                    ELECTRONIC CITATION: 2007 FED App. 0013P (6th Cir.)
                                 File Name: 07b0013p.06

             BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: WILLIAM COCANOUGHER and                      )
TINA COCANOUGHER,                                   )
                                                    )
            Debtors.                                )
______________________________________              )
                                                    )
MG INVESTMENTS, INC. and                            )
CITIFINANCIAL MORTGAGE CO., INC.,                   )             No. 06-8049
                                                    )
               Defendants-Appellants,               )
                                                    )
               v.                                   )
                                                    )
ANNA C. JOHNSON, TRUSTEE,                           )
                                                    )
            Plaintiff-Appellee.                     )
______________________________________              )


                         Appeal from the United States Bankruptcy Court
                        for the Eastern District of Kentucky, at Lexington.
                                 No. 05-52759; Adv. No. 05-5124.

                                     Argued: August 1, 2007

                             Decided and Filed: November 14, 2007

           Before: AUG, GREGG, and LATTA, Bankruptcy Appellate Panel Judges.

                                     ____________________

                                           COUNSEL

ARGUED: Dennis R. Williams, ADAMS, STEPNER, WOLTERMANN & DUSING, Covington,
Kentucky, for Appellants. John D. Kermode, ATKINSON, SIMMS & KERMODE, Lexington,
Kentucky, for Appellee. ON BRIEF: Marc D. Dietz, ADAMS, STEPNER, WOLTERMANN &
DUSING, Covington, Kentucky, for Appellants. John Martin Simms, ATKINSON, SIMMS &
KERMODE, Lexington, Kentucky, for Appellee.
                                     ____________________

                                           OPINION
                                     ____________________

        J. VINCENT AUG, JR., Chief Bankruptcy Appellate Panel Judge. In this appeal, the
Appellant, Citifinancial Mortgage Co., Inc., f/k/a Associates Home Equity Service, Inc. as successor
in interest to MG Investments, Inc. (“Citifinancial”), appeals the bankruptcy court’s judgment
voiding Citifinancial’s security interests in real estate owned by the Debtors, William and Tina
Cocanougher. The bankruptcy court voided the mortgages based on its finding that both mortgages
were defective because the names of the Debtors do not appear in the body of the acknowledgment
certificate as required by Kentucky Revised Statute § 423.130. Subsequent assignments of the
mortgages were also defective because they failed to provide a brief description of the notes and the
date of the notes as required by Kentucky Revised Statute § 382.290. As a result of the defects in
the documents, the bankruptcy court found that neither the mortgages nor the assignments were
sufficient to put the trustee on notice of Citifinancial’s mortgages. We AFFIRM the decision of the
bankruptcy court.

                                    I. ISSUES ON APPEAL

       The issues raised by this appeal are:

        1.      Whether summary judgment was warranted on the Trustee’s complaint to avoid
Citifinancial’s mortgages based on the defective notary clauses that did not comply with Kentucky
law. See 11 U.S.C. § 544; Ky. Rev. Stat. § 382.270.

       2.      Whether the assignments of the mortgages were sufficient to give the Trustee
constructive notice or inquiry notice of Citifinancial’s security interest.

       3.    What effect, if any, does the amendment to Kentucky Revised Statute § 382.270
which became effective July 12, 2006, have on the Trustee’s ability to avoid the mortgages.

                    II. JURISDICTION AND STANDARD OF REVIEW

         The Bankruptcy Appellate Panel (“BAP”) of the Sixth Circuit has jurisdiction to decide this
appeal. By order entered September 8, 2006, the United States District Court for the Eastern District
of Kentucky authorized appeals to the BAP. A final order of the bankruptcy court may be appealed
as of right. 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order “ends the litigation on the
merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v.
United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The bankruptcy
court’s order granting the Trustee’s motion for summary judgment resulting in the avoidance of
Citifinancial’s mortgage liens is a final order and states conclusions of law that are reviewed de
novo. Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir.
2001). “De novo means that the appellate court determines the law independently of the trial court’s
determination.” Id.

      Because there are no factual disputes, summary judgment is appropriate for one of the parties.
See Rogan v. Am.’s Wholesale Lender d/b/a Countrywide Home Loans, Inc. (In re Vance), 99 F.
App’x 25, 27 (6th Cir. 2004).

                                                 -2-
                                           III.   FACTS

       The facts of this appeal are set forth below in chronological order.

