Meade v. Bank of America

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
SOUTHERN DIVISION
No. S:11-CV-SOI-FL
BANK OF AMERICA, successor-in-interest 	)
to GreenPoint Mortgage Funding, Inc. 	)
)
Appellant, 	)
)
v. 	) 	ORDER
)
AUBREY LYMAN MEADE, JR., 	)
)
Appellee. 	)
)
This matter is before the court on appeal by Bank of America, successor-in-interest to
GreenPoint Mortgage Funding, Inc., from an order of the United States Bankruptcy Court dated July
29,2011. Notice of appeal was filed on August 11,2011, pursuant to 28 U.S.C. § 158(a), within the
time period allotted by Fed. R. Bankr. P. 8002. The appeal has been fully briefed, and the matter is
now ripe for decision. For the reasons that follow, the decision below is affirmed.
STATEMENT OF THE CASE
Aubrey Lyman Meade, Jr. ("appellee") filed for relief under Chapter 11 of the Bankruptcy
Code on December 22,2009. Appellee, as debtor in possession ("DIP"), then initiated an adversary
proceeding against Bank of America, successor-in-interest to GreenPoint Mortgage Funding, Inc.
("appellant"), seeking to avoid two liens ostensibly created by deeds oftmst on his property located
in Franklin County, North Carolina. 	The parties conducted discovery, and appellee moved for
summary judgment on March 11, 2011, appellant on May 2, 2011.
The bankruptcy court held a hearing on the parties' motions for summary judgment on July
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12, 2011. 	By order entered July 29, 2011, the bankruptcy court found in favor of appellee.
Appellant filed notice of appeal on August 11, 2011. The record on appeal was docketed in this
court on September 23, 2011, and the parties thereafter filed their briefs for the court's consideration.
STATEMENT OF FACTS
Where the parties have not objected to the bankruptcy judge's findings of fact, the court,
discovering no error, adopts said findings and copies them below for ease of reference:
[Appellee] owns approximately 30 rental properties. Two tracts relevant to
this adversary proceeding are described in the general warranty deed granted to
[appellee] on June 18, 1998, as lots 978 and 979 located in Lake Sagamore
Subdivision as shown in plats filed in Plat Book 12, pages 19-26 in the Franklin
County Register of Deeds. Lot 978 is associated with the property address of 228
Shawnee Drive in Louisburg, North Carolina, and Lot 979 is associated with the
address of226 Shawnee Drive. 	On December 16,2005, [appellee] executed four
deeds of trust in favor of [appellant]. 	The first two contain the same property
description, but the first secures a note in the amount of $81 ,600.00 and the second
secures a note for $15,300.00. 	The property description for these deeds of trust
states:
Being all of Lot No. 979, lying and being in Lake Sagamore
Subdivision, Cypress Creek Township, Franklin County, North
Carolina, as the same is shown on those certain plats filed in the
office of the Register of Deeds of Franklin County, North Carolina,
in Plat Book 12, Pages 19-26, the description of said lots as shown on
said plats being incorporated herein by reference thereto.
After the final period of the description and a few blank lines of space, the deed of
trust goes on to state "which currently has the address of 228 Shawnee Drive,
Louisburg, North Carolina, 27549." The liens created by these two deeds oftrust are
the subject of [appellee's] avoidance action [(the "subject deeds of trust")]'
The third and fourth deeds of trust executed on December 16,2005, secure
notes in the amount of$83,200.00 and $15,600.00 respectively. The third and fourth
deeds of trust contain identical property descriptions to each other that are the same
as the description quoted above, except the property address associated with these
deeds of trust is described as 226 Shawnee Drive. To summarize, all four deeds of
trust describe Lot 979 as shown in Plat Book 12, but the first two list the property
address as 228 Shawnee Drive, while the latter two correctly describe the address as
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226 Shawnee Drive.
Based on these descriptions alone, it appears that [appellee] has granted four
deeds of trust in favor of [appellant] on Lot 979. The property addresses, however,
indicate that the first two encumber the property at 228 Shawnee Drive (which is
really Lot 978) and the latter two encumber 226 Shawnee Drive (Lot 979). 	The
parties do not dispute that it was the their mutual intention to encumber Lot 978 with
the first two deeds of trust and Lot 979 with the latter two deeds oftrust, despite the
fact that all four include the description "Lot 979." Additionally, the second and
fourth deeds of trust are titled as secondary liens. Given these property descriptions
and despite the mutual intent, [appellee] seeks a determination that [appellant] lacks
a secured interest in Lot 978 and asks to avoid any interest encumbering Lot 978.
