Court: United States Bankruptcy Court, E.D. Missouri; October 15, 2014; Us Bankruptcy; United States Bankruptcy Court
Defendant LOM Property Corporation's Notice of Removal of Civil Action and Motion for Summary Judgment, along with supporting and opposing memoranda, were reviewed by the court, with oral arguments held on June 3, 2014. The court considers the overall record and presents key findings: Debtor Iva M. Allen filed for Chapter 18 bankruptcy on June 18, 2004, owning real property at 6155 Westminster, St. Louis, Missouri. On August 23, 1996, Debtor executed a $150,000 Promissory Note to Boatmen’s National Bank, secured by a Deed of Trust against the Westminster Property and another property at 3903 Goodfellow Street. Both deeds were recorded on September 24, 1996. Following a series of ownership changes, Bank of America acquired the Note and Deeds after purchasing Boatmen’s National Bank. In 2001, Bank of America released the Deed of Trust on the Goodfellow Property. In 2002, the Note and Deed were assigned to WAMCO XXX Ltd, which did not record the assignment. First City Servicing Corporation, as WAMCO's servicing agent and the predecessor to LOM, filed a secured claim in the bankruptcy case for $178,947.39, asserting the claim was secured by the Westminster Property valued at $215,000. Claim 4-1 included the Boatmen’s Deed of Trust, the Note, and the unrecorded assignment. First City later sought relief from the automatic stay, which was granted on October 19, 2004, through a stipulation with the Debtor.
Debtor and First City entered into a Relief from Stay Stipulation acknowledging First City’s lien on the Property, which was partially unsecured. As part of this agreement, Debtor granted First City a Deed of Trust for $40,000 to secure the unsecured portion of the 1996 Note. In a separate case, Creditor Select Portfolio Servicing, Inc. filed a secured claim of $88,792.72 against the Property, while Debtor had not made payments to First City for over a year. Debtor requested a series of Deeds of Release from Bank of America following the assignment of the Boatmen’s Deed of Trust.
The first Deed of Release, executed on December 23, 2004, was unrecorded. The second, on January 14, 2005, contained conflicting details regarding the Deed of Trust it aimed to release and was recorded on January 24, 2005. It incorrectly referenced a different Deed of Trust than intended. The third Deed of Release, executed on March 24, 2005, was recorded on April 5, 2005, and like the previous ones, was executed without the knowledge or consent of First City or WAMCO.
On February 16, 2005, Debtor filed a Motion For Permission to Incur Debt, claiming she could refinance the Property’s debt to pay all valid liens and unsecured claims. This motion was granted the next day. Subsequently, on March 21, 2005, Debtor executed a $244,000 Promissory Note to Option One Mortgage Corporation, secured by a Deed of Trust filed on March 30, 2005. The closing agent was given the unrecorded 2004 Deed of Release and the defective January 2005 Deed of Release at closing. Debtor initially failed to pay WAMCO with the funds received from Option One but used them to satisfy Select Portfolio Servicing, Inc.'s secured lien.
On May 3, 2005, WAMCO initiated Adversary Proceeding 05-4109, seeking to void Deeds of Release from Bank of America, restore its lien on the Property, and subordinate any subsequent liens by the Debtor. An affidavit from Bank of America on August 8, 2005, confirmed that the 1996 Note and Boatmen’s Deed of Trust had been assigned to WAMCO on June 5, 2002, indicating the 2004 and early 2005 Deeds of Release were executed in error. Subsequently, on August 12, 2005, WAMCO and the Debtor reached a settlement, stipulating that the Debtor would pay WAMCO $50,000, that the Deeds of Release would be rendered null, and that WAMCO would hold a first priority lien against the Goodfellow Property, reinstating the Boatmen’s Deed of Trust as the First Priority Deed of Trust. This stipulation was recorded on August 26, 2005.
WAMCO received the settlement payment, and the Debtor was discharged from the 2004 Case on September 6, 2005, which closed on September 29, 2005. On September 13, 2005, WAMCO recorded the assignment of the Boatmen’s Deed of Trust. On March 30, 2006, the Debtor executed a new Note and Deed of Trust for $274,500 to Option One, which was recorded on April 6, 2006, and used to satisfy the previous 2005 Note. Option One's title agent was aware of the 2005 Adversary Stipulation and the assignment of the Deed of Trust. WAMCO assigned the Boatmen’s Deed of Trust to LOM on November 21, 2005, with the recordation occurring on January 17, 2007. Subsequently, on April 3, 2009, Option One assigned the 2006 Deed of Trust to Deutsche Bank, recorded on September 26, 2012.
