Maximum Developers Investments, L.L.C., a Maryland

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
MAXIMUM DEVELOPERS
INVESTMENTS, LLC,
Debtor.
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Case No. 07-00539
(Chapter 7)
For Publication in West’s
Bankruptcy Reporter
MEMORANDUM DECISION RE
OBJECTION TO CLAIM OF KINGSWAY & ASSOCIATES
This supplements the oral decision of April 28, 2010,
regarding the objection (Dkt. No. 250) of David S. Alterman and
Equity Lending Defined Retirement Plan (collectively “Alterman”)
to the claim of Kingsway & Associates (assigned Claim No. 12 on
the claims register).
I
When this case commenced, the land records of the District
of Columbia included a purported release of the deed of trust
securing Kingsway’s claim, and I will assume in Alterman’s favor
(without actually deciding the issue) that the release was in
good form and that nothing in the land records or other
circumstances would have suggested to a purchaser that the
release might be invalid. 	Alterman contends (with the trustee’s
The document below is hereby signed.
Signed: April 29, 2010.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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authorization at the hearing permitting Alterman to raise the
contention) that Kingsway is not entitled to be treated as
holding a secured claim because the trustee had the right as a
hypothetical bona fide purchaser under 11 U.S.C. § 544 to hold
the real property free of Kingsway’s lien based on the release of
record of the lien.
The release, however, was unauthorized. 	It was executed by
Paul Hester on behalf of Kingsway, but Hester was not the trustee
vested by the deed of trust with authority to act on Kingsway’s
behalf and had no authorization otherwise from Kingsway to
execute a release on its behalf. 	Nevertheless, Alterman cites to
an ancient decision by the Supreme Court of the District of
Columbia (the predecessor to the United States Court of Appeals
for the District of Columbia Circuit), Eldridge v. Conn. Gen.
Life Insur. Co., 10 D.C. (3 MacArth.) 301 (D.C. 1879), as
supporting his view that a bona fide purchaser without notice of
an infirmity in a release of a deed of trust takes free of that
deed of trust.
Eldridge does not support Alterman’s argument. 	Although
Eldridge held that “a mortgagee with knowledge of the fraudulent
discharge of a prior mortgage is not a bona-fide purchaser,”
Eldridge, 10 D.C. (3 MacArth.) at 313, it does not follow, as
Alterman argues, that a mortgagee without knowledge of the
fraudulent discharge of a prior mortgage is a bona fide purchaser
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regardless of who made the fraudulent release. 	The critical fact
that made notice a relevant issue in Eldrige was that the
existing deed of trust was fraudulently released by the trustee
under that deed of trust.
The entity in Eldridge that claimed bona fide purchaser
status was a company lending money, secured by a new deed of
trust, in reliance upon the release of the existing deed of trust
on the property. 	It argued that the trustee under the
purportedly released deed of trust “was the trusted agent of the
cestui que trust, that they had clothed him with authority to
release the deed, and they were concluded by his act, especially
as the company had taken their conveyance in good faith.”
Eldridge, 10 D.C. (3 MacArth.) at 313-14. 	But the court found
that the purchaser was on notice that the release was possibly
not valid, and thus it could not be treated as a bona fide
purchaser without notice. 	In other words, a release by a trustee
under a deed of trust can be relied upon by a purchaser, but not
if the purchaser has notice that the underlying debt, contrary to
the release, has not actually been satisfied.
A similar rule might apply, as in Virginia, when the
original holder of a note secured by a deed of trust, records,
after the note has been sold, a false certificate of
satisfaction: if the purchaser of the real property is not on
notice that the underlying promissory note has been transferred
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or has not actually been satisfied, the purchaser, on the
strength of the release, takes free of the deed of trust. 	See
HSBC Bank USA, N.A. v. Gold (In re Taneja), 2010 WL 1039805
(Bankr. E.D. Va. Mar. 16, 2010) (Mitchell, J.). 	From Eldridge
and In re Taneja the conclusion may be drawn that a purchaser,
unless on notice (either actual notice or inquiry notice) that
the note has not been satisfied, is entitled to rely on the
representations of the trustee under the deed of trust (or of the
entity stated in the land records to be the beneficiary of the
deed of trust) that the secured note has been satisfied.
Here, in contrast to Eldridge and In re Taneja, Hester was
neither the trustee under the deed of trust nor an agent of the
entity that the land records indicated was the beneficiary of the
deed of trust. 	The release was by an individual with no
authority to act on behalf of Kingsway. 	As a fraudulent release,
without Kingsway having acted in any way that would lead a
hypothetical purchaser to believe that Hester had apparent
authority to act on Kingsway’s behalf, it ought not be treated as
effective as against Kingsway. 	As stated in M.M. & G., Inc. v.
