Karl Johnson, Briggs and Morgan, P.A.
Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
Contributing Editors: Kesha Tanabe, Tanabe Law & Kristina Keppeler, University of St. Thomas Law
Kunkel_v_CUSB_Bank_186031P_Eighth_Circuit.pdf
In Kunkel v. CUSB, No. 18-6026 (Bankr. D. Minn. June 28, 2019), the BAP affirmed the bankruptcy court’s determination that a Bank’s mortgage on real estate should be avoided pursuant to 11 USC § 544(a)(3) and preserved for the estate’s benefit under 11 USC § 551.
Prior to the Petition Date, the Debtor purchased real estate with his father. Note, the real estate was titled to the Debtor in his personal capacity only: neither his spouse nor his Trust were ever in title. The Debtor later divorced. The real estate was deemed marital property, and at the conclusion of the divorce proceeding, a Summary Real Estate Disposition Judgment was entered transferring the wife’s marital interest in the real estate to the Debtor in his personal capacity. The wife then executed a quit claim deed in favor of the Debtor’s Trust. The Bank subsequently recorded a mortgage against the real estate, but it appears to have proceeded with the misimpression that the Debtor’s Trust was the owner and mortgagor of the real estate (rather than the Debtor, in his personal capacity).
Four years later, the Debtor filed a voluntary chapter 11 bankruptcy petition. A Chapter 11 Trustee was appointed and filed an adversary proceeding to avoid the Bank’s mortgage. The Trustee filed a motion for summary judgment, arguing that the Bank held a mortgage from the Debtor’s Trust, but title to the real estate was held by the Debtor. The bankruptcy court granted summary judgment in favor of the Trustee. The Bank appealed
The BAP affirmed the bankruptcy court. Recall, § 544(a)(3) allows the Trustee to avoid a transfer by the Debtor that is voidable by a bona fide purchaser of real property under applicable state law. Citing In re Crowley, the BAP reasoned that under Minnesota law, only the record title owner of property can pledge real estate as collateral for a mortgage. 131 Minn. 99, 101, 154 N.W. 743, 744 (1915). Here, the State Court had confirmed the Debtor had title to the real property in his personal capacity. The Wife’s subsequent quit claim deed to his Trust was superfluous and had no impact on his ownership interest in the real estate. Thus, the Bank’s mortgage was fundamentally defective because the Debtor’s Trust never had title to the real estate that it purportedly pledged to the Bank. The Bank’s mortgage was thus avoidable by a bona fide purchaser under state law and by the Trustee under § 544(a)(3)).