In re May, TCA 80-0995.

• Decision Date: 02 April 1982
• Docket Number: No. TCA 80-0995.,TCA 80-0995.
• Citation: 19 BR 655
• Parties: In re Jack C. MAY and De Lena C. May, Bankrupt. GROWTH PROPERTIES OF FLORIDA, LTD., Appellant, v. W. Kirk BROWN, Trustee, Appellee.
• Court: U.S. District Court — Northern District of Florida

19 B.R. 655 (1982)

In re Jack C. MAY and De Lena C. May, Bankrupt.

GROWTH PROPERTIES OF FLORIDA, LTD., Appellant, v. W. Kirk BROWN, Trustee, Appellee.

No. TCA 80-0995.

United States District Court, N.D. Florida, Tallahassee Division.

April 2, 1982.

L. Ralph Smith, Jr., Tallahassee, Fla., for appellant Growth Properties.

Neil H. Butler, Tallahassee, Fla., for Jack C. May and De Lena C. May.

W. Kirk Brown, Tallahassee, Fla., for trustee.

ORDER

STAFFORD, Chief Judge.

This case is before the court on appeal from the final order entered by the Honorable N. Sanders Sauls, Bankruptcy Division, on September 3, 1980 granting summary judgment in favor of the defendant trustee. Upon review of the case and oral argument of counsel it is the opinion of this court that Judge Sauls' judgment should be affirmed.

It is uncontroverted that by reason of mutual mistake, Jack and De Lena May became record title holders to an undivided half interest in a 49% share of a real property lease. The lease assignment on record shows conveyance to "JACK C. MAY, individually and as General Partner for Growth Properties of Florida, Ltd., a limited partnership formed under the laws of the State of Florida, and DE LENA C. MAY, his wife, and GPF, INC., a Florida Corporation, General Partner of Growth Properties of Florida, Ltd." The parties agree that the signatories to the assignment intended conveyance solely to Growth Properties of Florida, Ltd. (Growth Properties) and not its individual partners. Appellant, Growth Properties, sought to reform the assignment and asked the Bankruptcy Court to direct the Trustee to execute the documents necessary to release all claims by the bankruptcy estate of Jack C. May to the leasehold interest. The Bankruptcy Court denied the relief requested.

In his order granting summary judgment, Judge Sauls correctly explains that a trustee in bankruptcy appears in a dual role: (1) he is the successor to all the rights, title and interest of the bankrupt himself subject to all outstanding claims, liens and equities, and (2) he is a hypothetical judicial lien creditor of each variety enumerated in § 70(c).

Section 70(c) of the Bankruptcy Act provides

c. The trustee may have the benefit of all defenses available to the bankrupt as against third persons, including statutes of limitation, statutes of fraud, usury, and other personal defenses; and a waiver of any such defense by the bankrupt after bankruptcy shall not bind the trustee. The trustee shall have as of the date of bankruptcy the rights and powers of (1) a creditor who obtained a judgment against the bankrupt upon the date of bankruptcy, whether or not such a creditor exists, (2) a creditor who upon the date of bankruptcy obtained an execution returned unsatisfied against the bankrupt, whether or not such a creditor exists, and (3) a creditor who upon the date of bankruptcy obtained a lien by legal or equitable proceedings upon all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt upon a simple contract could have obtained such a lien, whether or not such a creditor exists. If a transfer is valid in part against creditors whose rights and powers are conferred upon the trustee under this subdivision, it shall be valid to a like extent against the trustee. . . .

The second sentence of § 70(c), the "strongarm clause," gives the trustee the status of a judicial lien creditor. State law, in turn, defines the rights and powers conferred on the trustee by virtue of that status. See Ivey v. Transouth Financial Corporation, 566 F.2d 1023 (5th Cir. 1978); In re Ludlum Enterprises, Inc., 510 F.2d 996 (5th Cir. 1975); Commercial Credit Company v. Davidson, 112 F.2d 54 (5th Cir. 1940).

Appellant, Growth Properties, asserts that a trustee can exercise the strong-arm clause only in relation to property entering the bankruptcy estate under § 70(a). Section 70(a) provides

a. The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this Act, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located . . .

Since the bankrupt Jack C. May lacked valid title to the property in question at the time of filing the petition in bankruptcy, the trustee can take no interest in the lease. The court is of the view that such a construction of the Act would make the strong-arm clause a nullity.

