In re Crowder
| Decision Date | 05 October 1998 |
| Docket Number | Adversary No. 97-1145 M.,Bankruptcy No. 11-96-10336 ML |
| Citation | 225 BR 794 |
| Parties | In re Phyllis L. CROWDER, Debtor. Phyllis L. CROWDER, Plaintiff, v. Stanley E. CROWDER and Sarah F. Crowder, Defendants. |
| Court | U.S. Bankruptcy Court — District of New Mexico |
David A. Grammer III, Albuquerque, NM.
Daniel J. Behles, Albuquerque, NM, for Debtor.
THIS MATTER came before the Court upon Defendants' Motion for Summary Judgment. The issue before the Court is whether 11 U.S.C. § 544(a)(3) operates to allow a debtor-in-possession, with the powers of a trustee, to avoid a transfer of real property by standing in the position of bona fide purchaser when parties who are not the record title holders to property are in possession of the property. There is no dispute as to the facts of this case; the only remaining issues involve questions of law. Having considered the briefs submitted by counsel, reviewed the pleadings and the applicable law, having had a hearing on the merits, and being otherwise fully informed and advised, the Court grants Defendants' Motion for Summary Judgment and concludes that the debtor-in-possession cannot avoid the transfer of the property at issue herein under 11 U.S.C. § 544(a)(3).
The real property at issue in this matter is approximately 2,097 acres located in Torrance and Bernalillo Counties, New Mexico (hereinafter referred to as the "Tijeras Ranch")1. Defendants claim that their open and notorious possession of the Tijeras Ranch property charges the debtor-in-possession with constructive notice of their title to the property.
On July 10, 1987, Plaintiff, Phyllis L. Crowder (Phyllis Crowder), and her former husband, Charles L. Crowder, executed and delivered a Warranty Deed conveying the Tijeras Ranch property to Stanley and Sarah Crowder. Stanley and Sarah Crowder took possession of the Tijeras Ranch property in July of 1987, but did not record the Warranty Deed.
From 1989 through 1997, Stanley and Sarah Crowder paid all property taxes on the Tijeras Ranch, and have made improvements and repairs on the Tijeras Ranch. Stanley and Sarah Crowder regularly spend at least part time at the Tijeras Ranch, it being their habit to inspect the ranch several days a week, and to spend some weekends at the Tijeras Ranch. Stanley and Sarah Crowder, as lessors, have entered into several pasturing and grazing leases on the Tijeras Ranch. Neighbors in the area consider Stanley and Sarah Crowder to be the owners of the Tijeras Ranch.
On January 26, 1996, Phyllis Crowder filed a petition in bankruptcy. The warranty deed to the Tijeras Ranch property was not recorded at that time. On March 3, 1997 the deed was recorded in the Bernalillo County real property records, and on March 7, 1997 the deed was recorded in the Torrance County real property records.
Plaintiff Phyllis Crowder filed a complaint in this adversary proceeding to avoid the transfer of the Tijeras Ranch property to Stanley and Sarah Crowder pursuant to 11 U.S.C. § 544(a)(1) and (3), or alternatively, under 11 U.S.C. § 549(a) as a post-petition transfer. Defendants Stanley and Sarah Crowder filed a Motion for Summary Judgment asserting that the debtor-in-possession cannot avoid the transfer under 11 U.S.C. § 544(a)(3) because the Defendants' possession of the Tijeras Ranch property puts the debtor-in-possession on constructive notice of Defendants' interest in the property, thus destroying the debtor-in-possession's status as a substituted bona fide purchaser under the bankruptcy code. Defendants withdrew their alternative claim for summary judgment.
Under 11 U.S.C. § 544(a)(3)2 the trustee has the power to avoid certain transfers of real property of the debtor. This power arises regardless of any actual knowledge the trustee or debtor in possession has of the transfer. 11 U.S.C. § 544(a) (). See also McCannon v. Marston, 679 F.2d 13, 15-16 (3rd Cir.1982) (). Thus the bankruptcy code imposes a fiction on the debtor-in-possession, who likely has actual knowledge of any transfers the debtor made, in order to give the trustee, or debtor-in-possession with the powers of a trustee, the ability to avoid certain transfers for the benefit of the bankruptcy estate. Any actual knowledge of the debtor's prior transfer of real property is irrelevant to an analysis of whether the debtor-in-possession can avoid a transfer of real property pursuant to 11 U.S.C. § 544(a)(3). See McCannon 679 F.2d at 16. The trustee assumes the position of a hypothetical bona fide purchaser and is entitled to avoid any transfer a bona fide purchaser could avoid. 11 U.S.C. § 544(a)(3). See Watkins v. Watkins, 922 F.2d 1513, 1514 (10th Cir.1991).