        March 20, 2000: The Debtors granted a first mortgage on real estate to MG Investments
securing a note in the principal amount of $98,800. On March 22, 2000, the mortgage was recorded
in the Office of the Clerk for Mercer County, Kentucky (“Mercer County Clerk’s Office”).

       March 20, 2000: The Debtors granted a second mortgage on the same real estate to MG
Investments securing a note in the principal amount of $24,700. On March 22, 2000, the second
mortgage was recorded in the Mercer County Clerk’s Office.

        May 23, 2000: MG Investments assigned the first mortgage to Associates Home Equity
Services, Inc. and that assignment was recorded on June 5, 2000, in the Mercer County Clerk’s
Office.

         May 23, 2000: MG Investments assigned the second mortgage to Associates Home Equity
Services, Inc. and that assignment was recorded on June 7, 2000, in the Mercer County Clerk’s
Office. Presumably, sometime after the assignments were entered into, Associates Home Equity
Services, Inc. became known as Citifinancial Mortgage Co., Inc. Neither party has referenced any
filings that would give notice of this change.

       July 22, 2005: The Debtors filed their chapter 7 petition.

       September 8, 2005: Anna C. Johnson (the “Trustee”) filed an adversary complaint seeking
to avoid the mortgages of Citifinancial.

        March 8, 2006: The bankruptcy court granted the Trustee’s motion for summary judgment
avoiding the mortgages based in part on the court’s finding that the notary clauses in both mortgages
are defective.

       The notary clause of both mortgages appear as follows:

       STATE OF KENTUCKY                                             County ss:

       The forgoing instrument was acknowledged before me this hw/ 3/20/00
       by ________________________________________________________________
       __________________________________________________________________
       __________________________________________________________________
       __________________________________________________________________.

       My Commission Expires: hw/ 8/16/00                       /s/David P. Nutgrass
                                                                     Notary Public




                                                  -3-
      The acknowledgment appears on a page separate from the Debtors’ signatures on the first
mortgage and appears at the bottom of the same page as the Debtors’ signatures on the second
mortgage. (Appendix at 12-13 & 30.)

       The bankruptcy court further found the assignments of the mortgages defective because the
assignments failed to provide a brief description of the notes and the date of the notes as required
by Kentucky Revised Statute § 382.290(5). As such, the court found that the assignments were not
recordable and not sufficient to put the Trustee on notice.

        March 13, 2006: Citifinancial Mortgage and MG Investments filed this appeal.

        April 21, 2006: The Kentucky legislature passed Senate Bill 45, amending Kentucky Revised
Statute § 382.270 to provide that even if a notary clause is defective, a recorded mortgage will
provide constructive notice to interested parties, including the Trustee, by virtue of the recording
alone.

        July 12, 2006: The amendment to Kentucky Revised Statute § 382.270 became effective.

                                         IV. DISCUSSION

        A.      The Acknowledgment Clauses Were Defective and the Mortgages
                Fail to Provide Constructive or Inquiry Notice.

        Pursuant to law in effect at the time the Debtors filed their petition,1 the Trustee is considered
a bona fide purchaser of the Debtors’ real property and may therefore avoid those liens upon the
property that are voidable under state law. 11 U.S.C. § 544; see also Rogan v. Bank One, Nat’l Ass’n
(In re Cook), 457 F.3d 561, 566 (6th Cir. 2006). Kentucky law governs the question of whether
Citifinancial’s security interests are superior to the Trustee’s interests in the Debtors’ real property.
Id. It does not matter whether the Trustee personally knew of the mortgage. “Rather, the inquiry
focuses on whether a bona fide purchaser would have notice” under Kentucky law. Thacker v.
United Cos. Lending Corp., 256 B.R. 724, 728 (W.D. Ky. 2000).

       At the time the Debtors executed the mortgages and through the time the bankruptcy court
rendered its judgment on March 8, 2006, Kentucky Revised Statute § 382.270 provided:

        382.270 Instruments not valid against purchasers or creditors unless recorded
        No deed or deed of trust or mortgage conveying a legal or equitable title to real
        property shall be valid against a purchaser for a valuable consideration, without


        1
        Because the Debtors filed their bankruptcy petition prior to October 17, 2005, the case is
governed by the Bankruptcy Code without regard to the amendments made by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005. All statutory references are to the Bankruptcy
Code, 11 U.S.C. §§ 101 to 1330 (2004), unless otherwise specifically noted.
                                                   -4-
       notice thereof, or against creditors, until such deed or mortgage is acknowledged or
       proved according to law and lodged for record. As used in this section "creditors"
       includes all creditors irrespective of whether or not they have acquired a lien by legal
       or equitable proceedings or by voluntary conveyance.

