MEMORANDUM OPINION AND ORDER GRANTING SUMMARY JUDGMENT IN FAVOR OF PLAINTIFF
ROBERT D. BERGER, Bankruptcy Judge.
The parties have filed cross-motions for summary judgment.
The Trustee sued
Defendant M
&
I Marshall & Ilsley Bank (“M & I”) to avoid preferential transfers and to recover real property or its value for the benefit of the Estate under 11 U.S.C. §§ 544, 547, and 550. This matter constitutes a core proceeding over which this Court has jurisdiction.
There being no genuine issue of material fact, the Court grants the Trustee’s motion and denies the Defendant’s motion.
Findings of Fact
Debtors filed for bankruptcy on March 29, 2007. M
&
I’s claim arises out of a series of promissory notes dated from October 25, 2002, to December 9, 2004, executed by Debtors’ businesses, Recycle Solutions, L.L.C., and Digital Waste, LLC. Debtors are personally obligated on the notes by either executing the notes individually or personally guarantying them. As of the petition date, Debtors owe M & I $540,649.39, of which M & I claims $50,000.00 is secured. The notes were partially secured by various personalty; however, the following described real estate is the only alleged collateral at issue in this proceeding.
On the petition date, Debtors claimed equitable interests as vendees under two separate contracts for deed for property located in Sunflower Estates, Johnson County, Kansas. Debtors purchased Lots 1, 2, and 3 from Richard and Annette Gratny on September 24, 2002. Debtors then purchased Lot 4 from Charles and Diane Pettit on February 2, 2003 (collectively, the “Contracts”).
In 2005, M
&
I requested Debtors provide additional collateral to support the outstanding indebtedness owed to M
&
I. On August 18, 2005, by two separate assignments, Debtors assigned their equitable interests in the Contracts to M & I (the “Assignments”). Both Assignments are identical in form and recite the various loan agreements by which Debtors are indebted to M & I. Each Assignment references and describes the relevant Contract assigned. The Assignments then read, in part, as follows:
Assignor desires to absolutely assign to Assignee the interest of Assignor in and under the Contract, as primary and not as secondary security both for the payment of all the above Indebtedness.
IN CONSIDERATION of the loans made to Assignor, the mutual covenants contained in this Assignment and for other good and valuable considerations, the receipt and sufficiency of which are acknowledged by Assignor, the parties agrees [sic] as follows:
1. Assignor absolutely and not conditionally assigns, transfers, set over, and conveys to Assignee (a) all present and future right, title, and interest of Assignor in, to, and under the Contract; and (b) all rents, fees, issues, proceeds, profits, income, payments, benefits, and advantages from the Property and any personal property owned by Assignor and located on the Property.
2. The Assignment will remain in effect until (a) all debts and other obligations evidenced by the above promissory notes and guaranties are timely paid in full; or (b) this Assignment is voluntarily released by Assignee.
3. Assignor must continue to make all payments and fulfill all of the terms and conditions of the Contract [for Deed], unless and until default occurs in the payment of the Indebtedness under the loan documents or Assignor
fails to perform any of the terms of the Contract.
4. Assignor will be in default under the Assignment upon the happening of any one or more of the following events:
a. Failure of Assignor to make any payment or perform any obligation contained in the above-described promissory notes, or in any of the other loan documents, or in this Assignment.
c. The Contract or the Property are encumbered without the prior written consent of Assignee, is subject to any levy, seizure, or attachment.
e.Assignor attempts to modify the Contract without obtaining prior written consent of the Assignee.
5. Upon the occurrence of an event of default, as defined above, Assignee will notify Owner [either the Gratnys or Pettits, as applicable] of this default and Assignee will have the right to take possession and control of the Property and all rights related to the Contract, without any notice to Assignor. After default, Assignor agrees that they have no further rights under the Contract, except as permitted by the Assignee.
6. The remedies provided in this Assignment and in the other loan documents are cumulative and not mutually exclusive....
7. The following provisions are additional terms of this Assignment:
a. Assignee has no duty to maintain, repair, or protect the Contract or the Property.
d. All obligations of Assignor will bind its trustees, custodians, successors, and assigns.
f. Nothing in this instrument will be construed to amend, modify, or change any of the terms and obligations under the promissory notes or loan documents.
g. Assignor agrees to fully defend and indemnify Assignee against any loss, cost, liability, claim, or assertion arising under the Contract.