An analysis of the trustee's substituted bona fide purchaser status necessarily contemplates an analysis of state law. Section 544(a)(3) provides: "a bona fide purchaser of real property . . . against whom applicable law permits such a transfer to be perfected." 11 U.S.C. § 544(a)(3) (emphasis added). "Applicable law" is the state law governing bona fide purchasers. The trustee's "bona fide purchaser position is subject to the state's constructive notice law." Watkins v. Watkins, 922 F.2d 1513, 1514 (10th Cir.1991). "The trustee, however, assumes the B.F.P. position subject to the state's notice laws." Patel v. Rupp, 195 B.R. 779, 782 (D.Utah 1996). "State law determines whether the trustee's status as BFP will defeat the rights of the person against whom the trustee seeks to assert his powers." Robertson v. Peters (In re Weisman), 5 F.3d 417, 419 (9th Cir.1993).
The state law governing the status of bona fide purchasers has both common law and statutory roots. The New Mexico recording statute protects bona fide purchasers for value who purchase property without notice of another party's interest. N.M. Stat. Ann. § 14-9-3 (Michie 1997). In other words, it protects purchasers from being bound by unrecorded instruments. Parties who fail to record their conveyancing documents are at risk that their interest may be terminated by a bona fide purchaser for value.
The statutory protection afforded bona fide purchasers works in conjunction with common law principles of inquiry or constructive notice. Constructive notice is firmly embedded in New Mexico common law. See Nelms v. Miller, 56 N.M. 132, 241 P.2d 333 (1952); Hunt v. Ellis, 27 N.M. 397, 201 P. 1064 (1921); McBee v. O'Connell, 19 N.M. 565, 145 P. 123 (1914). Under constructive notice principles, once a duty of inquiry arises, subsequent purchasers are held to have notice of all documents a reasonable inquiry would uncover, even if those documents are not recorded. See Robertson v. Peters (In re Weisman), 5 F.3d 417, 420 (9th Cir.1993). A party in possession of the property who is not the record title holder of the property gives rise to a duty of inquiry on the part of a subsequent purchaser, mortgagee, or lienholder. See Nelms v. Miller, 56 N.M. 132, 156-157, 241 P.2d 333, 349 (1952). Moreover, as the New Mexico Court of Appeals observed, the New Mexico Supreme Court held that:
. . . one who purchases real estate in the possession of someone other than his vendor is, in good faith, bound to inquire of such possessor what right he has in the property, and failing to make such inquiry, equity charges him with notice of all facts that such inquiry would disclose. Citizens Bank of Clovis v. Hodges, 107 N.M. 329, 331-332, 757 P.2d 799, 801-802 (Ct.App. 1988).
The undisputed facts in this case show that Plaintiff and her former husband delivered a warranty deed to Defendants conveying the Tijeras Ranch property on July 10, 1987. Stanley and Phyllis Crowder were in possession of the Tijeras Ranch property from July 1987 to the present, but the warranty deed to the property was not recorded until March 1997. At the time the bankruptcy petition was filed, the record title showed Phyllis and Charles Crowder as owners of the Tijeras Ranch property. Following New Mexico constructive notice principles, a bona fide purchaser would be held to have constructive notice of Defendants' ownership interest in the property provided that Defendants' open and notorious possession of the property would cause a reasonably prudent person to inquire, and provided further, that a reasonable inquiry would uncover that interest. See Hunt v. Ellis, 27 N.M. 397, 398, 201 P. 1064 1065 (1921).
The undisputed facts support the finding that a reasonable inquiry would have revealed Defendants' interest in the Tijeras Ranch. Stanley and Sarah Crowder were in possession of the Tijeras Ranch property. The neighbors considered Stanley and Sarah Crowder the owners of the Tijeras Ranch property. Lessees under certain grazing leases on the Tijeras Ranch property considered Stanley and Sarah Crowder, as lessors, the owners of the Tijeras Ranch property. The "no trespassing" signs list Stanley Crowder as "owner, or occupant." Further inquiry into these facts would have revealed Defendants' ownership interest in the Tijeras Ranch property to an inquirer.
Plaintiff relies on Robertson v. Peters (In re Weisman), 131 B.R. 148 (N.D.Ca.1991) to support her claim that no duty to inquire arises when the record title to the property is not inconsistent with the ownership of the possession of the property. Plaintiff's reliance on a California court's interpretation of constructive notice principles is misplaced. First, Weisman, was overruled by the Ninth Circuit Court of Appeals. Robertson v. Peters (In re Weisman), 5 F.3d 417 (9th Cir. 1993). The ninth circuit overruled the district court on grounds that possession of a residence by a husband and second wife was inconsistent with the record title to the property...
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