Bank of N.Y. v. Sheeley (In re Sheeley)

Guy R. Humphrey

This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio. IT IS SO ORDERED.

_______________

Guy R. Humphrey

limited States Bankruptcy Judge

Judge Humphrey
Chapter 13
Decision Granting The Trustee's and Sheeleys' Motion for Summary Judgment as to
Trustee, Denying Plaintiff's Motion for Summary Judgment and Supplemental Motion for Summary Judgment and Dismissing The Trustee's and Sheeleys' Counterclaims I. Introduction

This is an adversary proceeding through which a lender seeks a declaratory judgment that it holds a valid first mortgage lien on the debtors' residence despite the fact that the mortgage lists the street address for the residence parcel but uses the metes and bounds legal description for an adjacent vacant parcel of property also owned by the debtors. In the alternative, the lender requests that the mortgage be reformed to correct the legal description from that of the vacant parcel to that of the residence parcel and to add the debtor wife's name to the granting clause. The court previously ruled on an earlier motion for summary judgment filed by the lender. See Bank of New York v. Sheeley (In re Sheeley), 2012 Bankr. LEXIS 1374 (Bankr. S.D. Ohio April 2, 2012)("Sheeley I").

The principal issue presently before the court is whether the Chapter 13 trustee and the debtors, derivatively, are barred by the limitations period under Bankruptcy Code § 546(a) from asserting the rights of a bona fide purchaser of real property under § 544(a). The lender asserts that since an action to avoid the mortgage was not filed within the limitations period provided by § 546(a) these "strong arm" powers of the trustee cannot be used to defeat its mortgage, with state law prevailing to establish the enforceability of the mortgage between the lender and debtors and state law permitting the lender to reform the mortgage to correct any deficiencies in the mortgage.

Unless otherwise noted, all statutory references are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. §§ 101-1532", cited hereinafter in this decision as "§ __".

For the reasons stated in this decision, the court holds under the circumstances of this case, including the fact that all property of the debtors remained property of the estate under the debtors' confirmed plan during the pendency of this case, that if a mortgage is defective at the time of the filing of a petition under Chapter 13 of the Bankruptcy Code such that it does not constitute a lien against the debtors' real property, the Chapter 13 trustee's status as a hypothetical bona fide purchaser of real property under § 544(a)(3) prevents the lender from reforming the mortgage to correct its defects while the property remains property of the estate despite the failure to file an adversary proceeding within the time period provided by § 546(a) to avoid the mortgage. Accordingly, the court is granting summary judgment in favor of the Chapter 13 trustee declaring that the lender does not hold a valid mortgage lien against the debtors' residence parcel and cannot reform the mortgage post-petition to correct its defects.

II. Stipulated Facts

On February 28, 2003 Danny G. Sheeley, Jr. and Jackie L. Sheeley (the "Sheeleys") obtained title to real property commonly known as 2292 Ogden Road, Wilmington, Ohio 45117 (the "Residence Parcel") through a trustee deed. The deed was recorded in 2003 in the Clinton County Recorder's Office (the "Recorder's Office"). Agreed Stipulations (doc. 21, Exh. A). In July 2006 the Sheeleys executed a mortgage on the Residence Parcel in favor of Accredited Home Lenders, Inc. in the amount of $202,500 (the "Accredited Mortgage"), which was recorded in the Recorder's Office (Exh. B). Then on July 26, 2006 the Sheeleys obtained title to a vacant parcel of real property (the "Vacant Parcel") through a general warranty deed, which was recorded in the Recorder's Office in August 2006 (Exh. C). The Vacant Parcel is adjacent to the Residence Parcel.

Unless otherwise noted, all exhibit references are the exhibits included as part of the Agreed Stipulations.

Later in 2006 the Sheeleys refinanced the Accredited Mortgage with Countrywide Bank, N.A. ("Countrywide"). On November 1, 2006 Danny Sheeley executed the following documents:

1) A note in favor of Countrywide in the amount of $208,800 (the "Note") which lists the address of the Residence Parcel (Exh. D);
2) A HUD-1 Settlement Statement, which stated on line 104, "Payoff First Mortgage to Accredited Home Lenders" in the amount of $206,449.71 (Exh. E); and
3) A Document Correction and Fees Agreement, Identity Affidavit, Truth in Lending Disclosure Statement, Uniform Residential Loan Application, Signature and Name Certification, New Loan Payment Form, Itemization of Amount Financed, and Notices Affidavit (Exhs. F - O).

