Law Developers, LLC

1
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
LAW DEVELOPERS, LLC,
Debtor. 	Case No. 08-00965-8-JRL
Chapter 11
____________________________________________________________________________
ORDER
This case is before the court on the debtor’s objection to the secured proof of claim filed by
The Bank of Currituck (Currituck). On June 2, 2008, the court conducted a hearing on this matter
in New Bern, North Carolina.
FACTS
The debtor, Law Developers, LLC (Law Developers), filed for relief under Chapter 11 of the
Bankruptcy Code on February 14, 2008 and continues to operate as a debtor-in-possession pursuant
to 11 U.S.C. § 1107. On January 12, 2006, the debtor executed to Currituck a promissory note in
the maximum amount of $194,500.00, secured by a deed of trust to William Brumsey III, as trustee
for the benefit of Currituck, and recorded the deed of trust in the Perquimans County registry. By
inadvertent draftsman’s error, the legal description of the property encumbered by the deed of trust
SO ORDERED.
SIGNED this 24 day of June, 2008.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
Case 08-00965-8-JRL Doc 125 Filed 06/24/08 Entered 06/24/08 16:05:31 Page 1 of 6

2
is identified as Lot 43 of Cedarwood Village. 	However, the intended legal description of the
property encumbered by the deed of trust, as shown on page one of the deed of trust, is Lot 17 of
Cedarwood Village. 	The parties agree that the intended legal description of the property
encumbered by the deed of trust is Lot 17 of Cedarwood Village. Currituck filed a secured proof
of claim in the amount of $204,117.59. On April 2, 2008, and by amended notice of motion on April
7, 2008, the debtor filed an objection to Currituck’s proof of claim as a secured creditor. The debtor
contends that the documents supporting Currituck’s claim do not indicate a deed of trust on Lot 17,
but would only reflect a lien on Lot 43, which was sold by the debtor on November 3, 2006. The
debtor requests that the claim be allowed as an unsecured claim in the amount of $204,117.59.
Currituck contends that the deed of trust should be reformed to correct the mistake in order to reflect
the true intention of the parties to encumber Lot 17 with a deed of trust in favor of Currituck.
DISCUSSION
A properly filed proof of claim is “prima facie evidence of the validity and amount of the
claim.” 	Fed. R. Bankr. P. 3001(f). 	An objecting party has the initial burden of challenging a
properly filed proof of claim. In re Se. Chem. Corp., 2007 Bankr. LEXIS 2136 (Bankr. M.D.N.C.
June 19, 2007). If the objecting party produces evidence challenging the proof of claim, the burden
shifts back to the claimant to prove the claim’s validity. 	Id. Here, the debtor contends that
Currituck’s secured proof of claim should be disallowed because the deed of trust lacks an adequate
description and therefore Currituck does not have a lien on Lot 17. Under North Carolina law, “[a]
deed purporting to convey an interest in land is void unless it contains a description of the 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 (1976). The description contained in the deed of
Case 08-00965-8-JRL Doc 125 Filed 06/24/08 Entered 06/24/08 16:05:31 Page 2 of 6

3
trust must be “either certain in itself or capable of being reduced to a certainty by a recurrence to
something extrinsic to which the deed refers.” Duckett v. Lyda, 223 N.C. 356, 358 (1943). In this
case, the deed of trust refers to both Lots 17 and 43 of Cedarwood Village. It is not clear from the
face of the document which parcel of land is intended to be encumbered by the deed of trust. In
addition, the deed of trust does not refer to anything extrinsic that would explain the ambiguity.
Therefore, the deed of trust, as written, is void under North Carolina law as the document fails to
provide an adequate description of the encumbered property.
In light of the defective description in the deed of trust, Currituck argues that the deed of
trust should be reformed in order to reflect the true intention of the parties to encumber Lot 17.
Reformation is an equitable remedy where a court rewrites a deed to make it conform to the
intention of the parties. Metro. Prop. & Cas. Ins. Co. v. Dillard, 126 N.C. App. 795, 798 (1997).
Reformation is used to reframe written instruments in cases of mutual mistake or draftsman’s error
where the written documents fail to embody the parties’ actual, original agreement. Id.; see also
Strong, N.C. Index 4th, Reformation of Instruments § 6. The party seeking reformation has the
burden of showing that a material agreement between the parties is incorrectly incorporated in the
instrument and that the agreement of the parties was not included in the instrument by mistake.
Light v. Equitable Life Assurance Soc’y, 56 N.C. App. 26, 33 (1982). Here, it is undisputed that
the deed of trust does not reflect the true intention of the parties. The parties agree that the deed of
trust was intended to encumber Lot 17 of Cedarwood Village, and not Lot 43, and that a draftsman’s
error is responsible for the reference to Lot 43 on page two of the deed of trust. Therefore, absent
other law, this is a clear case where reformation of the deed of trust would be appropriate to conform
the instrument to the true intention of the parties.
However, North Carolina law also provides the general rule that reformation rights will not
Case 08-00965-8-JRL Doc 125 Filed 06/24/08 Entered 06/24/08 16:05:31 Page 3 of 6

