In re Richardson
| Decision Date | 02 October 1982 |
| Docket Number | Bankruptcy No. 82C-00736,Civ. No. 82PC-0746. |
| Parties | In re Kent D. RICHARDSON, and F. Nadine Richardson, Debtors. Duane H. GILLMAN, Trustee of the estate of Kent D. and F. Nadine Richardson, Plaintiff, v. PRESTON FAMILY INVESTMENT COMPANY, and First Interstate Bank of Utah, Defendants. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah |
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Duane H. Gillman, Boulden & Gillman, Salt Lake City, Utah, for plaintiff.
Stephen T. Preston, Salt Lake City, Utah, for defendant Preston Family Investment Co.
Roy A. Williams, Jones, Waldo, Holbrook & McDonough, Salt Lake City, Utah, for defendant First Interstate Bank of Utah.
This case requires the Court to decide whether 11 U.S.C. §§ 544(a)(3), 544(b), or 548(a)(2) permits a trustee to avoid a non-judicial foreclosure sale held under a Utah deed of trust. Central to the issue of avoidance under Section 548(a)(2) is whether the Court should follow Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir. 1980) or Lawyers Title Insurance Corp. v. Madrid (In re Madrid), 21 B.R. 424 (9th Cir. App. Pan. 1982).
The Richardsons (debtors), husband and wife, bought a home in 1976, giving a deed of trust to First Security State Bank. In 1978, they gave a second deed of trust to First Interstate Bank of Utah (First Interstate). By mid-1981, the debtors were in default on their payments to First Interstate. In November of 1981, First Interstate filed in the Salt Lake County Recorder's office a notice of default.1 Power of sale rights under a deed of trust may not be exercised in Utah until three months after the recording of a notice of default. After the three month period expired, First Interstate properly gave notice of a public sale to be held on March 24, 1982.2
On March 24, 1982, First Interstate sold the home to the Preston Family Investment Company (Preston) for $6,738.43,3 the exact amount of its debt. On the day after the sale, March 25, the debtors filed a petition for relief under Chapter 7. Preston had not recorded its trustee's deed.
On June 15, 1982, the trustee of the debtors' estate filed a complaint against Preston and First Interstate seeking to avoid the transfer of the debtors' equity in the home under 11 U.S.C. §§ 544(a)(3), 544(b), and 548(a)(2).4 Preston moved to dismiss and First Interstate answered the complaint.
The trustee then moved for summary judgment, submitting two supporting affidavits. After a hearing, the Court denied the motion to dismiss and took under advisement the motion for summary judgment. By the time of the hearing, neither defendant had submitted affidavits opposing summary judgment, although Preston had filed a memorandum. At the hearing, the trustee stipulated that the defendants could have through September 3, 1982, to file affidavits.
On September 3, First Interstate filed a memorandum opposing summary judgment and Preston filed an answer, a counterclaim, and a cross-claim. Neither defendant, however, filed affidavits opposing summary judgment.
The Court now files this memorandum decision on the trustee's motion for summary judgment.5
Because the Court has determined not to grant summary judgment on the trustee's causes of action under Sections 544(a) and 544(b), analysis of the alleged factual disputes in this proceeding is deferred to the discussion below of the trustee's cause of action under Section 548(a)(2).
Avoidance of the transfer of the debtors' equity under Section 544(a)(3)
In essence, the trustee argues, Section 544(a)(3) deems him a bona fide purchaser without notice of the transfer to Preston. The defendants read Section 544(a)(3) differently. In their view, if, on the facts of the particular case, there could be no bona fide purchaser, then the trustee is impotent under Section 544(a)(3). In this case, the defendants argue, because a recorded notice of default placed the world on constructive notice of the debtors' default and of an impending sale of the property, there could be no bona fide purchaser of this property from the debtors.
A purchaser, to qualify as a bona fide purchaser, must be without notice, actual or constructive. This rule is the law in Utah, where "a purchase with notice is considered a purchase made mala fide." Pender v. Dowse, 1 Utah 2d 283, 265 P.2d 644 (1954). The question here is whether, when Congress enacted Section 544(a)(3), it meant to give the trustee the highly preferred status of a true bona fide purchaser without qualification, or, in other words, whether Section 544(a)(3) frees a trustee seeking to avoid a transfer of an interest of the debtor in real property from both actual and constructive notice or only from actual notice of the transfer.
