In re Kim

• Decision Date: 09 December 1993
• Docket Number: BAP No. CC-92-2277-HPV. Bankruptcy No. LA 91-96694-WL. Adv. No. LA 92-01840-WL.
• Citation: 161 BR 831
• Parties: In re Hi Ja KIM d/b/a Laura's French Baking Company & Laura's Bakery, Debtor. WONDER-BOWL PROPERTIES, Appellant, v. Hi Ja KIM d/b/a Laura's French Baking Company & Laura's Bakery, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

161 B.R. 831 (1993)

In re Hi Ja KIM d/b/a Laura's French Baking Company & Laura's Bakery, Debtor WONDER-BOWL PROPERTIES, Appellant, v. Hi Ja KIM d/b/a Laura's French Baking Company & Laura's Bakery, Appellee.

BAP No. CC-92-2277-HPV. Bankruptcy No. LA 91-96694-WL. Adv. No. LA 92-01840-WL.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted September 22, 1993.

Decided December 9, 1993.

Leslie K. Hart, Torrance, CA, for appellant.

Lawrence R. Young, Downey, CA, for appellee.

Before: HAGAN¹, PERRIS, and VOLINN, Bankruptcy Judges.

OPINION

HAGAN, Bankruptcy Judge:

Hi Ja Kim ("debtor") is the debtor in possession in this chapter 11 case. Debtor filed an adversary proceeding against Wonder-Bowl Properties ("Wonder-Bowl"), seeking to set aside a judgment lien in the amount of $308,127.82 against certain real property of the debtor. Wonder-Bowl appeals the bankruptcy court's grant of summary judgment for the debtor. For the reasons stated in this opinion, the decision of the Bankruptcy Court is affirmed.

FACTS

Wonder-Bowl received a judgment against the debtor in February of 1988. It recorded an abstract of judgment to establish a judgment lien against certain real property on February 18, 1988. The initial filing, however, did not contain the debtor's driver's license and social security numbers as required by California law. After the debtor filed her chapter 11 petition on October 30, 1991, Wonder-Bowl filed an "Amendment to Abstract of Judgment" that included the necessary data. Debtor then brought this adversary proceeding to avoid the judgment lien.

The complaint sought to avoid the lien under section 545(2) of the Bankruptcy Code² on the grounds the initial filing was void because it lacked certain information required by California Civil Procedure Code § 674.³ The amendment to the abstract of judgment was alleged to be void as a violation of 11 U.S.C. § 362(a)(5). Debtor filed a motion for summary judgment on these legal theories. Neither the complaint nor the motion for summary judgment alleged any other legal theory.

The defendant opposed the motion on the grounds that: (1) the abstract of judgment was not automatically void under section 674 simply because it lacked the debtor's social security number and driver's license number; (2) section 674 should not be interpreted to permit the lien to be avoided for the benefit of creditors unless they obtained an interest in the property and did not have actual notice of Wonder-Bowl's interest; and (3) the automatic stay did not prohibit or void the filing of the amendment to the abstract of judgment.

At oral argument on the motion for summary judgment, the trial judge raised the issue of the applicability of 11 U.S.C. § 544(a)(3). He indicated that section 544 permitted a trustee to avoid a lien without regard to any actual knowledge of the trustee or of any creditor. Wonder-Bowl contended the debtor's actual knowledge of the existence of the abstract of judgment prevented it from avoiding the lien under section 544. It did not object to the court's sua sponte introduction of the section 544 issue.

Findings of fact and conclusions of law entered by the trial judge found the initial judgment lien failed to note the social security number and driver's license number of the debtor, and thus the lien was void and unenforceable. The trial judge did not reach the question of whether the filing of the amendment was void under section 362, because "the Debtor-in-Possession has the right to avoid that lien in any event pursuant to the provisions of Section 544(a)(3) of the Bankruptcy Code." (Findings of Fact and Conclusions of Law p. 8, ¶ 4.) The debtor was held to be able to avoid the lien as a bona fide purchaser pursuant to section 544(a)(3) of the Bankruptcy Code, and summary judgment was granted in favor of the debtor.

ISSUES

Two issues are presented on appeal:

(1) Whether a debtor in possession with actual knowledge of an abstract of judgment lacking certain information required under California law may nonetheless avoid a lien as a bona fide purchaser under section 544(a)(3); and

(2) Whether the bankruptcy court improperly granted summary judgment in favor of the debtor based on legal arguments that were not briefed by the parties.

