Kovacs v. First Union Home Equity Bank

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RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 In re Huffman, et al. Nos. 02-4468; 03-3174/3175 ELECTRONIC CITATION: 2004 FED App. 0153P (6th Cir.) File Name: 04a0153p.06 No. 03-3174 - - UNITED STATES COURT OF APPEALS In re: DOUGLA S R. HUFFMAN; - - In re: ROBIN LYNN HUFFMAN, - FOR THE SIXTH CIRCUIT _________________ Debtors. - - PATRICIA A. KOVACS , - No. 02-4468 X - - Trustee, Plaintiff-Appellee, - In re: DOUGLA S R. HUFFMAN; - - - Nos. 02-4468; - In re: ROBIN LYNN HUFFMAN; > 03-3174/3175 - v. - In re: EDWARD N. TUCHOLSKI; In re: DEBBIE S. - - - FIRST UNION HOME EQUITY - TUCHOLSKI; In re: JOHN J. - - BANK, et al., RICE; In re: JOSEPHINE E. - - Defendants-Appellants. RICE, - - Debtors. - - - No. 03-3175 - - - PATRICIA A. KOVACS , - - In re: EDWARD N. Trustee, - - TUCHOLSKI; In re: DEBBIE S. Plaintiff-Appellee, - - TUCHOLSKI, - - - Debtors. - v. - - - JOHN N. GRAHAM, Trustee; - FIRST UNION HOME EQUITY - - PATRICIA A. KOVACS , BANK, et al., - - Trustee, Defendants, - - Plaintiffs-Appellees, - - FIRST UNION MORTGAGE - - - V. - CORPORATION , - - Defendant-Appellant. - - - - - - 1 Nos. 02-4468; 03-3174/3175 In re Huffman, et al. 3 4 In re Huffman, et al. Nos. 02-4468; 03-3174/3175 _________________ NATIONAL LENDING CENTER , - INC.; FIRST UNION NATIONAL - OPINION BANK, as Indenture Trustee, - _________________ - Defendants-Appellants. - WILLIAM W SCHWARZER, Senior District Judge. These are three consolidated appeals from judgments of the Appeal from the United States District Court district court allowing the bankruptcy trustee to avoid for the Northern District of Ohio at Toledo. mortgages held by the defendants, First Union Home Equity No. 01-07219/7220/7426—James G. Carr, District Judge. Bank and ContiMortgage Corporation, under 11 U.S.C. § 544. In In re Rice, No. 02-4468, the district court exercised Argued and Submitted: March 19, 2004 its appellate jurisdiction under 28 U.S.C. § 158(a) and reversed a judgment by the bankruptcy court, which had Decided and Filed: May 26, 2004 rejected the trustee’s challenge to the validity of the mortgage. In In re Huffman and In re Tucholski, Nos. 03- Before: COLE and GILMAN, Circuit Judges; 3174 and 03-3175, the district court exercised its original SCHWARZER, Senior District Judge.* jurisdiction under 28 U.S.C. § 1334(a) and granted summary judgment upholding the trustee’s challenge to the validity of _________________ the mortgages. We have jurisdiction pursuant to 28 U.S.C. § 158(d). Our review is de novo. Lanier v. Bryant, 332 F.3d COUNSEL 999, 1003 (6th Cir. 2003); Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 88-89 (6th Cir. 1993). For the reasons ARGUED: Gregory W. Happ, Medina, Ohio, for Appellant. stated, we affirm the judgment of the district court. Ericka S. Parker, HUNTER & SCHANK, Toledo, Ohio, for Appellee. ON BRIEF: David A. Freeburg, MCFADDEN & I. ASSOCIATES CO., Cleveland, Ohio, Gregory W. Happ, Medina, Ohio, John C. Deal, KEGLER, BROWN, HILL & We must decide whether the trustee was entitled to avoid RITTER, Columbus, Ohio, Robert B. Holman, the three mortgages under Ohio law. Under the bankruptcy MCDONALD, FRANK, HITZMAN & HOLMAN, Oakwood code, a bankruptcy trustee “may avoid any transfer of Village, Ohio, for Appellants. Ericka S. Parker, HUNTER & property of the debtor or any obligation incurred by the debtor SCHANK, Toledo, Ohio, for Appellees. Michael Sikora III, that is voidable by . . . a bona fide purchaser.” 11 U.S.C. HAVENS & WILLIS, Columbus, Ohio, for Amicus Curiae § 544(a)(3); Buzulencia v. TMS Mortgage, Inc. (In re Baker), 300 B.R. 298, 307 (Bankr. N.D. Ohio 2003) (stating that “[s]ection 544(a) expressly provides that the trustee shall have, as of the commencement of the case, the rights and powers of a bona fide purchaser”). Only properly-executed mortgages take priority over a bona fide purchaser under Ohio * law. OHIO REV . CODE (“ORC”) § 5301.25; Citizens Nat’l The Honorable William W Schwarzer, Senior United States District Bank in Zanesville v. Denison, 133 N.E.2d 329, 332-33 (Ohio Judge for the Northern District of California, sitting by designation. Nos. 02-4468; 03-3174/3175 In re Huffman, et al. 5 6 In re Huffman, et al. Nos. 02-4468; 03-3174/3175 1956). Former ORC § 5301.01 (repealed Feb. 1, 2002) Ohio General Assembly