In re Weisman, C-91-0402 EFL.
| Decision Date | 26 August 1991 |
| Docket Number | No. C-91-0402 EFL.,C-91-0402 EFL. |
| Citation | 131 BR 148 |
| Court | U.S. District Court — Northern District of California |
| Parties | In re Marc A. WEISMAN, and Sheila J. Weisman, Debtors. Jerome E. ROBERTSON, Trustee, Appellant, v. Marc PETERS, Appellee. |
Cathleen C. Moran, Palo Alto, Cal., for appellant.
Esther Z. Hirsh, Long & Levitt, San Francisco, Cal., for appellee.
AMENDED ORDER AFFIRMING IN PART AND REVERSING IN PART JUDGMENT OF THE UNITED STATES BANKRUPTCY COURT
This matter comes on appeal from the judgment of the United States Bankruptcy Court for the Northern District of California, Division 5, in favor of defendant Marc Peters (appellee herein), denying the bankruptcy trustee any interest in the subject property at 565 Cambrian Drive, Campbell, California. This Court's jurisdiction is proper pursuant to 28 U.S.C. section 158(a).
The appeal raises the issue of whether 11 U.S.C. section 544(a)(3) permits constructive notice of another party's property interest to overcome a trustee's hypothetical bona fide purchaser status under that statute if constructive notice deprives a bona fide purchaser of the protection of the recording acts under applicable state law. If answered affirmatively, the case gives rise to a second issue: whether the bankruptcy court clearly erred in finding that the trustee had constructive notice of Mr. Peters' and/or his new wife's unrecorded interests in the subject property. This Court finds in the affirmative on both issues. Therefore, the judgment of the bankruptcy court is affirmed in part and reversed in part.
Both parties have stipulated to the following facts:
Sheila Weisman (formerly known as Sheila Peters), one of the debtors in the underlying proceeding, married appellee Marc Peters on August 31, 1963. The two bought the property at 565 Cambrian Drive, Campbell, California, (the "subject property") on August 8, 1967. They lived together on the subject property continuously from August, 1967 until March, 1985. Their marriage was dissolved effective November 4, 1985.
The two reached a property settlement agreement with respect to the dissolution of their marriage. Pursuant to it, appellee Peters had the right to purchase Sheila Weisman's interest in the subject property within three years of the agreement.
The judgment of dissolution of the marriage of Marc Peters and Sheila Weisman (then Sheila Peters), entered in Santa Clara County Superior Court Case No. 573920, was filed on October 24, 1985. The judgment of dissolution of marriage was not recorded with the County Recorder. In November 1985, Sheila J. Peters married Marc A. Weisman. Since that time she has been known as Sheila J. Weisman.
In accordance with the property settlement agreement between Mr. Peters and Ms. Weisman, Mr. Peters undertook to purchase her interest in the subject property by refinancing the property and using the proceeds of the loan to pay her for it. However, the refinancing lender required Ms. Weisman to sign the loan documents as a condition of granting the loan, and, consequently, Ms. Weisman remained on title. Title in the subject property was transferred from Marc Peters and Sheila Peters, as community property, to Marc Peters, an unmarried man, and Sheila Weisman, a married woman as her sole and separate property, as tenants in common. The deed reflecting this transfer was dated June 23, 1986 and recorded on July 2, 1986.
The day after the date of that deed, Sheila Weisman's new husband (and one of the debtors in the underlying bankruptcy action), executed a quitclaim deed in favor of Ms. Weisman disavowing any interest in the subject property. That deed was dated June 24, 1986 and recorded on July 2, 1986.
By quitclaim deed dated June 25, 1986, Ms. Weisman transferred her interest in the subject property to Marc Peters after she received from him the proceeds of the aforementioned loan. The deed was delivered to Mr. Peters on or about August 27, 1986, but he did not record it until December 8, 1988, almost two years later.
Mr. Peters himself remarried. After Ms. Weisman had executed the quitclaim deed to him, but prior to its delivery, he married Niane Neergaard, on August 1, 1986. From that date to the present, Ms. Neergaard has lived openly and continuously on the subject property with Mr. Peters. He has lived openly and continuously on the property from August 1967 until the present.