Section 544(a)(3) does not shield the trustee from constructive notice. This conclusion is supported by the language of Section 544(a)(3), which gives the trustee the rights of a bona fide purchaser without regard to the knowledge of the trustee or of any creditor. As a number of courts have recognized, the term "notice" may include either actual or constructive notice, while the term "knowledge" includes only actual notice. That Congress selected the term "knowledge" is significant. McCannon v. Marston, 679 F.2d 13 (3d Cir. 1982); Elin v. Busche (In re Elin), 20 B.R. 1012 (D.N.J. 1982); Home Life Insurance Co. v. Jones (In re Jones), 20 B.R. 988 (Bkrtcy.E.D.Pa. 1982);6Fitzgerald v. Thornley (In re Lewis), 19 B.R. 548 (Bkrtcy.D.Idaho 1982). Moreover, if the trustee were made a bona fide purchaser without regard to constructive notice, the trustee might be able to avoid properly recorded transfers,7 a result which is inconsistent with the purpose of Section 544(a)(3) to protect creditors from secret interests in real property.8
Under Utah law, First Interstate's recorded notice of default and published notice of sale placed the world on constructive notice of the debtors' failure to pay, of First Interstate's intent to sell the property, and of the impending sale on March 24. See 6A Utah Code Ann. §§ 57-1-24, 57-1-25, and 57-3-2; McCarthy v. Lewis, 615 P.2d 1256 (Utah 1980) (). At the commencement of the debtors' bankruptcy case, sufficient information was available to place upon a prospective purchaser a duty to inquire as to the sale. Because an inquiry would have disclosed the sale to Preston, a subsequent purchaser would take with constructive notice of the sale.9 Where there is constructive notice of a transfer of property of the debtor, the trustee's status as a bona fide purchaser without knowledge is unavailing.
Avoidance of the transfer of the debtors' equity under Section 544(b)
Section 544(b) provides that the trustee may avoid any transfer of an interest of the debtor in property that is voidable under applicable law by a creditor holding an allowable unsecured claim. The trustee relies on Section 25-1-4 of the Utah Fraudulent Conveyance Act, which is set forth in the margin.10 First Interstate argues that under Section 25-1-4, the challenged conveyance must be "made . . . by the person who is, or will be thereby rendered, insolvent . . ." and that the conveyance of the debtors' equity in the home to Preston by means of the trust deed sale was not made by the debtors. Therefore, First Interstate contends, the conveyance cannot be avoided under Section 25-1-4.
It may be that on these facts a Utah Court would adopt First Interstate's interpretation of Section 25-1-4, especially if it determined that to allow creditors to avoid trust deed sales was not intended by Section 25-1-4 and would improperly undermine Utah trust deed law. On the other hand, a Utah court might conclude that the transfer to Preston was made by the debtors because it was made with their authorization given in the deed of trust, that the grant of authority to sell and the sale itself were separate transfers, that the transfer by way of the sale was without fair consideration, that it rendered the debtors insolvent, that it deprived the debtors' other creditors of a significant asset, and that policies of creditor protection reflected in Section 25-1-4 mandate avoidance of the transfer.
Application of Section 25-1-4 to a trust deed sale appears to be a matter of first impression in Utah. It involves significant issues of state policy. Absent instruction from the parties on any authority indicating how the Utah courts would interpret Section 25-1-4 on these facts and in view of the Court's disposition of the trustee's motion under Section 548(a)(2), the Court exercises its discretion to deny summary judgment on the trustee's claim under Section 544(b) at this time.
Avoidance of the transfer of the debtors' equity under Section 548(a)(2)
Section 548(a)(2) provides, in pertinent part, that "the trustee may avoid any transfer of an interest of the debtor in property . . . that was made . . . on or within one year before the date of the filing of the petition, if the debtor (A) received...
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