Mercer v. The Bank of Currituck

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
RICKARD B. MERCER,
DEBTOR.
RICKARD B. MERCER,
PLAINTIFF,
v.
THE BANK OF CURRITUCK,
DEFENDANT.
THE BANK OF CURRITUCK,
THIRD-PARTY PLAINTIFF,
v.
SEA HORSE REALTY AND
CONSTRUCTION, INC.,
THIRD-PARTY DEFENDANT.
CASE NO. 09-04088-8-JRL
Chapter 11
ADVERSARY PROCEEDING
NO. L-09-00221-8-JRL
ORDER
The matter before the court is the debtor’s motion for partial summary judgment. A
SO ORDERED.
SIGNED this 23 day of July, 2010.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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hearing was held in Raleigh, North Carolina on June 30, 2010.
JURISDICTION
This court has jurisdiction over the parties and the subject matter of this proceeding
pursuant to 28 U.S.C. §§ 151, 157, and 1334, and the General Order of Reference entered by the
United States District Court for the Eastern District of North Carolina on August 3, 1984. This
is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), which this court may hear and
determine.
SUMMARY OF THE PROCEEDINGS
1. 	On May 18, 2009, the debtor filed a voluntary petition for relief under chapter 11 of the
Bankruptcy Code. The debtor operates as debtor-in-possession under 11 U.S.C. §
1107(a).
2. 	This adversary proceeding was filed by the debtor to determine the validity of the lien
asserted by The Bank of Currituck (“the bank”) on real property owned by the debtor.
3. 	On January 29, 2009, the debtor filed a motion for partial summary judgment, seeking to
avoid the bank’s lien under 11 U.S.C. §§ 544(a)(1) and 1107(a) as unenforceable against
the debtor-in-possession because the lien was not properly perfected at the time of the
debtor’s bankruptcy filing.
4. 	The bank responded to the debtor’s motion and requested additional time to conduct
discovery. After discovery was completed, the bank filed a revised brief in opposition to
the debtor’s motion for partial summary judgment. The bank asserts that genuine issues
of material fact exist as to whether the debtor operated Sea Horse Realty and
Construction, Inc. (“Sea Horse”) as an alter ego of himself, such that the corporate veil
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should be pierced and Sea Horse’s actions imputed to the debtor-in-possession.
UNDISPUTED FACTS
1. 	On July 13, 2005, Frank and Shirley Panetta executed a general warranty deed to the
debtor conveying certain real property located in the Southern Shores subdivision in Dare
County, North Carolina (“the property”). The general warranty deed was recorded in the
Dare County Register of Deeds in Book 1647 at Page 107 on August 22, 2005.
2. 	Sea Horse executed a promissory note payable to the bank in the original principal
amount of $323,000 on August 19, 2005. The debtor signed the note as maker on behalf
of Sea Horse as president of the corporation. He also signed the note as personal
guarantor in his individual capacity.
3. 	In conjunction with the promissory note, Sea Horse executed a deed of trust in favor of
the bank, which attempted to grant a security interest in the property as collateral for the
note. The debtor signed the deed of trust as president of Sea Horse, with Sea Horse listed
as grantor. The debtor did not sign the deed of trust in his individual capacity.
4. 	The deed of trust was recorded in the Dare County Register of Deeds in Book 1647 on
Page 108 on August 22, 2005.
5. 	At the time the deed of trust was executed, Sea Horse was not the record owner of the
property.
6. 	In August of 2006 and 2007 and in June of 2008, Sea Horse modified the note and the
deed of trust to extend the term of the note. The 2006 modification of the note and deed
of trust was recorded in the office of the Dare County Register of Deeds in Book 1698 on
Page 481 on August 30, 2006. The 2007 modification was recorded in the office of the
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Dare County Register of Deeds in Book 1741 on Page 326 on August 29, 2007. The
2008 modification was recorded in the office of the Dare County Register of Deeds in
Book 1747 on Page 319 on July 23, 2008.
7. 	The debtor personally guaranteed the 2006 and 2007 note modifications, but he did not
guarantee the 2008 note modification.
8. 	On the dates that Sea Horse entered into the modification agreements, Sea Horse did not
own the property.
9. 	The debtor was the record owner of the property at all times.
10. 	Neither the deed of trust nor the modifications are in the property’s chain of title.
STANDARD OF REVIEW
Under Federal Rule of Civil Procedure 56(c), incorporated by Bankruptcy Rule 7056,
summary judgment is proper “if the pleadings, depositions, answers to interrogatories and
admissions on file, together with the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a judgment as a matter of law.” FED . R.
CIV . P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, (1986). The “plain language of Rule
56(c) mandates the entry of summary judgment, after adequate time for discovery and upon
motion, against a party who fails to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the burden of proof at
trial.” Celotex, 477 U.S. at 322. In making this determination conflicts are resolved by viewing
all facts and all reasonable inferences in the light most favorable to the nonmoving party. United
States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
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1 The debtor asserts that he was unaware that the note and the deed of trust had been
executed by Sea Horse, rather than himself, until shortly before the chapter 11 filing.
2 The bank also asserts that the debtor was always aware that the deed was executed by
Sea Horse and is guilty of fraud, but these claims are not at issue in this motion for partial
summary judgment.