Jackie Sheeley signed the Notice of Right to Cancel, the Owners Affidavit, the Truth in Lending Disclosure Statement, the Itemization of Amount Financed, and the Notices Affidavit (Exhs. I, J, N and O).

In order to secure the Note, on November 1, 2006 the Sheeleys also executed a mortgage in the amount of $208,000 in favor of MERS, solely as nominee for Countrywide (the "Mortgage"), which was recorded in the Recorder's Office on November 9, 2006 (Exh. P). The granting clause of the Mortgage states as follows:

Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS the following described property located in the County of Clinton:
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF.
Parcel ID Number: [left blank] which currently has the address of 2292 OGDEN RD, WILMINGTON, Ohio 45177-7184 ("Property Address"):

This street address is the address by which the Residence Parcel is commonly known. However, the Exhibit A attached to the Mortgage contains the metes and bounds legal description of the Vacant Parcel and not that of the Residence Parcel. The Sheeleys admit that they intended the Mortgage to serve as a lien against the Residence Parcel, and that $206,449.71 of the loan proceeds from this transaction were used to pay off the Accredited Mortgage. On October 29, 2008 MERS, as nominee for Countrywide, executed an assignment of the Mortgage to the Bank of New York, as Trustee for the Benefit of Alternative Loan Trust 2007-OA2 Mortgage Pass-Through Certificates, Series 2007-OA2 by and through BAC Home Loans Servicing, L.P., its servicer, (the "Bank"), which was recorded on November 3, 2008 (the "Assignment") (Exh. Q).

III. Procedural Background

On May 12, 2008 the Sheeleys filed a joint petition for relief under Chapter 13 of Title 11 of the United States Code; their schedules and Statement of Financial Affairs (est. doc. 1); and a Chapter 13 plan (the "Plan") (est. doc. 7). The Residence Parcel was scheduled as having a value of $150,000 with no encumbrances (Schedule A). The Vacant Parcel was scheduled as having a value of $17,500 (Schedule A) and encumbered by the Mortgage with an estimated balance of $218,000 on the Petition Date (Schedule D).

Paragraph 18 of the Plan listed the Residence Parcel as Parcel No. 1, but listed no lienholders. The Vacant Parcel was listed as Parcel No. 2 with Countrywide as the lienholder. The Plan provides for the surrender of the Vacant Parcel to Countrywide or its successor(the Bank), allowing the Bank to sell that property in accordance with its contractual rights and applicable law. Neither Countrywide nor the Bank objected to the Plan and the court entered an order confirming the Plan on July 21, 2008 (est. doc. 20) (the "Confirmation Order").

The Bank filed two motions for relief from stay with respect to the Residence Parcel (est. docs. 25 & 44), the first of which was withdrawn after the Sheeleys responded in opposition. The court subsequently entered an order denying the second motion for relief from stay as to the Residence Parcel, but granted relief from the stay as to the Vacant Parcel (est. doc. 52).

The Bank subsequently commenced this adversary proceeding through a complaint seeking declaratory judgment that the Mortgage is a valid first mortgage lien on the Residence Parcel as to both Danny and Jackie Sheeleys' fee simple interests and requesting that the Mortgage be reformed to correct the legal description from that of the Vacant Parcel to that of the Residence Parcel and to add Jackie Sheeley's name to the granting clause. The Sheeleys filed an answer asking that the Bank's requests be denied (doc. 8). The Bank moved for summary judgment which the court denied on April 2, 2012. See Sheeley I (doc. 28). The court further found that it could not accord complete relief to the Bank and the Sheeleys without either the joinder of the Chapter 13 trustee (the "Trustee") or evidence of the Trustee's refusal to pursue his rights under § 544(a). Accordingly, the Bank was granted leave to file an amended complaint adding the Trustee as a party defendant. In the event the Bank failed to file an amended complaint within this time period, the Sheeleys were granted leave to request that the Trustee intervene as a party defendant and to file an amended answer and counterclaim. In the event the Trustee elected to intervene, he was also permitted to file his own answer and counterclaim.