Jackson, 612 A.2d 186, 191 (D.C. 1992):
It is well settled that a forged deed cannot validly
transfer property and that even a bona fide purchaser
takes nothing from that conveyance. 	Unity Banking &
Saving Co. v. Bettman, 217 U.S. 127, 135, 30 S.Ct. 488,
489-90, 54 L.Ed. 695 (1910); Harding v. Ja Laur Corp.,
20 Md.App. 209, 315 A.2d 132, 135-36 (Md. 1974).
By the same token, a fraudulent release, by someone not
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authorized to act on behalf of the beneficiary of record under a
deed of trust, ought not be effective to release the deed of
trust unless the beneficiary was negligent.
Alterman argues that the release was not a forged release
but at best a fraudulent release, and thus the rule regarding
forged deeds ought not apply here. 	There is no reason why a
release by someone not authorized to act on the beneficiary’s
behalf ought to fare any better than a release containing a
forgery of the beneficiary’s signature. 	Both are acts not
authorized by the beneficiary of record (or by someone, like the
trustee under the deed of trust, vested with apparent authority
to act on the beneficiary’s behalf). 	As noted in In re Taneja:
In the majority of states, the modern rule is that the
holder of a note secured by a recorded mortgage or deed
of trust that is released without authority will
prevail over an innocent purchaser of the property.
“Reinstatement and Restoration of Mortgages Released or
Discharged Without Authorization, as Against Subsequent
Purchasers, Lienholders, Judgment Creditors, and the
Like, Without Notice,” 35 A.L.R.2d 948 § 5[a] (1954 &
Cumm. Suppl.) (“A mortgage discharged of record by a
fraud or forgery without the participation, knowledge,
or negligence of the mortgagee, takes precedence over
the rights of subsequent innocent purchasers or
encumbrancers.”); see, e. g., First Fin. Savings Bank,
Inc. v. Sledge, 106 N.C.App. 87, 88, 415 S.E.2d 206,
207 (1992) (“The discharge of a perfected mortgage upon
public record by the act of an unauthorized third party
entitles the mortgagee to restoration of its status as
a priority lienholder over an innocent purchaser for
value”).
In re Taneja, 2010 WL 1039805 at 5. 	The ALR annotation cited to
in In re Taneja distinguishes the type of cases it discusses
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(such as this case) from:
cases involving the release of the deed of trust by the
trustee in contravention of the terms of the instrument
or without the authority of the cestui
(an example of which would be Eldridge) and from:
cases in which the position of the subsequent purchaser
or encumbrancer as against an assignee whose security
was released by the record mortgagee without the
assignee's authority is determined on the basis of the
subsequent party's lack of notice, actual or
constructive, of the assignment, or upon the basis of
the assignee's negligence in failing to record
(an example of which would be In re Taneja). 	See 35 A.L.R.2d 948
§ 1 (1954 & Cumm. Suppl.). 	This case fits within neither the
factual scenario of Eldridge (because the release was not
executed by the trustee under the deed of trust) nor the factual
scenario of In re Taneja (because the release was not executed by
the holder of record of the note secured by the deed of trust).
A hypothetical purchaser would not be entitled to take free of
the deed of trust based on the fraudulent release.
Kingsway is not guilty of laches in asserting its lien
rights, and no negligence of Kingsway led to the perpetration of
the fraudulent release. 	The objection to Kingsway’s claim’s
secured status will be overruled.
II
Alterman and the trustee also question the amount claimed to
be owed to Kingsway. 	The note provided for $23,200 of principal
to be paid with interest in 90 days in the total amount of
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$27,000. 	The note then provided that if the note was not paid
within 90 days, interest at 18% per annum would be owed. 	For the
reasons stated at the hearing, the proper interpretation of the
note is that interest of $3,800 accumulated in the first 90 days,
and thereafter interest ran on the principal amount of $23,200 at
18% per annum, not on the $27,000 owed as of the 90th day. 	I
computed the amount owed on that basis: if I made an error in my
mathematical calculation, any party may bring that to my
attention by a motion filed within 14 days after entry of the
order fixing the allowed amount of the claim.
III
An order follows.
[Signed and dated above.]
Copies to: Jeffrey M. Sherman, Esq. (counsel for Alterman); Kevin
R. McCarthy, Esq. (Chapter 7 Trustee); Richard H. Gins, Esq.
(counsel for Kingsway); Office of U.S. Trustee.
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