Chapter 13 debtor whose mobile home was involuntarily converted to real
property by court order had standing to seek avoidance of a perfected lien
on the real property under Section 522(h)(1) of the bankruptcy code. A
copy of the opinion is attached.
The borrower in this matter gave Countrywide Home Loans ("Countrywide") a
note and mortgage on an unimproved lot in consideration for a loan. She
then used the loan proceeds to purchase a manufactured home, and placed
that home on the mortgaged real property. Under the terms of the
mortgage, Countrywide was granted a lien against the real property and
"all improvements now or hereafter erected on the property, and all
easements, appurtenances, and fixtures now or hereafter a part of that
property." Several years later, the borrower filed for bankruptcy under
Chapter 7 and was granted a discharge; she did not reaffirm the debt.
After a subsequent default, Countrywide initiated foreclosure proceedings.
In its foreclosure complaint, Countrywide asserted that while the parties
had intended the mortgage to secure a valid, first lien on the
manufactured home, the borrower had failed to surrender the title to the
manufactured home, thus preventing the Countrywide from noting its lien on
the title to the manufactured home. Countrywide obtained a judgment from
the state court that it had a valid first priority lien on the real
property, that the real property be sold to satisfy Countrywide's lien,
and that the manufactured home be "deemed converted to real estate."
Shortly thereafter, the borrower filed a Chapter 13 petition. Countrywide
sought relief from the stay, but the borrower responded by filing an
adversarial complaint, asserting that Countrywide had failed to properly
perfect its lien on the manufactured home. Countrywide moved for summary
judgment on the bases that the borrower lacked standing to bring the
adversary proceeding because the mortgage lien was consensual, that the
borrower's claim was barred by res judicata as a result of the prior
Chapter 7 case, and that the prior state court judgment prevented
avoidance of Countrywide's lien. The borrower filed a similar cross
motion for summary judgment, disputing each of Countrywide's assertions.
The bankruptcy court denied both parties' motions, and ruled that the
borrower did have standing because the lien at issue was created by a
non-consensual judgment lien. After renewed cross motions from both
parties, the bankruptcy court eventually again ruled in favor of the
borrower, concluding that "the only manner in which to perfect a lien on a
manufactured home under Kentucky law is by noting the lien on the
certificate of title, that Countrywide had failed to perfect its lien, and
that even if Countrywide had perfected its lien, such lien was avoidable
as a preference." On appeal, the Bankruptcy Appellate Panel upheld the
bankruptcy court's judgment and order in favor of the borrower, and
Countrywide appealed to the Sixth Circuit.
The Sixth Circuit noted that, under Kentucky law, "a manufactured home is
personal property for which a certificate of title is required" and that
"[i]n order to perfect a lien on personal property, the lien must be noted
on the certificate of title." However, the Court also noted that "a
manufactured home may also be converted from personal property to an
improvement to real estate.thereby allowing perfection through first
recording without notice."
The Court further noted that "the plain language of the mortgage contract
did not grant Countrywide a lien on [the borrower's] manufactured home as
personal property." Accordingly, "unless converted to an improvement to
real estate, Countrywide did not obtain a security interest in the
manufactured home through the mortgage contract."
The Court also considered various state-law decisions in ruling that "even
if Countrywide obtained a lien against the manufactured home by way of the
mortgage contract, it is undisputed that Countrywide did not note this
security interest on the certificate of title, and the filing of a lis
pendens cannot serve to perfect a security interest in a manufactured
home" and thus, "before the state-court foreclosure judgment, Countrywide
did not have a perfected lien on the borrower's manufactured home."
The Court then examined the state court order of sale converting the
borrower's manufactured home to an improvement to real property, and
concluded that the state court judgment created a perfected security
interest in the manufactured home. The Court also noted that, because the
borrower did not appeal the state court judgment, the conversion was
binding under the doctrine of res judicata.
In addition, the conversion also placed the manufactured home "clearly
within the terms of the mortgage contract," which then "granted a security
interest in favor of Countrywide on the listed real estate, together with
'all the improvements now or hereafter erected on the property.'"
Accordingly, the Court ruled, "upon the entry of the state-court judgment.
Countrywide possessed a perfected lien on the borrower's manufactured
The Court then considered whether the borrower had standing to seek
avoidance of Countrywide's perfected lien. Considering the language of
Section 522(h) of the Bankruptcy Code, the Court ruled that "a Chapter 13
debtor has standing to avoid a transfer under Section 522(h) if five
conditions are met: (1) the transfer was not voluntary; (2) the transfer
was not concealed; (3) the trustee did not attempt to avoid the transfer;
(4) the debtor seeks the avoidance pursuant to Sections 544, 545, 547,
548, 549, or 724(a) of the Bankruptcy Code; and (5) the transferred
property is of a kind that the debtor would have been able to exempt from
the estate if the trustee had avoided the transfer under one of the
provisions in Section 522(g)."
The Court ruled that Countrywide did not obtain a perfected security
interest in the manufactured home until it "was converted to an
improvement to real estate, thereby bringing the home within the
boundaries of the mortgage contract," and thus, "while a transfer in real
property did occur through the mortgage contract, the mortgage was not the
Rather, the Court ruled, the "conversion of [the borrower's] manufactured
home to an improvement to real property was involuntary because it was
accomplished by operation of law without consent." Countrywide did not
dispute that the borrower met requirements 2 through 4 of Section 522(h),
and therefore, the Court ruled, the borrower "possesses direct standing"
to avoid Countrywide's lien pursuant to Section 522(h).
Finally, the Court also considered whether the lien was properly avoided
pursuant to Section 547, which as you may recall allows for the avoidance
transfers within the 90 days period before the filing of a bankruptcy
petition. The Court first examined a prior decision holding that under
Section 547, "a transfer is deemed to have been made at the time the
transfer is perfected, if perfection takes place more than 30 days after
However, the Court ruled, "the creation and perfection of Countrywide's
interest in the manufactured home occurred at the time of the state-court
judgment. [which was] well-within the 90-day preference period" and
therefore, the Court ruled "Countrywide's lien on the manufactured home
was properly avoided pursuant to Section 547.5."
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at:
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.