On August 2, 1988, Marc A. and Sheila J. Weisman filed for bankruptcy under Chapter 7 of the United States Bankruptcy Code. On that date, Mr. Peters and Ms. Neergaard were living openly on the subject property. However, as of that date, record title to the subject property was still held by Marc Peters and Sheila Weisman as tenants in common.
Prior to the time the trustee filed the underlying action, the trustee made no inquiry into the state of the title or the ownership of the subject property, other than to review a report indicating that Sheila Weisman was a record title holder to the subject property. The trustee has never made any inquiry of Mr. Peters or Ms. Neergaard regarding the title of the premises or regarding Ms. Neergaard's rights in the subject property.
Jerome E. Robertson, the appointed Chapter 7 trustee, claims a one-half interest in the subject property. By Memorandum Decision filed August 17, 1990, the bankruptcy court entered judgment in favor of Mr. Peters, holding that the bankruptcy trustee is not entitled to any interest in the subject property. This appeal followed.
The issues on appeal are two:
(1) whether Bankruptcy Code section 544(a)(3) permits constructive notice, if it strips a bona fide purchaser of the protection of the recording acts under applicable state law, to remove similarly the protection of the recording acts from the bankruptcy trustee as a hypothetical bona fide purchaser under 11 U.S.C. section 544(a)(3); and
(2) if so, whether the bankruptcy court clearly erred in concluding that the circumstances were sufficient to put appellant trustee on inquiry notice of another's interest in the subject property so as to constitute constructive notice of that interest under California law.
The first issue, a statutory interpretation of Bankruptcy Code section 544(a)(3), is a question of law and is therefore reviewed under a de novo standard. In re Nunn, 788 F.2d 617 (9th Cir.1986). The second issue, whether the circumstances were sufficient to put one on inquiry so as to constitute constructive notice, is a question of fact and is therefore reviewed under the "clearly erroneous" standard. In re Probasco, 839 F.2d 1352, 1355 (9th Cir.1988).
A. Constructive Notice, If It Can Overcome The Rights Of A Bona Fide Purchaser Under Applicable State Law, Is Relevant To Determine The Rights Of A Bankruptcy Trustee As A Hypothetical Bona Fide Purchaser Pursuant To 11 U.S.C. Section 544(a)(3).
The question on appeal can be simply stated: whether the trustee may avoid the transfer to Peters of the debtor's one-half interest in the subject property, under the strong arm powers afforded the trustee pursuant to Section 544(a)(3). Section 544(a)(3) provides, in pertinent part:
This somewhat labyrinthine statute merits a brief restatement. 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.1
The parties on appeal differ over the proper construction of the statute. Appellee contends that under section 544(a)(3), the trustee, as hypothetical bona fide purchaser, has no greater rights than any other bona fide purchaser under state law. Under California law, a bona fide purchaser who records does not take priority over a prior transferee of whose transfer the bona fide purchaser had constructive notice. In re Probasco, 839 F.2d 1352, 1354 (9th Cir.1988). Therefore, appellee contends that if the trustee had, at the time the bankruptcy commenced, constructive notice of the unrecorded, prior interests in the subject property of Peters and/or Neergaard, the trustee would lack priority over appellee as to the one-half interest in the subject property at issue.
Appellant maintains that constructive notice, even if it removes the protection of the recording acts from a subsequent purchaser under California law, is irrelevant under section 544(a)(3) because that provision, by its terms, confers bona fide purchaser status upon the trustee "without regard to any knowledge of the trustee." Therefore, even if actual or constructive notice of a prior transfer would preclude a subsequent purchaser from having priority over the prior transferee, it should not affect the trustee's priority over a prior transferee for purposes of section 544(a)(3).
Appellant would have the court equate lack of "knowledge" under the statute with lack of legal "notice." However, the legislative history, the majority of decisions, and plain logic indicate that "knowledge" within that provision ought to be read to refer to personal knowledge, not legal notice, actual or constructive. The seminal decision on the issue is McCannon v. Marston, 679 F.2d 13 (3d Cir.1982). There, the Third Circuit had...
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