In re Perosio

364 B.R. 868

In re Marc E. PEROSIO and Debra J. Perosio, Debtors Marc E. Perosio and Debra J. Perosio, Appellants, v. NBT Bank National Association and United States of America, Appellees.

Bankruptcy No. 03-67641.

Civ.No. 6:05-CV-895 (LEK).

United States District Court, N.D. New York.

November 21, 2006.

David H. Ealy, Trevett, Cristo Law Firm, Rochester, NY, for Appellants.

Jeffrey W. Baker, Victor, NY, John T. Sullivan, Jr., Phillips, Lytle Law Firm — Rochester Office, Rochester, NY, for Appellees.

MEMORANDUM-DECISION AND ORDER¹

KAHN, District Judge.

I. INTRODUCTION

Marc E. Perosio and Debra J. Perosio ("Debtors" or "Appellants") appeal from a Memorandum-Decision, Findings of Fact, Conclusion of Law and Order ("MDO") of the United States Bankruptcy Court for the Northern District of New York (Gerling, Chief B.J.) entered March 2, 2005, granting a motion to dismiss filed by the United States of America, Department of Agriculture, Farm Services Agency ("FSA" or "Appellee"); denying motions for summary judgment against FSA and NBT National Bank Association ("NBT" or "Appellee") filed by Appellants; denying without prejudice a motion for reformation of mortgages filed by FSA; and modifying an automatic stay to allow Appellees to seek reformation of their mortgages in State court. Notice of Appeal (Dkt. No 1, Attach. 53) at 1.

Appellants assert that the Bankruptcy Court committed error in (1) its interpretation of 11 U.S.C. § 547 with regard to NBT's lis pendens as a preferential transfer, (2) its interpretation of 11 U.S.C. § 544(a)(3) with regard to the voidability of the mortgages held by FSA and NBT, and (3) its decision as a matter of law that a bona fide purchaser would have constructive notice of recorded documents within Appellants' chain of title. Appellants' Br. (Dkt. No. 6) at 26-27. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a). See In re Litas Int'l, Inc., 316 F.3d 113, 116 (2d Cir.2003); FED. R. BANKR.P. 8001(a). For the following reasons, the March 2, 2005 MDO of the Bankruptcy Court is affirmed.

II. FACTS

As neither party disputes any material fact on appeal, the Court notes the following chronology of events as set forth in substantial part by the Bankruptcy Court. MDO (Dkt. No. 1, Attach.49) at 4-7.

Irving T. Brown and Elizabeth A. Brown conveyed three parcels (Parcels I, II, and III) of land to Appellants by deed dated May 13, 1980. The Parcels were located in New York's Cayuga and Tompkins Counties. Included in the deed was a description not only of Parcels I, II, and III, but also of four parcels excepted from Parcels I and II ("Exceptions").

On or about February 2, 1999, Appellants executed a note in the amount of $292,000 and mortgages in the amounts of $50,000 and $240,000 in favor of Central National Bank ("CNB"), predecessor in interest to NBT. It was intended by the parties that the mortgages cover Appellants' interests in Parcels I, II, and III. However, the mortgages only contained a description of the Exceptions to Parcels I and II, as well as a description of Parcel III. They did not contain any descriptions of Parcels I and II as set forth in the original deed to Appellants.

On or about May 10, 2001,² Appellants executed a note and mortgage in the amount of $200,000 in favor of FSA, with the intent that it cover Appellants' interest in Parcels I, II, and III. On the same date, Appellants executed a second note and mortgage in the amount of $30,250 in favor of FSA, with the intent of conveying an interest in Parcels I, and III. Like the CNB mortgages, the land descriptions in the May 10 mortgages described Parcel III, as well as the Exceptions to Parcels I and II. They did not contain a description of Parcels I and II.

On or about October 3, 2003, NBT filed a Notice of Pendency ("lis pendens") and an Amended Notice of Pendency in the Office of the Clerk for Tompkins County. On or about October 14, 2003, NBT also filed a Notice of Pendency and an Amended Notice of Pendency in the Office of the Clerk for Cayuga County. The Notices were filed in actions by NBT to foreclose its two mortgages and to reform the real property descriptions found in the mortgages.

On or about November 12, 2003, Appellants filed a voluntary petition pursuant to Chapter 12 of the Bankruptcy Code (the "Code"). Thereafter, on or about February 13, 2004, Appellants filed an adversarial proceeding against Appellees seeking to avoid both NBT's and FSA's mortgages under 11 U.S.C. § 544(a)(3), and to avoid NBT's lis pendens as preferential transfers under 11 U.S.C. § 547.³

III. DISCUSSION

A. Standards of Review

In reviewing the Bankruptcy Court's decision, this Court reviews conclusions of law de novo. In re Manville Forest Prods. Corp., 209 F.3d 125, 128 (2d Cir.2000); In re Petition of Bd. of Dirs. of Hopewell Int'l Ins. Ltd., 275 B.R. 699, 703-04 (S.D.N.Y.2002); FED. R. BANKR.P. 8013. The Bankruptcy Court's factual determinations are reviewed for clear error. MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 107 (2d Cir.2006).

