Professional Inv. Properties of America, In re

• Decision Date: 30 January 1992
• Docket Number: No. 90-35175,90-35175
• Citation: 955 F.2d 623
• Parties: , 26 Collier Bankr.Cas.2d 528, Bankr. L. Rep. P 74,445 In re PROFESSIONAL INVESTMENT PROPERTIES OF AMERICA, Debtor. Robert BRIGGS and Grace Briggs, Plaintiffs-Appellees, v. Roy W. KENT, Trustee, Estate of Professional Investment Properties of America, Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 623

955 F.2d 623

60 USLW 2543, 26 Collier Bankr.Cas.2d 528,

Bankr. L. Rep. P 74,445

In re PROFESSIONAL INVESTMENT PROPERTIES OF AMERICA, Debtor Robert BRIGGS and Grace Briggs, Plaintiffs-Appellees, v. Roy W. KENT, Trustee, Estate of Professional Investment Properties of America, Inc., Defendant-Appellant.

No. 90-35175.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 3, 1991.

Decided Jan. 30, 1992.

Charles K. Wiggins, Edwards, Wiggins & Hathaway, Seattle, Wash., for defendant-appellant.

Shawn B. Briggs, Briggs & Briggs, Tacoma, Wash., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Washington.

Before WRIGHT, THOMPSON and T.G. NELSON, Circuit Judges.

T.G. NELSON, Circuit Judge:

In this bankruptcy case, we are asked to decide under Washington law whether the contents of the Briggs' involuntary petition which forced the debtor into bankruptcy put the trustee on sufficient inquiry notice of the Briggs' interest under unrecorded instruments. If so, he may not invoke the avoidance powers provided by 11 U.S.C. § 544. We affirm the district court and hold that the trustee had sufficient notice which precludes the avoidance powers.

FACTS AND PROCEEDINGS BELOW

In October, 1985, the Briggs lent $50,000 to the debtor, Professional Investment Properties. They received a promissory note and a deed of trust on the debtor's real property as security for the loan. The deed of trust was not recorded.

When the Briggs learned of the debtor's financial difficulties, they filed a petition to force the debtor into involuntary bankruptcy on May 28, 1986. Simultaneously, they filed a Motion for Appointment of Trustee, and the real property became an asset of the bankruptcy estate pursuant to 11 U.S.C. § 541. In anticipation of a sale of the real property by the trustee, the Briggs attempted to impose an equitable lien on the proceeds. The bankruptcy court denied their motion for summary judgment and held that the Briggs were unsecured creditors of the estate.

The Briggs appealed to the district court which remanded for further findings of fact. Specifically, the district court questioned whether the trustee had constructive notice of the Briggs' interest in the real property. On remand, the Briggs presented expert testimony "that the contents of the petition constituted constructive notice of the Briggs' interest in the real property." Nevertheless, the bankruptcy court granted summary judgment in favor of the trustee concluding that "any constructive notice of plaintiffs' interest achieved by filing the original bankruptcy pleadings comes too late to secure their interest in a position prior to that acquired by the trustee."

The district court reversed, reaching the opposite conclusion: "It is the judgment of the court that the quoted language constituted constructive notice of a prior claim by the Briggs."

On March 3, 1990, the trustee appealed the decision of the district court. On August 3, 1990, however, the bankruptcy court approved the trustee's sale of the estate's claim to the proceeds from the sale of the property to Maynard B. Miller.

I. Transferability of the trustee's "strong arm powers."

Initially, we must decide whether the trustee's strong arm powers are transferable to Miller. The Briggs claim that only the trustee may invoke § 544, discussed hereafter.

First, Miller argues that this court should not discuss the issue because it was not first raised in the district court. Generally, an appellate court will not consider arguments not first raised before the district court unless there were exceptional circumstances. Villar v. Crowley Maritime Corp., 782 F.2d 1478, 1483 (9th Cir.1986). The specific "exceptional circumstances" that this circuit has identified are as follows: (1) review is necessary to prevent a miscarriage of justice; (2) a new issue arises while an appeal is pending because of a change in the law and (3) the "issue presented is purely one of law and either does not depend on the factual record developed below, or the pertinent record has been fully developed." Bolker v. C.I.R., 760 F.2d 1039, 1042 (9th Cir.1985).

The third exception applies here. The record has been fully developed and the parties do not dispute that the transfer took place, only the attendant legal ramifications. It would serve no purpose to remand this case back to the district court to hear an issue that can be addressed equally as well here. Moreover, the explanation for not arguing the issue before the district court is obvious: it was an issue that did not yet exist.