DISCUSSION
A. 	Standard of Review
This court has appellate jurisdiction pursuant to 28 U.S.c. § 158(a)(1) to review the
bankruptcy court's order. 	"On an appeal [from the bankruptcy court] the district court ... may
affirm, modifY, or reverse a bankruptcy judge's judgment, order, or decree or remand with
instructions for further proceedings." Fed. R. Bankr. P. 8013. Findings offact are reviewed for clear
error, and questions of law are reviewed de novo. 	Bowers v. Atlanta Motor Speedway (In re
Southeast Hotel Properties Ltd. Partnership), 99 F.3d 151, 154 (4th Cir. 1996); see also Fed. R.
Bankr. P. 8013 ("Findings of fact, whether based on oral or documentary evidence, shall not be set
aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy
court to judge the credibility of the witnesses.").
The bankruptcy court granted summary judgment for appellee under Federal Rule of Civil
Procedure 56, made applicable to adversary proceedings in bankruptcy by Federal Rule of
Bankruptcy Procedure 7056. Summary judgment is appropriate when there exists no genuine issue
of material fact, and the moving party is entitled to judgment as a matter oflaw. 	Fed. R. Civ. P.
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56(c); Anderson v. Liberty Lobby, 477 U.S. 242,247 (1986). The party seeking summary judgment
bears the initial burden of coming forward and demonstrating the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met
its burden, the nonmoving party then must affirmatively demonstrate that there exists a genuine issue
of material fact requiring trial. Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986). There is no issue for trial unless there is sufficient evidence favoring the non-moving
party for a jury to return a verdict for that party. Anderson, 477 U.S. at 250.
B. 	Analysis
Pursuant to 11 U.S.C. § 1107(a), appellee, as debtor in possession, has nearly all the same
rights and powers as a Chapter 11 trustee, including the strong-arm powers set forth in § 544(a).
Most relevant to this case are the avoidance powers established by § 544(a)(1):
(a) The trustee shall have, as of the commencement of the case, and without regard
to any knowledge of the trustee or any creditor, the rights and powers of, or may
avoid any transfer of property ofthe debtor or any obligation incurred by the debtor
that is voidable by
(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 ...
11 U.S.C. § 544(a)(1).1 	When determining the extent of the trustee's (or DIP's) power under §
544(a)(l), the court looks to the applicable state law. Havee v. Belk, 775 F .2d 1209, 1218 (4th cir.
1985).
1 The parties do not objectto the bankruptcy court's determination that, pursuant to In re Hartman Paving, Inc., 745 F.2d
307, 310 (4th Cir. 1984), appellee, as debtor in possession, cannot act as a bona fide purchaser to invalidate a deed of
trust under § 544(a)(3), where appellee was a party to the original transaction and had actual notice of its existence. See
Bankr. Order 5.
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The bankruptcy court accurately identified the dispositive issue in this case: namely, whether
the two deeds of trust that incorrectly place Lot No. 972. at "228 Shawnee Drive" (the "subject deeds
of trust") were valid encumbrances of Lot No. 97~ as of the date appellee filed his bankruptcy
petition.
North Carolina law provides: "No deed of trust ... of real ... property ... shall be valid to
pass any property as against lien creditors ... from the grantor, mortgagor or conditional sales
vendee, but from the time of registration thereof," and "instruments registered in the office of the
register of deeds shall have priority based on the order of registration as determined by the time of
registration." N.C. Gen. Stat. § 47-20(a).
The purpose of [the recording statute] is to enable intending purchasers and
encumbrancers to rely with safety on the public record concerning the status ofland
titles. It serves to provide constructive notice of claims to real property. It has been
characterized as a pure race statute. Where a grantor conveys the same property to
two different purchasers, the first purchaser to record his deed wins the race to the
Register of Deeds' office and thereby defeats the other's claim to the property, even
ifhe has actual notice of the conveyance to the other purchaser. Thus, in order to
protect himself against the possibility that his grantor has conveyed the same property
to another, a purchaser must examine the public registry. If he finds no record of
such, even ifhe knows there has been a prior conveyance, he may record his deed
with the assurance that his title will prevail.
Inre McCormick, 669 F.3d 177, 181 (4th Cir. 2012) (emphasis in original) (quoting Hill v. Pinelawn
Mem'} Park, Inc., 304 N.C. 159, 163,282 S.E.2d 779, 782 (1981)).
