In re: Gary Trujillo v. ( 2007 )

ELECTRONIC CITATION: 2007 FED App. 0012P (6th Cir.)
File Name: 07b0012p.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: GARY VICTOR TRUJILLO, )
)
Debtor. )
________________________________________ )
)
SELECT PORTFOLIO SERVICES, INC. )
and )
THE CIT GROUP/CONSUMER FINANCE, ) No. 06-8098
INC., )
)
Defendants-Appellants, )
)
v. )
)
BEVERLY BURDEN, Chapter 13 Trustee, )
)
Plaintiff-Appellee. )
________________________________________ )
Appeal from the United States Bankruptcy Court
for the Eastern District of Kentucky, at Lexington.
No. 04-54023; Adv. No. 06-5060.
Argued: May 2, 2007
Decided and Filed: November 14, 2007
Before: AUG, LATTA, and WHIPPLE, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Douglas T. Logsdon, McBRAYER, McGINNIS, LESLIE & KIRKLAND, Lexington,
Kentucky, for Appellants. John Martin Simms, ATKINSON, SIMMS & KERMODE, Lexington,
Kentucky, for Appellee. ON BRIEF: Douglas T. Logsdon, McBRAYER, McGINNIS, LESLIE &
KIRKLAND, Lexington, Kentucky, for Appellants. John Martin Simms, ATKINSON, SIMMS &
KERMODE, Lexington, Kentucky, for Appellee.
____________________
OPINION
____________________
J. VINCENT AUG, JR., Chief Bankruptcy Appellate Panel Judge. The CIT Group/
Consumer Finance, Inc. (“CIT”) and Select Portfolio Servicing, Inc. (“Select Portfolio”)1 appeal the
bankruptcy court’s judgment entered July 13, 2006 (the “July 13th Order”), granting summary
judgment for Beverly Burden, the chapter 13 trustee (the “Trustee”). The bankruptcy court’s
decision is based on its determination that CIT’s mortgage did not provide constructive notice to
subsequent purchasers or creditors because the mortgagor’s signature was not properly
acknowledged under Kentucky law, and therefore, the mortgage is subject to avoidance by the
Trustee. The Creditors further appeal the bankruptcy court’s order entered November 16, 2006,
denying the Defendants’ Motion to Alter, Amend or Vacate Judgment (the “Motion to Alter or
Amend”).
I. ISSUES ON APPEAL
At issue is whether the bankruptcy court committed reversible error:
A. by granting summary judgment for the Trustee on her § 544 complaint based on the
bankruptcy court’s conclusion that CIT’s mortgage did not provide constructive notice under
applicable Kentucky law, or
B. by denying the Creditors’ Motion to Alter or Amend the summary judgment due to
the intervening amendment of Kentucky Revised Statute § 382.270.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel for the Sixth Circuit Court of Appeals (“BAP”) has
jurisdiction to decide this appeal. The United States District Court for the Eastern District of
Kentucky has authorized appeals to the BAP, and a final order of the bankruptcy court may be
appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order “ends
the litigation on the merits and leaves nothing for the court to do but execute the judgment.”
Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations
omitted). An order granting summary judgment for the defendant is a final order. Wicheff v.
Baumgart (In re Wicheff), 215 B.R. 839, 840 (B.A.P. 6th Cir. 1998). An order disposing of a motion
to alter or amend a prior judgment is likewise a final order for purposes of appeal. Gencorp, Inc. v.
Am. Int’l Underwriters, 178 F.3d 804, 832-33 (6th Cir. 1999).
1
CIT and Select Portfolio are referred to collectively as the “Creditors.”
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The bankruptcy court’s grant of summary judgment is reviewed de novo. Treinish v. Norwest
Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir. 2001). The bankruptcy
court’s interpretation and application of the Bankruptcy Code and pertinent state law are reviewed
de novo. Ruskin v. DaimlerChrysler Servs. N. Am., L.L.C. (In re Adkins), 425 F.3d 296, 298 (6th
Cir. 2005); Van Aken v. Van Aken (In re Van Aken), 320 B.R. 620, 623 (B.A.P. 6th Cir. 2005).
Denial of a motion to alter or amend a grant of summary judgment is also reviewed de novo although
denial of such a motion is otherwise reviewed for abuse of discretion. Cockrel v. Shelby Co. Sch.
