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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

Harker v. PNC Mortgage Co.

Case Type:
Case Status:
File Name: 18b0001p.06; No. 17-8005 (6th Circuit, Feb 06,2018) Published
Sixth Circuit Bankruptcy Appellate Panel (BAP) affirmed the decision of the bankruptcy court that: (i) a trustee's avoidance power as a hypothetical lien creditor pursuant to Sec. 544(a)(1) is not limited due to the constructive notice provision in O.R.C. Sec. 1301.401 and the Ohio Supreme Court's decision in In re Messer; and (ii) O.R.C. Sec. 5301.07 (effective April 6, 2017) does not apply retroactively to limit a trustee's avoidance power as a hypothetical lien creditor as the bankruptcy petition was filed prior to such effective date.
Procedural context:
Debtor filed a Chapter 7 bankruptcy. One mortgage on the debtor's principal residence contained a defective acknowledgement clause which did not comply with Ohio law. The trustee filed an adversary proceeding to avoid the mortgage. The mortgagee filed a motion to dismiss. The adversary proceeding was stayed pending the Ohio Supreme Court's ruling in In re Messer. In the Messer decision the Ohio Supreme Court held that O.R.C. Sec. 1301.401 applied to all recorded mortgages in Ohio and that statute provided constructive notice to the world of a recorded mortgage with a defective acknowledgement clause. Accordingly, a trustee was unable to avoid a defectively acknowledged recorded mortgage as a bona fide purchase under Sec. 544(a)(3) since the trustee was charged with constructive notice of the defectively acknowledged recorded mortgage. After the Messer decision, the trustee amended its complaint to seek to avoid the mortgage in question pursuant to Sec. 544(a)(1). The mortgagee moved to dismiss. The bankruptcy court denied the motion to dismiss. The BAP granted the mortgagee's motion to appeal the interlocutory decision.
The Messer decision applies only to the rights of a trustee as a bona fide purchaser and not to the trustee's rights as a hypothetical lien creditor. The bankruptcy and the BAP both determined that constructive notice affects the trustee's rights as a bona fide purchaser as the applicable statute provides that a defectively acknowledged recorded mortgage provides constructive notice, thus destroying the tristee's rights under Sec. 544(a)(3). The trustee maintained, and both the bankruptcy court and the BAP agreed, that constructive notice does affect the ability of a lien creditor to take priority over a prior recorded mortgage that was defectively acknowledged. The bankruptcy court and the BAP agreed that lien priority is not affected by constructive notice. The BAP agreed with the bankruptcy court that, while O.R.C. Sec. 5301.07 would militate a different result, the petition was filed prior to the effective date of that statute - and that is what matters.,
Harrison, Opperman and Wise, Bankruptcy Appellate Judges.

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