that the Mortgage serve as a lien against the Residence Parcel and $206,449.71 of the loan proceeds from this transaction were used to pay off the Accredited Mortgage. On October 29, 2008 MERS, as nominee for Countrywide, executed an assignment of the Mortgage to the Bank of New York, as Trustee for the Benefit of Alternative Loan Trust 2007-OA2 Mortgage Pass-Through Certificates, Series 2007-OA2 by and through BAC Home Loans Servicing, L.P., its server (the "Bank"), which was recorded on November 3, 2008 (the "Assignment") (Exh. Q).
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF.
Parcel ID Number: [left blank] which currently has the address of 2292 OGDEN RD, WILMINGTON, Ohio 45177-7184 ("Property Address"):
III. Procedural Background
On May 12, 2008 the Sheeleys filed a joint petition for relief under Chapter 13 of Title 11 of the United States Code (the "Code"); their schedules and Statement of Financial Affairs (est. doc. 1); and a Chapter 13 plan (the "Plan") (est. doc. 7). The Residence Parcel was scheduled as having a value of $150,000 with no encumbrances (Schedule A). The Vacant Parcel, which is adjacent to the Residence Parcel, was scheduled as having a value of $17,500 (Schedule A) and encumbered by the Mortgage with a balance of $218,000 (Schedule D). See est. doc. 1.
Unless otherwise noted, all statutory references are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. §§ 101-1532", cited hereinafter in this decision as "§ ___".
Paragraph 18 of the Plan listed the Residence Parcel as Parcel No. 1, but listed no lienholders. The Vacant Parcel was listed as Parcel No. 2 with Countrywide as the lien holder. The Plan provides for the surrender of the Vacant Parcel to the Bank, allowing the Bank to sell that property in accordance with its contractual rights and applicable law. Neither Countrywide nor the Bank objected to the Plan and the court entered an order confirming the Plan on July 21, 2008 (est. doc. 20) (the "Confirmation Order").
The Bank filed two motions for relief from stay with respect to the Residence Parcel (est. docs. 25 & 44), the first of which was withdrawn after the Sheeleys responded in opposition. The court subsequently entered an order denying the second motion for relief from stay as to the Residence Parcel, but granted relief from the stay as to the Vacant Parcel (est. doc. 52).
The Bank subsequently commenced this adversary proceeding through a complaint seeking declaratory judgment that the Mortgage is a valid first mortgage lien on the Residence Parcel as to both Danny and Jackie Sheeleys' fee simple interests in the property and requesting that the Mortgage be reformed to correct the legal description from that of the Vacant Parcel to that of the Residence Parcel and to add Jackie Sheeley's name to the granting clause. The Sheeleys filed an Answer asking that the Bank's requests be denied. The matter is before the court on the Bank's Motion for Summary Judgment (doc. 23).
IV. Positions of the Parties
The primary disputes are: whether the Mortgage encumbers the Sheeleys' interests in the Residence Parcel; and whether the Bank is entitled to reformation of the Mortgage to correct the metes and bounds legal description for the Residence Parcel and to add Jackie Sheeley as a named "Borrower." However, the parties have also sparred in their briefing over procedural issues, including whether the Chapter 13 trustee is a necessary party to this adversary proceeding and the availability and applicability of certain defenses. The court will briefly outline the respective contentions and opposing views of the parties on the issues briefed by the parties.
A. Lien on Residence Parcel
The Bank contends that it possesses a valid first mortgage lien upon the Residence Parcel that is enforceable against the Sheeleys notwithstanding the fact that the Mortgage contains the legal description for the Vacant Parcel and that Jackie Sheeley is not named in the granting clause, particularly since the Sheeleys intended to encumber the Residence Parcel with the Mortgage. The Sheeleys respond that the Mortgage does not encumber the Residence Parcel because, given inclusion of the legal description for the Vacant Parcel in that mortgage, a hypothetical bona fide purchaser would not have had constructive notice that the Residence Parcel was so encumbered and the Chapter 13 trustee's rights as a bona fide purchaser have intervened as a result of the filing of the bankruptcy petition.
B. Rights and Interests of the Chapter 13 Trustee
The Sheeleys contend that because the Chapter 13 trustee enjoys the status of a bona fide purchaser and because the trustee's rights have intervened as a result of their bankruptcy filing, the Chapter 13 trustee is an indispensable party who must be joined as a party defendant to this adversary proceeding. The Bank asserts that the Sheeleys are not cloaked with the avoidance powers of a bankruptcy trustee under § 544 and that, as parties to the Mortgage, the Sheeleys do not qualify as bona fide purchasers who can avoid a consensual lien. The Bank asserts the Chapter 13 trustee is not indispensable to a resolution of this litigation.
C. Standing
The Bank contends that the Sheeleys do not have standing to avoid the Mortgage pursuant to § 544 because the Mortgage was a voluntary transfer of their interests in the Residence Parcel, and a Chapter 13 debtor is authorized to avoid only those transfers that are involuntary and then only to the extent necessary to protect an exemption. See Kildow v. EMC Mortgage Corp. (In re Kildow), 232 B.R. 686, 692 (Bankr. S.D. Ohio 1999), citing 11 U.S.C. § 522(g)(1) and (h). The Sheeleys respond that while the Bank has commenced this adversary proceeding, the Sheeleys have yet to assert an avoidance claim for which their standing might be brought into question. Instead, they are relying on the fact that unless and until the Bank's request for reformation is granted, the Mortgage will continue to cover only the Vacant Parcel and leave the Residence Parcel unencumbered. They argue that their standing in this adversary proceeding, as presently postured, is not an issue. Nevertheless, the Sheeleys assert that as Chapter 13 debtors they would have derivative standing to pursue avoidance of the Mortgage on the basis of the incorrect legal description. See Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R 399 (B.A.P. 6th Cir. 2010), aff'd on other grounds, 655 F.3d 585 (6th Cir. 2011).
D. Reformation of the Mortgage and Preclusive Effect of the Confirmed Plan
The Bank asserts that it is entitled to reformation of the Mortgage pursuant to Ohio Revised Code § 2719.01 to reflect the actual intent of the parties that the Mortgage encumber the entirety of the Sheeleys' interests in the Residence Parcel. The Sheeleys, however, contend that reformation is not appropriate because of the intervening bankruptcy and the rights and interests of the Chapter 13 trustee and because the Bank is bound by the terms of the Sheeleys' confirmed Chapter 13 plan which provides for surrender of the Vacant Parcel, as well as a 100% dividend to unsecured creditors based on the equity in the Residence Parcel. With respect to the preclusive effect of the Plan, the Bank argues that the Sheeleys have waived any argument that the Bank is bound by the terms of their Chapter 13 Plan due to the Sheeleys' failure to plead this as an affirmative defense in their answer.