4
be granted if the rights of an innocent bona fide purchaser, or someone occupying a similar status,
would be prejudiced. Hice v. Hi-Mil, Inc., 301 N.C. 647, 653 (1981). Therefore, reformation is
inappropriate if Law Developers qualifies as a bona fide purchaser for value, or someone occupying
a similar status, whose rights would be prejudiced by reforming the deed of trust to encumber Lot
17. 	Section 544(a)(3) of the Bankruptcy Code provides that “[t]he trustee shall have, as of the
commencement of the case, . . . the rights and powers of . . . a bona fide purchaser of real property.”
11 U.S.C. § 544(a)(3). Therefore, in Chapter 11, a debtor-in-possession has the power to avoid a
claim that could be voidable by a bona fide purchaser for value at the time of the filing of the
bankruptcy petition. In re Hartman Paving, Inc., 745 F.2d 307, 309 (4th Cir. 1984). However, the
Fourth Circuit, in a heavily criticized opinion, has held that a debtor-in-possession, acting as a bona
fide purchaser pursuant to Section 544(a)(3), cannot invalidate a deed of trust where he is an original
party to the deed of trust and had actual notice of its existence. Id. at 310. Thus, under Hartman
Paving, a Chapter 11 debtor’s actual notice of a mistake in a deed of trust is imputed to the debtor-
in-possession acting as a bona fide purchaser for value. A debtor-in-possession with notice of the
deed of trust is not “innocent” and therefore cannot prevent reformation of the deed of trust under
North Carolina law.
In this case, it is clear that the Fourth Circuit’s holding in Hartman Paving prevents the
debtor from invalidating the deed of trust pursuant to its status as a bona fide purchaser for value
under Section 544(a)(3). The debtor was a party to the original transaction and had actual notice
of the transaction and the recording of the deed of trust in the Perquimans County registry.
However, while 	Hartman Paving focuses on the debtor-in-possession’s position as a bona fide
purchaser under 544(a)(3), Section 544(a)(1) of the Code also acts to give the debtor-in-possession
the status of a judicial lien creditor on all property as of the date of the bankruptcy petition. 11
Case 08-00965-8-JRL Doc 125 Filed 06/24/08 Entered 06/24/08 16:05:31 Page 4 of 6

5
U.S.C. § 544(a)(1). “Once the [debtor-in-possession] has assumed the status of a hypothetical lien
creditor under Section 544(a)(1), state law is used to determine what the lien creditor’s priorities and
rights are.” In re Kors, 819 F.2d 19, 22-23 (2d Cir. 1986). Under North Carolina law, an intervening
judgment lien will only cut off reformation rights where the lien creditor is without knowledge of
the mistake and has “advanced some new consideration or incurred some new liability on the faith
of the apparent ownership.” M&J Fin. Corp. v. Hodges, 230 N.C. 580, 582 (1949).
In this case, Currituck’s reformation rights were cut off as of the petition date because
Section 544(a)(1) assumes that the debtor-in-possession is a judicial lien creditor that both has no
knowledge of the mistake and incurred new liability on the petition date. First, unlike under Section
544(a)(3), no Fourth Circuit case imputes the debtor’s knowledge of the deed of trust to the debtor-in
possession acting as a hypothetical judicial 	lien creditor pursuant to Section 544(a)(1). 	This
analysis was followed by the Bankruptcy Court for the Eastern District of North Carolina in In re
Millerburg, 61 B.R. 125 (Bankr. E.D.N.C. 1986). In Millerburg, the court found that Hartman
Paving prevents a debtor-in-possession from qualifying as a bona fide purchaser without knowledge
under Section 544(a)(3), but that “notice and knowledge are not factors to be considered” for
purposes of the debtor-in-possession’s position as a hypothetical judicial lien creditor under Section
544(a)(1). Therefore, following the court’s reasoning in Millerburg, the debtor-in-possession is
assumed to be innocent for purposes of North Carolina reformation law when acting as the holder
of a hypothetical judicial lien. Second, Section 544(a)(1) states that the debtor-in-possession is
treated as “a creditor that extends credit to the debtor at the time of the commencement of the case.”
Because the debtor-in-possession is treated as having extended credit subsequent to the recording
of the defective deed of trust, the requirement that the debtor-in-possession incur new liability is
met. Therefore, the hypothetical judicial lien cut off Currituck’s reformation rights as of the date
Case 08-00965-8-JRL Doc 125 Filed 06/24/08 Entered 06/24/08 16:05:31 Page 5 of 6

6
of the bankruptcy petition. Since reformation is not possible, the deed is void and Currituck does not
hold a lien on Lot 17.
CONCLUSION
Pursuant to the foregoing, the court ALLOWS the debtor’s objection to the secured proof
of claim filed by Currituck. The court declines Currituck’s request to reform the deed of trust to
reflect a lien on Lot 17, Cedarwood Village. Currituck’s claim is allowed as an unsecured claim in
the amount of $204,117.59.
“END OF DOCUMENT”
Case 08-00965-8-JRL Doc 125 Filed 06/24/08 Entered 06/24/08 16:05:31 Page 6 of 6