When the Bankruptcy Court's ruling is based on undisputed facts, as is the case here, this Court reviews the Bankruptcy Court's dismissal of Appellants' complaint against FSA and its denial of Appellants' cross-motion for summary judgment de novo. In re Nemko, Inc., 202 B.R. 673, 677 (E.D.N.Y.1996) (citing In re Males, 999 F.2d 607, 609 (2d Cir.1993)). This Court also reviews the Bankruptcy Court's denial of Appellants' motions for summary judgment de novo. Keeffe v. Natalie, 337 B.R. 11, 13 (N.D.N.Y.2006) (Kahn, D.J.). Appellants are entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the [Appellants are] entitled to judgment as a matter of law." See FED. R. BANKR.P. 7056 (making FED.R.Civ.P. 56 applicable to bankruptcy adversary proceedings). Appellants must make a prima facie showing that they are entitled to summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In so deciding, this Court must resolve all ambiguities and draw all inferences in favor of Appellees. See Derienzo v. Metro. Transp. Auth., 404 F.Supp.2d 555, 562 (S.D.N.Y.2005).

The Bankruptcy Court's modification of the automatic stay was discretionary, and is thus reviewed for abuse of discretion. See In re Sonnax Indus., Inc., 907 F.2d 1280, 1286 (2d Cir.1990).

B. Lis pendens as a Preferential Transfer Under 11 U.S.C. § 547

Appellants claim that NBT's lis pendens is an avoidable preferential transfer under Section 547. In so doing, Appellants argue that the lis pendens is preferential "because it perfected or created additional rights in the debtor's property in favor of NBT .... [and,][i]t was also a transfer on account of an antecedent debt." Appellants' Br. (Dkt. No. 6) at 17. However, the lis pendens must first be a transfer under New York law before a preferential analysis under the Code is appropriate.

Under the Code, "the [Appellants] may avoid any transfer of an interest of the debtor in property." 11 U.S.C. § 547(b) (2006) (emphasis added). Transfer is defined by the Code as:

(A) the creation of a lien;

(B) the retention of title as a security interest;

(C) the foreclosure of a debtor's equity of redemption; or

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with —

(i) property; or

(ii) an interest in property.

11 U.S.C. § 101(54) (2006).

Presumably, Appellants' transfer theory rests on the "creation of a lien" language of Section 101. See 11 U.S.C. § 101(54)(A). As correctly noted by the Bankruptcy Court, states differ as to whether the filing of a lis pendens constitutes a transfer so as to qualify for preferential disqualification under Section 547. See MDO (Dkt. No. 1, Attach.49) at 8-9. New York, however, has consistently held that the filing of a lis pendens is merely a method of giving notice and does not create a lien. See, e.g., In re Am. Motor Club, Inc., 109 B.R. 595, 597 (Bankr. E.D.N.Y.1990) ("A notice of pendency ... does not create a lien or encumbrance on the property. It merely allows the plaintiff to prosecute its lawsuit to the execution of a judgment by putting the world on constructive notice that the property is the subject of a pending lawsuit."); Simon v. Vanderveer, 155 N.Y. 377, 382, 49 N.E. 1043 (1898) ("`The lis pendens is merely notice of some claim made in respect of the property ... [and] it does not of itself create an incumbrance apart from the equity on which the action is founded.'"); Finkelman v. Wood, 203 A.D.2d 236, 609 N.Y.S.2d 655, 656 (1994) ("[N]otice[s] of pendency .... have as their general object the preservation of existing property rights and do not affect the merits of those interests."); Schoepp v. State, 69 A.D.2d 917, 415 N.Y.S.2d 276, 277 (1979) ("The lis pendens does not create an encumbrance or a lien ... it merely provides notice that an action is pending which may affect title to real property.") (citations omitted).

Appellants fail to provide controlling law in support of their contention that NBT's lis pendens is a voidable transfer. Instead, Appellants focus on the preferential aspect of their lis pendens claim and only tangentially address, through reference to a Ninth Circuit decision, whether the lis pendens first constitutes a transfer under New York law. See Appellants' Br. (Dkt. No. 6) at 17. This is apparently because Appellants fail to recognize the two distinct standards: first showing a transfer and second showing the transfer was preferential.⁴ Appellants seemingly wish to show that because the lis pendens are allegedly preferential, they are also a transfer. Such a showing incorrectly interprets Section 547. As such, because this Court finds that NBT's lis pendens is not a transfer in accordance with Section 101(54) of the Code...