V. Legal Analysis
A. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the standing order of reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K).
B. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings through Bankruptcy Rule 7056, sets forth the standard to address the parties' filings. It states, in part, that a court must grant summary judgment to the moving party if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.
In order to prevail, the movant, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the nonmovant at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmovant's claim or 2) demonstrate to the court that the nonmovant's evidence is insufficient to establish an essential element of the nonmovant's claim. Id. at 331-32. Thereafter, the nonmovant "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 587-88.
C. Discussion
1. Absent the Bankruptcy, the Mortgage Encumbers
The Sheeleys' Interests in the Residence Parcel
The Bank seeks a declaratory judgment that the Mortgage is a valid and enforceable lien against the Sheeleys' fee simple interests in the Residence Parcel. The court, as a matter of law, must deny this request.
The essence of the Bank's argument is that: a) the Mortgage is a contract between the Sheeleys and the Bank; b) the Mortgage is ambiguous as to the property encumbered by the Mortgage and extrinsic evidence may be used to clarify that ambiguity; c) the extrinsic evidence establishes that the Sheeleys and Countrywide intended that the Mortgage encumber the Sheeleys' fee simple interests in the Residence Parcel; and d) as a contract between the Sheeleys and The Bank, the Mortgage is enforceable against the Sheeleys as clarified through incorporation of the extrinsic evidence establishing that it is intended to encumber the Residence Parcel. The Bank contends that the Sheeleys, as parties to the Mortgage who intended to encumber the Residence Parcel, do not qualify as bona fide purchasers or innocent intervening third parties who could rely on their lack of constructive knowledge. According to The Bank, there is no intervening third party. Since a mortgage is always effective between the mortgagor and the mortgagee under Ohio law, the Bank asserts that it is entitled to a declaratory judgment that the Mortgage encumbers the Residence Parcel.
a. Construction of the Mortgage
Ohio law applies the same principles of construction to mortgages as are applied to the interpretation of contracts. Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 804 (B.AP. 6th Cir. 2007); Hardesty v. Huntington Nat'l Bank (In re Payne), 450 B.R. 711, 718 (Bankr. S.D. Ohio 2011). Interpretation of the Mortgage is a matter of law. Rhiel v. BAC Home Loans Servicing, LP (In re Foster), 448 B.R. 914, 918 (Bankr. S.D. Ohio 2011), aff'd 458 B.R. 391 (B.A.P. 6th Cir. 2011).
Due to the conflict between the street address in the Mortgage and the attached metes and bounds legal description, as to the Bank and the Sheeleys, an ambiguity as to the construction of the Mortgage may exist and extrinsic evidence may be permissible to resolve that ambiguity. Wells v. Am. Elec. Power Co., 548 N.E.2d 995 (Ohio Ct. App. 1988). Under such circumstances, extrinsic evidence may be permissible to establish the intentions of the parties. Kelly v. Medical Life Ins. Co., 509 N.E.2d 411, 413 (Ohio 1987). The Stipulations establish that the Sheeleys intended that the Mortgage be a lien upon the Residence Parcel.
b. Enforceability of the Mortgage against the Sheeleys
If the bankruptcy had not intervened, the Mortgage is enforceable against the Sheeleys' fee simple interests in the Residence Parcel under Ohio law. Absent fraud or duress, a mortgage is enforceable between the mortgagor and the mortgagee even if the mortgage contains a defect or is improperly executed or recorded. Citizens Nat'l Bank in Zanesville v. Denison, 133 N.E.2d 329 (Ohio 1956); LaSalle Bank N.A. v. Zapata, 921 N.E.2d 1072, 1075-76 (Ohio Ct. App. 2009). Further, as discussed below, given the nature of the asserted mistake in the Mortgage, absent the intervention of a party holding the rights of a bona fide purchaser, the Bank likely could obtain reformation of the Mortgage to correct the asserted mistakes in the Mortgage. However, due to the intervening bankruptcy, the Residence Parcel is now property of the Sheeleys' bankruptcy estate, with the Chapter 13 trustee being an authorized representative of the estate with the rights of bona fide purchaser. The Bank likely could introduce sufficient facts at trial to establish that the Mortgage is enforceable against the Sheeleys' fee simple interests under state law. However, once the bankruptcy petition was filed, the Chapter 13 trustee's rights as a bona fide purchaser for value of the Residence Parcel became effective, supplanting the Sheeleys' status as parties in privity with knowledge of the error.
The issue is not whether the Mortgage serves as a lien against the Residence Parcel in a vacuum, but rather, against whose interests it serves as a lien. The Bank asserts that the Mortgage is enforceable against the Sheeleys and the court believes that the Bank could likely introduce sufficient facts at trial to establish that the Mortgage is enforceable against the rights of the Sheeleys if the Sheeleys held the Residence Parcel outside of bankruptcy. The Sheeleys contend that the Mortgage is not enforceable against the Residence Parcel because the metes and bounds legal description only describes the Vacant Parcel. Thus, they assert as it stands now, the Mortgage encumbers only the Vacant Parcel. See Bostic v. Nat'l City Bank (In re DeRee), 403 B.R. 514, 524 (Bankr. S.D. Ohio 2009) (trustee not required to avoid mortgage liens where court finds that such liens do not encumber the debtor's interest in the subject real property). However, the Sheeleys' argument assumes that the property is under the control of a bona fide purchaser or judicial lien creditor. Thus, the real issue in this proceeding is against whose interests is the lien enforceable.
2. Creation of the Bankruptcy Estate, Trustee as Representative of
the Bankruptcy Estate, Best Interests of Creditors, and the Sheeleys' Plan
Upon the filing of a bankruptcy case, a bankruptcy estate is created consisting of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The scope of § 541(a)(1) is intended to be broad and generally includes all interests of the debtor in property or assets, subject to certain exceptions and limitations provided by § 541(b) and (d). United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 (1983).