passed ORC § 5301.234 as part of required the presence of two witnesses at the signing of any House Bill No. 163 (1999) (“HB 163”). HB 163 had no title mortgage. The three mortgages at issue were not properly identifying its subject. The bill contained thirty-one sections witnessed and, thus, under the former law the trustee would and amended, reenacted or repealed fifty-three provisions of be entitled to avoid them.1 The question is whether the Ohio Revised Code relating to a wide range of subjects. subsequent changes in Ohio law validate the execution of the Other than the provision at issue here, none related to real mortgages. property. Rather, they involved the following sections of Ohio’s code: State Government, Counties, Municipal A. At the time the mortgages were executed and recorded Corporations, Criminal Procedure, Liquor, Motor Vehicles, during 2000, ORC § 5301.234 (which has since been Public Utilities, Roads and Highways and Taxation. repealed) was in effect. The statute provided that a recorded Section 1 of the bill, which enacted § 5301.234, also enacted mortgage was “irrebuttably presumed to be properly or amended provisions dealing with the appointment of peace executed, regardless of any actual or alleged defect in the officers, Ohio’s public employee retirement and witnessing” of the mortgage. See § 5301.234(A).2 The compensation fund, compensation of county auditors, seizure recording of a mortgage was constructive notice to all of property by law enforcement officials, liquor control persons, including a subsequent bona fide purchaser, enforcement, privacy of information obtained by the registrar regardless of any defect in witnessing. § 5301.234(C). Thus, of motor vehicles, creation of an aviation office in the under § 5301.234, the trustee would be unable to avoid the Division of Transportation Assistance, and food stamp mortgages. trafficking, among others. Thus, § 5301.234 was enacted as part of a bill that on its face violated the one-subject rule. See The district court held that the statute violated the Ohio Wasserman v. Household Realty Corp. (In re Barkley), 263 Constitution’s one-subject rule, however, and we agree. B.R. 553, 558-60 (Bankr. N.D. Ohio 2001) (finding that Article II, § 15(D) of the Ohio Constitution provides, in § 5301.234 violates the one-subject rule). relevant part, that “No bill shall contain more than one subject, which shall be clearly expressed in its title.” The Defendants advance two arguments in support of the validity of § 5301.234. First, they assert that the one-subject rule is merely directory and cannot be applied to invalidate a 1 legislative enactment. They cite Pim v. Nicholson, 6 Ohio St. Although the record is not entirely clear on whether one of the mortgages may have been attested by two witnesses, co unsel for First 176 (1856), where the court stated that “[i]t would be most Union Home B ank conceded at oral argument that only one witness mischievous in practice, to make the validity of every law attested to the signatures. depend upon the judgment of every judicial tribunal of the 2 State as to whether an act or bill contained more than one Ohio Re vised Code § 530 1.23 4(A) provided : subject.” Id. at 180. The Ohio Supreme Court qualified the Any recorded mortgage is irrebuttably presumed to be properly executed, regardless of any actual or alleged defect in the holding of Pim in State ex rel. Dix v. Celeste, 464 N.E.2d 153 witnessing or acknowledgment on the mortgage, unless one of (Ohio 1984), stating that a “gross and fraudulent violation of the following app lies: [procedural] rules might authorize the court to pronounce a (1) the mortgagor, under oath, denies signing the law unconstitutional.” Id. at 157 (quoting Pim, 6 Ohio St. at mortgage; 180). Recent decisions, however, appear to have cut the (2) the mortgagor is not available, but there is other sworn evidence of a fraud upon the mortgagor. ground from under Pim. In Simmons-Harris v. Goff, 711 Nos. 02-4468; 03-3174/3175 In re Huffman, et al. 7 8 In re Huffman, et al. Nos. 02-4468; 03-3174/3175 N.E.2d 203 (Ohio 1999), the Ohio Supreme Court applied the Id. at 1099-1100 (citations omitted). So here, the fifty-three one-subject rule to invalidate a school voucher program provisions of HB 163 lack any semblance of common attached to an appropriations bill upon finding that there