Ibbotson v. Riel (In re Riel)
| Decision Date | 23 January 2020 |
| Docket Number | Adv. Proc. No. 18-80042-WLH,Case No. 18-02970-WLH7 |
| Court | U.S. Bankruptcy Court — Eastern District of Washington |
| Parties | In re: DARRELL RIEL, Debtor. IAN IBBOTSON, Plaintiff, v. DARRELL RIEL, et al., Defendants. |
NOT FOR PUBLICATION
The Bankruptcy Code grants bankruptcy trustees an array of powers, exercise of which sometimes produces harsh results for those who did nothing wrong but failed to comply with a seemingly technical legal requirement. Among those powers is the ability to avoid certain pre-bankruptcy transfers and obligations using the "strong arm" powers in Bankruptcy Code section 544(a).
This dispute requires the court to define the reach of these powers. The conflict arises from competing motions seeking summary judgment regarding the discrete issue of whether notice of plaintiff Ibbotson's asserted interest in certain real property is sufficient to defeat the interests of a bona fide purchaser ("BFP") under Washington law and, therefore, withstand a bankruptcy trustee's challenge.
For the reasons discussed below, the court concludes that Ibbotson's asserted more-than-50% interest would not be enforceable against a BFP under Washington law and thus must also yield to the chapter 7 trustee's strong-arm powers under Bankruptcy Code section 544(a)(3). The court accordingly will in a separate order grant the trustee's motion for partial summary judgment, deny Ibbotson's motion for partial summary judgment, and schedule a further status conference.
Toward the end of 2007, plaintiff Ibbotson and debtor Riel agreed to purchase land located in Yakima County, Washington, and assorted other assets from Riel's father.1 The transaction closed in January 2008 and included agreements that, along with other documents, generally set forth a 50/50 economic arrangement between Ibbotson and Riel as well as terms on which various payments were to be made to Riel's father.2
After Riel's father did not receive certain of the promised payments, the father acted to enforce his rights in a fashion that could have led to a forfeiture of much of Ibbotson's and Riel's interests in their enterprise, including by serving and apparently recording in August 2013 a Notice of Intent to Forfeit Pursuant to Revised Code of Washington Chapter 61.30, as Amended (the "Forfeiture Notice") in the Yakima County recording system.3 To preserve the property, Ibbotson personally paid all of the amounts owed to Riel's father, including original principal, interest, penalties, fees, and other costs.4 As a result, Ibbotson contributed funds far exceeding the equal portion contemplated by the parties.5
Because Ibbotson paid Riel's father in full, the father in September 2014 signed and had recorded a Statutory Warranty Fulfillment Deed (the "Deed") in theYakima County recording system.6 The grantees in the Deed are "DARRELL E. RIEL, a single person, and IAN R. IBBOTSON, a married man as his sole and separate property, as tenants in common." Other than identifying the two as "tenants in common," the Deed is silent about Riel's and Ibbotson's respective interests.
Undoubtedly upset about his disproportionate contribution and subsequent developments in the parties' relationship, Ibbotson sued Riel in Washington state court in July 2017, asserting claims for breach of fiduciary duty and an accounting (the "State Court Action").7 Ibbotson did not record a lis pendens or other notice under RCW 4.28.320 in the Yakima County recording system, but the State Court Action was a matter of public record that could be located by a diligent search.8
Riel filed a chapter 7 bankruptcy petition in this court on October 29, 2018, and John D. Munding was duly appointed as the successor chapter 7 trustee.9 In December 2018, Ibbotson removed the State Court Action to bankruptcy court.10 Ibbotson later filed an amended complaint joining the chapter 7 trustee and others to this adversary proceeding, which the trustee and others answered (and, in the case of the trustee, counterclaimed against Ibbotson, which Ibbotson then answered).11 These pleadings, among other things, frame a dispute about the extent of Ibbotson's ownership interest in the property conveyed by Riel's father.
In October 2019, Ibbotson moved for partial summary judgment, seeking a determination that Ibbotson's ownership interest is proportional to the amount he paid Riel's father.12 The chapter 7 trustee opposed Ibbotson's motion and cross-moved for partial summary judgment, seeking a determination that, as a result of his powers under Bankruptcy Code section 544(a)(3),13 Ibbotson and Riel'sbankruptcy estate each own an equal 50% interest in the real property.14 After the completion of briefing, the court heard oral argument regarding these dueling motions on January 10, 2020, and the matter is now ready for decision.
The court has subject matter jurisdiction regarding this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) & 157(a) and LCivR 83.5(a) (E.D. Wash.). This court is a proper venue for this litigation as a result of Ibbotson's removal under 28 U.S.C. § 1452(a). The parties' dispute regarding the application of Bankruptcy Code section 544(a)(3) is statutorily "core"15 and "the action at issue stems from the bankruptcy itself."16 In any case, Ibbotson and the chapter 7 trustee have both expressly or implicitly consented to a final adjudication of the adversary proceeding by this bankruptcy court.17 Accordingly, the court may properly exercise the judicial power necessary to finally decide this dispute.
Federal Rule of Civil Procedure 56, which applies here through Bankruptcy Rule 7056, allows a party to move for complete or partial summary judgment, which should be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
18
Here, there is little, if any, dispute about the material facts. The parties basically agree about what happened before Riel's bankruptcy filing; they disagree about the legal consequences that flow from those prepetition events.
Among the powers given to a chapter 7 trustee is the ability to defeat certain prepetition transfers and obligations using applicable nonbankruptcy law. As relevant here, the statute provides that:
[t]he 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 . . . 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.19
This strong-arm power is a right conferred by federal law to advance the fair and equitable treatment of creditors in bankruptcy, including by cutting off "unperfected security interests, secret liens and undisclosed prepetition claims against the debtor's property as of the commencement of the case."20 The trustee's status under section 544(a) is acquired by operation of law "as of the time when the petition in bankruptcy is filed."21
The plain text of section 544(a) makes the trustee's actual or subjective knowledge irrelevant, but "[a] trustee does not become a hypothetical bona fide purchaser if she has been put on constructive or inquiry notice" of a competing interest that would limit a BFP's rights under state law.22 Put differently, if the record on the petition date contains materials that would preclude a BFP from taking free and clear of a given interest under state law, then the bankruptcy trustee similarly remains subject to that interest.
As the Ninth Circuit Court of Appeals has explained:
In Washington, a bona fide purchaser is defined as one who without notice of another's claim of right to, or equity in, the property prior to his acquisition of title, has paid the vendor a valuable consideration. Washington, which is a race-notice state, generally holds that a bona fide purchaser prevails over a prior transferee who has failed to record. Since the strong arm powers elevate the trustee to a level of a bona fide purchaser, a trustee without notice can generally avoid any unrecorded transfer of land in the State of Washington.23
This general rule is not absolute, however, as Washington law includes an inquiry or constructive notice principle applicable when "a purchaser has knowledge of information of facts which are sufficient to put an ordinarily prudent man upon inquiry, and the inquiry, if followed with reasonable diligence, would lead to the discovery of defects in the title or of equitable rights of others effecting the property in question."24 When considering whether a person is a BFP, Washington courts thus "ask (1) whether the surrounding events created a duty of inquiry and, if so, (2) whether the purchaser satisfied that duty."25
In the particular context of a deed or agreement that vests property in multiple parties without specifically stating their proportional ownership, "it is presumed that they share equally."26 This "presumption that tenants in common hold equal shares when the instrument under which they claim is silent in that regard, is...
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