The breadth of "property of the estate" has been emphasized in several reported decisions of the Bankruptcy Appellate Panel for the Sixth Circuit. A fraudulent conveyance decision discussed the reach of property of the estate, stating:
Section 541(a)(1) states that "property of the estate" includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). This definition is unquestionably broad, its main purpose being to "'bring anything of value that the debtors have into the [bankruptcy] estate.'" Booth v. Vaughan (In re Booth), 260 B.R. 281, 284-85 (B.A.P. 6th Cir. 2001) (quoting H.R. Rep. No. 95-595 at 176 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6136). "To this end the term 'property' has been construed most generously" and has been found to include a variety of tangible or intangible property as well as future, non-possessory, or contingent interests and causes of action.Lyon v. Eiseman (In re Forbes), 372 B.R. 321, 331 (B.A.P. 6th Cir. 2007). See also Sicherman v. Ohio Public Employees Deferred Comp. Sys. (In re Leadbetter), 992 F.2d 1216, 1993 WL 141068 (B.A.P. 6th Cir. April 30, 1993); Azbill v. Kendrick (In re Azbill), 385 B.R. 799 (table), 2008 WL 647407, at *7 (B.A.P. 6th Cir. March 11, 2008); Rhiel v. OhioHealth Corp. (In re Hunter), 380 B.R. 753, 779 (Bankr. S.D. Ohio 2008).
In a Chapter 13 bankruptcy case, while the property of the estate remains in the physical possession of the debtor during the pendency of the case pursuant to § 1306(b), the debtor's property is vested in the estate at the commencement of the case. Telfair v. First Union Mortgage Corp., 216 F.3d 1333, 1340 (11th Cir. 2000); Black v. United States Postal Serv. (In re Heath), 115 F.3d 521, 524 (7th Cir. 1997). Pursuant to § 323(a) and (b), the trustee is the representative of the bankruptcy estate and has the capacity to sue and be sued. Unless the plan or confirmation order provide otherwise, then upon confirmation of the Chapter 13 plan, the property of the estate vests in the debtor. 11 U.S.C. § 1327(b). The standard confirmation order entered in all Chapter 13 cases in the Dayton location of the court, including the Confirmation Order in this case, withholds vesting of property of the estate in the debtor until dismissal, discharge, or conversion of the case. See Confirmation Order, ¶ 6. Therefore, under the Sheeleys' Plan, although the property of estate remained in the physical possession of the Sheeleys pursuant to § 1306(b), the property of the estate remained legally vested in the bankruptcy estate and continues to remain property of the estate until the Sheeleys receive their discharge or the case is dismissed or converted. The Residence Parcel is indisputably property of the Sheeleys' bankruptcy estate and represents potential value to the unsecured creditors of the Sheeleys' estate. See In re Amaravathi Ltd. Partnership, 416 B.R. 618, 624 (Bankr. S.D. Tex. 2009)
This is known as the "estate preservation" approach. See Telfair v. First Union Mortgage Corp., 216 F.3d 1333, 1340 (11th Cir. 2000) and Security Bank of Marshalltown v. Neiman, 1 F.3d 687, 689 (8th Cir. 1993).
An integral concept of the reorganization chapters of the Code is the "best interests of creditors" standard. This standard incorporated in Chapter 13 through § 1325(a)(4), in Chapter 11 through § 1129(a)(7)(A)(ii), and in Chapter 12 through § 1225(a)(4) generally requires that an unsecured creditor not receive less than the creditor would receive if the debtor liquidated under Chapter 7 of the Code. Under Chapter 13, the debtors are the proponents of the reorganization plan. 11 U.S.C. § 1321. To be confirmed, a plan must provide a dividend for unsecured creditors which is not less than the amount they would receive in a Chapter 7 liquidation. 11 U.S.C. § 1325(a)(4).
Under a Chapter 11 plan, an unsecured creditor may consent to receiving less than what the creditor would receive under Chapter 7 if the creditor accepts the plan. 11 U.S.C. § 1129(a)(7)(A)(ii).
If the Sheeleys are correct that the Mortgage is not a valid lien against the Residence Parcel, then it was incumbent upon the Sheeleys, not the Chapter 13 trustee, to propose a plan that provided for the value of the Residence Parcel to be distributed to their unsecured creditors. The Sheeleys met this requirement by confirming a plan to pay allowed unsecured creditors 100% of their claim.
3. The Bank's Lien against the Bankruptcy Estate or Chapter 13 Trustee's
Rights and Interests in the Property of the Estate
In its motion for summary judgment, the Bank did not dispute that a Chapter 13 trustee, pursuant to the rights and powers of a bona fide purchaser, could avoid a mortgage that contains the correct street address and parcel, but which includes the legal description for a different property. However, in its reply brief, the Bank argued for the first time that
the Sixth Circuit's decision in Argent Mortgage Co., LLC v. Drown (In re Bunn), 578 F.3d 487 (6th Cir. 2009) establishes that the Mortgage is an enforceable lien against the Residence Parcel even as to the rights and interests of a bona fide purchaser, such as the Chapter 13 trustee.
Pursuant to § 103(a), Chapter 5 of the Code is incorporated into Chapter 13. As a result, § 544 is applicable to Chapter 13 cases and provides in relevant part:
(a) 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—11 U.S.C. § 544(a)(1) and (3). By legal fiction, § 544(a) allows a trustee to avoid a transfer of real property as "a hypothetical bona fide purchaser as of the commencement of the case." Gemini Servs., Inc. v. Mortgage Elec. Regis. Sys., Inc. (In re Gemini Servs., Inc.), 350 B.R. 74, 81 (Bankr. S.D. Ohio 2006), citing Kovacs v. First Union Home Equity Bank (In re Huffman), 408 F.3d 290, 293 (6th Cir. 2005); Geygan v. World Savings Bank (In re Nolan), 383 B.R. 391, 397 (B.A.P. 6th Cir. 2008).
(1) A creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; . . .
. . . or
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
State law applies in determining the parameters of the trustee's rights as a bona fide purchaser. "Under Ohio law, a bona fide purchaser is defined as one who takes in good faith, for value, and without actual or constructive notice of any defect." Terlecky v. Beneficial Ohio, Inc. (In re Key), 292 B.R. 879, 883 (Bankr. S.D. Ohio 2003),citing Shaker Corlett Land Co. v. City of Cleveland, 41 N.E.2d 243 (Ohio 1942). Because the Code provides that a bankruptcy trustee is a bona fide purchaser regardless of actual knowledge, constructive knowledge is the only relevant inquiry in the context of an avoidance action under § 544(a)(3). Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1027 (6th Cir. 2001).
In Bunn the Sixth Circuit court noted that Ohio law deems any purchaser, including a bona fide purchaser, to have constructive notice of all instruments executed by the current owner of the land that are "proper[ly] record[ed]" and that the law assumes that any such purchaser has searched the relevant title indexes and examined the deeds in the chain of title. 578 F.3d at 489. Thus, the law credits the hypothetical bona fide purchaser with knowledge of the deed or deeds through which the mortgagor took title to the property and of the recorded mortgage at issue.