Debtors executed and delivered the Assignments to M & I. Debtors did not receive any credit toward the debt owing to M & I or receive any new value in exchange for the Assignments. On December 9, 2005, M & I filed the Assignments with the Johnson County Register of Deeds. M
&
I paid a $44.00 filing fee to record the Gratny Contract Assignment and a $40.00 filing fee to record the Pettit Contract Assignment. M & I also recorded Affidavits of Equitable Interest pertaining to each property and paid a $12.00 filing fee for each affidavit (the “Affidavits”). The Affidavits also reference the relevant Contract by date, parties, and legal description of the property. The Affidavits aver they are given “solely for the purpose of providing notification that the Contract for Deed described above has been assigned to the Affiant.” M & I did not pay a Kansas mortgage registration fee for any of the Assignments or Affidavits filed.
On December 29, 2006, Debtors sold their equitable interest in Lot 2 under the Gratny Contract for $155,000.00.
M
&
I
received $24,758.75 from the Lot 2 sale proceeds.
On July 24, 2007, after notice of intended sale, this Court approved the Trustee’s proposed sale of Debtors’ equitable interests in Lots 1, 3, and 4 for a purchase price of $450,000.00 free and clear of all liens, claims, interests, and encumbrances. After sale expenses, the Trustee holds net proceeds of $39,408.55.
On December 19, 2007, the Trustee filed the instant complaint to recover the $24,758.75 in pre-petition proceeds received by M & I for the sale of Lot 2 as a preferential transfer. The Trustee also seeks to avoid the Assignments as unper-fected encumbrances on Debtors’ real estate and retain the net sale proceeds of $39,408.55 from the post-petition sale of Lots 1, 3, and 4 for the benefit of the Estate. The Trustee maintains the Assignments were unperfected mortgages because M & I did not pay a mortgage registration fee when it recorded either Assignment.
M & I counters the Assignments were absolute conveyances, so the lots were never property of the Estate. In the alternative, M & I argues the Kansas mortgage registration fee is merely a revenue producing tax and does not keep the Assignments from being perfected mortgages against the real estate.
The first issue is whether the Assignments and Affidavits constitute absolute transfers or security transfers. The second issue is if the transactions were security transfers, whether they were properly perfected prior to the preference period.
Conclusions of Law
A. Summary Judgment Standard
Summary judgment is appropriate if the moving party demonstrates there is no genuine issue as to any material fact, and he is entitled to judgment as a matter of law.
The moving party bears the initial burden of demonstrating an absence of a genuine issue of material fact and entitlement to judgment as a matter of law.
A movant who does not bear the ultimate burden of persuasion at trial must demonstrate to the court a lack of evidence from the other party on an essential element of that party’s claim.
If the movant meets this burden, the nonmovant who would bear the burden of persuasion at trial must go beyond the pleadings and set forth specific facts which would allow the court to find for the nonmovant.
Cross-motions for summary judgment allow the court to assume the only evidence to be considered has been submitted with the pleadings. However, cross-motions are to be considered independently, and summary judgment is not appropriate if disputes remain as to any material fact.
The court resolves any conflicting inferences drawn from undisputed evidentiary facts. All inferences are to be construed in favor of the non-moving party.
Only when reasonable minds could not differ as to the import of the proffered evidence is summary judgment proper.
B. Controlling Law
When a debtor files for bankruptcy, the debtor’s legal and equitable interests in property become property of the estate.
State law usually defines the debtor’s rights in the property.
Federal law provides the trustee with rights of a bona fide purchaser of a debtor’s real property under § 544(a)(3). However, a Chapter 7 trustee receives the property subject to any restrictions imposed on the debtor’s rights by state law. Thus, whether the Chapter 7 trustee receives property into the estate depends on the debtor’s interest in the property as of the petition date. Likewise, whether a creditor holds a security interest and whether the security interest is unperfected, and therefore avoidable, is also controlled by state law.
