Belisle v. Plunkett

• Decision Date: 06 June 1989
• Docket Number: No. 88-3189,88-3189
• Citation: 877 F.2d 512
• Parties: , 19 Bankr.Ct.Dec. 872, Bankr. L. Rep. P 72,983 Ray J. BELISLE, et al., Plaintiffs-Appellants, v. Oliver PLUNKETT, Monica Plunkett, and Ralph C. Anzivino, Trustee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 512

877 F.2d 512

57 USLW 2737, 19 Bankr.Ct.Dec. 872, Bankr.

L. Rep. P 72,983

Ray J. BELISLE, et al., Plaintiffs-Appellants, v. Oliver PLUNKETT, Monica Plunkett, and Ralph C. Anzivino Trustee, Defendants-Appellees.

No. 88-3189.

United States Court of Appeals Seventh Circuit.

Argued April 3, 1989.

Decided June 6, 1989.

Morton J. Schmidt, Schmidt, Martz & Zodrow, Milwaukee, Wis., for plaintiffs-appellants.

Mark L. Metz, Reinhart, Boerner, Vandeuren, Norris & Rieselbach, Milwaukee, Wis., for Ralph C. Anzivino.

Thomas P. Shannon, Fox, Carpenter, O'Neill & Shannon, Morton J. Schmidt, Schmidt, Martz & Zodrow, Peter Blain, Reinhart, Boerner, Vandeuren, Norris & Rieselbach, Milwaukee, Wis., John G. Persa, Fox Point, Wis., for Oliver and Monica Plunkett.

Before BAUER, Chief Judge, and CUMMINGS and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

May the trustee in a bankruptcy case bring into the estate property that the debtor holds in constructive trust for victims of fraud? Oliver Plunkett organized partnerships that provided funds to buy a 50-year leasehold interest in a shopping center, Pan-Am Pavilion in Christiansted, St. Croix, Virgin Islands. Plunkett treated the leasehold as his own--including making a collateral assignment to secure a loan of $100,000 that Plunkett put to personal use. Invoking the strong-arm powers of 11 U.S.C. Sec. 544, the Trustee claimed the status of a bona fide purchaser for value. Both the bankruptcy court, 89 B.R. 776 (Bankr.E.D.Wis.1988), and the district court held that Sec. 544(a)(3) allows the Trustee to claim the leasehold for the estate, leaving the partners to participate as creditors. The partners contend that Sec. 541(d) keeps the leasehold out of the estate and that the Trustee may not employ Sec. 544(a) to fetch into the estate something that Sec. 541(d) excludes.

Stripped of irrelevant detail, the facts are that in March 1979 Plunkett (a real estate entrepreneur operating out of Milwaukee) signed a contract, in his own name, to buy the leasehold from W.O.F. Associates for $1.2 million. Through the spring and summer of 1979 Plunkett formed five partnerships to raise the money for the acquisition. After getting the cash, Plunkett closed the deal in October 1979--in his own name, despite using partnership funds. He recorded the assignment of the leasehold in the St. Croix real estate records, again in his own name. Although Plunkett recognized the partnerships for tax purposes--he reported a share between 5% and 7%--and informed the partners of the income and deductions they should report on their own returns, he dealt with tenants and creditors as if he owned the leasehold.

Plunkett and his wife filed petitions under the Bankruptcy Code in 1982. After the Trustee asserted that the leasehold is an asset of the estate, the partners filed an adversary proceeding, seeking to quiet title in the partnerships. Chief Judge Clevert of the bankruptcy court granted the Trustee's motion for summary judgment, and the district judge affirmed on appeal under 28 U.S.C. Sec. 158(a). We have jurisdiction under Sec. 158(d) because the decision is the "final" disposition of an adversary proceeding that would be a stand-alone suit outside of bankruptcy. In re Sandy Ridge Oil Co., 807 F.2d 1332 (7th Cir.1986); In re Morse Electric Co., 805 F.2d 262 (7th Cir.1986). The partners have filed adversary proceedings against the Trustee personally, contesting his allocation of tax benefits (and detriments) from the leasehold during the administration of the estate, but as these were not consolidated with the quiet title action, they do not affect appellate jurisdiction even though there is some overlap between the actions. Compare Sandwiches, Inc. v. Wendy's International, Inc., 822 F.2d 707, 710 (7th Cir.1987), with In re Berke, 837 F.2d 293 (7th Cir.1988).