Courts have determined that when the metes and bounds legal description included in a mortgage, or attached and incorporated into a mortgage, conflicts with the street address or parcel number for the property included in the mortgage, a trustee does not have constructive notice as to the mortgaged property. See Stubbins v. Am. Gen. Fin. Servs., Inc. (In re Easter), 367 B.R. 608, 614 (Bankr. S.D. Ohio 2007) (street address and parcel number are not part of a property's legal description and do not give the trustee constructive notice where the mortgage contains a detailed, specific legal description); Ameriquest Mortgage Co. v. Stradtmann (In re Stradtmann), 391 B.R. 14, 18-19 (B.A.P. 8th Cir. 2008) (a mortgage containing a defective legal description does not provide constructive notice to subsequent purchasers unless the subject property can be determined with reasonable certainty or the defect is apparent on the face of the mortgage); Chase Home Fin., LLC v. Calloway (In re Calloway), 429 B.R. 802, 812-14 (Bankr. N.D. Ala. 2010) (public records of an improved parcel did not put the trustee on notice that the security deed encumbered the improved party when the security deed listed the proper street address, but contained a legal description of a vacant parcel); Hanrahan v. University of Iowa Cmty. Credit Union (In re Thomas), 387 B.R. 4, 11 (Bankr. N.D. Iowa 2008) (mortgage which included the correct street address but contained a legal description for a completely different property failed to provide constructive notice).
Nevertheless, the Bank's position is that Bunn stands for the proposition that a correct street address by itself places a person of ordinary prudence on inquiry or constructive notice that the Residence Parcel might be encumbered by the Mortgage. The court disagrees.
In Bunn the mortgage lacked any legal description and the Sixth Circuit concluded that the validity of a mortgage under Ohio law did not depend on the inclusion of a precise legal description if the property provides a description of the land and that description leads back through the recorded chain of title to the "precise legal description." The Sixth Circuit defined "precise legal description" as:
a metes and bounds description, a reference to a government survey, or a reference to a recorded plat. Such a description allows any interested party to determine exactly which land is in question with reasonable precision. Less formal descriptions, such as "all my land in Franklin County" or "my property commonly known as Blackacre," would require a party desiring to know exactly which land is at issue to track down an instrument with a precise legal description.578 F.3d at 490. In this case, as in the other cited cases, the Mortgage contained a precise legal description of a different property. The more precise description is preferred over the less specific one, and a metes and bounds description therefore trumps a street address that is also recited in the mortgage. See Wagner v. Christiana Bank & Trust Co. (In re Wagner), 353 B.R. 106, 119 (Bankr. W.D. Pa. 2006). Even if a bona fide purchaser traced the chain of title back to the Sheeleys' deeds, the matter would not have been clarified since they acquired the Residence Parcel and the Vacant Parcel through separate deeds at separate times, with separate metes and bounds descriptions. Even though the correct street address on the Mortgage would have referred back to the correct metes and bounds description on the deed for the Residence Parcel, the precise legal description for the Vacant Parcel included in the Mortgage prevails over the less precise street address, which easily could have just been used because that is the address at which the Sheeleys reside. Other decisions have similarly distinguished Bunn. Cf. Mason v. Ocwen Loan Servicing, LLC (In re Votaw), 2012 WL 529242 (Bankr. N.D. Ohio Feb. 17, 2012) (a mortgage did not put the trustee on constructive notice when the mortgage contained a correct street address, no parcel number, and an incorrect legal description); Jahn v. Bank of America (In re Lawson), 2011 WL 1167115 (Bankr. E.D. Tenn. March 28, 2011) (deed of trust did not provide constructive notice when the correct street address was included in the mortgage but the improper legal description was attached).
A decision was recently issued in Field v. Ocwen Loan Servicing, LLC (In re Schlabach), Case No. 10-10361, Adv. Pro. No. 10-1229 (Bankr. S.D. Ohio March 1, 2012) (Buchanan, J.). That case involved two mortgages which were intended to cover two adjacent parcels of property. One of the mortgages described the property with the correct street address, but the attached legal description referenced the one parcel but described the metes and bounds description for the other parcel. The attached legal description for that mortgage also repeated the correct street address. The body of the second mortgage contained the correct street address and referenced the one parcel and attached a legal description referencing the other parcel and the metes and bounds for that other parcel. The attached legal description for that mortgage also repeated the correct street address. Under those facts the court found that the trustee would be on constructive notice that the mortgaged property for both mortgages included both parcels. Because the legal descriptions attached to those mortgages described both parcels either by reference to the parcel number or through the metes and bounds description and contained the correct street address and because that case did not involve a Chapter 13 case with a plan provision addressing treatment of the claim and lien, the court finds Schlabach to be distinguishable.
Accordingly, the court concludes that the trustee, cloaked with the rights of a bona fide purchaser without notice under § 544(a), did not have constructive notice that the Mortgage encumbers the Residence Parcel when the legal description attached to the Mortgage only contained the metes and bounds description for the Vacant Parcel.
4. Standing of the Sheeleys and Whether the Chapter 13 Trustee
is a Required Party Under Bankruptcy Rule 7019
Having established that: a) the Residence Parcel is property of the estate; b) that if it is unencumbered by the Mortgage, the Sheeleys had a legal obligation under the Code to propose a plan that provided for the distribution of the value of that property to their unsecured creditors; and c) that the Mortgage does not encumber the Residence Parcel as property of the estate with respect to the Chapter 13 trustee's powers under § 544(a) as a bona fide purchaser, the issue arises as to whether the Sheeleys, as proponents of the Plan providing for distribution of the value of the Residence Parcel to their unsecured creditors, have standing to protect the property of the estate for the benefit of their creditors or to avoid the Mortgage exercising the powers and rights granted to a trustee under § 544(a). A related issue to be addressed is whether the Chapter 13 trustee is a required party under Bankruptcy Rule 7019.
The Sheeleys argue that standing is not in issue because this is not an avoidance proceeding through which the Sheeleys are seeking to avoid a defectively executed or recorded mortgage using the strong arm powers of the trustee. This is a declaratory judgment proceeding that the Bank filed against the Sheeleys without naming the Chapter 13 trustee as a defendant. Thus, the Sheeleys are merely defensively asserting the rights and interests of the bankruptcy estate for the benefit of the unsecured creditors who are to be paid under their plan and not using the trustee's powers under § 544(a) offensively to avoid the Mortgage (doc. 26, pp. 13-14).
The Sheeleys' argument that standing is not in issue has some appeal. First, § 544(a) does seem to differentiate between the trustee's holding the "rights and powers of" a bona fide purchaser or judicial lien creditor and the actual avoiding of a transfer of an interest in property. See § 544(a) ("The trustee shall have . . . the rights and powers of, or may avoid any transfer of property of the debtor . . . ." (emphasis added)). The Sheeleys argue that they are not avoiding a transfer and implicitly argue that they are merely protecting the estate's interests, with the estate intervening as a bona fide purchaser to defeat the Mortgage, without having to avoid the Mortgage.