Dist., 270 F.3d 1036, 1047 (6th Cir. 2001). “De novo means that the appellate court determines the
law independently of the trial court’s determination.” In re Periandri, 266 B.R. at 653. No
deference is given to the bankruptcy court’s conclusions of law. Mktg. & Creative Solutions, Inc.
v. Scripps Howard Broad. Co. (In re Mktg. & Creative Solutions, Inc.), 338 B.R. 300, 302 (B.A.P.
6th Cir. 2006).
III. FACTS
The facts are stipulated. On August 8, 2001, the Debtor, Gary Victor Trujillo, executed a
promissory note in the principal sum of $153,000.00 in favor of CIT. To secure repayment of the
note, he signed a mortgage with respect to certain real property located at 315 South Mill Street in
Lexington, Fayette County, Kentucky, in favor of CIT. The mortgage was accepted for recording
and was recorded in the Fayette County Clerk’s Office on August 29, 2001. Select Portfolio services
the mortgage. The mortgage contains the following:
IN WITNESS WHEREOF, the undersigned (has-have) signed this instrument on the
date and year first above written.
/s/Gary Victor Trujillo (Seal)
GARY VICTOR TRUJILLO
__________________(Seal)
STATE OF KENTUCKY
COUNTY OF /hw/ FAYETTE ss. __________________(Seal)
The foregoing instrument was acknowledged before me this /hw/ 8th day of
/hw/ August 2001
My commission expires /hw/ 8-4-03 /s/ [illegible signature]
(Notary Public)
Prepared by /s/ [illegible signature] /hw/ Fayette County, Kentucky.
(Signature)
[stamped] MAINOUS & GRANT
201 West Vine Street
Lexington, Kentucky 40507
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There are no allegations of fraud, forgery or other improper conduct, and it is undisputed that
the Debtor actually signed the mortgage and that his name appears in at least two places on the
mortgage instrument.
On December 7, 2004, the Debtor filed a petition for relief under chapter 13 of the
Bankruptcy Code. On February 22, 2006, the Trustee filed a complaint to avoid the CIT mortgage.
According to the Trustee, the certificate of acknowledgment in CIT’s mortgage instrument is
defective because the Debtor is not identified or named in the certificate. As such, under Kentucky
law, the mortgage does not operate to provide constructive notice to subsequent creditors or
purchasers even though it was recorded. CIT responded that the certificate of acknowledgment was
sufficient to provide constructive notice, essentially arguing that it substantially complies with the
statutory requirements.
The parties filed joint stipulations of fact on June 9, 2006. On that same date, the Trustee
filed a motion for summary judgment urging that, inasmuch as the mortgage was defectively
acknowledged, it should be avoided and preserved for the benefit of the estate under the holding of
Rogan v. Am.’s Wholesale Lender (In re Vance), 99 F. App’x 25, 2004 WL 771484 (6th Cir. 2004).
CIT countered that neither Kentucky case law nor statutory law requires that the name of the
mortgagor be included in the certificate of acknowledgment. CIT asserted that the acknowledgment
certificate substantially complies with the requirements of Kentucky law and that its instrument was
recorded, which is all that is required for it to give constructive notice to subsequent creditors or
purchasers. CIT further argued that Vance, an unpublished opinion, should be revisited because the
issue of the sufficiency of the certificate of acknowledgment was not appealed by the creditor in that
case. Therefore, according to CIT, the bankruptcy court’s conclusion that the omission of the name
only from a certificate of acknowledgment renders the certificate defective is inconsistent with
Kentucky statutes. Additionally, CIT urged that certain 2006 amendments to the Kentucky notice
statute, Kentucky Revised Statute § 382.270, which protect defectively acknowledged mortgages
recorded before July 2006, should be applied retroactively to protect this mortgage from avoidance
because the amendments are remedial and intended merely to clarify existing law.
The Trustee filed a reply to CIT’s response to the motion for summary judgment. According
to the Trustee, Vance is strong precedent because even though the issue of the defective
acknowledgment was not appealed, the Sixth Circuit specifically addressed it and concluded that the
bankruptcy and district courts were correct in finding that the acknowledgment failed to comport
with Kentucky law. The Trustee further countered that the amendments to Kentucky Revised Statute
§ 382.270 could not be applied retroactively because the changes were not effective at the time of
the litigation and because to do so would violate the Supremacy Clause of the United States
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Constitution by stripping the Trustee of her rights in and to the property that had vested at the
commencement of the bankruptcy case.
