594 F.3d 1073 (9th Cir. 2010), 07-55266, In re Deuel

Docket Nº:07-55266.
Citation:594 F.3d 1073
Opinion Judge:KLEINFELD, Circuit Judge.
Party Name:In the Matter of Jill C. DEUEL, Debtor, v. Harold S. TAXEL, Trustee, Appellee. Chase Manhattan Bank, USA, N.A., Appellant,
Attorney:James C. Mitchell, Mitchell & Gilleon, San Diego, CA, for the appellant. Michael Y. MacKinnon, Kathleen A. Cashman-Kramer, Pyle Sims Duncan & Stevenson, APC, San Diego, CA, for the appellee.
Judge Panel:Before: ALEX KOZINSKI, Chief Judge, ANDREW J. KLEINFELD and JOHNNIE B. RAWLINSON, Circuit Judges.
Case Date:January 28, 2010
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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594 F.3d 1073 (9th Cir. 2010)

In the Matter of Jill C. DEUEL, Debtor,

Chase Manhattan Bank, USA, N.A., Appellant,

v.

Harold S. TAXEL, Trustee, Appellee.

No. 07-55266.

United States Court of Appeals, Ninth Circuit

January 28, 2010

Argued Sept. 11, 2008.

Submitted Sept. 29, 2009.

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[Copyrighted Material Omitted]

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James C. Mitchell, Mitchell & Gilleon, San Diego, CA, for the appellant.

Michael Y. MacKinnon, Kathleen A. Cashman-Kramer, Pyle Sims Duncan & Stevenson, APC, San Diego, CA, for the appellee.

Appeal from the Ninth Circuit, Bankruptcy Appellate Panel, Klein, Montali, and Snyder, Bankruptcy Judges, Presiding. BAP Nos. SC-06-01063-MoSnK, SC-06-01132-MoSnK.

Before: ALEX KOZINSKI, Chief Judge, ANDREW J. KLEINFELD and JOHNNIE B. RAWLINSON, Circuit Judges.

KLEINFELD, Circuit Judge.

We address the " strong-arm power" of the bankruptcy trustee under 11 U.S.C. § 544(a)(3) in the context of an unrecorded deed of trust. The question comes down to whether a bona fide purchaser for value without notice can take ahead of an unrecorded lien, and once the question is put that way, the answer is obviously " yes."

I. Facts

The case arises out of repeated home refinancing to take advantage of rising real estate values. Debtor Jill Deuel and her ex-husband Will Deuel bought a condominium in California in 1999. They borrowed $106,700 from North American Mortgage Company, secured by a duly recorded deed of trust. Two years later, on June 6, 2001, they refinanced, this time borrowing $122,400 from American Mortgage Express Financial Corp., again secured by a duly recorded deed of trust. The Deuels used this loan to pay off the prior North American loan. This second loan was assigned to Chase Manhattan in May 2002, and the assignment was duly recorded.

The problem giving rise to this case arises from the Deuel's third loan, the second time they refinanced and drew more equity out of their condo, in 2002.

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This time they borrowed $136,000 from Chase Manhattan and gave Chase Manhattan a deed of trust to secure their note. Somehow Chase Manhattan failed to get the deed of trust recorded. What did get recorded was the deed of reconveyance from the previous loan, which was paid off in full out of the new loan. Thus as far as anyone could tell from the county records, the condo had been paid off and there was no longer a lien against it.

The next year, in 2003, Ms. Deuel filed for a chapter 13 bankruptcy. That case was dismissed on the motion of the chapter 13 trustee. A year later, in 2004, she again filed for bankruptcy, this time under chapter 7. This 2004 case is the one before us. The appellee, Taxel, is the trustee for Deuel's chapter 7 bankruptcy. Deuel filed electronically. Along with her petition, she filed her schedules, listing Chase Manhattan's secured debt.

Chase Manhattan filed a complaint to quiet title to its lien, and prevailed in Bankruptcy Court on the theory that under our decision in Briggs v. Kent ( In re Professional Investment Properties. of America )1 her schedules provided constructive notice to the bankruptcy trustee of Chase Manhattan's unrecorded lien, and alternatively, that it was subrogated to its own previous recorded lien because it had used the new loan to pay it off. The Bankruptcy Appellate Panel reversed, ruling in favor of the trustee, distinguishing Professional Investment, and rejecting the subrogation theory.2 Chase Manhattan appeals.

II. Analysis

We review the Bankruptcy Appellate Panel's decision de novo.3 Our conclusion is that its reasoning is correct, and we affirm.

A. Trustee's Strong Arm Power.

A bankruptcy trustee has the power to avoid any transfer that a hypothetical bona fide purchaser for value could have avoided under the law of the state in which the real property is located. What matters to this case is when the hypothetical bona fide purchaser is treated as having hypothetically purchased the property for value. The statutory language gives the answer " as of the commencement of the case." 4 The relevant portion of the statute says:

(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.5

In this case the petition and the schedules were filed simultaneously by means of

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electronic filing. Does that mean that the trustee took with notice of the lien disclosed in the schedules? If we were talking about real people walking over to the bankruptcy court and looking at the documents, the answer would be yes, but we are not. As is often the case in property law, we speak not of the physical but of the metaphysical.6 The statute says that a chapter 7 bankruptcy is " commenced by the filing with the bankruptcy court of a petition," 7 so the petition and only the petition commences the case, regardless of what else happens at the same time. As the Bankruptcy Appellate Panel explained, the schedules " cannot be filed until there is a case in which to file them." 8 The trustee has not even been appointed when the petition is filed, and could not possibly be a bona fide purchaser for value without notice upon the filing of the petition, but he is treated by the statute as though he were.

Chase Manhattan correctly argues that a real person buying the property and checking the court records would know from the schedules Deuel filed simultaneously with her petition that it had a lien. But we are talking about a metaphysical and not a real person. The trustee who is treated as a bona fide purchaser for value without notice as of the commencement of...

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