The bankruptcy courts in this district and other districts have, under certain circumstances, permitted Chapter 13 debtors to protect and recover property of the estate without the intervention of Chapter 13 trustees. Accordingly, in Sininger v. Fulton (In re Sininger), 84 B.R. 115 (Bankr. S.D. Ohio 1988), this court authorized a Chapter 13 debtor's use of the turnover power under § 542 to obtain an order compelling a state court to pay garnished funds over to the Chapter 13 trustee. Additionally, In re Sharon, 200 B.R. 181 (Bankr. S.D. Ohio 1996), aff'd 234 B.R. 676 (B.A.P. 6th Cir. 1999) tacitly approves Chapter 13 debtors' recovery of repossessed automobiles from secured creditors when those vehicles have not been disposed of through a sale.
Third, pursuant to § 1306(b) Chapter 13 debtors retain possession of property in the bankruptcy estate and under § 1303 they have the right to use, sell, or lease property of the estate exclusive of the rights of the Chapter 13 trustee. The legislative history for § 1303 indicates that this section does not limit a Chapter 13 debtor's authority, but merely specifies the rights and powers that a debtor has exclusive of the trustee's rights and powers and an area of concurrent authority between Chapter 13 trustees and debtors is the ability to sue and be sued on behalf of the bankruptcy estate. See Smith v. Rockett, 522 F.3d 1080, 1081 (10th Cir. 2008); Crosby v. Monroe County, 394 F.3d 1328, 1331 n.2 (11th Cir. 2004); Cable v. Ivy Tech State College, 200 F.3d 467, 472-74 (7th Cir. 1999); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 515-16 (2nd Cir. 1998), citing Freeman v. Eli Lilly Fed. Credit Union (In re Freeman), 72 B.R. 850, 854 (Bankr. E.D. Va. 1987) (While the trustee is the representative of the Chapter 13 bankruptcy estate under § 323, "[t]he reality of a filing under Chapter 13 is that the debtors are the true representatives of the estate and should be given broad latitude essential to control the progress of their case."); Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1209 n.2 (3rd Cir. 1992); Autos, Inc. v. Gowin, 244 Fed. Appx. 885, 889 (10th Cir. 2007); and Looney v. Hyundai Motor Mfg. Ala., LLC, 330 F. Supp. 2d 1289, 1298-99 (M.D. Ala. 2004) ("Considering the structural framework of Chapter 13, including the more limited role of the trustee in Chapter 13 than in Chapter 7, the debtor's property rights under 11 U.S.C. § 1303, the debtor remaining in possession of property prior to and except as provided for in the plan pursuant to 11 U.S.C. 1306(b), that the debtor is not expressly stripped of standing under the Code, and the legislative history of 11 U.S.C. §§ 323; 1303, the court concludes that Looney, a Chapter 13 debtor, does have standing to pursue her claims."). Thus, it would seem that if Congress has authorized Chapter 13 debtors to sue and be sued on behalf of the bankruptcy estate, such authority must necessarily include the authority to defend the bankruptcy estate's interest — otherwise such authority would seem meaningless and even detrimental to the bankruptcy estate.
Judge Walter also recently considered whether Chapter 13 debtors have standing to pursue causes of action belonging to the estate and concluded that they do. See Simmerman v. Ocwen Fin. and Mortgage Servs., Inc. (In re Simmerman), 463 B.R. 47, 56-57 (Bankr. S.D. Ohio 2011).
Fourth, tied in with all these principles and perhaps most compelling is that paragraph 6 of the confirmation order in this case, which is the standard confirmation order entered by the Dayton location of this court, provides that "[t]he debtor shall be responsible for the preservation and protection of all property of the estate [.]" (est. doc. 20). The court construes this provision of the confirmation order as an express delegation to the Sheeleys of the Chapter 13 trustee's rights and authority to protect and defend the property of the estate. That delegation is consistent with § 1302(b)(4) of the Code which provides that the trustee shall "advise, other than on legal matters, and assist the debtor in performance under the plan[.]" Thus, these provisions clearly place the responsibility for execution of the plan on the debtors, with the trustee serving in an advisory rather than an enforcement capacity.
Nevertheless, § 544(a) is unambiguous and grants the trustee, not debtors, the powers and rights of a bona fide purchaser, irrespective of whether those rights and powers are used to avoid a transfer of an interest in property or simply to defeat a mortgage, such as the Mortgage in this case, of which the debtors have knowledge but for which the trustee does not have constructive notice as a bona fide purchaser. Furthermore, § 323 provides that the trustee is the representative of the estate and has the capacity to sue and be sued. And while § 1303 provides Chapter 13 debtors with the authority to use, sell, and lease property of the estate under § 363 to the exclusion of the trustee, it fails to provide express authority to debtors to use the strong arm powers of a trustee under § 544 or the other powers under Chapter 5. See Drake, Ponapfel and Goodman, Chapter 13 Practice and Procedure, § 6:2 (2011).
The Bank argues that this court's decision in Kildow precludes the Sheeleys from exercising the rights and powers of the trustee under § 544(a). In Kildow the court held that a Chapter 13 trustee could not use a trustee's strong-arm powers to avoid voluntarily granted mortgages, but rather, may only do so pursuant to §§ 522(g)(1) and (h) to the extent necessary to protect a debtor's exemption in property that the debtor has not concealed, and only when the lien sought to be avoided is involuntary. The Sheeleys argue on the other hand that had they initiated an avoidance action, they would have had derivative standing to avoid even a consensual lien such as the Mortgage under § 544 based on the Bankruptcy Appellate Panel's more recent decision in Dickson. The Bank has countered in its reply that the Sixth Circuit did not adopt the reasoning of the Bankruptcy Appellate Panel, but instead found that the lien which encumbered the manufactured home was involuntary and that the debtors therefore had direct standing to seek the lien's avoidance under § 522(h). Dickson, 655 F.3d at 593. As a result, the court of appeals concluded that it was unnecessary to address the issue of derivative standing. Id. Given the panel's determination that the lien in Dickson was involuntary, the Bank contends that the case is no different than Kildow.