was purpose or relationship. The reasoning of the Ohio Supreme a “blatant disunity between topics and no rational reason for Court compels the conclusion that it would hold § 5301.234 their combination [so that] it may be inferred that the bill is to be unconstitutional.3 the result of logrolling.” Id. at 216 (quoting Hoover v. Franklin County Bd. of Comm’rs, 482 N.E.2d 575, 580 (Ohio Defendants’ second argument is that the Ohio Supreme 1985)). While the Simmons-Harris court stated that it did not Court has impliedly held ORC § 5301.234 to be overrule Dix, but only modified it, id., it is clear that the Ohio constitutional. They rely on In re Stewart, 771 N.E.2d 250 Supreme Court no longer treats the one-subject rule as merely (Ohio 2002), in which the court responded to the following directory. In State ex rel. Ohio Acad. of Trial Lawyers v. question certified by the Bankruptcy Appellate Panel for the Sheward, 715 N.E.2d 1062 (Ohio 1999), the Court’s most Sixth Circuit: “Can Ohio Revised Code § 5301.234 be recent case on this subject, the Court struck down Ohio’s applied to presume the validity of a mortgage in a bankruptcy comprehensive tort reform legislation in toto, reasoning: case filed after the effective date of the statute, when the mortgage at issue in the bankruptcy case was recorded before [T]his court has been emphatic about its reluctance to the statute’s effective date?” Id. at 250-51. The court interfere or become entangled with the legislative process responded to the certified question in the affirmative. Id. at . . . . On the other hand, we have been equally emphatic 251. about not extending this reluctance to impede the legislative process so far as to negate the one-subject Defendants argue that this response implies that the statute provision of Section 15(D), Article II. . . . With these is constitutional on the theory that, to determine that the principles in mind, we have adopted the position that the statute operated retroactively, the court necessarily had to find “one-subject provision is not directed at plurality but at that it was valid. This contention is unavailing. The disunity in subject matter.” . . . Undoubtedly, Bankruptcy Appellate Panel’s order certifying the question to Am.Sub.S.B. No. 350 embraces a multitude of topics. the Supreme Court stated that “the parties in the captioned The bill affects some eighteen different titles, thirty-eight cases did not raise the constitutionality issue. The question different chapters, and over one hundred different being certified by the Panel assumes, without deciding, that sections of the Revised Code, as well as procedural and the statute is constitutional and raises the issue of how the evidentiary rules and hitherto uncodified common law. statute is to be applied under Ohio law.” The order also noted The pivotal question is whether these various topics that the constitutional issue had been separately certified in share a common purpose or relationship, i.e., whether they unite to form a single subject for purposes of Section 15(D), Article II of the Ohio Constitution. . . . With all due respect and deference to the General Assembly, it is simply impossible to uphold the constitutionality of Am.Sub.H.B. No. 350 under the one- subject provision of Section 15(D), Article II of the Ohio 3 Constitution. This court must decide the question of § 5301.234’s validity by predicting how the Ohio Supreme Court would decide it. James v. Meow Media, Inc., 300 F.3d 683 , 689 (6th C ir. 200 2). Nos. 02-4468; 03-3174/3175 In re Huffman, et al. 9 10 In re Huffman, et al. Nos. 02-4468; 03-3174/3175 another proceeding.4 Thus, we cannot say that the Ohio Therefore, the law in effect at the time these cases were Supreme Court passed on the constitutionality question. commenced was former § 5301.01, which required the presence of two witnesses at the signing of the mortgages. Section 5301.234 being unconstitutional, it had no force at the commencement of the cases and could not bar the trustee B. A question remains, however, whether the amended from avoiding the mortgages. Rossborough Mfg. Co. v. version of ORC § 5301.01 saves the mortgages. In 2001, Trimble, 301 F.3d 482, 491 (6th Cir. 2002) (“The rule in Ohio after the filing of the complaints in the case at bar, the Ohio has long been that when a statute is held to have been legislature