The Missouri Department of Revenue recorded a Certificate of Tax Lien against the Property on July 27, 2009, and the Missouri Division of Employment Security may claim an interest due to a Transcript of Judgment from February 6, 2012. The Debtor filed for Chapter 13 bankruptcy on February 1, 2010, and an amended schedule indicated that Deutsche's servicer held a first priority lien on the Property, with LOM also secured by a first priority lien on the Goodfellow Property.
On March 10, 2011, Deutsche Bank was granted relief from the automatic stay due to the Debtor's failure to comply with a stipulation allowing her to address post-petition delinquencies over six months. In the 2010 case, LOM did not seek relief from the automatic stay. The 2010 case was dismissed on June 7, 2012, for nonpayment, and officially closed on July 12, 2012. On December 23, 2013, the court reopened the 2010 case to resolve a lien priority dispute between LOM and Deutsche. Deutsche aims to quiet title and prevent LOM from foreclosing on the property, while LOM seeks summary judgment asserting it holds the first priority lien. LOM contends that Option One had constructive notice of the Debtor’s 2004 case and relevant documents indicating existing liens before executing the 2005 Note and Deed of Trust. Conversely, Deutsche asserts that the 2006 Option One Deed of Trust replaced the 2005 version, granting them first priority under the replacement mortgage doctrine. Deutsche also claims there are material factual disputes that should preclude summary judgment, including potential fraud by the Debtor regarding the 2004 and 2005 Deeds of Release. The court has jurisdiction under 28 U.S.C. §§ 151, 157, and 1334, and this proceeding is classified as core under 28 U.S.C. § 157(b)(2)(E). The court will decide whether Deutsche or LOM holds the first priority lien under Missouri law, applying the summary judgment standards where the movant must demonstrate no genuine issue of material fact exists, and the nonmovant must provide specific facts to show issues remain for trial.
Bank of America, N.A. v. Armstrong establishes key principles regarding the recording of real estate instruments under Missouri law. According to Missouri Statute Section 442.380, all written instruments affecting real estate must be recorded in the county where the property is located. Section 442.390 states that such recorded instruments provide notice to all parties, and subsequent purchasers or mortgagees are deemed to have knowledge of the recorded contents. Additionally, Section 443.035.2 protects individuals acquiring interests in real property for value and without notice of unrecorded assignments, allowing them to do so free from liens of security instruments if they have relied on a release executed by the last recorded owner.
The Replacement Mortgage Doctrine outlines the priority of a new mortgage replacing a released senior mortgage, maintaining the same priority unless a change materially prejudices junior interest holders or if a protected party acquires an interest when the senior mortgage is not recorded. Modified mortgages retain priority against junior interests unless materially prejudicial changes occur outside agreed modifications. A reservation of rights to modify allows the mortgage to retain priority even if prejudicial, unless a notice to terminate this right is issued by the mortgagor, at which point the mortgagee must acknowledge receipt.
Missouri adheres to the Restatement 3d on Property: Mortgages for analyzing replacement mortgage priorities, as affirmed in relevant case law. The state follows the "first to record" principle, ensuring that mortgagees are secured only when the deed of trust is properly recorded.
A deed of trust securing a note remains valid only between the involved parties until it is recorded. In Missouri, buyers have constructive notice of all prior recorded deeds in the chain of title; unrecorded instruments do not provide notice. Constructive notice can arise from actual or constructive knowledge that prompts a reasonable inquiry regarding the title. If a discrepancy suggests a deed of release was mistakenly executed, the buyer is deemed to have constructive notice of that mistake. Reformation of a flawed instrument is inappropriate if it adversely affects a bona fide purchaser. A recorded judgment serves as notice of its contents and any inferred facts. Two parties cannot alter a third party's lien without consent, and courts of equity cannot create rights that do not exist. Equity is not available to those who could have avoided harm and aids only the vigilant.
The 2005 Option One Deed of Trust’s recording is crucial, as the 1996 Note was secured by both the Boatmen’s Deed of Trust and a separate Goodfellow Property Deed of Trust. Bank of America, which acquired an interest in the Boatmen’s Deed of Trust, executed a Deed of Release for the Goodfellow Property, leaving it solely encumbered by the Boatmen’s Deed of Trust. Although Bank of America assigned this deed to WAMCO, the assignment was not recorded, and WAMCO was aware of this omission. Following the commencement of the 2004 Case by the Debtor, Bank of America executed a 2004 Deed of Release, which was unrecorded, and subsequently recorded a January 2005 Deed of Release that contained conflicting information regarding the property's legal description.