More recently, however, the Bankruptcy Appellate Panel for the Sixth Circuit had occasion to revisit the issue of whether a Chapter 13 debtor has derivative standing to exercise the trustee's strong-arm powers under § 544 with respect to consensual liens. See U.S. Bank, N.A., v. Barbee (In re Barbee), 461 B.R. 711 (B.A.P. 6th Cir. 2011). The panel saw no reason to depart from the previous panel's holding in Dickson and affirmed the bankruptcy court's determination that Barbee had derivative standing to avoid the bank's lien under § 544. Id. at 715. It reasoned that "[a]dhering to precedent promotes uniformity of case law throughout the Circuit and promotes the goals of 'stability' and 'predictability' that the doctrine of statutory stare decisis aims to ensure." Id.
This court generally follows the decisions of the Sixth Circuit Bankruptcy Appellate Panel. Noland v. Burns (In re Burns), 435 B.R. 503, 514 n. 11 (Bankr. S.D. Ohio 2010).
The court concludes that the Bank's reliance on Kildow is misplaced. Under § 522(h), the debtor acts for his own personal benefit in order to recapture exempt assets. Dickson, 427 B.R. at 405 n. 2. Granting Chapter 13 debtors avoidance powers under § 544 will therefore not render § 522(h) superfluous. Id. The restriction on a debtor's avoidance of voluntary liens will continue to apply when the debtor acts directly on his own behalf to bring exempt assets back into the estate.
Based on the Bankruptcy Appellate Panel's recent reaffirmation that a Chapter 13 debtor may have derivative standing to pursue lien avoidances under § 544, the court finds that the Sheeleys may have such standing to assert the powers and rights of the Chapter 13 trustee under § 544(a) in this adversary proceeding. However, a requirement for derivative standing here is that the Chapter 13 trustee decline to pursue the avoidance action. See Dickson, 427 B.R at 405. The Sheeleys have not provided any evidence that they have made a demand upon the trustee to exercise the trustee's strong arm powers under § 544(a) or that the trustee has declined to do so. Accordingly, the court finds that the Sheeleys do not have direct standing to pursue the trustee's strong arm powers under § 544(a) and, based upon the record, they presently do not have derivative standing because there is no evidence of a demand upon the trustee to exercise those rights or a declination on the part of the trustee.
While the court respects the parties' respective legal arguments and positioning over the issue as to whether the Sheeleys may exercise the powers and rights of a trustee under § 544, it seems to the court that the parties' legal fencing over the standing issue was unnecessary. As argued by the Sheeleys, the Bank as plaintiff could have joined the trustee as a necessary party in light of the trustee being a representative of the bankruptcy estate. See 11 U.S.C. §§ 323 and 544(a) and Fed. R. Bankr. P. 6009. On the other hand, the Sheeleys could have requested the trustee to join the action or to authorize the retention of their legal counsel as special counsel to the Chapter 13 trustee to prosecute and defend the rights and interests of the trustee, including under § 544(a). See Drake, Ponapfel and Goodman, Chapter 13 Practice and Procedure, § 6:2 (2011). Under circumstances such as this in which the bankruptcy estate's interests favor the position taken by the Sheeleys and those interests are being adequately represented by the Sheeleys through their legal counsel, the granting of such a request would seem appropriate pursuant to § 1302(b)(4).
5. Required Joinder of the Chapter 13 Trustee Under Bankruptcy Rule 7019.
While the Sheeleys did not assert it as an affirmative defense in their answer, they argue that "[g]iven [the Chapter 13 trustee's] strong-arm authority over the property involved here, [he] is an indispensable party missing from this adversary proceeding." Sheeleys' Response, p. 11. The court agrees in part.
With two exceptions inapplicable, Federal Rule of Bankruptcy Procedure 7019 incorporates Federal Rule of Civil Procedure 19, which provides in pertinent part:
(a) Persons Required to Be Joined if Feasible.Fed. R. Civ. P. 19(a). The Sixth Circuit has stated that "Rule 19 . . . provides criteria for determining whether an unjoined party's interests are sufficiently substantial that a court should not proceed to a decision on the merits in its absence." Boles v. Greeneville Hous. Auth., 468 F.2d 476, 478 (6th Cir. 1972). Furthermore, "in the absence of an indispensable party, the federal courts are no more empowered to render a declaratory judgment than we would be to give affirmative relief." NLRB v. Doug Neal Mgmt. Co., 620 F.2d 1133, 1139 (6th Cir. 1980); quoting Kimball v. Florida Bar, 537 F.2d 1305, 1307 (5th Cir. 1976).
(1) Required Party. A person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined as a party if:
(A) in that person's absence, the court cannot accord complete relief among existing parties; or
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person's absence may:
(i) as a practical matter impair or impede the person's ability to protect the interest; or
(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.
(2) Joinder by Court Order. If a person has not been joined as required, the court must order that the person be made a party. A person who refuses to join as a plaintiff may be made either a defendant or, in a proper case, an involuntary plaintiff.
The Chapter 13 trustee is a required party to this litigation. The trustee is the representative of the Chapter 13 estate under § 323 and is granted the strong-arm powers under § 544(a). The Residence Parcel is property of the estate and with the estate vested with the trustee as the representative of the estate and the holder of the powers and rights under § 544(a), the presence of the trustee is required so that complete relief can be accorded to the Bank and the Sheeleys. In addition, failure to join the trustee may impair or impede the trustee's interests in the property of the estate. The court cannot render a declaratory judgment on the issues presented without the Chapter 13 trustee as a party, or evidence that the trustee has been requested to pursue his powers and rights under § 544(a) and has declined.
6. The Bank is not Entitled to Reformation of the Mortgage
to Conform It to the Intentions of the Parties
The Bank also requests the court to reform the Mortgage so that it conforms to the intentions of the parties. Specifically, the Mortgage would be reformed to contain a metes and bounds legal description of the Residence Parcel and the inclusion of Jackie Sheeley as a named "Borrower." The court must also deny this request as a matter of law.
Ohio Revised Code § 2719.01 provides that whenever a written instrument contains an omission, defect, or error resulting from the inadvertence of a party which causes the instrument not to be in strict compliance with Ohio law, an Ohio court may give full effect to the instrument in accordance with the true, manifest intention of the parties. "Reformation is an equitable remedy whereby a court modifies the instrument which, due to mutual mistake on the part of the original parties to the instrument, does not evince the actual intent of those parties." Phoenix Concrete, Inc. v. Reserve-Creekway, Inc., 654 N.E.2d 155, 157 (Ohio Ct. App. 1995). The party seeking reformation must establish by clear and convincing evidence that the parties made a mutual mistake. Id. A "mistake" for reformation purposes "exists only when the instrument, in its terms or legal effect, is different from what the parties believed it to be at the time of its execution." Snyder v. Monroe Twp. Trustees, 674 N.E.2d 741, 747 (Ohio Ct. App. 1996).
