Hamilton, Matter of, 96-20666

• Decision Date: 20 October 1997
• Docket Number: No. 96-20666,96-20666
• Citation: 125 F.3d 292
• Parties: Bankr. L. Rep. P 77,533, 11 Tex.Bankr.Ct.Rep. 359 In the Matter of: Charles HAMILTON, Jr., Debtor. REALTY PORTFOLIO, INC., Appellant, v. Charles HAMILTON, Jr., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 292

125 F.3d 292

Bankr. L. Rep. P 77,533, 11 Tex.Bankr.Ct.Rep. 359

In the Matter of: Charles HAMILTON, Jr., Debtor.

REALTY PORTFOLIO, INC., Appellant, v. Charles HAMILTON, Jr., Appellee.

No. 96-20666.

United States Court of Appeals, Fifth Circuit.

Oct. 20, 1997.

Michael J. Pledger, Houston, TX, for Appellant.

John Vincent Burger, The Keeling Law Firm, Houston, TX, for Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before KING and PARKER, Circuit Judges, and ROSENTHAL ^*, District Judge.

ROSENTHAL, District Judge:

A debtor filed a Chapter 13 bankruptcy petition three days after his homestead was sold in a foreclosure sale. When the homeowner filed for bankruptcy protection, the foreclosure purchaser had not filed the substitute trustee's deed. Indeed, the purchaser failed to file and record the deed for another eleven days. The debtor asked the bankruptcy court to avoid the transfer of title to his homestead under 11 U.S.C. §§ 522(h) and 544(a)(3). The bankruptcy court found that the debtor had standing to seek such relief and voided the transfer; the district court affirmed.

This appeal presents the issue of whether a Chapter 13 debtor may avoid a prepetition foreclosure conveyance when the purchaser at the foreclosure sale fails to record the substitute trustee's deed before the bankruptcy filing.

I. BACKGROUND

The facts are undisputed. On September 2, 1966, Charles Hamilton, Jr. ("Hamilton"), plaintiff-appellee, executed a promissory note payable to First Continental Corporation. The note was secured by a deed of trust executed on the same date and properly recorded in Harris County, Texas. The deed of trust gave Federal National Mortgage Association ("FNMA") a first lien on Hamilton's homestead property, described as Tracts 8A and 8E, Block 3 of Houston Gardens, in Harris County, Texas. FNMA was the owner and holder of the note and deed of trust; Bank United of Texas, FSB ("Bank United") was the servicing agent for FNMA.

In December 1994, Hamilton defaulted on his note payments and Bank United accelerated the indebtedness. On May 2, 1995, on behalf of Bank United, a substitute trustee conducted a nonjudicial foreclosure sale of the property under the deed of trust. Notice of the foreclosure sale was posted in the Harris County, Texas courthouse. The sale was properly conducted under state law. Defendant-appellant Realty Portfolio, Inc. ("Realty Portfolio") purchased the foreclosed property at the sale.

On May 5, 1995, Hamilton filed personal bankruptcy under Chapter 13. On May 16, 1995, Realty Portfolio recorded its substitute trustee's deed in Harris County, Texas. Hamilton filed this adversary proceeding to avoid the transfer to Realty Portfolio and regain title to the property under 11 U.S.C. §§ 522(h) and 544(a)(3).

On October 17, 1995, following a bench trial, the bankruptcy court divested Realty Portfolio of title to the property, revested title in Hamilton, and awarded Realty Portfolio a lien on the property in the amount of $3,600, the price Realty Portfolio paid for the property at the foreclosure sale. The district court affirmed the judgment of the bankruptcy court. Realty Portfolio appeals.

II. THE STANDARD OF REVIEW

This court reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Kemp, 52 F.3d 546, 550 (5th Cir.1995), cited in Traina v. Whitney Nat'l Bank, 109 F.3d 244, 245 (5th Cir.1997).

III. DISCUSSION

A. A CHAPTER 13 DEBTOR'S POWERS OF AVOIDANCE

The threshold issue is whether Hamilton, the Chapter 13 debtor, has standing to exercise the avoidance powers of a Chapter 13 trustee under the Bankruptcy Code. Section 544 of the Bankruptcy Code grants Chapter 13 trustees strong-arm powers to avoid certain prepetition property transfers. 11 U.S.C. § 544(a)(3). ¹ Section 1303 of the Bankruptcy Code grants Chapter 13 debtors certain powers otherwise reserved to trustees. 11 U.S.C. § 1303. ² Section 1303 does not include trustees' section 544 strong-arm avoidance powers. There is no specific statutory provision generally authorizing Chapter 13 debtors to exercise trustees' avoidance powers. ³

A number of bankruptcy courts have found that Chapter 13 debtors may exercise trustees' strong-arm avoidance powers. See Freeman v. Eli Lilly Fed. Credit Union (In re Freeman), 72 B.R. 850, 854 (Bankr.E.D.Va.1987); Ottaviano v. Sorokin & Sorokin (Matter of Ottaviano), 68 B.R. 238, 240 (Bankr.D.Conn.1986); Einoder v. Mount Greenwood Bank (In re Einoder), 55 B.R. 319 (Bankr.N.D.Ill.1985); In re Boyette, 33 B.R. 10, 10-11 (Bankr.N.D.Tex.1983); In re Hall, 26 B.R. 10, 11 (Bankr.M.D.Fla.1982). In these cases, the courts emphasized the "reality" of Chapter 13 bankruptcies, the limited role of Chapter 13 trustees, and the perceived unfairness to Chapter 13 debtors of denying them standing under section 544. ⁴