The bankruptcy court entered an order, without a memorandum opinion, granting summary
judgment in favor of the Trustee on July 13, 2006. The amendment to the Kentucky notice statute
discussed above became effective one day earlier on July 12, 2006. On July 21, 2006, the Creditors
filed the Motion to Alter or Amend the July 13th Order based on an intervening change in the law.
They argued that the protective amendment to § 382.270 should be applied retroactively to protect
their mortgage because the amendment simply clarified the notice provision, was therefore remedial,
and was expressly intended to be applied retroactively. The Creditors cited Meoli v. Citicorp Trust
Bank (In re Oswalt), 444 F.3d 524 (6th Cir. 2006), in support of their request for retroactive
application of the amendment. According to the Creditors, Oswalt is analogous to this case because
the Sixth Circuit applied retroactively a newly enacted statutory amendment intended to clarify
existing Michigan law regarding the perfection of security interests in mobile homes. The Oswalt
court determined that the amendment was applicable even though it was enacted after a mortgage
lien was recorded and after the mortgage debtors filed for bankruptcy protection.
The Trustee countered with much the same argument that she advanced in response to the
Creditors’ first request for application of the § 382.270 amendment, i.e., that the amendment could
not be applied retroactively to strip the Trustee of her rights in and to the property that had vested
at commencement of the bankruptcy case. In addition, the Trustee asserted that Oswalt is not
applicable to this case because the Kentucky amendment changes the law rather than merely
clarifying it as was the case in Oswalt.
On November 16, 2006, the bankruptcy court entered an order overruling the Creditors’
Motion to Alter or Amend, reasoning that the amendment to § 382.270 could not be applied
retroactively because to do so would violate federal law fixing a trustee’s rights as of the date of the
petition. The Creditors filed this appeal.
According to the Creditors, the bankruptcy court erred in granting summary judgment to the
Trustee and denying their Motion to Alter or Amend because the bankruptcy court incorrectly
applied the Kentucky Uniform Recognition of Acknowledgments Act, including §§ 423.130 through
423.160, and erroneously failed to apply the rule that substantial compliance with authentication
statutes is sufficient to render an instrument recordable. The Creditors further contend that the
bankruptcy court erred in failing to read the certificate of acknowledgment in conjunction with the
underlying instrument of which it is a part and in declining to apply the 2006 amendment to
§ 382.270 to this case.
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IV. DISCUSSION
A. CIT’s Mortgage Instrument Did Not Provide Constructive Notice To
the Trustee.
Upon the commencement of a bankruptcy case, the trustee succeeds to the rights of a debtor’s
creditors, judicial lien holders and bona fide purchasers of real property whether or not any such
entities exist at that time. 11 U.S.C. § 544(a); Simon v. Chase Manhattan Bank (In re Zaptocky), 250
F.3d 1020, 1024 (6th Cir. 2001). The trustee is empowered to avoid any transfer or transaction that
would be voidable by such an entity to recover assets for the benefit of the bankruptcy estate without
regard to whether the trustee has actual knowledge of the prior transaction. Id. at 1027. Who may
qualify as a bona fide purchaser of real property is determined under state law. Owens-Ames-
Kimball Co. v. Mich. Lithographing Co. (In re Mich. Lithographing Co.), 997 F.2d 1158, 1159 (6th
Cir. 1993). Therefore, the trustee’s power as a hypothetical bona fide purchaser of real property is
subject to constructive notice to the same extent as an actual purchaser under applicable state law.
Id.
In Kentucky, a bona fide purchaser of real property is put on constructive notice of a prior
interest in the property by the presence of a recorded deed or mortgage “acknowledged . . . according
to law.” Ky. Rev. Stat. § 382.270. When the Debtor filed his bankruptcy petition, the applicable
notice statute provided as follows:
No deed or deed of trust or mortgage conveying a legal or equitable title to real
property shall be valid against a purchaser for a valuable consideration, without
notice thereof, or against creditors, until such deed or mortgage is acknowledged or
proved according to law and lodged for record. As used in this section “creditors”
includes all creditors irrespective of whether or not they have acquired a lien by legal
or equitable proceedings or by voluntary conveyance.
Ky. Rev. Stat. § 382.270 (1962).
The mortgage here was “lodged for record.” The dispute is whether it was adequately
“acknowledged . . . according to law” to put a subsequent bona fide purchaser on constructive notice.