Plunkett bamboozled the partners and used for his own benefit the leasehold acquired with partnership funds. Virgin Islands law impresses a constructive trust on the leasehold and its fruits. A constructive trust ordinarily survives bankruptcy: the property may not be used to satisfy the debtor's obligations to other creditors, and the debts to the victims of the fraud may not be discharged. 11 U.S.C. Sec. 523(a)(2), (4). See United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 nn. 8, 10, 103 S.Ct. 2309, 2313-14 nn. 8, 10, 76 L.Ed.2d 515 (1983); In re Teltronics, Ltd., 649 F.2d 1236, 1239 (7th Cir.1981). The Trustee acknowledges all of this but relies on Sec. 544(a)(3):

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 from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists. ¹

A bona fide purchaser of the leasehold interest, without notice of the earlier claim, would take ahead of a person who has not recorded his entitlement. Not only Virgin Islands real estate law, 28 V.I.Code Sec. 124, but also the Uniform Partnership Act, adopted in both the Virgin Islands and Wisconsin, 26 V.I.Code Sec. 42, Wis.Stat. Sec. 178.07(3), provides this. See also In re Marino, 813 F.2d 1562, 1565 (9th Cir.1987) (trustee may avoid undisclosed partnership claim against real property under similar California statute). So the Trustee submits that the Plunkett estate includes the Pan-Am leasehold, "as of the commencement of the case", without need for action on his part. ²

Not so fast!, the partners rejoin. The estate can't contain the leasehold "as of the commencement of the case" because Sec. 541(d) says that it does not contain property in which the debtor holds bare legal title:

Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a) of this section only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold. ³

If this were not enough, the partners continue, Sec. 544(a)(3) speaks of a "transfer", yet Plunkett did not transfer the Pan-Am leasehold, and there is therefore nothing for the Trustee to avoid. As the partners see things, Secs. 541(d) and 544(a)(3) allow a trustee to recover property transferred out of the estate before the filing, but not to claim for the estate property held in a constructive trust. Several courts have perceived a "conflict" between Sec. 541(d) and Sec. 544(a)(3). E.g., In re General Coffee Corp., 828 F.2d 699, 704-06 (11th Cir.1987); In re Quality Holstein Leasing, 752 F.2d 1009, 1013-14 (5th Cir.1985). The parties ask us to decide which statute prevails. We believe, however, that there is no conflict.

Section 544(a)(3) pulls into the debtor's estate property that ostensibly was there all along. Dealing with ostensible ownership is not, however, the statute's objective--at least not its only one--because the benefits are not limited to those who relied on the asset in extending credit. Section 544(a)(3) complements Secs. 544(a)(1) and (2), which give the trustee the status of a judgment creditor vis-a-vis chattels in the debtor's possession. If one creditor had (or could get) a judgment effective against the chattels, the trustee secures the same advantage for all--which reduces any creditor's incentive to try to be first in line, a rush that may reduce the value of the debtor's assets. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 70-79 (1986); cf. Douglas H. Baird, Notice Filing and the Problem of Ostensible Ownership, 12 J. Legal Studies 53 (1983). Sections 544(a)(1) and (2) follow state law, however, in giving the trustee no greater rights than the judgment creditor would have. If the debtor possesses a stolen diamond ring, the real owner's rights would trump those of a judgment creditor, and under the Code therefore would defeat the claims of all of the debtor's creditors. Whether or not we say that the debtor holds the ring in "constructive trust" for the owner is a detail. Under state law the owner's claims are paramount; the debtor could not defeat those rights by pledging or selling the ring, and the creditors in bankruptcy receive only what state law allows them. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Under most states' laws, however, the buyer in good faith of real property can obtain a position superior to that of the rightful owner, if the owner neglected to record his interest in the filing system. Section 544(a)(3) gives the trustee the same sort of position.

A bona fide purchaser from Plunkett would have taken ahead of the partners under local law. They neglected to record the partnerships' interest, though recording is easy. (The partners could, and in retrospect should, have refused to invest funds except through an escrow agent, who would have held the cash until good title had been recorded in the partnerships' names.) One of Plunkett's creditors, extending $100,000 against a collateral assignment of the leasehold, actually obtained a position superior to that of the partners. The Trustee claimed the same position for the estate (meaning the creditors collectively, including the partners).

Nothing in the text or function of Sec. 544(a)(3) makes the force of this claim turn on whether Plunkett once owned the leasehold and then sold it to the partnerships (but failed to record their...