In re Michigan Lithographing Co.

Decision Date03 February 1992
Docket NumberBankruptcy No. SG 90-80574,Adv. No. 90-8200.
PartiesIn re MICHIGAN LITHOGRAPHING COMPANY, Debtor. OWEN-AMES-KIMBALL COMPANY, Plaintiff/Counter-Defendant, v. MICHIGAN LITHOGRAPHING COMPANY, U.S. Concord, Inc., Barclays-American/Business, Inc. and Old Kent Bank and Trust Company, Defendants, v. Brett N. RODGERS, Trustee for the Estate of Michigan Lithographing Company, Counter-Plaintiff.
CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

Day, Sawdey & Flaggert (Jonathan F. Thoits, argued), Grand Rapids, Mich., for trustee.

Dunn, Schouten & Snoap (Thomas W. Schouten, argued), Wyoming, Mich., for Owen-Ames-Kimball Co.

Brett N. Rodgers, Grand Rapids, Mich., trustee.

OPINION AND JUDGMENT

JO ANN C. STEVENSON, Bankruptcy Judge.

The issue which confronts this court can be succinctly stated as whether Owen-Ames-Kimball's ("OAK") failure to record a notice of lis pendens with the Kent County Register of Deeds as required by § 117 of the Michigan Construction Lien Act (the "Act") renders OAK's asserted construction lien unenforceable against the Trustee under 11 U.S.C. § 544(a)(3) of the Bankruptcy Code where OAK's construction lien was timely and properly recorded and the lien foreclosure suit timely commenced in state court.

The court has jurisdiction over this matter, 28 U.S.C. § 1334(b), which is a core proceeding, 28 U.S.C. § 157(b)(2)(K), (O). Accordingly we may enter a final order or judgment subject to appellate review, 28 U.S.C. § 158.

As established by the facts contained in the pleadings, affidavits and briefs, there is no material issue of fact. Thus this matter is correctly before us on cross motions for summary judgment. See In re Morweld Steel Prods. Corp., 8 B.R. 946 (Bankr. W.D.Mich.1981).

Some background information is required.

OAK did substantial construction work on the Grand Rapids facility located at 217 Grandville Avenue (the "Grandville Property") owned by Debtor Michigan Lithographing Company ("Michigan Litho"). As of February 1, 1989 Michigan Litho owed OAK some $975,093.59 in principal plus $18,875.98 in interest under the construction contract. On February 3, 1989 OAK recorded its claim of lien with the Kent County Register of Deeds office indicating the total amount owing as of that date as $1,037,063.42. On December 20, 1989 OAK commenced suit against Michigan Litho and various other defendants in the Kent County Circuit Court to foreclose its construction lien on the Grandville facility.

An involuntary chapter 11 petition was filed against Michigan Litho on February 8, 1990, some one year and five days after the recording of the construction lien. Brett N. Rodgers was appointed Trustee on February 12, with the consensual order for relief entered on February 13, 1990. On May 8, 1990 OAK's suit to foreclose its construction lien was removed to this court, Trustee Rodgers filing his counterclaim on May 24, 1990.

The parties have stipulated that the only issue in this case is as follows:

Whether OAK\'s failure to record a Notice of Lis Pendens with the Kent County Register of Deeds as required by § 117 of the Michigan Construction Lien Act renders OAK\'s asserted construction lien unenforceable against the Trustee under § 544(a)(3) of the Bankruptcy Code.

June 10, 1991 Rescheduling Order at 2. Acknowledging that OAK's lien was timely and properly recorded and that the foreclosure suit was also timely and properly commenced, the Trustee claims that under Michigan law a bona fide purchaser purchasing the Grandville Property on February 8, 1990, the date of the involuntary petition, would take the property free of OAK's lien simply because the notice of lis pendens was not recorded as of that date. Since such a bona fide purchaser of the property could have existed, the Trustee asserts that pursuant to 11 U.S.C. § 544(a)(3) he may stand in the shoes of such a hypothetical bona fide purchaser and accordingly the estate would succeed to this property free of OAK's lien interest. OAK contends that as a matter of law, any such purchaser would have constructive notice of OAK's lien by virtue of the recorded claim of lien and therefore OAK is entitled to priority over the Trustee. We agree and grant OAK's motion for summary judgment.

I.

The Trustee's claim that OAK's lien could be defeated by a bona fide purchaser is based upon the "strong arm" provision of § 544(a)(3) which provides as follows:

(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.