Ohio law permits a properly-executed and recorded mortgage to be reformed to conform to the intentions of the parties when a mutual mistake results in the inclusion of an incorrect legal description. See Kildow, 232 B.R. at 694. Both the parties to the instrument and those in privity with them may invoke the remedy. Id., citing Strang v. Beach, 11 Ohio St. 283, 287-88 (1860). However, a mortgage cannot be reformed if it will prejudice the rights of intervening bona fide purchasers. Wells Fargo Bank Minn. v. Mowery, 931 N.E.2d 1121, 1129 (Ohio Ct. App. 2010); Hardesty v. Huntington Nat'l Bank (In re Payne), 450 B.R. 711, 720 n. 9 (Bankr. S.D. Ohio 2011); Easter, 367 B.R. at 615 and Helbling v. Mortgage Elec. Registration Sys., Inc. (In re Cala), 2008 WL 2001761 (Bankr. N.D. Ohio May 6, 2008).
The court cannot grant the Bank's request for reformation at this time for several reasons. First, the Residence Parcel is property of the Sheeleys' bankruptcy estate and the rights of the trustee as a bona fide purchaser have intervened. The Mortgage cannot be reformed to abrogate the rights of the trustee as a bona fide purchaser. See Payne, 450 B.R. at 720 n. 9 and Easter, 367 B.R. at 615.
In addition, the court does not have sufficient evidence to grant reformation. The Bank contends clear and convincing evidence exists that both the Sheeleys and Countrywide intended for the Mortgage to encumber the Residence Parcel. Certainly, the Sheeleys have stipulated that they intended to encumber the Residence Parcel when they executed the Mortgage. While it logically follows that Countrywide or MERS, as their agent, shared that intent, the Bank has not submitted any evidence of the assignor's intent. The Bank should be prepared to offer evidence of the mortgagee's intentions. Assuming that the parties did intend for the Residence Parcel to be encumbered when they executed the Mortgage, a mutual mistake resulted in the inclusion of the legal description for the Vacant Parcel. Reformation would be appropriate to correct the legal description so long as such reformation would not abrogate the rights of an intervening third party.
The Bank also maintains that Jackie Sheeley's name was omitted from the granting clause of the Mortgage due to mutual mistake. The Bank states that not only did Jackie Sheeley admit that she intended to encumber her interest in the Residential Parcel, but that she also signed the Mortgage on a signature line provided for a borrower, acknowledged her signature before a notary, initialed every page of the Mortgage, and signed the Adjustable Rate Rider on a signature line for borrower. According to the Bank, Jackie Sheeley's execution of this rider places this case on all fours with Foster.
In Foster, the trustee filed a complaint for determination of extent or validity of mortgage, contending that the debtor-wife's one-half interest in the real estate was not encumbered because the mortgage used the term "Borrower" to denote the mortgagor and "Borrower" was defined in the mortgage to refer only to the debtor-husband. In addition, only the debtor-husband signed the underlying note. Both debtors signed the mortgage although only the debtor-husband's name was preprinted below the corresponding signature line. Both debtors acknowledged their signatures before the notary. They also initialed each page of the mortgage. On the same day, the debtors executed the adjustable rate rider the terms of which were expressly incorporated into the mortgage. The rider defined "Borrower" as the "undersigned." The debtor-husband's signature appeared on the first signature line, below which were preprinted his name and the word "Borrower." The debtor-wife signed on the second signature line below which her handwritten name appears beside the preprinted word "Borrower." Both debtors also initialed each page of the rider. See Foster, 448 B.R. at 919-20.
The court found that the unambiguous language of the mortgage evidenced the parties' clear intent that the debtor-husband be the sole grantor. Id. at 920. Judge Preston also determined that a provision in the mortgage stating that "any Borrower who co-signs this Security Instrument, but does not execute the Note . . . is co-signing this Security Instrument only to mortgage . . . the co-signer's interest in the Property" did not change this conclusion, reasoning that the term "Borrower" harkened back to the definition section which meant the debtor-husband only. Id. at 921. However, the rider defined "Borrower" as "the undersigned." Because the debtor-wife signed the rider, by definition, she became a "Borrower" and because the rider expressly stated that it amended and supplemented the mortgage, the debtor-wife became a "Borrower" under that instrument as well. Id. at 921. Accordingly, the court found there was no genuine dispute of material fact concerning the mortgagee's interest in the debtor-wife's one-half interest in the property and therefore granted summary judgment to the mortgagee. Id. at 921-22.
The Bankruptcy Appellate Panel reached the same result under similar facts in Rogan v. Fifth Third Mortgage Co. (In re Rowe), 452 B.R. 591, 597 (B.A.P. 6th Cir. 2011), concluding that under Kentucky law the debtor-wife was sufficiently identified in the mortgage documents to make the mortgage enforceable against her interest in the property.
The applicability of Foster and Rowe to the Bank's reformation claim is not clear. In neither of those cases did the mortgagee request the remedy the Bank is seeking. Moreover, even had those mortgagees requested reformation, the remedy would not have been available to them if the rights of an intervening third party would have been abrogated.
Also, the Bank has not provided sufficient evidence that it is entitled to reformation of the Mortgage to add Jackie Sheeley's name to the granting clause. As noted, to invoke reformation, the Bank must prove by clear and convincing evidence that the instrument did not evince the intentions of the original parties due to a mutual mistake. See Phoenix Concrete, 654 N.E.2d at 157. While Jackie Sheeley admits that she intended to mortgage her one-half interest in the Residence Parcel, that Countrywide shared the same intent is not in evidence.
7. Preclusive Effect of the Plan
The Sheeleys contend that to reform the Mortgage to include the legal description for the Residence Parcel would undo the terms of their confirmed Chapter 13 plan and cause undue prejudice to them, the Chapter 13 trustee and the unsecured creditors. The Sheeleys further explain that they have made all required payments required by their confirmed plan and that the trustee has distributed most of those funds to unsecured creditors. Despite adequate notice, neither Countrywide nor the Bank objected to the treatment of the Residence Parcel as unencumbered. Anticipating that the Bank would argue that they were required to file an adversary proceeding under Rule 7001(2) to determine the extent and validity of the Mortgage as to the Residence Parcel rather than achieving their objective through the Plan, the Sheeleys point out that in United Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010), the Supreme Court refused to void a confirmation order which discharged a portion of the student loan debt even though the debtor failed to file an adversary proceeding, and the bankruptcy court made no finding of undue hardship under § 523(a)(8).
The Bank did, in fact, raise this issue in its Reply.