This is because, as noted in the Sixth Circuit’s Vance opinion, Kentucky cases have consistently held
that recorded but defectively acknowledged mortgages do not operate to provide constructive notice
of a mortgage. In re Vance, 99 F. App’x 25, 27, 2004 WL 771484 (6th Cir. 2004); see also State
Street Bank & Trust Co. v. Heck’s Inc., 963 S.W.2d 626 (Ky. 1998).
In State Street Bank & Trust Co., the Kentucky Supreme Court faced the issue of “whether
a valid, recorded second mortgage, acquired with actual notice of the existence of a prior equitable
mortgage, takes priority over the equitable mortgage.” State Street Bank & Trust Co., 963 S.W.2d
at 627. The court held that the second mortgage did not have priority because it was acquired with
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actual notice of the prior, improperly executed mortgage. The prior mortgage was improperly
executed because the signatures of the parties to be charged were not subscribed at the end of the
mortgage as required by Kentucky statute. The Kentucky court determined that the second mortgage
holder had actual notice of the prior mortgage because its own loan documents referred to the prior
interest. The second mortgage holder also had constructive notice of the improperly executed
mortgage because of a subordination agreement that referred to the prior mortgage and that was
prepared and recorded contemporaneously with the prior, improperly executed mortgage. The State
Street Bank court construed the “without notice” language of Kentucky Revised Statute § 382.270
to include actual, inquiry, and constructive notice. It concluded that, “although the recording of the
[prior, improperly executed] mortgage did not give constructive notice of its existence to a
subsequent purchaser or creditor, it retained priority over one whose interest was acquired with
actual or inquiry notice of its existence.” Id. at 630 (emphasis in original).
In Vance, the question was whether a defectively acknowledged but recorded mortgage could
provide actual or inquiry notice to a bankruptcy trustee in the position of a subsequent purchaser for
value. The certificate of acknowledgment in Vance failed to include the name of the county where
the acknowledgment was taken, the date of the acknowledgment and the names or identity of those
who signed the mortgage. On appeal, the district court agreed with the bankruptcy court that the
mortgage was not properly acknowledged pursuant to Kentucky Revised Statute § 423.130 but,
because it was recorded, the district court determined that the mortgage could give actual or inquiry
notice under Kentucky law and reversed the bankruptcy court’s decision. In re Vance, 99 F. App’x
at 26-27.
The trustee appealed. Even though the creditor did not file a cross appeal regarding the
defective certificate of acknowledgment, the court of appeals chose to address the issue. In re Vance,
99 F. App’x at 27. After observing that the certificate of acknowledgment failed to include the name
of the county where the acknowledgment was taken, the date of the acknowledgment, and the names
or identity of those who signed the mortgage, the court set out the language of Kentucky Revised
Statute § 423.130 which is titled, “Certificate of person taking acknowledgment” and provides:
The person taking an acknowledgment shall certify that:
(1) The person acknowledging appeared before him and acknowledged he executed
the instrument; and
(2) The person acknowledging was known to the person taking the acknowledgment
or that the person taking the acknowledgment had satisfactory evidence that the
person acknowledging was the person described in and who executed the instrument.
The court then opined, “[t]he notary failed to include this [§ 423.130] information in the
certification. Therefore the district court was correct in finding that the acknowledgment failed to
comport with Kentucky law.” In re Vance, 99 F. App’x at 27. The court turned to Kentucky
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Revised Statute § 382.270, and also agreed with the prior courts that the defectively acknowledged
mortgage would not operate to give constructive notice to subsequent purchasers or creditors. It
distinguished the trustee from other creditors and purchasers, such as those in the State Street Bank
& Co. case, noting that 11 U.S.C. § 544(a)(3) expressly “precludes the trustee from having actual
notice and/or knowledge” of events prior to the filing of the bankruptcy petition. Id. at 28. The court
concluded that a bankruptcy trustee can only be charged with constructive notice. Id. Accordingly,
the decision of the district court, charging the trustee with inquiry notice, was reversed.
Although the Vance decision was not published, it is instructive as to how the Sixth Circuit
would analyze and determine the issue before this Panel. Additionally, notwithstanding the
Creditors’ contrary argument, the circumstances in Vance are substantially similar to those in this
appeal. Furthermore, the Sixth Circuit similarly held in a published opinion addressing Tennessee
law that a bankruptcy trustee could avoid a mortgage because the notary acknowledgment failed to
provide the names of the individuals who had signed the mortgage. See Gregory v. Ocwen Fed.