On April 24, 2012 the Sheeleys filed a motion to add the Trustee as a party defendant (doc. 32) which the court granted. The Trustee filed an application on that same date to employ counsel for the Sheeleys as special counsel to represent him in this adversary proceeding (doc. 34) which the court also granted. On May 1, 2012 the Sheeleys filed an amended answer and counterclaim which asserted that the Bank's requests for declaratory judgment and reformation should be denied and that the Bank's claims were barred by res judicata and laches. The Trustee later filed an answer and counterclaim which made those same assertions. The Bank replied to each of the counterclaims and raised various affirmative defenses, including that the Trustee is barred from avoiding the Mortgage due to the statute of limitations set forth in § 546(a).

On September 21, 2012 the Bank filed its second motion for summary judgment (doc. 52), and the Trustee and the Sheeleys filed their own joint motion for summary judgment (doc. 53). The cross-motions for summary judgment were fully briefed and on December 17, 2012 the Bank filed a supplemental motion for summary judgment against the Sheeleys (doc. 66). At the Bank's request the court heard oral argument on December 19, 2012. The matter is now ripe for decision.

Because the Trustee was voluntarily added as a party defendant and is asserting his rights and powers under § 544(a)(3), the Sheeleys do not have derivative standing with respect to the Trustee's status as a bona fide purchaser of real property. See Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re Trailer Source, Inc.), 555 F.3d 231, 244-45 (6th Cir. 2009) (party may not proceed under derivative standing when trustee plans to do).

The Bank's supplemental motion for summary judgment is moot. It relates solely to the issue of whether the Sheeleys have derivative standing, primarily arguing that the Bankruptcy Appellate Panel's recent action in vacating its decision in U.S. Bank, N.A. v. Barbee (In re Barbee), 461 B.R. 711 (B.A.P. 6th Cir. 2011), should be construed to have abrogated the authority of a Chapter 13 debtor to exercise derivative standing to avoid a consensual lien under any factual scenario. First, this court does not believe that any such change in the law was intended through the vacating of the BAP's Barbee decision because the vacating of the decision came after the parties had settled an appeal by the defendant to the Sixth Circuit and it appears that the decision was simply vacated through the agreement of the parties as a term of the parties' settlement. Further, the Bank does not explain why the BAP's prior holding regarding derivative standing in Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399, 404 (B.A.P. 6th Cir. 2010), aff'd on other grounds 655 F.3d 585 (6th Cir. 2011), which was not vacated, would no longer apply. However, even assuming that the Barbee panel intended to effect such a change in the law, this purported change would still have no effect on the court's disposition of this adversary proceeding. The requirements for derivative standing include a demand on the trustee to act and a refusal by the trustee to do so. See Trailer Source, 555 F.3d at 244-45. The Trustee has not refused to act in this case and has joined in the adversary proceeding as a party and the court has not authorized the Sheeleys to proceed with respect to the Trustee's rights under § 544(a) as a bona fide purchaser of real property. Because the court has determined that the relief sought by the Bank in its complaint is barred by the Trustee's assertion of those rights, the issue of the Sheeleys' standing is moot.

IV. Positions of the Parties

The Bank relies on § 546 for its statute of limitations defense. This section provides in relevant part that "[a]n action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after . . . the later of 2 years after the entry of the order for relief; or 1 year after the appointment or election of the first trustee . . . if such appointment or such election occurs before the expiration of the [2-year] period . . . ." 11 U.S.C. § 546(a)(1). The Sheeleys commenced their joint case by filing a voluntary petition on May 12, 2008, and the commencement of that case constituted an order for relief under Chapter 13. The Trustee was and remains the standing Chapter 13 Trustee for Dayton. The Bank asserts that by virtue of § 546(a) the Trustee was barred from pursuing any action to avoid the Mortgage and, further, is barred from pursuing any of his rights under § 544(a) beyond May 12, 2010. The Bank further asserts that the Sheeleys, to the extent they have standing, must also have brought any avoidance action prior to the expiration of this deadline because any such standing would necessarily be derived from the Trustee's powers.