Regardless of whether the Plan could avoid the mortgage lien without an adversary being filed or bind the Bank as to the Sheeleys' designation as to which parcel is subject to the Mortgage and which is not, the Plan, at a minimum, binds the Bank as to the payments it may receive on its claim. The Plan binds the Bank as to what it shall receive under the Plan and through the bankruptcy and upon completion of the payments due under the Plan, the Sheeleys' monetary obligations to the Bank shall be discharged. Confirmation of the Plan binds the Bank to such payment and claim treatment terms pursuant to § 1327. See Espinosa, 13o S.Ct. at 1380; In re McLemore, 426 B.R. 728, 734, 739-41 (Bankr. S.D. Ohio 2010); See also Bennett v. Springleaf Fin. Servs. (In re Bennett), ___ B.R. ___, 2012 WL 113363 (Bankr. S.D. Ohio Jan. 12, 2012) and In re Miller, 428 B.R. 791, 797 (Bankr. S.D. Ohio 2010). However, because the Bank failed to establish that it is entitled to summary judgment on its reformation claim, the court need not address the issue of whether the Plan had the effect of eliminating any lien or conclusively determined whether a mortgage lien exists as to the Residence Parcel. See 11 U.S.C. § 1327(a) (concerning the binding effect of a Chapter 13 plan) versus Fed. R. Bankr. P. 7001(2) (concerning proceedings "to determine the validity, priority, or extent of a lien").
The Bank contends that the Sheeleys waived their argument as to the preclusive effect of the Plan by failing to raise it as an affirmative defense in their answer. The failure to raise an affirmative defense under Federal Rule of Civil Procedure 8(c) does not always result in the waiver of that defense provided that the plaintiff receives notice of the affirmative defense by some other means. See Seals v. General Motors Corp., 546 F.3d 766, 770 (6th Cir. 2008). Although the Sheeleys failed to plead the affirmative defenses of res judicata, collateral estoppel, or claim preclusion in their answer, they did list the following as an issue of law in their pretrial statement filed on March 16, 2011: "Does res judicata and/or collateral estoppel prevent The Bank from asserting a secured interest on the Defendants' Residence Parcel[?]" (doc. 12, p. 3). The court determines that the Sheeleys' pretrial statement put the Bank on notice that they intended to assert such an affirmative defense. Until the Bank filed its reply memoranda, the issue of waiver was never raised.
The Answer filed by the Sheeleys failed to assert either the § 1327 preclusion defense or the Rule 19 required party defense. A "best practices" approach to drafting an answer or responsive pleading or motion may include a review of the affirmative and other defenses set forth in Federal Rule of Civil Procedure 8(c)(1) and 12(b) or such lists of defenses as may be available in litigation treatises. The court is not encouraging the whole-scale incorporation of such defenses into answers or responsive pleadings, as such a practice may have implications under Bankruptcy Rule 9011. However, a review of such lists in relation to the allegations of the particular pleading will help assure that all appropriate defenses are timely raised.
Most courts do not focus on the failure to plead the defense of res judicata in an initial pleading and are content to permit the issue to be raised for the first time even in summary judgment proceedings. See 10B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2735 (3d ed. 2011). Since the Bank has not argued that it would be prejudiced by allowing the Sheeleys to raise this defense, the Court concludes that it has not been waived.
In addition, while the Sheeleys have not explicitly requested leave to amend their Answer to include the res judicata preclusion defense, the principles applicable to granting leave to amend pleadings are instructive. Federal Rule of Civil Procedure 15(a)(2) (applicable through Federal Rule of Bankruptcy Procedure 7015) provides that a party may amend its pleading with the opposing party's written consent or with leave of court and that leave should be freely given when justice so requires. Factors frequently considered in determining whether leave should be granted to amend a pleading include: "delay in filing, lack of notice to the opposing party, bad faith by the moving party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of amendment." General Electric Co. v. Sargent & Lundy, 916 F.2d 1119, 1130 (6th Cir. 1990), quoting Hageman v. Signal L. P. Gas, Inc. 486 F.2d 479, 484 (6th Cir. 1973). While this court has discretion in permitting amendment of the pleadings, this discretion is "limited by Fed. R. Civ. P. 15(a)'s liberal policy of permitting amendments to ensure the determination of claims on their merits." Id., quoting Marks v. Shell Oil Co., 830 F.2d 68, 69 (6th Cir. 1987). Crucial to the inquiry as to whether leave should be granted to amend a pleading is whether the opposing party will suffer undue prejudice as a result of the amendment. Id.
The court finds that none of the factors which would justify denial of a motion for leave to amend the answer to include the preclusion defense are applicable. The court is providing the parties an opportunity to amend their pleadings to address the issue of the Chapter 13 trustee not being a party. The parties have ample time prior to any trial to prepare for any such defense. Finally, as noted, the Sheeleys raised this defense in their initial pretrial statement. The Bank will not incur any undue prejudice as a result of any such amendment nor would it unduly delay this proceeding.
The Sheeleys appear also to have raised a laches defense to reformation in their Response in Opposition. Judge Caldwell rejected such a defense in Kildow v. EMC Mortgage Corp. (In re Kildow), 232 B.R. 686, 694-95 (Bankr. S.D. Ohio 1999), in which each of the parties failed to recognize the defects in the mortgage until shortly after the sheriff's sale. The court expresses no opinion on whether the reasoning in that case would apply here given the Bank's more than two-year delay in commencing this adversary proceeding after discovering the incorrect legal description in the Mortgage.
VI. Conclusion
Based upon the foregoing, the court denies the Bank's motion for summary judgment. The court further finds that the court cannot accord complete relief among the existing parties without joinder of the Chapter 13 trustee or evidence of the trustee's refusal to pursue his rights under § 544(a).
The Bank is granted leave for a period of fourteen days following the entering of the order on this decision to file an amended complaint adding the trustee as a party defendant. In the event the Bank fails to file an amended complaint adding the trustee as a defendant, the Sheeleys shall have 21 days from the entry of the order on this decision to request the trustee to intervene as a party defendant. The trustee may retain counsel for the Sheeleys as special counsel to the trustee in the event that the trustee determines that such retention would be in the best interests of the estate. Within twenty-eight days after the entering of the order on this decision, if the Bank does not file an amended complaint adding the trustee as a defendant, the Sheeleys may file an amended answer, with a counterclaim if they deem appropriate, adding the trustee as a party with the trustee's consent or averring that a request was made to the trustee to pursue the trustee's powers and rights under § 544(a) and the trustee declined to pursue such rights.
The court will contemporaneously enter an order consistent with this decision.
Copies to:
Richard Thomas Craven, 685 South Front Street, Columbus, OH 43206 (Counsel for Plaintiff) Harold Jarnicki, 576 Mound Court, Ste B, Lebanon, OH 45036 (Counsel for Defendants)