Bank (In re Biggs), 377 F.3d 515 (6th Cir. 2004). We observe that Tennessee law on this issue is
not distinguishable from Kentucky law and find the Sixth Circuit’s discussion in Biggs regarding the
importance of naming the signor in the acknowledgment to be particularly helpful. The Sixth Circuit
stated:
[T]he authentication of a deed of trust is not a purposeless formality. The procedure
serves to verify the identity of the individual signing the instrument and to establish
a fraud-free system for recording the ownership of real property–a necessary
prerequisite to any free market. In this instance, the integrity of the acknowledgment
is placed in doubt because it omits the most important information on the
acknowledgment form: who, if anyone, is doing the acknowledging? Failing to
name the individuals who signed the deed of trust bears directly on the ability of a
subsequent purchaser of real property to verify that the instrument was signed by the
true property owners. Without it, a purchaser is left to wonder who appeared before
the notary, if indeed anyone appeared before the notary, to acknowledge their
signatures. In this sense, the missing names “lend [ ] uncertainty about the legal
effectiveness of the instrument and for that reason alone the acknowledgment fails
substantially to comply with Tennessee law.”
Id. at 519 (citations omitted).
Since the Biggs and Vance opinions were issued, Kentucky Revised Statute § 423.130, which
is part of Kentucky’s Uniform Recognition of Acknowledgments Act, has been interpreted in
numerous decisions of the bankruptcy court for the Eastern District of Kentucky to require that the
notary name or identify the person acknowledging the instrument in the certificate of
acknowledgment. See, e.g., Dunlap v. Commonwealth Cmty. Bank (In re Phelps), 341 B.R. 848,
852-53 (Bankr. W.D. Ky. 2006); Gardner v. Chase Home Fin. (In re Patton), 2006 WL 3877755,
*2 (Bankr. E.D. Ky. 2006); Miller v. Raisor (In re Raisor), 2006 WL 3885132, *2 (Bankr. E.D. Ky.
2006); Schlarman v. Suntrust Mortgage, Inc. (In re Helvey), 2006 WL 3877754, *2 (Bankr. E.D. Ky.
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2006); Baker v. CIT Group/Consumer Fin., Inc. (In re Hastings), 353 B.R. 513, 516-17 (Bankr. E.D.
Ky. 2006) (information required by Kentucky Revised Statute § 423.130 includes identifying the
debtors). Nevertheless, the Creditors contend that the identification of the person acknowledging
the instrument in the notary’s certificate of acknowledgment is not necessary for the acknowledged
mortgage to provide constructive notice. They argue that Kentucky Revised Statute § 423.130 itself
does not expressly require this information and the contrary interpretation fails to give effect to
legislative intent. Rather, according to the Creditors, the Kentucky acknowledgment and recording
statutes require only substantial compliance with their terms and are to be read together. They argue
that the Kentucky statutes, when read together, give the notary an option not to name the person
acknowledging the instrument in the event the person named in the instrument and acknowledging
the instrument are the same. In support of this argument, they cite the following Kentucky statutes:
423.140 Recognition of certificate of acknowledgment
The form of a certificate of acknowledgment used by a person whose authority [to
certify acknowledgments] is recognized under KRS 423.110 shall be accepted in this
state if:
(1) The certificate is in a form prescribed by the laws or regulations of this state;
(2) The certificate is in a form prescribed by the laws or regulations applicable
in the place in which the acknowledgment is taken; or
(3) The certificate contains the words "acknowledged before me," or their
substantial equivalent.
423.150 Certificate of acknowledgment
The words "acknowledged before me" mean:
(1) That the person acknowledging appeared before the person taking the
acknowledgment;
(2) That he acknowledged he executed the instrument;
(3) That, in the case of:
(a) A natural person, he executed the instrument for the purposes therein
stated; . . . and
(4) That the person taking the acknowledgment either knew or had satisfactory
evidence that the person acknowledging was the person named in the instrument or
certificate.
According to the Creditors, the significance of these statutes is that Kentucky has no
prescribed form for a certificate of acknowledgment and such a certificate must be accepted in
Kentucky if it contains the language, “acknowledged before me,” which this certificate has. Further,
they argue that if the certificate contains that language, § 423.150 provides a “safe harbor” that
excuses the notary from naming the person acknowledging the instrument when that person is named
in the instrument. Essentially, the Creditors argue that the phrase, “acknowledged before me,”
satisfies as a matter of law the § 423.130 requirement that the notary certify that the person
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acknowledging the instrument appeared before the notary, acknowledged that he executed the
document, and was known to the notary to be the person described in and who executed the
instrument. They argue there is no need for the notary to identify the person acknowledging if he
is one and the same as the person executing the instrument.