amended § 5301.01 by adding a savings provision. unconstitutional as of its enactment, that statute is void Under that provision, a mortgage executed prior to the ab initio.”); see also City of Middletown v. Ferguson, 495 amendment’s effective date is presumed valid even if not N.E.2d 380, 388 (Ohio 1986) (“‘An unconstitutional act is not attested by two witnesses, unless the mortgagor’s signature a law; it confers no rights; it imposes no duties; it affords no thereon was obtained by fraud. § 5301.01(B)(1)(a). protection; it creates no office; it is, in legal contemplation, as Moreover, “[t]he recording of the [mortgage] in the office of inoperative as though it had never been passed.’”) (quoting the county recorder . . . is constructive notice of the Norton v. Shelby County, 118 U.S. 425, 442 (1886)).5 instrument to all persons.” § 5301.01(B)(1)(b). The provision, on its face, appears to save the mortgages. But the amended statute, though retroactive by its terms, 4 The Supreme Court did not answer the question certified in that cannot be applied retroactively to impair the trustee’s vested proceeding. Hu nter v. First Union Home Equity Bank, 759 N.E.2d 784 rights. The statute specifically protects vested rights; (Ohio 200 1). § 5301.01(B)(2) states that “[d]ivision (B)(1) of this section 5 does not affect any accrued substantive rights or vested rights Ohio courts recognize an exception to this rule “in those case s in that came into existence prior to the effective date of this which contractual rights have arisen or a party has acquired vested rights under prior law.” Roberts v. Treasurer, 770 N.E.2d 1085, 1091 (Ohio Ct. amendment.” Because § 5301.234 was unconstitutional, the App. 2001). That exception is not applicable here b ecause § 5 301 .234 did original version of § 5301.01 was the only valid law in effect not create a vested right in Defendants. “[A] fundamental distinction at the time the debtors’ petitions were filed, and its provisions exists between a law changing accrued substantive rights and a law which (requiring two witnesses) controlled. As the trustee was changes the remedy for the enforcement of those rights.” Weil v. entitled to avoid the mortgages under former § 5301.01, her Taxicabs of Cincinnati, Inc., 39 N.E.2d 148, 151 (Ohio 1942). A law changes substantive rights when it “creates or imposes an obligation rights vested, and by the terms of § 5301.01(B)(2) they are where none existed before,” whereas remedial provisio ns “have to do with not affected by the subsequent amendment. See McClatchey the methods and procedure by which rights are recognized, protected and v. Altegra Credit Co. (In re Carte), 303 B.R. 338, 342 (Bankr. enforced, not with the rights themselves.” Id.; see also Bielat v. Bielat, S.D. Ohio 2003); Baker, 300 B.R. at 307-308 (“Section 721 N.E .2d 2 8, 33 -34 (O hio 2000 ). Sectio n 5301.2 34 w as rem edial: it did 544(a) vests a trustee’s rights as a bona fide purchaser of real not grant Defend ants any rights, but rather changed the quantum of proof required to recognize, protect and enforce the rights created by the property as of the commencement of the case.”). Amended mortgage contra cts. Cf. In re Stew art, 771 N.E.2d at 250-51 (advising § 5301.01, therefore, does not divest the trustee of the rights that § 53 01.2 234 can “b e app lied to p resum e the validity of a mortgage she had as a bona fide purchaser under the law governing at in a bankrup tcy case filed after the effective date of the statute, when the the commencement of these cases, and she was entitled to mortgage at issue in the bankruptcy case was recorded before the statute’s avoid the mortgages. effective date”). Nos. 02-4468; 03-3174/3175 In re Huffman, et al. 11 II. Defendants also argue that we should reverse the district court’s ruling because it violated the Eleventh Amendment of the United States Constitution. This contention is patently meritless. The Eleventh Amendment protects a state from actions seeking relief from the state. See Doe v. Wigginton, 21 F.3d 733, 736 (6th Cir. 1994); see also Edelman v. Jordan, 415 U.S. 651, 662-63 (1974). Although the complaints named the Ohio Attorney General as a defendant, they sought no relief from or against the state, but only against the mortgage holders. CONCLUSION For the reasons stated, the judgments of the district court are AFFIRMED.