Commonwealth Land Title Insurance Co. v. Miller (In re Project Homestead, Inc.)

374 B.R. 193 (2007)

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Commonwealth Land Title Insurance Co. v. Miller (In re Project Homestead, Inc.)

United States Bankruptcy Court for the Middle District of North Carolina
374 B.R. 193 (2007)

Facts

Project Homestead, Inc. (debtor) was a North Carolina nonprofit that developed and sold affordable housing. In 2003, Project Homestead sold homes to six purchasers who obtained financing from various lenders. Commonwealth Land Title Insurance Company (Commonwealth) issued closing protection letters when the homes were purchased. Closings for the six purchase transactions occurred in early 2003 with closing attorney Armina Swittenberg. During each closing, the purchaser received a deed from Project Homestead that purported to convey the property. Also at each closing, the purchaser executed a promissory note and deed of trust in favor of the respective lender that purportedly granted the lender a lien on the property. Swittenberg retained the deeds from each closing. Each of the six properties sold to the purchasers was encumbered by a preexisting deed of trust from Project Homestead. For each property, Swittenberg used the funds from the closing to pay off the debt secured by the preexisting deed of trust. However, Swittenberg never recorded the new deeds from Project Homestead to the purchasers or the deeds of trust from the purchasers to the lenders. Project Homestead filed for Chapter 7 bankruptcy in January 2004. Commonwealth and the lenders filed adversary proceedings against the purchasers and Chapter 7 trustee William Miller, asserting that the purchasers owned the properties and that the lenders held first liens securing their respective debts. Commonwealth and the lenders argued that (1) a constructive trust had been created in the purchasers’ favor prior to the bankruptcy filing, giving the purchasers equitable title to the properties; (2) on the date of the bankruptcy filing, only bare legal title to the properties became property of the bankruptcy estate; and therefore, (3) under 11 U.S.C. § 541(d), the properties were excluded from the bankruptcy estate and were beyond Miller’s reach. Miller contended that under 11 U.S.C. §544(a)(3), he had the rights of a bona fide purchaser of real property, and that under North Carolina law, those rights were superior to any rights the purchasers or lenders might have as beneficiaries of a constructive trust. Miller thus asserted that he held title to the properties free and clear of all unrecorded interests. The parties cross-moved for summary judgment.

Rule of Law

Issue

Holding and Reasoning (Stocks, J.)

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