The Briggs argue specifically that Miller cannot assert the strong arm powers of the trustee. In Grass v. Osborn, 39 F.2d 461 (9th Cir.1930), this court held under the old Bankruptcy Act that the trustee's avoidance powers could not be transferred. While the Ninth Circuit has not had occasion to comment on the case since it was decided, the Tenth Circuit has done so recently. In In re Sweetwater, 884 F.2d 1323, 1327-28 (10th Cir.1989), the Court noted Grass among other cases and determined that it had been superseded by the enactment of the 1978 Bankruptcy Code. Sweetwater dealt specifically with 11 U.S.C. § 1123(b)(3)(B) pertaining to settlement and enforcement of a bankruptcy plan "by the debtor, by the trustee, or by a representative appointed for that purpose." It explained that a creditor was not allowed to assert the trustee's strong arm powers when done solely for the benefit of that single creditor. For example, the creditor in Texas General Petroleum Corp. v. Evans (In re Texas General Petroleum Corp.), 58 B.R. 357 (Bankr.S.D.Tex.1986) was denied the power because he was not acting to benefit the plan as a whole and all similarly situated creditors.

We agree with the analysis of the Tenth Circuit. Grass has been superseded by statute and is no longer current law. If a creditor is pursuing interests common to all creditors or is appointed for the purpose of enforcement of the plan, he may exercise the trustee's avoidance powers.

Here, the trustee sold the estate's claim to the proceeds from the sale of the property with the tacit approval of the bankruptcy court. The court ordered the estate's interest in the appeal terminated and that all responsibility for the claim rested with Miller. While Miller may be acting on his own, he does so with the apparent blessing of the bankruptcy court and the trustee. Clearly, it was in the estate's interests to resolve its involvement in the dispute. In fact, while it was not argued by Miller, nor was he specifically identified for this purpose, he could best be identified as a representative appointed to enforce the debt in line with section 1123(b)(3)(B).

More importantly, the trustee originally asserted the avoidance powers in the bankruptcy and district courts. To refuse Miller the opportunity to stand in the trustee's shoes would frustrate the obvious wish of the bankruptcy court to end its participation in the matter. In Texas General Petroleum, there was no such involvement by the trustee or the bankruptcy court. The creditor was acting independently and for his sole benefit. For these reasons, we hold that Miller may assert the powers of the trustee.

II. Constructive or Inquiry Notice. ¹

Standard of Review

Generally, the bankruptcy court's findings of facts are reviewed under the clearly erroneous standard and its conclusions of law are reviewed de novo. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986). Whether a purchaser has inquiry notice is largely a factual determination. In fact, while the district court applied a de novo standard of review, In re Probasco, 839 F.2d 1352, 1355 (9th Cir.1988), indicates that with a question of fact such as we have here, a clearly erroneous standard should apply. "We must accept the bankruptcy court's finding that there was no constructive notice unless we are 'left with a definite and firm conviction that a mistake has been committed.' " (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948)). In Probasco, the Court noted that the facts did not appear to be in dispute but it applied the clearly erroneous standard anyway because of "judicial economy." We will do likewise.

Finally, the bankruptcy court's conclusions of law are reviewed de novo by the district court and we, in turn, review the district court's decision de novo. "Because this court is in as good a position as the district court to review the findings of the bankruptcy court, it independently reviews the bankruptcy court's decision." Ragsdale, at 795 (9th Cir.1986).

Analysis

The bankruptcy trustee holds "strong arm powers" provided by 11 U.S.C. § 544(a)(3) which states the trustee is to be considered:

A bona fide purchaser of all real property ... from the debtor, against whom applicable law permits such transfer to be perfected, that attains 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).

State law determines whether a party is a bona fide purchaser. In re Washburn and Roberts, Inc., 795 F.2d 870, 872 (9th Cir.1986). In Washington, a bona fide purchaser is defined as "one who without notice of another's claim of right to, or equity in, the property prior to his acquisition of title, has paid the vendor a valuable consideration." Miebach v. Colasurdo, 102 Wash.2d 170, 175, 685 P.2d 1074, 1078 (1984). Washington, which is a race-notice state, generally holds that a bona fide purchaser prevails over a prior transferee who has failed to record. RCW 65.08.070; Paganelli v. Swendsen, 50 Wash.2d 304, 308, 311 P.2d 676, 678 (1957). Since the strong arm powers elevate the trustee to a level of a bona fide purchaser, a trustee without notice can generally avoid any unrecorded transfer of land in the State of Washington. Washbu...