The Bank further argues that it is entitled as a matter of law to a declaratory judgment that the Mortgage be reformed to encumber the Residence Parcel pursuant to Ohio Revised Code § 2719.01. As the Bank sees it, the court previously denied summary judgment because (1) reformation would abrogate the rights of the Trustee as an intervening bona fide purchaser and (2) although the Sheeleys conceded that they intended to mortgage their interest in the Residence Parcel, there was no evidence in the record that Countrywide intended to take a security interest in the Residence Parcel as opposed to the Vacant Parcel that was described in the Mortgage. The Bank contends that reformation will not prejudice the rights of the Trustee as an intervening bona fide purchaser because the Trustee no longer can assert such rights given the expiration of the statute of limitations. In addition, the Bank now offers evidence in the form of an affidavit and certain loan documents and closing instructions that Countrywide did intend for the Mortgage to be a valid first and best lien on the Residence Parcel rather than the Vacant Parcel.

The Trustee and the Sheeleys claim that the Mortgage does not encumber the Residence Parcel because it contains the legal description for the Vacant Parcel and therefore did not provide constructive notice to a subsequent bona fide purchaser that either Countrywide or the Bank possessed any interest in the Residence Parcel. They contend that the lack of constructive notice renders the Mortgage ineffective as to the Residence Parcel.

The Trustee and the Sheeleys claim that the Trustee has standing to pursue avoidance of the Mortgage as an unperfected security interest against the Residence Parcel and that the Sheeleys enjoy derivative standing. They further assert that the two-year statute of limitation found in § 546(a)(1) does not affect the Trustee's status as a bona fide purchaser when the Trustee does not initiate an avoidance action, but merely uses his strong arm powers defensively. It was the Bank that commenced this adversary proceeding following expiration of the two-year period after entry of the Sheeleys' order for relief. Although conceding that the Trustee would not be permitted at this time to bring an action under § 544(a)(3) to avoid the Bank's unperfected security interest in the Residence Parcel, the Trustee and the Sheeleys argue that the Trustee's status as an intervening bona fide purchaser defeats as a matter of law the Bank's claim for reformation of the Mortgage.

Although some of the references in the Trustee's and Sheeleys' filings are generically to the Trustee's strong arm powers provided by § 544, the only specific power relied upon by the Trustee and Sheeleys is the Trustee's power as a hypothetical bona fide purchaser of real property provided by § 544(a)(3). Accordingly, the court's discussion and determinations will be limited to the Trustee's power as a hypothetical bona fide purchaser under § 544(a)(3).

The Trustee and the Sheeleys also argue that, pursuant to the terms of the Sheeleys' confirmed Chapter 13 plan, only the Vacant Parcel was subject to the Mortgage, and the Residence Parcel is unencumbered. Because the Bank received notice of the Chapter 13 plan and failed to object, the Sheeleys maintain that res judicata bars the Bank from seeking reformation of the Mortgage. In addition, the Sheeleys point to the fact that the Bank did not commence this adversary seeking reformation until some three years after it received multiple notices in connection with its motions for relief from stay that the Residence Parcel was unencumbered. The Sheeleys allege that this constitutes an unreasonable delay prejudicial to them and that the Bank's reformation claim is thereby barred by laches.

V. Legal Analysis

A. Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the standing order of reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K).

B. Summary Judgment Standard

Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings through Bankruptcy Rule 7056, sets forth the standard to address the parties' filings. It states, in part, that a court must grant summary judgment to the moving party if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.

In order to prevail, the movant, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the nonmovant at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmovant's claim or 2) demonstrate to the court that the nonmovant's evidence is insufficient to establish an essential element of the nonmovant's claim. Id. at 331-32. Thereafter, the nonmovant "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 587-88.

The fact that the parties have filed cross motions for summary judgment does not alter the standards for determining motions for summary judgment. See Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991). The filing of cross-motions for summary judgment does, however, "authorize the court to assume that there is no evidence which needs to be considered other than that which has been filed by the parties." Greer v. United States, 207 F.3d 322, 326 (6th Cir. 2000).

C. Discussion

In the decision in Sheeley I, the court made certain findings and conclusions that are directly relevant to the cross-motions at hand. First, the Trustee, cloaked with the rights of a hypothetical bona fide purchaser without notice under § 544(a)(3), did not have constructive notice that the Mortgage encumbered the Residence Parcel when the legal description attached to the Mortgage contained only the metes and bounds description for the Vacant Parcel. Second, § 544(a) is unambiguous and grants the Trustee the powers and rights of a bona fide purchaser, irrespective of whether those rights and powers are used to avoid a transfer of an interest in property or simply to defeat a mortgage. Third, the Residence Parcel is property of the Sheeleys' bankruptcy estate and the rights of the Trustee as a bona fide purchaser intervened on the petition date. Therefore, unless the Trustee lost his rights and powers as a bona fide purchaser, the Mortgage cannot be reformed to abrogate the rights of the Trustee as a bona fide purchaser. See Payne, 450 B.R. at 720 n. 9 and Easter, 367 B.R. at 615.