STANDARD OF REVIEW

An order granting a motion for summary judgment is reviewed de novo. Hyman v. Plotkin (In re Hyman), 123 B.R. 342, 344 (9th Cir. BAP 1991), aff'd, 967 F.2d 1316 (9th Cir.1992). "A summary judgment may be affirmed only if it appears, after reviewing all evidence and factual inferences in the light most favorable to the opposing party, that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law." Id.

DISCUSSION

1. THE BANKRUPTCY COURT DID NOT COMMIT ERROR IN HOLDING THAT ACTUAL KNOWLEDGE OF THE DEBTOR IN POSSESSION WAS IRRELEVANT TO AN AVOIDANCE ACTION UNDER 11 U.S.C. § 544 AND CAL.CIV.PROC.CODE § 674.

Wonder-Bowl contends the bankruptcy court should have given it an opportunity to present evidence with regard to whether the debtor in possession had knowledge of the existence of the lien. The essence of Wonder-Bowl's argument is as follows. Section 544(a)(3) only grants to the trustee (and thus to the debtor-in-possession) the power of a hypothetical bona fide purchaser to set aside a lien. The powers of a bona fide purchaser are determined by state law. Probasco v. Eads (In re Probasco), 839 F.2d 1352, 1354 (9th Cir.1988). California state law provides that where a person "has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, that person has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact." Cal.Civ.Code § 19 (West 1982). "Whether the circumstances are sufficient to put one on inquiry of another's interest in property is a question of fact." Probasco, 839 F.2d at 1355. Because the bankruptcy court made no findings as to knowledge, and because the bankruptcy court did not permit Wonder-Bowl to submit evidence on the question of the debtor's knowledge, the bankruptcy court should have found there was a genuine issue of material fact.

Section 544 of the Bankruptcy Code provides:

(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.

11 U.S.C. § 544(a)(3). The powers of the hypothetical bona fide purchaser are measured by state law. Placer Savings & Loan Ass'n v. Walsh (In re Marino), 813 F.2d 1562, 1565 (9th Cir.1987). Although section 544 specifically gives avoidance powers only to the "trustee," section 1107(a) gives to a debtor in possession all of the rights, powers, and duties of a trustee, with certain exceptions not relevant here. 11 U.S.C. § 1107(a).⁴

In light of these principles, we turn to the applicable California statute. Section 674 of the California Civil Procedure Code, dealing with abstracts of judgment, states:

(d) An abstract of judgment, recorded after January 1, 1979, that does not list the social security number and driver\'s license number of the judgment debtor, or either of them, as required above may be amended by the recording of a document entitled "Amendment to Abstract of Judgment." The Amendment to Abstract of Judgment shall contain all of the information required by this section, shall list both the social security number and driver\'s license number if both of those numbers were known at the date of recordation of the original abstract of judgment, or one of them, if only one was known, and shall set forth the date of recording and the book and page location in the records of the county recorder of the original abstract of judgment.

A recorded Amendment to Abstract of Judgment shall have priority as of the date of recordation of the original abstract of judgment, except as to any purchaser, encumbrancer, or lessee who obtained their interest after the recordation of the original abstract of judgment but prior to the recordation of the Amendment to Abstract of Judgment without actual notice of the original abstract of judgment. The purchaser, encumbrancer, or lessee without actual notice may assert as a defense against enforcement of the abstract of judgment the failure to comply with this section regarding the contents of the original abstract of judgment notwithstanding the subsequent recordation of an Amendment to Abstract of Judgment. . . .

Cal.Civ.Proc.Code § 674(d) (West Supp. 1993).

It is uncontested that the initial abstract of judgment filed in this case lacked the debtor's social security and driver's license numbers. The debtor in possession has, under section 544(a)(3), the avoidance powers of a hypothetical purchaser who purchased as of the date of the order for relief. In this case, the hypothetical purchaser would have purchased after the defective abstract of judgment was filed, but before the amendment to abstract of judgment was filed. The only issue is whether such a hypothetical purchaser should be charged with notice of the defective abstract of judgment sufficient to deprive the purchaser of priority. If the hypothetical purchaser is not charged with such notice, the lien is avoidable under section 544(a)(3).

Section 18 of the California Civil Code provides:

NOTICE, ACTUAL AND CONSTRUCTIVE. Notice is:

1. Actual — which consists in express information of a fact; or,

2. Constructive — which

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