The Creditors further contend that this interpretation and application is supported by
Kentucky case law including Hackworth v. Flinchum, 475 S.W.2d 140 (Ky. 1971), and Bagby v.
Koch, 98 S.W.3d 521 (Ky. App. 2002). These cases concern the validity of attempts by heirs to
renounce their respective spouse’s wills. The issue in both cases was whether the parties had
complied with the Kentucky statute governing the procedure for renunciation of a former spouse’s
will. That statute, Kentucky Revised Statute § 392.080, directs in pertinent part:
Such relinquishment shall be made within six (6) months after the probate, and
acknowledged before and left for record with the county clerk or his authorized
deputy in the county where probate was made, or acknowledged before a subscribing
witness and proved before and left with the county clerk or his authorized deputy.
In Hackworth, Mrs. Hackworth was the second wife of the decedent who, in addition to Mrs.
Hackworth, was survived by nine children from his previous marriage. Under his will she was to
receive a one-tenth share of his estate. She timely filed a document attempting to renounce the will
in order to receive her statutory share. The issue was whether Mrs. Hackworth’s renunciation was
properly acknowledged before the county clerk. Appearing just below Mrs. Hackworth’s signature,
the clerk’s certificate of acknowledgment stated, “Subscribed and sworn to before me by Anna B.
Hackworth, this 17 day of October, 1967.” Hackworth, 475 S.W.2d at 141. There was, however,
no “certificate that Mrs. Hackworth appeared before the clerk and personally acknowledged the
instrument to be her voluntary act and deed for all purposes contained therein, a form of
acknowledgment customarily used with deeds of conveyance and other instruments requiring formal
acknowledgment.” Id. at 142. Thus, the trial court determined that the acknowledgment was
insufficient to give effect to the renunciation. Observing that the word acknowledgment was not
defined nor required to be in any particular form by the statute governing renunciation, the appeals2
court held:
Where an acknowledgment is essential to the validity of a document, but the word
acknowledgment is not defined and no particular form of acknowledgment is
required by the statute, it would seem to this court that a subscription of the signature
to the document in the presence of the proper official under oath is a sufficient proof
of due execution of the document and would constitute substantial compliance with
the statute. We think this is especially true where the statute has relaxed the
standards of formality to the extent that a signature to the instrument of renunciation
is not expressly required.
2
Before 1976, the Kentucky Court of Appeals was the highest state court. 19 Sheryl G.
Snyder, et al, Kentucky Practice Series, Appellate Practice § 1:1 (2006).
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Hackworth, 475 S.W.2d at 143. However, when asked to distinguish an earlier case involving a
deed, the court went on to say that,
It may well be that the acknowledgment of deeds of conveyance should require
greater formality because of the historical development of the law pertaining to the
rights of married women and the necessity for them to personally acknowledge the
execution of an instrument of conveyance. But we see no need to impose super-
technical requirements of form of acknowledgment in other cases where the
legislature has not done so.
Id.
In Bagby, the decedent’s husband had attempted to renounce his wife’s will but had filed the
renunciation document with the probate division of circuit court rather than with the county clerk
as required by the renunciation statute set out above. He asserted that he had substantially complied
with the statute as required by Hackworth. The appeals court acknowledged the appropriateness of
the application of the substantial compliance standard in the Hackworth case. It explained,
“[b]ecause Hackworth’s purported renunciation was signed, witnessed, notarized and recorded by
the county clerk, she substantially complied with the statute and thus effectively renounced her late
husband’s will despite not having executed the type of formal acknowledgment required of, for
example, a deed of conveyance.” Bagby, 98 S.W.3d at 523.