All of the court's findings of fact and conclusions of law contained in Sheeley I (doc. 28) (2012 Bankr. LEXIS 1374) are incorporated by reference and the conclusions of law constitute law of the case. See Moses v. Business Card Express, Inc., 929 F.2d 1131, 1137 (6th Cir. 1991) and In re Commercial Money Ctr., Inc., Equip. Lease Litig., 627 F. Supp. 2d 786, 796 (N.D. Ohio 2009).

The Bank contends the Trustee did lose those rights when he failed to bring an avoidance action within two years of the date the Sheeleys filed their Chapter 13 petition. The Bank's argument is that the only way that a trustee can exercise the rights and powers of a bona fide purchaser of real property is through the filing of an adversary proceeding under § 544(a) and Bankruptcy Rule 7001. If that is true, then the Trustee's exercise of those rights and powers are barred by § 546(a) because such "an action or proceeding" was not commenced by the Trustee within the time constraints of that section. The Sheeleys and the Trustee maintain that § 546(a) is limited to proceedings initiated by a trustee and does not bar the defensive use of a trustee's avoidance powers provided by § 544(a) outside the two-year time limit. Accordingly, this dispute between the Bank and the Trustee and Sheeleys requires an analysis of the powers granted by § 544(a), the limitations provided by § 546(a), and the interrelationship between Code §§ 544(a) and 546(a). That task must begin with an analysis of the statutes themselves.

The Trustee and the Sheeleys rely on their interpretation of a line of cases in which a trustee, after expiration of the time period for bringing an avoidance action, invoked § 502(d) to disallow a secured claim when the lien otherwise would have been avoidable under §§ 522(f), 522(h), 544, 545, 547, 548, 549, or 724. See In re Mid Atlantic Fund, Inc., 60 B.R. 604 (Bankr. S.D.N.Y. 1986); In re Coan, 96 B.R. 828 (Bankr. N.D. Ill. 1989); In re Stoecker, 143 B.R. 118 (Bankr. N.D. Ill. 1992); In re Badger Lines, Inc., 202 F.3d 945 (7th Cir. 2000); Wallick v. Cambio (In re Block), 259 B.R. 498 (Bankr. D. R.I. 2001); Lassman v. Poulos (In re American Pie, Inc.), 361 B.R. 318 (Bankr. D. Mass. 2007); In re McKenzie, 2011 Bankr. LEXIS 4828 (Bankr. E.D. Tenn. Dec. 9, 2011). This line of cases is consistent with the principle that affirmative claims that are barred by a statute of limitations may still be used to off-set a plaintiff's claims through the assertion and establishment of recoupment and set-off defenses. See United States v. Petroff-Kline, 557 F.3d 285, 296 (6th Cir. 2009); Grand Rapids v. McCurdy, 136 F.2d 615, 619 (6th Cir. 1943) and Wentz v. Saxon Mortgage (In re Wentz), 393 B.R. 545 (Bankr. S.D. Ohio 2008). The Bank counters that even under the line of cases cited by the Trustee and Sheeleys bankruptcy courts must still pay attention to § 546(a) and that a trustee is limited under § 502(d) to offset the claim asserted by the creditor and still may not avoid a lien under § 544 after the statute of limitations has run. See Wofford v. JPMorgan Chase Bank, N.A. (In re Wofford), 2012 Bankr. LEXIS 3493 (Bankr. E.D. Tenn. July 30, 2012). The court does not find the cases cited by the parties particularly helpful to resolution of the primary issues in this case. This is not a case in which the Trustee has invoked § 502(d) to disallow or set-off a claim. In fact, the Trustee did not commence this action and, until very recently - January 23, 2013, the Bank did not file a proof of claim. Whether the Trustee could use § 544 defensively to disallow the Bank's secured proof of claim after the § 546(a) time limitation has expired on the grounds that the Mortgage is avoidable is simply not presented here.