Ky. Rev. Stat. § 382.270 (West 2005). Another statute that is relevant to this case, Kentucky
Revised Statute § 423.130, provides:

       423.130 Certificate of person taking acknowledgment
       The person taking an acknowledgment shall certify that:


       (1) The person acknowledging appeared before him and acknowledged he executed
       the instrument; and

       (2) The person acknowledging was known to the person taking the acknowledgment
       or that the person taking the acknowledgment had satisfactory evidence that the
       person acknowledging was the person described in and who executed the instrument.

         In State Street Bank & Trust Co. of Boston, Mass. v. Heck’s, Inc., 963 S.W.2d 626 (Ky.
1998), the court interpreted the phrase “without notice thereof” as used in Kentucky Revised Statute
§ 382.270 to mean “without actual knowledge of the existence of a mortgage, either unrecorded or
improperly recorded, or knowledge of such facts as would lead a reasonably prudent person under
like circumstances to inquire into the matter and discover the existence of that mortgage.” Id. at 630.

       In State Street Bank, an improperly executed mortgage had been recorded. The court
       found that “the recordation of an unrecordable instrument does not constitute
       constructive notice.” [State Street Bank, 963 S.W.2d at 630]. The court concluded
       that the inquiry did not end; other factors apart from the recording itself could
       provide notice. In State Street, the mortgage at issue was referenced in another
       mortgage and the subordination agreement between the parties had been duly
       recorded. These factors wholly separate from the recorded document gave notice.

Thacker, 256 B.R. at 729 (emphasis added). In Thacker the district court interpreted the Kentucky
Supreme Court’s decision in State Street Bank that an unrecordable instrument does not constitute
constructive notice to also mean that the unrecordable instrument does not constitute inquiry notice
because the distinction between the two would be illusory. Id. As the language emphasized above
shows, however, the Kentucky Supreme Court has determined that “while the recordation of an
unrecordable instrument does not provide constructive notice, factors other than recording can
nevertheless overcome this defect to provide inquiry notice.” Id.

        The Thacker court also recognized the difficulty of analyzing these cases while keeping the
trustee in his hypothetical position as a bona fide purchaser as required by the Bankruptcy Code.
11 U.S.C. § 544(a)(3). The district court in Thacker describes this conundrum well:


                                                  -5-
               This Court does not deny that one searching the record books would find . . .
       [a] properly executed mortgage as well as . . . the recordation of an unrecordable
       instrument. This, however, should not undo the negligence of those who executed
       the unrecordable mortgage. Were this Court to allow the recordation of an
       unrecordable instrument to provide constructive or inquiry notice, the effect would
       be to remove the technical requirements of mortgages and leave subsequent creditors
       liable for the mistakes of those before them. The better view is to place the burden
       of perfection on the parties involved.

Thacker, 256 B.R. at 730.

         The case of Baker v. CIT Group/Consumer Fin., Inc. (In re Hastings), 353 B.R. 513 (Bankr.
E.D. Ky. 2006) (Howard J.) is a case that is substantially similar to the appeal before the Panel. In
Hastings, Judge Howard2 found that a mortgage was void where the names of the mortgagors were
left off of the acknowledgment and that the words “acknowledged before me”3 could not make an
otherwise deficient notary clause satisfactory for recording purposes. The reasoning in Judge
Howard’s decision is clearly stated:

       [Creditor] takes the position that the words “acknowledged before me” in subsection
       (3) render the certificate of acknowledgment valid, even though the certificate does
       not identify the Debtors. Likewise, subsection (3) does not recite a requirement that
       the notary sign his or her name to the acknowledgment, but we do not believe the
       Legislature intended to validate acknowledgments which are not signed by the notary.
       This provision is not a stand-alone indicia of validity. It is intended to be taken in the
       context of all the regular requirements for a valid certificate of acknowledgment.
       Use of the words “acknowledged before me” is therefore insufficient in the absence
       of the elements set out in KRS 423.130 which sets out the requirements for a proper
       acknowledgment clause.