To the extent that these cases are cited for the proposition that substantial compliance with
the acknowledgment statutes renders a certificate of acknowledgment sufficient to provide
constructive notice to subsequent interest holders, there is no objection. For example, in the Phelps
case cited above, Judge Stosberg echoed that very rule and made the determination that a certificate
of acknowledgment containing the words, “sworn and subscribed before me,” substantially complies
with the statutory requirement that the certificate contain the words, “acknowledged before me or
their substantial equivalent.” Phelps, 341 B.R. at 853. It is important to remember, however, that
Hackworth and Bagby did not involve the acknowledgment of deeds or mortgages. In fact, the
courts in both of those cases stated that the renunciation statute at issue did not require the type of
formal acknowledgment required of deeds of conveyance. Hackworth, 475 S.W.2d at 143; Bagby,
98 S.W.3d at 523. It should also be noted that Mrs. Hackworth’s acknowledgment was certified in
1967, prior to the 1970 enactment of the Uniform Recognition of Acknowledgments Act in
Kentucky. See Ky. Rev. Stat. § 423.170. The Uniform Recognition of Acknowledgments Act
contains Kentucky statutes designated 423.110 through 423.170. As such, while the Creditors are
correct that the acknowledgment statutes should be read together, such a reading must include
§ 423.130.
Section 423.130 referenced by Vance and its progeny, is authority for the requirement that
a certificate of acknowledgment must name or identify the person acknowledging the instrument in
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order to provide constructive notice. Under the Creditors’ argument, the pertinent statutes, except
for § 423.130, would be read together and § 423.150 would supercede § 423.130. Section 423.150
was enacted in 1970 at the same time as § 423.130 and has never been interpreted to negate the
requirements of § 423.130. Such an interpretation of § 423.150 would make § 423.130 superfluous
and undermine the Vance court’s determination that § 423.130 was not satisfied when the names or
identities of those acknowledging the instrument were omitted from the certificate of
acknowledgment. See In re Phelps, 341 B.R. 848, 852-53; In re Hastings, 353 B.R. 513, 516-17.
In this case, the name or identity of the person acknowledging the mortgage was omitted from
the notary’s certificate of acknowledgment. Under the Kentucky acknowledgment and notice
statutes as interpreted in the above precedential cases, the certificate of acknowledgment is defective.
Accordingly, even though the mortgage was recorded, it did not provide constructive notice to a
subsequent creditor, bona fide purchaser or bankruptcy trustee. Absent constructive notice, the
Trustee may avoid the mortgage for the benefit of the Debtor’s bankruptcy estate. The bankruptcy
court’s summary judgment in favor of the Trustee on the basis that the acknowledgment was
defective is affirmed.
B. The 2006 Amendments to Kentucky Revised Statute § 382.270
Cannot Be Applied Retroactively.
Turning next to the issue of whether the 2006 amendments to Kentucky Revised Statute
§ 328.270 may be applied to protect this mortgage from avoidance, the Creditors argue that the
amendments are remedial, merely clarifying existing law, and so may be applied retroactively. The
Trustee contends that to do so would strip her of previously vested property rights in violation of the
Supremacy Clause of the United States Constitution, the Bankruptcy Code and Kentucky law.
The Supremacy Clause of the United States Constitution precludes retroactive application
of § 382.270. The Debtor filed his bankruptcy petition before the effective date of the amended
statute. Under federal law, a trustee’s rights as a bona fide purchaser are fixed as of commencement
of the bankruptcy case. See 11 U.S.C. § 544(a)(3). Amended § 382.270 may not be applied
retroactively in this case as such application would be in conflict with the federal bankruptcy statute.
In re Hastings, 353 B.R. at 520; cf. United States v. Craft, 535 U.S. 274, 288-89, 122 S. Ct. 1414,
1426 (2002) (applying the Supremacy Clause and concluding that debtor’s interest in entireties
property constituted “property” or “rights to property” under the federal tax lien statute,
notwithstanding the fact that such property was not subject to levy under state law).
Further, under Kentucky law, the amended recording statute cannot be applied retroactively
in the situation before this Panel. The amended statute provides:
No deed or deed of trust or mortgage conveying a legal or equitable title to real
property shall be lodged for record and, thus, valid against a purchaser for a valuable
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consideration, without notice thereof, or against creditors, until such deed or
mortgage is acknowledged or proved according to law and lodged for record.
However, if a deed or deed of trust or mortgage conveying a legal or equitable title
to real property is not so acknowledged or proved according to law, but is or has
been, prior to July 12, 2006, otherwise lodged for record, such deed or deed of trust
or mortgage conveying a legal or equitable title to real property or creating a
mortgage lien on real property shall be deemed to be validly lodged for record for
purposes of KRS Chapter 382, and all interested parties shall be on constructive
notice of the contents thereof. As used in this section "creditors" includes all
creditors irrespective of whether or not they have acquired a lien by legal or equitable
proceedings or by voluntary conveyance.