If the trustee can contest the ownership of only that property that the bankrupt himself can secure against third parties, the § 70(c) grant of all rights and powers of three different types of creditors as against third party interests is irrelevant. Section 70(c) would never come into play if § 70(a) resolved all questions of title. 4B, Collier on Bankruptcy, ¶ 70.48 (14th ed. 1978) notes that § 70(a)(5) on its face seems to give the trustee only the title of the bankrupt. However, "since in almost every case where the strong-arm clause of § 70(c) is useful to the trustee, the title of a bankrupt to the property in question is subject to the very lien or encumbrance which is sought to be avoided, giving the trustee that title only would aid him not at all." Id. at 583. "Section 70(c) does everything that section 70(a)(5) does and more besides." Id. at 586.

When initially introduced in 1910 as part of § 47(a)(2) of the Bankruptcy Act, the strong-arm clause was designed to strike down secret liens and other transfers that prior to that time evaded the trustee's attack. See Collier, ¶ 70.47. Although the bankrupt has no claim of title on the date of bankruptcy, the creditor can nevertheless acquire a lien on the property by judicial proceeding on that date, if the bankrupt retains an interest on record.

The Florida recording statute, § 695.01 Florida Statutes (1979) provides

No conveyance, transfer or mortgage of real property, or of any interest therein, nor any lease for a term of one year or longer, shall be good and effectual in law or equity against creditors or subsequent purchasers for a valuable consideration and without notice, unless the same be recorded according to law; . . .

Judge Sauls states that the objective state of the record determines the protection afforded creditors and bona fide purchasers under the statute. If a third party interest is unrecorded and there is neither evidence in the record chain of title nor possession of the property which would give rise to a duty to inspect or inquire, it cannot prevail. Additionally, Judge Sauls holds that it is irrelevant whether a judicial lien creditor actually relies on the record if that record reveals no third party interest. See Growth Properties of Florida, Ltd. v. Jack C. May and De Lena C. May, No. 78-7083-C, 13 (N.D.Fla. Sept. 3, 1980). Judge Sauls asserts that National Bank of Arcadia v. Savarese, 134 So. 501 (Fla.1931) is an aberration in Florida law. "To the extent that the Savarese line of cases purports to alter the burden of proof from a consideration other than the reflection of the state of the record title it is submitted that such appears to be clearly erroneous." Growth Properties of Florida, Ltd., supra, at 21.

In First National Bank of Arcadia v. Savarese, supra, Nellie Savarese filed suit to reform a deed erroneously entered in the name of her husband, John Savarese. She sought to enjoin the Sarasota County Sheriff from selling the property in execution of a judgment held by the First National Bank of Arcadia against her husband. The lower court reformed the deed and entered judgment in favor of Nellie Savarese. The Florida Supreme Court affirmed as there was no showing that the First National Bank of Arcadia had extended credit to John Savarese in reliance on the fact that title to the property on which it levied was held by John Savarese at the time the bank extended credit. The Court held that the objective state of the record

may operate as an estoppel, where persons without actual knowledge and without circumstances to put them upon inquiry reasonably may have taken substantial steps relying upon the record, and those who by their conduct or neglect in permitting the record to mislead others must bear any consequent loss rather than the one who in good faith may have acted with reference to the record as being in accord with actual facts.

Id. at 503, citing Hunter v. State Bank of Florida, 65 Fla. 202, 61 So. 497, 499 (1913). The Court explains that "a distinction is generally drawn between a judgment creditor who extended credit and acquired judgment on the faith of the title to certain property being at the time of the extension of credit in the judgment debtor and a judgment creditor who extended credit without any such reliance." Id. at 504.

Despite Judge Sauls' conclusion to the contrary, this court does not find the Florida case law to be hopelessly irreconcilable. It is apparently still possible in Florida to reform a deed against a judicial lien creditor, without notice, who fails to rely on the record. See Chatlos v. McPherson, 95 So.2d 506 (Fla.1957); Hull v. Maryland Casualty Co., 79 So.2d 517 (Fla.1954); Michaels v. Albert Pick & Co., 30 So.2d 498 (Fla.1947); Arundel Debenture Corporation v. Le Blond, 190 So. 765 (Fla.1939); Laganke v. Sutter, 187 So. 586 (Fla.1939); First National Bank of Arcadia v. Savarese, 134 So. 501 (Fla.1931). See also Bank of Marin v. England, 385 U.S. 99, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966); Zartman v. First National Bank of Waterloo, 216 U.S. 134, 30 S.Ct. 368, 54 L.Ed. 418 (1910). The Bankruptcy Court cites a number of Florida cases both before and after Savarese for the proposition that Savarese is bad law. This court's reading of those cases does not lead it to the same conclusion. The cases of Lusk v....