Under North Carolina law, "[a] deed purporting to convey an interest in land is void unless
it contains a description ofthe land sufficient to identifY it or refers to something extrinsic by which
the land may be identified with certainty." Overton v. Boyce, 289 N.C. 291, 293, 221, S.E.2d 347,
349 (1976). "A deed of trust containing a defective description ofthe subject property is a defective
deed of trust and provides no notice, actual or constructive, under [North Carolina] recordation
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statues." 	Fifth Third Mortg. Co. v. Miller, 202 N.C. App. 757, 761, 690 S.E.2d 7, 9-10 review
denied. 364 N.C. 601, 703 S.E.2d 445 (2010).
Here, the parties intended that the two subject deeds of trust reference and encumber "Lot
97~." Indeed, the subject deeds of trust correctly identify the intended address: 228 Shawnee Drive.
Reference to Lot 972, rather than 97~, is a scrivener's error. 	Appellant asserts that this "minor"
typographical error would not prevent a reasonably prudent title searcher from determining that the
subject deeds of trust encumber the intended Lot 978. In support, appellant notes that the subject
deeds of trust each reference the correct address, 228 Shawnee Drive, three times, and the wrong
plat, Lot 972, only once. Furthermore, appellant contends that a title examiner would not reasonably
assume that Lot 979 was intended to be encumbered by four separate deeds of trust.
The court finds, however, that the two subject deeds of trust fail to provide a "description of
the land sufficient to identify it or refer[ ] to something extrinsic by which the land may be identified
with certainty." 	Overton, 289 N.C. at 293, 221, S.E.2d at 349 (emphasis added). 	The parties
intended that the two deeds of trust encumber Lot 97~, with corresponding address 228 Shawnee
Drive. Instead, they reference the correct address but mistakenly identify Lot 972. Appellee, at the
time the deeds of trust were executed, owned both Lots 978 and 979. From the face of the deeds
alone, one could not determine whether encumbrance of Lot 979 or of 228 Shawnee Drive was
intended. 	Nor do the deeds of trust "refer[] to something extrinsic by which the land may be
identified with certainty." Id. Furthermore, as noted by the bankruptcy court, North Carolina courts
give particular weight to the plat identified in a deed of trust. See Peterson v. Polk-Sullivan. LLC,
206 N.C. App. 756, 759,698 S.E.2d 514, 515-16 (2010) ("While the Petersons argue that we should
consider the deed description and the parties' intentions, the North Carolina Supreme Court has
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plainly stated that the plat referenced in the deed is controlling"). Accordingly, where the subject
deeds of trust do not provide a description or reference something extrinsic to identity the land with
certainty, they are defective, void, and fail to provide notice, actual or constructive, under North
Carolina recordation statutes. Fifth Third, 202 N.C. App. at 761,690 S.E.2d at 9-10; see also In re
McCormick, 669 F .3d at 183 ("We would effectively be laying waste to North Carolina's recordation
system if we were to conclude that ... recording a deed of trust with respect to the wrong parcel
substantially complied with the recordation requirements").
Appellant would seek in the alternative to reform the subject deeds of trust. "Reformation
is a well-established equitable remedy used to reframe written instruments where, through mutual
mistake or the unilateral mistake of one party induced by the fraud of the other, the written
instrument fails to embody the parties' actual, original agreement." Metro. Prop. & Cas. Ins. Co. v.
Dillard, 126 N.C. App. 795, 798,487 S.E.2d 157, 159 (1997). However, reformation is not available
when an intervening lien creditor, without knowledge of the mistake, has advanced new
consideration or incurred some new liability on the faith of the debtor's apparent ownership. In re
Law Developers, LLC, 404 B.R. 136, 140 (Bankr. E.D.N.C. 2008) (citing M & J Fin. Corp. v.
Hodges, 230 N.C. 580, 582, 55 S.E.2d 201 (1949».
Pursuant to § 544(a)(1), appellee has the powers of a hypothetical lien creditor who extends
credit to the debtor at the time of the commencement of the bankruptcy case and who does so
without any knowledge of any mistakes in the debtor's prior encumbrances. 11 U .S.C. § 544(a)(1);
see also In re Law Developers, LLC, 404 B.R. at 140. Accordingly, reformation is not available to
appellant.
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Where the subject deeds of trust are void and not subject to reform, appellee, acting as a
hypothetical lien creditor pursuant to § 544(a)(1), may avoid appellant's interest in Lot 978.
CONCLUSION
The decision of the bankruptcy court is AFFIRMED. The clerk is directed to close the case.
I-
SO ORDERED, this the ~day of July, 2012.
~J._>'~
OSEW. FLANAG~
United States District Judge
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