The language of §§ 544(a) and 546(a) contradict the Bank's argument because 1) § 544(a) grants trustees the rights and powers of a hypothetical bona fide purchaser of real property without regard to knowledge of the trustee and of any creditor "as of the commencement of the case," rather than only when an adversary proceeding is filed to avoid a mortgage; and 2) § 544(a) separates the general rights and powers of trustees from their avoidance powers in the disjunctive, and § 546(a) only provides a time limitation on avoidance actions.

First, § 544(a) granted the Trustee the rights and power of a hypothetical bona fide purchaser of real property as of the commencement of the case. Those rights interceded automatically as of the commencement of the case under § 544(a). Their existence and effect were not dependent upon the filing of an adversary proceeding. The rights and powers of a bona fide purchaser of real property cut off the rights of an equitable interest in real property, including unrecorded mortgages. Wayne Building & Loan Co. v. Yarborough, 228 N.E.2d 841, 846 (Ohio 1967); Weir v. Snider Saw Mill Co., 103 N.E. 133, 134-35 (Ohio 1913). Because, as found in Sheeley I, the Mortgage did not describe the Residence Parcel, it did not create a lien against the Residence Parcel, and the rights of the Trustee as a hypothetical bona fide purchaser of the Residence Parcel without notice interceded as of the commencement of the case.

For Ohio statutory provisions protecting bona fide purchasers, see Ohio Revised. Code §§ 1336.08, 2129.21 and 2325.03.

Second, the introductory paragraph of § 544(a) states in the disjunctive that "[t]he trustee shall have, as of the commencement of the case . . . the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable . . . ." (emphasis added). Thus, "the rights and powers of" and "may avoid any transfer of property . . . " are expressed in the disjunctive. The Supreme Court has advised that in construing a statute courts "are obliged to give effect, if possible, to every word Congress used." RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2071 (2012); Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979). When phrases of a statute are stated in the disjunctive, cannons of statutory construction instruct that the phases be given separate meanings unless the context provides otherwise. Reiter at 339; Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 229 (1993); Garcia v. United States, 469 U.S. 70, 73 (1984); and Stevens v. Employer-Teamsters Joint Council No. 84 Pension Fund, 979 F.2d 444, 452 (6th Cir. 1992). Following these rules of statutory construction in construing § 544(a), the Trustee has both the "rights and powers of" a bona fide purchaser of real property and "may avoid any transfer of property . . . that is voidable by a" bona fide purchaser of real property. The manner in which § 544(a) is written leads one to conclude that the "rights and powers" of a bona fide purchaser of real property are not limited to the power to avoid a transfer.

The pertinent provisions of § 544(a) are as follows:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—

* * *

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

However, while § 544(a) distinguishes between the "rights and powers" of a trustee and the avoidance of transfers of property, § 546(a) only provides time limitations on trustees' commencement of "an action or proceeding under section 544 . . . ." Thus, § 546(a) only bars adversary proceedings commenced by a trustee seeking to avoid transfers based upon the avoidance powers granted under Chapter 5 of the Bankruptcy Code. The Bank's argument ignores the fact that the Trustee and the Sheeleys have not filed an adversary proceeding or claim seeking to avoid the Mortgage, they simply have responded to the Bank's complaint seeking a declaratory judgment that the Mortgage is a lien against the Residence Parcel, which the court in Sheeley I rejected. The Trustee and the Sheeleys are not seeking to avoid the Mortgage, but rather only seek a declaration that the Mortgage as written and recorded does not constitute a lien against the Residence Parcel. The critical point is that the Trustee did not need to avoid the Mortgage in this case - his rights interceded automatically upon the filing of the case. Thus, because the Trustee and the Sheeleys have not sought avoidance of the Mortgage using the Trustee's avoidance powers, § 546(a) is not implicated.

Section 546(a) provides as follows:

(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of—

(1) the later of—

(A) 2 years after the entry of the order for relief; or
(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

11 U.S.C. § 546(a).

This analysis and conclusion is consistent with the reported decisions on the subject. In Stearns Bank, N.A. v. Mann (Matter of Rent-A-Tent, Inc.), 468 B.R. 442 (Bankr. N.D. Ga. 2012), the lender's successor filed a complaint against the trustee and the debtors seeking a finding that as of the petition date it had an equitable lien on certain property under the doctrines of equitable reformation or equitable subrogation. The trustee answered the complaint alleging that the plaintiff had no security interest in the property because the debtor did not own the property at the time of the purported transfer. The trustee also filed a counterclaim seeking a determination that to the extent the plaintiff was found to have an interest in the property, such interest was avoidable under § 544(a). The plaintiff replied that the trustee's ability to avoid its equitable lien was time-barred under §546(a) .