Ky. Rev. Stat. § 382.270 (eff. 7-12-06) (Strikeout format is used to show deletions; italics are used
to show additions).
Kentucky Revised Statute § 466.080(3) provides that “No statute shall be construed to be
retroactive, unless expressly so declared.” The language of amended § 382.270 does indicate that
it is intended to apply retroactively. To apply the statute retroactively in this case, however, would
deprive the Trustee of rights that have already vested. This is not permitted by Kentucky case law:
[T]he judicial determination of whether a statutory amendment should be applied
retroactively involves a two-step inquiry: (1) Is the amendment limited to the
furtherance, facilitation, improvement, etc., of an existing remedy; and (2) If so, does
it impair a vested right. If the statute in question only serves to facilitate the remedy,
and if no vested right is impaired, the amendment in question is then properly applied
to preexisting unresolved claims if such application is consistent with the evident
purpose of the statutory scheme.
Kentucky Ins. Guar. Ass’n v. Jeffers, 13 S.W.3d 606, 610 (Ky. 2000) (applying amended statute
increasing insurance coverage limits only to cases unresolved at the time the statute was amended
and thus, where the rights of the parties had not vested) (emphasis added); see also Cassidy v.
Adams, 872 F.2d 729 (6th Cir. 1989) (finding that retroactive application of new five-year statute
of limitations for agency to recoup overpaid unemployment benefits did not deprive plaintiff of
vested rights because the prior three-year statute of limitations had not run out when the longer
limitations period was adopted); Baumgart v. Potts (In re Potts), 353 B.R. 874 (Bankr. N.D. Ohio
2006) (statute could not be applied retroactively to divest trustee of rights in which he was already
vested). In Eckles v. Wood, 136 S.W. 907 (Ky. 1911), the Kentucky Court of Appeals retroactively
applied an amendment to a statute regarding the notary requirements for a married woman to transfer
real estate by deed. The court emphasized the importance of vested rights, and applied the amended
statute to prevent a party from being divested of rights. Upon commencement of a bankruptcy case,
the trustee is vested with the rights and powers of a bona fide purchaser of real property without
notice of any prior claim thereto. No intervening change in law may be applied retroactively to strip
the trustee of previously vested rights under either federal or state law. As previously noted, the
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Trustee’s rights at issue in this appeal vested at the time the petition was filed and the bankruptcy
estate was established.
Although the Creditors cite Meoli v. Citicorp Trust Bank (In re Oswalt), 444 F.3d 524 (6th
Cir. 2006), in support of their argument that § 382.270 should be applied retroactively, that case is
distinguishable. In Oswalt, the Sixth Circuit addressed the issue of retroactivity of a Michigan
statute dealing with the perfection of security interests in mobile homes. The court recognized that
its decision in Boyd v. Chase Manhattan Mortgage Corp. (In re Kroskie), 315 F.3d 644 (6th Cir.
2003), had created chaos in the Michigan mobile home financing market. Prior to Kroskie, the
Michigan Mobile Home Commission Act (“MHCA”) provided a method for perfecting security
interests in mobile homes by noting liens on titles; however, creditors also perfected such security
interests by recording traditional mortgages. In Kroskie, the court held that the MHCA provided the
exclusive means of perfecting mobile home security interests under Michigan law. Shortly
thereafter, in order to “undo the effect of the [Kroskie] decision,” the Michigan legislature amended
the MHCA, specifying that creditors could perfect security interests in mobile homes by recording
traditional mortgage liens. Oswalt, 444 F.3d at 527. The Michigan legislature also added language
that the amendment applies retroactively. Because “the amendment’s language and the
circumstances under which it was enacted indicate that the Michigan legislature intended it to clarify
the perfection procedures,” the Sixth Circuit concluded in Oswalt that the amendment must be
applied retroactively. Id. at 528. Unlike the situation in Oswalt, there is no indication that the
Kentucky legislature intended to clarify previous law. Rather, the language of the amendment clearly
provides for a change in the law regarding when a party is put on constructive notice of a deed or
mortgage.
For the foregoing reasons, the bankruptcy court’s conclusion that the 2006 amendments to
Kentucky Revised Statute § 382.270 may not be applied retroactively to protect the mortgage in this
case from avoidance is affirmed.
V. CONCLUSION
The decision of the bankruptcy court is AFFIRMED in its entirety.
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