C. Kansas Contracts for Deed
A buyer under a Kansas contract for deed on real property becomes the equitable owner of the real property and the seller retains legal title as security for the purchase price.
K.S.A. § 79-3101 provides:
An executory contract for the sale of real estate, or a bond for a deed, the complete performance of which is deferred for a longer period than ninety days from its execution, under which the grantee or vendee is entitled to the possession of such real estate, by the terms of which the grantor holds the legal title as security for the unpaid purchase money, shall for the purpose of this [Mortgage Registration and Intangibles Act] be treated as a mortgage of real property to secure the balance of the unpaid purchase price.
Thus, a Kansas contract for deed is treated as an equitable mortgage. The buyer is analogous to a mortgagor and the seller is analogous to a mortgagee. The contract for deed constitutes a first lien encumbering the real property.
D.Defining a Mortgage under Kansas Law
The vendee’s interest under a contract for deed is an interest in real property which may be transferred or mortgaged.
A buyer under a contract for deed who mortgages his equitable interest in the real property is thus granting a second mortgage. The second mortgage is behind the contract for deed which evidences the seller’s first equitable mortgage for the remainder of the purchase price. The second mortgage is enforceable only so long as the contract for deed is kept in force; however, the second mortgagee obtains an interest in the real estate, not the contract.
Under Kansas law, a mortgage of real property is an instrument creating or imposing a lien on real property.
No particular form is necessary. All that is necessary is a debt and real property encumbered as security for payment of the debt.
The test in determining whether a transaction is an absolute conveyance or a
mortgage is whether, after the transaction, a debtor and creditor relationship continues between the parties.
While the form of the instrument may state an absolute conveyance is being entered, a continuing debt evidences the instrument is in reality a mortgage.
Thus, whether the instrument is titled a mortgage, a security agreement,
an assignment,
an affidavit, a trust indenture,
or a bond resolution,
if the instrument pledges land for the payment of money, the instrument is a mortgage. In
Assembly of God,
the Kansas Supreme Court considered whether a bond resolution created a lien on real property as to make it subject to the mortgage registration fee.
The resolution provided the property could not be encumbered while the bonds were outstanding and contained provisions relating to insurance, acceleration, and default. In finding the resolution to be a mortgage, the court found the resolution created a lien on real property to secure the repayment of the bonds. The court deemed a provision stating the instrument was not intended as a mortgage to be a self-serving statement which did not detract from the more obvious purpose of the document as a whole.
Thus, an instrument is a mortgage regardless its title if it includes a recital of a debt and a lender claiming an interest in real property belonging to the debtor.
E. Perfecting a Mortgage under Kansas Law
In analyzing preferential transfers, the transfer date is set as the date of perfection.
A transfer of real property is perfected when a bona fide purchaser cannot acquire an interest superior to the interest of the transferee.
In Kansas, transfers of an interest in real property must be evidenced by a written document and perfected by recording the document with the register of deeds of the county in which the real estate is situated.
The law’s purpose is to provide a public notice recording system for transactions affecting real property titles.
Recording imparts notice of the transferred interest to all subsequent purchasers and mortgagees.
Unrecorded documents or improperly recorded documents remain valid as between the parties to the transaction; however, failure to record the document properly keeps the transaction from being properly perfected and thus renders the mortgage vulnerable
to a bankruptcy trustee’s avoidance powers.
F. The Mortgage Registration Fee
Recording a mortgage is not free. Before any mortgage of real property is received and filed for record, there shall be paid to the register of deeds of the county in which such property or any part thereof is situated a registration fee of .26 percent of the principal debt or obligation which is secured by such mortgage.
Any mortgage of real property on which the registration fee has not been paid shall not be filed for record by any register of deeds, and such mortgage shall not be received in evidence in any suit, action or proceeding, and no judgment, decree or order for the enforcement shall be rendered, made or entered in or by any court in this state.
If a mortgagee does not pay for public notice, a mortgagee is not entitled to the benefits of public notice. In short, no fee, no judgment, no enforcement, no mortgage.
The fee’s purpose is to insure the cost of the mortgage recording system is borne by those seeking its protection, namely, the mortgagees.
Thus, without payment of the mortgage registration fee, the mortgage is without force.
