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In re Hojnoski

May 16, 2006

IN RE: SANDRA A. HOJNOSKI,
GEORGE M. REIBER APPELLANT,
v.
OPTION ONE MORTGAGE CORP.. SHERMAN ACQUISITION, L.P. VICTORY VILLAGE MHC, LLC, APPELLEES.



The opinion of the court was delivered by: David G. Larimer United States District Judge

DECISION AND ORDER

On January 4, 2006, Bankruptcy Judge John C. Ninfo, II entered a Decision and Order in this Chapter 13 adversary proceeding, which denied the Trustee's motion for summary judgment, granted summary judgment in favor of defendant/appellee Option One Mortgage Corporation ("Option One"), and dismissed the Trustee's adversary proceeding. In that proceeding, the Trustee sought to avoid a mortgage lien on certain real property ("Property") of the debtor, Sandra A. Hojnoski ("Debtor"). In re Hojnoski, 335 B.R. 282 (Bankr.W.D.N.Y. 2006). The Trustee, George M. Reiber, Esq. ("Trustee") appeals.

BACKGROUND

The Debtor acquired the Property by Deed dated May 5, 2002. The deed was recorded in the Steuben County Clerk's Office ("Clerk's Office") on May 17, 2002.

On or about May 17, 2002, the Debtor executed and delivered a mortgage ("Mortgage") to Fairmont Funding. Although the mortgage document was correctly signed by the Debtor, it erroneously showed her name on the front page as "Sandra Hojnowski" rather than "Sandra Hojnoski."

The Mortgage was recorded in the Clerk's Office on May 17, 2002, and was indexed by the Steuben County Clerk ("Clerk") under the name "Hojnowski." On June 6, 2002, an Affidavit of Correction of Typographical Error ("Correction Affidavit") was recorded in the Clerk's Office. The Correction Affidavit, which was executed and delivered by the Debtor in her correct name, indicated that the Mortgage contained a typographical error with respect to the spelling of her name, and that the Debtor and Sandra "Hojnowski" were one and the same. The affidavit requested that the Clerk cross-reference the Affidavit to all related documents. It appears, however, that although the Property is located in the Town of Campbell, the Clerk indexed the Correction Affidavit as affecting real property in the Town of Erwin, Steuben County. This error was not discovered until sometime later, as explained below.

The Debtor filed her Chapter 13 petition in October 2004, and indicated in her schedules and statements that she was the owner of the Property, that it was located in the Town of Campbell, and that Option One (to whom the mortgage had been assigned by Fairmont Funding) held a "verified unrecorded" mortgage on the Property with an outstanding balance of $31,718.

On January 31, 2005, Monroe Title Insurance Company ("Monroe") performed a title search of the Property at the Trustee's behest. Apparently because of the Clerk's error with respect to the Correction Affidavit and the location of the Property, the title search failed to uncover the existence of the Mortgage or the Correction Affidavit.

In his complaint against Option One filed on February 4, 2005, the Trustee alleged that the Mortgage had not been properly recorded prior to the filing of the Debtor's petition in accordance with the provisions of the New York Real Property Law ("RPL"). He further asserted that the lien of the Mortgage was therefore avoidable by a bona fide purchaser pursuant to RPL § 291, and that since the Trustee, pursuant to RPL § 544(a), stood in the position of a hypothetical bona fide purchaser of the Property, he could avoid the lien also. The Trustee sought an order avoiding the lien of the Mortgage and preserving it for the benefit of the estate.

On February 28, 2005, Monroe (which had been retained by both the Trustee and Option One) performed an Indexing Name Search for the name "Sandra Hojnoski." That search yielded two entries, the first of which indicated a recording date of May 17, 2002, for a deed to property in the Town of Campbell. The second, with a date of June 6, 2002, indicated that it was for an affidavit concerning property in the Town of Erwin. Bankr. Dkt. #33-9 Ex. B. Upon further investigation, Monroe discovered that the Correction Affidavit had been erroneously indexed with respect to the location of the Property, and informed the Clerk of the error. That same day, the Clerk re-indexed the Correction Affidavit as affecting property in the Town of Campbell.

After Option One filed its answer (which asserted, inter alia, that the Mortgage had been properly recorded, in part because of the filing of the Correction Affidavit), both the Trustee and Option One moved for summary judgment. In his motion, the Trustee asserted that, because of the indexing errors concerning both the spelling of the Debtor's name and the location of the Property, the Mortgage was outside the Debtor's chain of title. The Trustee argued that, notwithstanding the later re-indexing of the Correction Affidavit, neither the recorded Mortgage nor the Correction Affidavit constituted constructive notice of the existence of the mortgage as of the date that the Debtor filed her petition, and that the lien of the mortgage was therefore avoidable.

In his Decision and Order, Bankruptcy Judge Ninfo held that the Trustee was not a hypothetical bona fide purchaser for value who could avoid the Mortgage. Judge Ninfo reasoned that prior to the Clerk's February 28, 2005 re-indexing of the Correction Affidavit, a person (such as a prospective purchaser) examining the results of an Indexing Name Search would have seen that:

(1) there was no record of any predicate document of conveyance indicating that the Debtor had any interest in real property located in the Town of Erwin; and (2) the affidavit concerning property in the Town of Erwin had been filed about three weeks after the deed for property in the Town of Campbell had been recorded. That information, the Bankruptcy Judge concluded, would have led a reasonable person to take further steps to ascertain the nature of the affidavit, which ...


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