Hastings, 353 B.R. at 516-17.




       2
        Judge Howard is also the bankruptcy judge who rendered the judgment in this appeal. We
consider his subsequent opinion in Hastings solely for the additional reasoning set forth in Hastings
that support his judgment in the appeal pending before us.
       3
        The words "acknowledged before me" mean:
       (1) That the person acknowledging appeared before the person taking the
       acknowledgment;
       (2) That he acknowledged he executed the instrument;
       (3) That, in the case of:
           (a) A natural person, he executed the instrument for the purposes therein stated;
            ...
       (4) That the person taking the acknowledgment either knew or had satisfactory
       evidence that the person acknowledging was the person named in the instrument or
       certificate.
Ky. Rev. St. § 423.150 (West 2006).
                                                  -6-
        The United States Court of Appeals for the Sixth Circuit has also addressed this issue. See
Rogan v. Am.’s Wholesale Lender d/b/a Countrywide Home Loans, Inc. (In re Vance), 99 F. App’x
25 (6th Cir. 2004). In Vance, the Sixth Circuit was dealing with the same Kentucky statutes that are
relevant to this appeal. In Vance, the Sixth Circuit determined that the notary acknowledgment was
defective and did not provide notice to the bankruptcy trustee where the acknowledgment did not
provide (1) the identity and/or names of those who signed the mortgage, (2) the name of the county
where the acknowledgment was taken and (3) the date of the acknowledgment. Circumstances in
Vance are analogous to those in the appeal before this Panel.

       In re Vance is an unpublished decision. However, the Sixth Circuit again dealt with the
question of a bankruptcy trustee avoiding a mortgage in the published decision Gregory v. Ocwen
Fed. Bank (In re Biggs), 377 F.3d 515 (6th Cir. 2004). Once again, in Biggs the notary
acknowledgment failed to provide the names of the individuals who signed the mortgage. Therefore,
the mortgage was defective under Tennessee law and did not even meet a substantial compliance test
available in Tennessee. The Sixth Circuit stated:

       [T]he authentication of a deed of trust is not a purposeless formality. The procedure
       serves to verify the identity of the individual signing the instrument and to establish
       a fraud-free system for recording the ownership of real property–a necessary
       prerequisite to any free market. In this instance, the integrity of the acknowledgment
       is placed in doubt because it omits the most important information on the
       acknowledgment form: who, if anyone, is doing the acknowledging? Failing to name
       the individuals who signed the deed of trust bears directly on the ability of a
       subsequent purchaser of real property to verify that the instrument was signed by the
       true property owners. Without it, a purchaser is left to wonder who appeared before
       the notary, if indeed anyone appeared before the notary, to acknowledge their
       signatures. In this sense, the missing names “lend [ ] uncertainty about the legal
       effectiveness of the instrument and for that reason alone the acknowledgment fails
       substantially to comply with Tennessee law.”

In re Biggs, 377 F.3d at 519 (citations omitted).

        We are constrained by the Sixth Circuit’s decisions in Biggs and Vance. There is no question
that the acknowledgments in both of Citifinancial’s mortgages are defective. The form used clearly
anticipates that the names of the mortgagors will be inserted where it states: “The foregoing
instrument was acknowledged before me this hw/ 3/20/00                  by __________________.”
(Appendix at 13 & 30 (emphasis added).) The names of the mortgagors are not provided in the body
of the acknowledgments, however. Citifinancial’s arguments that the identity of the Debtors is
shown directly above the notary clause does not cure the defect. Contrary to Citifinancial’s
argument, the Debtors’ signatures on the first mortgage appear on a separate page from the notary
clause, not directly above the clause. The bankruptcy court did not err in determining that the
acknowledgment clauses are defective and therefore do not provide constructive or inquiry notice
to the Trustee.

                                                 -7-
       B.      The Assignments Were Defective and Do Not Cure the Defects in the
               Mortgages.