More recently, bankruptcy courts addressing the issue have receded from their earlier opinions and refused to use section 544 to allow Chapter 13 debtors to exercise strong-arm powers reserved for Chapter 13 trustees. See In re Redditt, 146 B.R. 693, 696-701 (Bankr.S.D.Miss.1992); In re Henderson, 133 B.R. 813, 816-17 (Bankr.W.D.Tex.1991); In re Tillery, 124 B.R. 127 (Bankr.M.D.Fla.1991); In re Coan, 134 B.R. 670 (Bankr.M.D.Fla.1991); In re Driver, 133 B.R. 476 (Bankr.S.D.Ind.1991); Bruce v. RepublicBank-South Austin (In re Bruce), 96 B.R. 717, 720-23 (Bankr.W.D.Tex.1989); In re Mast, 79 B.R. 981 (Bankr.W.D.Mich.1987). These courts have acknowledged the "realities" of Chapter 13 bankruptcies and the trustees' limited role, the factors emphasized by earlier courts. However, they have also noted the lack of "explicit statutory foundation for the debtor to seek avoidance." In re Redditt, 146 B.R. at 701; In re Bruce, 96 B.R. at 720-21; cf. In re Pointer, 952 F.2d 82, 87-88 (5th Cir.), cert. denied, 505 U.S. 1222, 112 S.Ct. 3035, 120 L.Ed.2d 904 (1992) (relying on the "plain language of the Code," the court denied standing to a Chapter 11 creditor seeking to invoke avoidance powers under section 549 of the Bankruptcy Code). ⁵

Under these cases, the debtor, Hamilton, would not have standing through section 1303. However, Congress has specifically authorized narrow exceptions to the general rule that Chapter 13 debtors lack standing to exercise the strong-arm powers of Chapter 13 trustees. In section 522(h), Congress granted debtors the authority to exercise section 544 avoidance powers under specific and limited circumstances. ⁶

Section 522(h) specifically grants debtors standing to avoid certain involuntary transfers of exempt property, such as homesteads, if the trustees have not themselves attempted to avoid the transfers. 11 U.S.C. § 522(h); see also DeMarah v. United States (In re DeMarah), 62 F.3d 1248 (9th Cir.1995); cf. In re Henderson, 133 B.R. at 817. The Ninth Circuit has identified a five-part test, that generally tracks section 522(h), to determine the power of a debtor to avoid a transfer of exempt property under section 522(h): (1) the transfer was not a voluntary transfer of property by the debtor; (2) the debtor did not conceal the property; (3) the trustee did not attempt to avoid the transfer; (4) the debtor seeks to exercise an avoidance power usually used by the trustee, listed within § 522(h); 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 § 522(g). In re DeMarah, 62 F.3d at 1250. The bankruptcy courts addressing this issue have applied section 522(h) to Chapter 13 debtors. See In re Elam, 194 B.R. 412 (Bankr.E.D.Tex.1996) (citing Young v. Washington Fed. Sav. & Loan Ass'n (In re Young), 156 B.R. 282 (Bankr.D.Idaho 1993)); In re Bruce, 96 B.R. at 721-22; Willis v. Borg-Warner Acceptance Corp. (In re Willis), 48 B.R. 295 (Bankr.S.D.Tex.1985). ⁷

In In re Elam, the court found that a Chapter 13 debtor had standing under the "narrow exception" of section 522(h) to seek to avoid the prepetition foreclosure of his homestead. 194 B.R. at 415. The court explained that:

Generally, Chapter 13 debtors may not exercise the statutory avoiding powers, at least not without prior authorization of the Court obtained after notice and a hearing and upon a showing that the Chapter 13 Trustee has neglected or refused to prosecute the action. In re Young, 156 B.R. 282, 284 (Bankr.D.Idaho 1993). However, there is a narrow exception to the general rule. Section 522(h) of the Code specifically grants a debtor standing to avoid certain involuntary transfers of exempt property. 11 U.S.C. § 522(h); In re Young, 156 B.R. at 284.... The transfer involved here was the foreclosure of Debtor's homestead. This clearly falls within the exception. Therefore, Debtor has standing to bring an avoidance action under section[ ] ... 544.

In re Elam, 194 B.R. at 415.

In this case, as in In re Elam, the debtor's property was exempt as his homestead; the foreclosure was an involuntary transfer; and the Chapter 13 trustee did not attempt to avoid the transfer. 11 U.S.C. § 522(h). Debtor Hamilton fits the narrow exception under section 522(h) and has standing to seek avoidance of his homestead's foreclosure sale under section 544(a)(3) of the Bankruptcy Code.

B. CONSTRUCTIVE AND INQUIRY NOTICE: THE BONA FIDE PURCHASER

Section 544(a) provides in pertinent part that:

(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 bona fide purchaser at the time of the commencement of the case, whether...