A recent decision explained "this somewhat labyrinthine statute" as follows:

It means that the trustee has the rights of a hypothetical bona fide purchaser of the debtor\'s property, who became a bona fide purchaser and had perfected the transfer at the moment the bankruptcy petition was filed, if indeed the transfer from the debtor to the bona fide purchaser could be perfected under applicable state law.

Weisman v. Peters, 131 B.R. 148, 151 (Bankr.N.D.Ca.1991).

The question of who may be a bona fide purchaser is one which is answered by reference to applicable state law. In re Davidson Rehab. Assoc., 103 B.R. 440 (Bankr.S.D.N.Y.1989). The entity claiming bona fide purchaser status bears the burden of proving that he falls within the definition. Oliver v. Sandborn, 60 Mich. 346, 27 N.W. 527 (1886).

In Michigan, the definition of a bona fide purchaser is a purchaser without actual or constructive notice:

Generally speaking, the essential elements of a "bona fide purchase" of land are the payment of valuable consideration, good faith, and the absence of any purpose to take unfair advantage of third persons, and absence of notice, actual or constructive, of the outstanding rights of others.
23 Mich. Law & Practice, Vendor and Vendee § 151 (1958).

On its face, the requirement of "absence of notice, actual or constructive, of the outstanding rights of others," would seem to conflict with § 544(a)(3)'s language "without regard to any knowledge of the trustee or of any creditor." However, this language does not negate the effect of constructive notice under applicable state law. In re Probasco, 839 F.2d 1352, 1354-55 (9th Cir.1988).

In In re Perrin's Marine Sales, Inc., 63 B.R. 4 (Bankr.W.D.Mich.1986), the Honorable David E. Nims addressed this conflict. Perrin's Marine involved the trustee's attempt to exercise his § 544(a)(3) "strong arm" powers against defendants who purchased a dockominium from the debtor pre-petition, but whose deed was not recorded until after the debtor filed bankruptcy. After reviewing McCannon v. Marston, 679 F.2d 13 (3d Cir.1982), the seminal opinion on this issue, Judge Nims addressed the apparent conflict between the concept "absence of notice, actual or constructive," and the statutory language "without regard to any knowledge of the trustee or of any creditor":

The court in McCannon, supra, makes it clear that an overly broad interpretation of the "without regard to any knowledge of trustee" language in § 544(a)(3) would render even recorded notice insufficient to defeat the claim of the trustee. Congress surely did not intend that result.

63 B.R. at 7. Judge Nims concluded that under Michigan law constructive notice of a third person's interest in property cannot be ignored by the bankruptcy trustee in his quest to achieve bona fide purchaser status even when those rights do not appear of record.

McCannon's conclusion that the "knowledge" element of § 544(a) encompasses only the personal knowledge of the trustee or creditor,1 not constructive notice which may arise under "applicable law," was adopted. The overwhelming majority of subsequent cases addressing this semantic conflict have followed suit. See In re Probasco, supra; In re Heinig, 64 B.R. 456, 458 (Bankr.S.D.Cal.1986); In re Morse, 30 B.R. 52, 54 (Bankr. 1st Cir.1983); In re Gurs, 27 B.R. 163, 165 (Bankr. 9th Cir. 1983); In re Hardway Restaurant, Inc., 31 B.R. 322 (Bankr.S.D.N.Y.1983); In re Minton Group, Inc., 27 B.R. 385, 389 (Bankr. S.D.N.Y.1983). This court finds the analysis in Perrin's Marine persuasive. Accordingly, we are not precluded by § 544(a) from considering any facts that would have given a hypothetical purchaser constructive notice of OAK's lien under state law.

II.

The crux of the Trustee's claim of entitlement to judgment as a matter of law is that OAK's failure to record a notice of lis pendens renders the construction lien ineffective against him as a bona fide purchaser pursuant to § 544(a)(3). We understand the argument to be that no other document, recorded or otherwise, or activity can serve as constructive notice of OAK's interest in the Grandville Property. In the Trustee's words, because "the Act clearly specifies the mode of giving notice of foreclosure of the lien, that is, by a notice of lis pendens, the recording of a notice of lis pendens is the exclusive method to give constructive notice of the enforcement of a construction lien." Trustee's Brief in Response to OAK's Motion for Summary Judgment at 5.

OAK contends that its recorded claim of lien would have given a purchaser sufficient notice of the possibility of a claim to necessitate additional investigation into that potential claim by a would-be purchaser. This is termed "inquiry notice." It further contends that the additional investigation would establish that OAK was foreclosing on its lien, and thus cause the purchaser to take subject to the lien.

The Trustee argues that the doctrine...

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