On plaintiff's motion for summary judgment, the Rent-A-Tent court first considered whether the plaintiff could have obtained reformation of the deeds under state law. After analyzing this issue, the court concluded that absent the bankruptcy filing, a Georgia court would have allowed equitable reformation of the deeds, and that upon reformation, the plaintiff would have been entitled to a lien on the property relating back to the original transaction. Id. at 455. This lien would enjoy priority over all subsequent interests except for those of a bona fide purchaser without notice of the plaintiff's equitable lien. Id.

The bankruptcy court next considered whether the trustee's status as a hypothetical bona fide purchaser is a valid defense to such equitable reformation and whether the trustee's failure to file suit within the period required by § 546(a) barred the trustee from asserting this defense. The court found that § 544(a)(3) grants a trustee both the rights and powers of a bona fide purchaser of real estate and that § 546(a) restricts only the trustee's power to avoid a transfer of property and places no time limit on his ability to rely on his rights as a bona fide purchaser. Id. The court concluded that the trustee was not required to file suit to avoid any lien held by the plaintiff and could simply rely on his status as a hypothetical bona fide purchaser as a defense to the plaintiff's claim because a suit for reformation would not result in a lien until a court granted reformation, and a Georgia court would not reform a deed to the detriment of a bona fide purchaser for value without notice of the encumbrance. Id. 455-56. See also Olson v. Aegis Mortgage Corp. (In re Bloxsom), 389 B.R. 52, 57 (Bankr. W.D. Mich. 2008) (§ 544(a) confers upon a trustee not only the ability to avoid liens, but also the "rights" of a bona fide purchaser).

The facts in Bloxsom are even more analogous to this case than those in Rent-A-Center. In that case neither of the mortgages included a description of the residential lot, but only the vacant lot. The mistake was not discovered until after the trustee had abandoned the property. The court noted that had abandonment not occurred, reformation would not have been available since the trustee's rights as a hypothetical bona fide purchaser had intervened at the outset of the bankruptcy and at that point the residential lot was unencumbered. Id. at 57-58.

The court agrees with the analysis in Bloxsom and Rent-A-Center. At the time the Sheeleys filed their petition, the Residence Parcel was unencumbered and there was no lien to avoid. In the absence of the bankruptcy, the Bank would have been entitled under Ohio law to reform the Mortgage to include the legal description of the Residence Parcel and to add Mrs. Sheeley to the granting clause. Once the Mortgage was reformed, the Bank would have had a lien on the Residence Parcel relating back to the time of that the Mortgage was recorded. However, the filing of the Sheeleys' bankruptcy petition effectively deprived the Bank of this remedy due to the intervening rights of the Trustee as a bona fide purchaser. Those rights are separate from and do not depend on the Trustee's avoidance powers. The Trustee therefore is not barred by § 546(a) from asserting those rights as a valid defense to the Bank's reformation claim. Furthermore, because any lien on the Residence Parcel would not have resulted until after the Mortgage was reformed, the unavailability of this remedy defeats any claim by the Bank that it has a valid first mortgage on the Residence Parcel. Given the court's disposition of this matter on the foregoing grounds, it is unnecessary to decide whether the Bank's claims are also barred by the doctrines of res judicata or laches.

However, upon the Sheeleys' receipt of their discharge upon completion of all payments under the Plan, and pursuant to the Plan and the Confirmation Order confirming the Plan and §§ 1327(b) and (c), the Residence Parcel shall vest in the Sheeleys free and clear of any claim or interest of the Bank. The Plan through treatment of the Residence Parcel as being free and clear of the Mortgage and through effectuation of the best interest of creditors requirement of § 1325(a)(4), provided for the Bank's claim or interest. The Dayton model Chapter 13 Plan, used by the Sheeleys in this case, provides for the revesting of the property of the estate in the Sheeleys upon their receipt of their discharge. See Plan, ¶ 9 (est. doc. 7) and Confirmation Order, ¶ 6 (est. doc. 20).
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D. Dismissal of Trustee's and Sheeleys' Counterclaims