“[0]ne who owns a mortgage cannot refuse to pay taxes to support the courts, and then resort to the courts to collect his mortgage.”
While failure to pay the registration fee does not void the mortgage as between the parties, the mortgage cannot be enforced until the fee is paid.
Outside bankruptcy, there is no stated deadline to pay the fee.
Ordinarily, the registrar’s refusal to file the instrument until payment is tendered is sufficient to insure the fee is timely paid. However, registrars have made mistakes and mortgages have been recorded without payment of the fee.
For example, in
Nebraska Hardware,
a mortgagee initiated an action to enforce a mortgage before the fee was paid. The mortgagor protested the action could not proceed. However, the court noted the fee was paid during the pendency of the trial and before the court received the instrument into evidence. Thus, the mortgage was enforceable under the statute at the time the court admitted the evidence. The court found the mortgagee’s desire to enforce its mortgage by resorting to the courts provided the incentive to insure the fee’s pay
ment.
On the other hand,
Ditzen
dismissed the mortgage enforcement action because the fee had never been paid. The court found the mortgagee had never complied with the statute and consequently no judgment could be based on the mortgage.
The conclusion of Kansas cases dealing with a recorded mortgage for which no registration fee has been paid is to definitively reiterate: No court may enter judgment on a mortgage for which the fee remains unpaid. Thus, in order to have an enforceable mortgage, that is, a perfected mortgage, the last act necessary under Kansas law is to pay the mortgage registration fee. Outside bankruptcy, this act may occur anytime up to entry of the mortgage instrument into evidence. If the case is submitted for judgment without payment of the fee,
Ditzen
holds the action must be dismissed.
G. Mortgage Registration Fee Exemption
The mortgage registration fee statute contains exemptions. No registration fee whatsoever shall be paid, collected or required for or on any mortgage or other instrument given in the form of an affidavit of equitable interest solely for the purpose of providing notification by the purchaser of real property of the purchaser’s interest.
This exemption provides the buyer under a contract for deed a way to give notice of his interest in the real property without being required to pay a mortgage registration fee. Because the contract for deed is treated as a mortgage with the seller as mortgagee, the seller should pay the registration fee; however, the cost, in reality, is passed to the mortgagor. This exemption allows the buyer/mortgagor to protect his interest while the seller/mortgagee retains legal title to the property as security for the debt. This exemption applies only to buyers under a contract for deed and cannot be used by anyone else who obtains an interest other than as a buyer. Further, the affidavit must be filed “solely for the purpose of providing notification” of the buyer’s interest. The affidavit may not incorporate another document, such as the contract for deed itself, to establish the interest.
The carve-out provides an exemption from taxation and must be narrowly construed.
If the affidavit provides notice of anything else, it does not satisfy the statute’s requirements and may not be recorded without paying a mortgage registration fee.
H. Analysis
Applying the law to the facts, the Assignments are unquestionably mortgages as a matter of Kansas law. The Assignments recite Debtors’ prior indebtedness to M & I and further recite the Contracts are given as primary security for the preexisting debt. Although both Assignments contain one paragraph stating the transfer is unconditional, the Assignments then each contain at least six paragraphs listing several conditions of the transfers, including releasing the Assignments upon payment of the underlying debt; providing M & I with cumulative remedies upon Debtors’ default; requiring Debtors to keep the underlying Contracts in effect; prohibiting Debtors from further encumbering their equitable interests without M
& I’s prior permission; and requiring Debtors to continue to make payments under the Contracts. All responsibilities indicative of property ownership under the Contracts are left to the Debtors, and no obligations under the Contracts are transferred to M & I. Under
Garnett State Savings Bank
and other Kansas cases cited herein, the Assignments must be deemed mortgages of Debtors’ equitable interest under the Contracts.