Debtor filed a Refinance Motion indicating an opportunity to refinance existing liens on the Property and pay all unsecured claims from the 2004 Case through excess funds received. Debtor refinanced with Option One for $244,000, executing the 2005 Note and 2005 Option One Deed of Trust. Option One's closing agent, Old Republic, was aware of the 2004 Case and issues surrounding the unrecorded 2004 Deed of Release and the defective January 2005 Deed of Release. Funds from the refinance were used to satisfy a lien held by Creditor Select Portfolio Servicing, Inc. for approximately $88,792.72, but not to pay WAMCO initially.
Shortly after the 2005 Option One Deed of Trust was delivered, Bank of America executed and recorded the April 2005 Deed of Release. Following WAMCO's initiation of Adversary Proceeding 05-4109 to reinstate its lien, WAMCO and Debtor entered into a 2005 Adversary Stipulation without Option One's knowledge, agreeing that $50,000 from Option One would be paid to WAMCO, granting WAMCO a First Priority Deed of Trust on the Property. WAMCO subsequently recorded this stipulation and the assignment of the Boatmen’s Deed of Trust.
Option One later refinanced the 2005 Note, executing a 2006 Note for $274,500, with knowledge of the 2005 Adversary Stipulation. Although WAMCO was aware it had not recorded the Boatmen’s Deed of Trust assignment, Missouri law does not require such assignments to be recorded. The priority dispute could have potentially been avoided if WAMCO had been the last recorded party with an interest in the Property during the execution of the 2005 Note.
WAMCO, in its Adversary Proceeding, could have included Option One to make any resolution binding on all parties, but chose only to include Debtor, limiting the 2005 Adversary Stipulation’s binding effect to Debtor and WAMCO alone. Option One had a duty to investigate the liens on the Property, and all parties were aware that Debtor required court approval for the loan. The presence of the unrecorded 2004 Deed of Release and the conflicting January 2005 Deed of Release should have prompted further inquiry from Option One before finalizing the 2005 Note.
Option One's execution of the 2005 Note was flawed due to its failure to conduct proper due diligence, as evidenced by its lack of inquiry into the status of the Boatmen’s Deed of Trust and WAMCO's asserted interest in the Property. The court determined that Option One, having constructive notice of LOM as WAMCO's successor, relied on a defective release executed by Bank of America, the recorded owner at that time. Consequently, Missouri Statute Section 443.035.2 did not favor Deutsche Bank, primarily because Option One had actual and constructive knowledge of WAMCO’s interest but failed to investigate further before closing the 2005 Note. The court noted that the defective January 2005 Deed of Release and the quick succession of the April 2005 Deed of Release should have prompted Option One to inquire further. Although the 2005 Adversary Stipulation was not binding on Option One, the recording of the stipulation imposed a duty to inquire about WAMCO's interest. As a result, the Replacement Mortgage Doctrine was deemed inapplicable, and LOM was not responsible for Option One's oversight. The court concluded there were no genuine issues of material fact, granting LOM’s Motion for Summary Judgment, quieting title in favor of LOM Property Corp., and allowing LOM to proceed with foreclosure on the Property. The ruling is final and constitutes the judgment of the Bankruptcy Court.
Debtor previously filed a Chapter 13 case (Case Number 03-51650) on September 2, 2003, just before WAMCO XXX Ltd’s foreclosure sale. This case was dismissed on March 19, 2004, due to the Chapter 13 Trustee's motion under Section 1307(c). A new foreclosure sale was scheduled for May 28, 2004, but was postponed to June 18, 2004, which is also the date the Debtor initiated the 2004 Case. In the 2004 Case, the Debtor objected to Claim 1-1 from Creditor Select Portfolio Servicing, Inc., asserting it was fully paid through refinancing with Option One. The Creditor acknowledged this payment in their response. Additionally, there is a dispute between LOM and Deutsche regarding WAMCO's intended lien position after the refinance, linked to prior settlement negotiations. However, under Rule 408 of the Federal Rules of Evidence, these negotiations are inadmissible, and the 2005 Adversary Stipulation serves as the definitive evidence of the parties’ intentions.