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ANALYSIS
The debtor seeks to invalidate the bank’s deed of trust because it was not executed by the
record owner of the property and is not in the property’s chain of title. Asserting that the deed of
trust is defective under North Carolina law, the debtor argues that its position as a hypothetical
lien creditor under 11 U.S.C. § 544(a)(1) gives the debtor-in-possession standing to invalidate
the bank’s purported lien on the property. Conceding that the deed of trust is defective, the bank
argues the debtor operated Sea Horse as a mere alter-ego of himself, such that the corporate veil
should be pierced and Sea Horses’s actions imputed to the debtor. In support, the bank points to
discovery responses stating that, despite the debtor’s knowledge that the property was titled in
his name only and his understanding that he was personally obligated on the note, 1 Sea Horse
provided the consideration to purchase the property, paid the property taxes, and made payments
on the note.2
North Carolina General Statute § 47-20 provides that a deed of trust conveying an
interest in real property is invalid as against lien creditors or purchasers for value until such time
as the deed is properly recorded in the county register. N.C.G.S. § 47-20(a) (2007). Essentially,
North Carolina is a pure “race” state, where “no notice, however full and formal, will supply the
place of registration.” Fifth Third Mortg. Co. v. Miller, 690 S.E.2d 7, 9 (N.C. Ct. App. 2010)
(quoting Lowery v. Wilson, 214 N.C. 800, 804 (1939)). While a properly registered deed
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3 The bank was unable to cite a single case to support the application of veil-piercing to
upset the priority of a lien on real property.
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provides “constructive notice to all the world,” a defective deed of trust “imports no constructive
notice and will be treated as if unregistered.” Id. (quoting Lowery, 214 N.C. at 804, New Home
Bldg. Supply Co. v. Nations, 259 N.C. 681, 687 (1963)). Moreover, registration of a defective
deed “is ineffective to pass title and may be regarded as a nullity as to subsequent purchasers or
encumbrancers.” Id. (holding that an inaccurate property description renders a deed of trust
defective and invalid against good faith purchasers for value) (quoting Cowan v. Dale, 189 N.C.
684 (1925) (finding that an improperly acknowledged deed is void against execution creditors)).
Sections 1107(a) and 544(a) of the Bankruptcy Code permit a debtor-in possession to
assume the positions of hypothetical lien creditor and bona fide purchaser, with rights arising
upon the filing of the bankruptcy petition. Under North Carolina law and 11 U.S.C. § 544(a)(3),
reformation of a defective deed of trust may be appropriate, where the debtor-in-possession
acting as bona fide purchaser had notice of the conveyance. See In re Hartman Paving, Inc., 745
F.2d 307, 309 (4th Cir. 1984); see also Fifth Third, 690 S.E.2d at 10. However as a hypothetical
lien creditor under § 544(a)(1), prior knowledge or notice of the debtor-in-possession is
irrelevant. See, e.g., 11 U.S.C. 544(a)(1); In re Millerburg, 61 B.R. 125, 127-28 (Bankr.
E.D.N.C. 1986).
Furthermore, under North Carolina’s recording requirements, which entitle purchasers
and encumbrancers to rely on the status of the public record, veil-piercing cannot be used to
undo the rights of an intervening lien creditor where the public record does not import
constructive notice of the prior conveyance.3 Den-Mark Props. LLC v. Suntrust Bank (In re
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Den-Mark Props. LLC), No. 08-04084-8-RDD, 2009 WL 917963 (Bankr. E.D.N.C. March 27,
2009). In Den-Mark Properties, the debtor-in-possession sought to invalidate a deed of trust on
the grounds that the deed was not executed by the record property owner. The bank argued that
the debtor-in-possession should be estopped from invalidating the lien because the property was
owned by an entity operated as an alter-ego of the debtor, such that reformation of the deed of
trust was appropriate to effectuate the parties’ intent. Finding that the bank’s right to
reformation was cut off upon the filing of the debtor’s bankruptcy petition under § 544(a)(1),
Denmark Properties holds that an alter-ego claim is irrelevant under North Carolina’s recording
requirements when the public record would not put a reasonably prudent person on notice that
the property’s chain of title was incomplete or incorrect. Id.
The facts that support the debtor-in-possession’s priority as a hypothetical lien creditor
are wholly undisputed. Title to the property was conveyed to the debtor and validly recorded in
July of 2005. Sea Horse, grantor under the deed of trust and obligor under the note, executed the
deed of trust and subsequent modifications, but Sea Horse did not own the property sought to be
conveyed. Although the debtor signed the documents on behalf of Sea Horse, as president of the
corporation and as guarantor of the note, he did not execute the deed of trust as “grantor” in his
individual capacity as the record owner of the property. Thus the court finds that the deed of
trust conveying a security interest in the property to the bank is defective and invalid, as it is not
in the property’s record chain of title and does not import constructive notice of the
encumbrance. As a hypothetical lien creditor under § 544(a)(1), the debtor-in-possession is
entitled to invalidate the bank’s defective deed of trust; reformation of the deed is not
appropriate. Because veil-piercing is irrelevant, no genuine issue of material fact exists as to the
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debtor’s motion for partial summary judgment.
Based on the foregoing, the debtor’s motion for partial summary judgment is
GRANTED. The deeds of trust and modification agreements recorded in the Dare County
Register of Deeds in Book 1647, Page 108; Book 1698, Page 481; Book 1741, Page 326; and
Book 1774, Page 319 do not encumber the property of the debtor.
“END OF DOCUMENT”
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