In addition to answering the complaint and asserting various affirmative defenses, the Sheeleys and the Trustee each filed a counterclaim. The counterclaims are identical except for minor differences due to the fact that the Trustee had not yet been joined as a party defendant when the Sheeleys filed their amended answer and counterclaim (doc. 35). The Trustee's counterclaim (doc. 50) states as follows:

1. Bank of New York improperly failed to list the Chapter 13 Trustee, Jeffrey M. Kellner, as a party to this adversary action.
2. Chapter 13 Trustee Jeffrey M. Kellner is an indispensable party to this action given his status as a bona fide purchaser for 11 U.S.C. § 544 purposes with authority over unperfected security interests such as that involved in the instant adversary proceeding with Bank of New York's unperfected security interest in Debtor/Defendant's Residence Parcel.
3. Chapter 13 Trustee Jeffrey M. Kellner is the correct holder of the claim and property at issue in the instant adversary proceeding.
4. Pursuant to his strong-arm powers as set forth in 11 U.S.C. § 544, Defendant Jeffrey M. Kellner believes he will prevail in the action to declare the Residence Parcel free, clear and unencumbered of the Countrywide Mortgage.

The counterclaims were not addressed by the parties in their cross-motions for summary judgment. The court nevertheless will address them at this time in order to arrive at a final judgment terminating this adversary proceeding.

In evaluating the counterclaims, the court will assess whether these counterclaims should be deemed defenses to the Bank's claims under Bankruptcy Rule 7012 and Fed. R. Civ. Proc. 12, rather than counterclaims under Bankruptcy Rule 7013 and Fed. R. Civ. Proc. 13. In making this determination, the court will first consider whether the allegations designated as counterclaims can be adjudicated separately from the Bank's claims. See Reiter v. Cooper, 507 U.S. 258, 265 (1993) ("A defense cannot possibly be adjudicated separately from the plaintiff's claim to which it applies; a counterclaim can be").

The Trustee's and the Sheeleys' assertions that the Bank failed to join the Trustee as a party and that the Trustee is an indispensable party constitute a defense. See Fed. R. Civ. P. 12(b)(7). The statements that the Trustee is the holder of the property and that he will prevail in this action due to his strong-arm powers are a closer call. Had the Trustee commenced an action seeking a declaration that the Residence Parcel is free and clear of the Mortgage, those statements would constitute a cognizable claim. It was the Bank, however, who filed this adversary proceeding seeking inter alia a declaration that the Mortgage does, in fact, encumber the Residence Parcel. The Trustee's and the Sheeleys' allegations simply mirror those of the Bank. The Mortgage either encumbers the Residence Parcel or it does not.

Courts have the authority to dismiss counterclaims that simply repeat the same issues already presented by the complaint and any affirmative defenses. See Medmarc Cas. Ins. Co. v. Pineiro & Byrd PLLC, 783 F.Supp.2d 1214, 1217 (S.D. Fla. 2011). In deciding whether to dismiss a counterclaim, a court should consider whether the counterclaim serves a useful purpose. Id. If resolution of the complaint, along with the affirmative defenses, would resolve all questions raised by the counterclaim, then the counterclaim serves no useful purpose. Id.

In this case, the Trustee has been joined as a defendant and the court has determined that the Mortgage does not encumber the Residence Parcel and cannot be reformed to do so. The counterclaims do not raise any issues that have not already been resolved and therefore serve no useful purpose. Accordingly, the Sheeleys' counterclaim (doc. 35) and the Trustee's counterclaim (doc. 50) are dismissed.

VI. Conclusion

Based on the foregoing reasons, the court determines that there is no genuine dispute as to any material fact and that the Trustee is entitled to judgment as a matter of law on both counts of the complaint. Accordingly, the Trustee's and the Sheeleys' motion for summary judgment (doc. 53) is granted as to the Trustee and the Bank's second motion for summary judgment (doc. 52) is denied. The Bank's supplemental motion for summary judgment (doc. 66) is denied as moot. The Trustee's and the Sheeleys' counterclaims (docs. 35 & 50) are dismissed. The court will contemporaneously enter an order consistent with this decision.

Copies to:

Richard Thomas Craven, 685 South Front Street, Columbus, OH 43206

(Counsel for Plaintiff) Harold Jarnicki, 576 Mound Court, Ste B, Lebanon, OH 45036

(Counsel for Defendants)

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