       Citifinancial next argues that even if the mortgages did not give the Trustee notice, the
assignments of the mortgages provided the Trustee with constructive or inquiry notice. The Trustee
argued and the bankruptcy court agreed that the assignments were also defective because they did
not comply with Kentucky Revised Statute § 382.290 and as such could not provide the Trustee with
constructive or inquiry notice. Pertinent Kentucky law provides:

       382.290 Recording of mortgages and deeds retaining liens; assignment;
       discharge; form of record; clerk's fee
       ...
       (5) If such assignment of a note is made by separate instrument or by deed assigning
       the note, or in a marginal entry record, the instrument of writing or deed or marginal
       entry record shall set forth the date of notes assigned, a brief description of notes, the
       name and post office address of assignee, and the deed book and page of the
       instrument wherein the lien or mortgage is recorded . . . .
       (6) No holder of a note secured by lien retained in either deed or mortgage shall
       lodge for record, and no clerk or deputy clerk shall receive and permit to be lodged
       for record, any deed or instrument of writing that does not comply with the
       provisions of this section.

Ky. Rev. Stat. § 382.290(5), (6) (West 2006) (emphasis added). The assignments provide:

       For Good and Valuable Consideration, . . . MG INVESTMENTS, INC., . . . as
       Holder of the Note and Lien by these presents does convey, grant, bargain, sell,
       assign, transfer and set over, . . . the described mortgage, together with the certain
       note(s) described therein with all interest, all liens, and any rights due or to become
       due thereon to: ASSOCIATES HOME EQUITY SERVICES, INC., 250 E. Carpenter
       Freeway, Irving, TX 75062.
       Said mortgage is recorded in the State of KY, County of Mercer on 3/22/00, at Book
       0283 Page 390 Dated: 3/20/00 AMOUNT: $98,800.00
       Original Mortgagor: WILLIAM MITCHELL COCANOUGHER AND TINA M.
       COCANOUGHER, HUSBAND AND WIFE
       Original Mortgagee: MG INVESTMENTS, INC., AN INDIANA CORPORATION

(Appendix at 47 & 49.)

       A straightforward reading of the statute requires four things: (1) the date of the notes
assigned; (2) a brief description of the notes; (3) the name and address of the assignee; and (4) the
deed book and page number of the recorded mortgage. In looking at the assignment, the name and
address of the assignee and the deed book and page number of the recorded mortgage are clearly
given. The date of the mortgage and amount of the mortgage are also clearly given but the date of
the note and the amount of the note are not given. The date and amount of a mortgage are not
necessarily the same as the date and amount of a related note. The assignments also do not contain

                                                  -8-
a description of the note other than to refer to the mortgage and the “note(s) described therein.”
Citifinancial cannot correct one defective document by referring to that defective document in
another document that is also defective. In addition, the assignment is unclear as to whether one note
or multiple notes exist. Counsel for Citifinancial failed to identify any authority interpreting what
is a sufficient description of a note under Kentucky Revised Statute § 382.290. The statute
specifically requires both the date of the note and the description of the note as separate items.
Therefore, it is unquestionable that the “description” would necessarily include something more than
just the date of the note.

        State Street Bank, the Kentucky Supreme Court case that stated that other documents
referring to an unrecordable mortgage could give constructive notice of that mortgage, is
distinguishable from this appeal. In State Street Bank, the court determined that the subsequent
mortgage and subordination agreement gave at least constructive notice to the mortgagee of that
subsequent mortgage. The subsequent mortgagee was the party attempting to avoid the first
mortgage due to the defective notary clause. There was no doubt that the subsequent mortgagee
knew of the first mortgage because the first mortgage was referenced in the subsequent mortgagee’s
own second mortgage and in the subordination agreement.

        The assignments were defective and not recordable. Therefore, they gave no constructive
notice to the Trustee or anyone else. The Trustee is not charged with knowledge or inquiry notice
as a matter of law.

       The bankruptcy court did not err in determining that the assignments were defective and
unrecordable and therefore did not provide constructive or inquiry notice to the Trustee.

       C.      The Amendment to Kentucky Revised Statute § 382.270 Does Not Apply to
               this Case.

       Citifinancial’s final argument is that the amendment to Kentucky Revised Statute § 382.270,
passed after the bankruptcy court rendered its judgment, can be retroactively applied by this Panel
to prevent Citifinancial’s mortgages from being avoided. Citifinancial did not raise the issue of
whether the statute could be applied retroactively in the bankruptcy court. Indeed, it could not do
so because the statute was not even passed prior to the time the bankruptcy court rendered its
decision. The Panel will not consider the issue for the first time on appeal.

                                       V. CONCLUSION

       For the foregoing reasons, the decision of the bankruptcy court is AFFIRMED.




                                                 -9-