Similarly, the Affidavits are nothing more than an attempt to give notice of M
&
I’s lien against Debtors’ property interest. The Affidavits are not limited to giving notice of an equitable interest in real property by a purchaser under a contract for deed. The Affidavits identify and incorporate the Contracts and the Assignments and, thus, give notice of two encumbrances: the sellers’ first priority interest under the Contracts and M & I’s second mortgage on Debtors’ interest under the Contracts. Therefore, the Affidavits do not meet the sole purpose requirement of K.S.A. § T9 — 3102(d)(5), which is limited to providing notice of a purchaser’s interest under a contract for deed. Further, the Affidavits are subscribed and sworn to by a person acting as an agent of M & I. M & I is not purchasing the real property under a contract for deed. Therefore, M & I does not qualify for a mortgage fee exemption with the Affidavits. Neither the Assignments nor the Affidavits should have been recorded without payment of the mortgage registration fee.
M & I argues K.S.A. § 79-3102 does not address perfection, and payment of the mortgage registration fee has no bearing on whether a mortgage is properly perfected. This is not true. The statute clearly states the mortgage cannot be enforced in a court of law without a fee payment. Those seeking protection of the notice system must pay for it. In this case, the fact the mortgage made it onto the public record without payment of the fee is insufficient to defeat a bona fide purchaser for although the Assignments appear in the record, they remain inadmissible and unenforceable in court. Consider a hypothetical for the purposes of § 547(e)(1)(A). If Debtors had sold their equitable interest to a third party, M & I would need to seek enforcement of its mortgage against the land through a quiet title action against the purchaser. Although M & I would argue (and does argue) its mortgage appears on the public record thereby providing notice of its claim, the court could not accept the mortgage into evidence without payment of the fee. M & I cannot claim the benefits of Kansas’s recording system without paying for it. M
&
I would be treated like any other mortgagee attempting to enforce an unrecorded mortgage. Likewise, M & I cannot accomplish notice indirectly with the Affidavits, having failed to pay any fee. Without payment of the fee, the court could not admit evidence of the mortgage.
Ditzen
requires the case be dismissed. The purchaser would prevail in the hypothetical quiet title action as the Trustee must in this case.
The cases relied on by M & I are distinguishable.
All involved partial or insufficient payment of the mortgage registration fee, not a complete failure to pay the fee at all. The statute says no fee, no enforcement. Because the fee supports the costs
of those who would seek to resort to the courts to enforce their mortgage agreements, mortgagees must pay the fee before the document may be admitted into evidence — regardless the fact the mortgage was recorded in contravention to the law in the first place.
Kruckenberg
specifically notes partial payment allows the mortgage instrument to be entered into evidence, but the mortgagee who fails to pay any fee will not be able to avoid the full force of the statute’s penalty.
Kruckenberg
is consistent with
Coryell
and its progeny which found the mortgagee could make its mortgage enforceable by paying the fee on the eve of offering the mortgage instrument into evidence. In this case, no argument is made that any portion of the fee has been paid.
While the result may seem draconian, perfection requires strict adherence to the statutes. For example, a notary’s failure to date the acknowledgment of a mortgage instrument can strip a mortgagee of his ability to enforce the mortgage.
An undated mortgage is not entitled to be recorded under Kansas law; thus, a recorded but undated mortgage does not provide the requisite notice to survive avoidance by the trustee’s strong-arm powers.
Similarly, a purchase-money security interest in an automobile is not perfected by filing a notice of security interest if the creditor does not also comply with Kansas’s certificate of title laws.
Lastly, a recorded mortgage is insufficient to perfect a security interest in the seller’s rights under a contract for deed.
A security interest in the seller’s interest must be perfected by filing a financing statement with the Kansas Secretary of State.
What these cases show is while the creditor’s interest may be part of the public record, such notice is without legal effect without strict compliance with the relevant statute pertaining to enforcing the interest.
The Assignments were transfers of Debtors’ property on account of an antecedent debt. The Assignments were never properly perfected, that is, they were unenforceable as of the petition date as against a bona fide purchaser. The Debtors are presumed to have been insolvent. The recording of the Assignments and Affidavits without payment of the mortgage registration fee could not impart notice as a matter of Kansas law. Accordingly, summary judgment is appropriate in favor of the Trustee.
I. Conclusion
For the foregoing reasons, M & I’s Motion for Summary Judgment is DENIED.
The Trustee’s Motion for Summary Judgment is GRANTED and judgment is entered in the Trustee’s favor on the Complaint. The Assignments and Affidavits are void and avoided under 11 U.S.C. § 544 and other applicable law.
IT IS SO ORDERED.