Weisman, In re, Nos. 91-16518

• Decision Date: 21 September 1993
• Docket Number: Nos. 91-16518,91-16600
• Citation: 5 F.3d 417
• Parties: Bankr. L. Rep. P 75,442 In re Marc A. WEISMAN and, Sheila J. Weisman, Debtors. Jerome E. ROBERTSON, Trustee, Plaintiff-Appellee-Cross-Appellant, v. Marc PETERS, Defendant-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 417

5 F.3d 417

Bankr. L. Rep. P 75,442

In re Marc A. WEISMAN and, Sheila J. Weisman, Debtors.

Jerome E. ROBERTSON, Trustee, Plaintiff-Appellee-Cross-Appellant, v. Marc PETERS, Defendant-Appellant-Cross-Appellee.

Nos. 91-16518, 91-16600.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 4, 1993.

Decided Sept. 21, 1993.

Esther Z. Hirsh, Long & Levit, San Francisco, CA, for defendant-appellant-cross-appellee.

Cathleen Cooper Moran (argued) and Michelle K. Rubin (on briefs), Mountain View, CA, for plaintiff-appellee-cross-appellant.

Appeal from the United States District Court for the Northern District of California, Eugene F. Lynch, District Judge, Presiding.

Before: FLETCHER, REINHARDT, and NOONAN, Circuit Judges.

REINHARDT, Circuit Judge:

We are faced with the question whether under California law a husband's occupation of his family residence with his second wife can create a duty in a bona fide purchaser for value or a bankruptcy trustee to inquire as to whether his former wife still retains the ownership interest in that property that appears of record. Guided by reality, our answer is yes.

I. Factual and Procedural Background ¹

Debtor Sheila Weisman (formerly Sheila Peters) married defendant Marc Peters in 1963. They bought a house, which is the subject of the instant dispute, in Campbell, California in 1967. The couple lived in the Campbell residence until March 1985, when Sheila Peters moved out. The couple's marriage was dissolved that fall, but the judgment of dissolution was not recorded. Pursuant to their property settlement, Marc Peters had the right to purchase his former wife's interest in the house they had previously shared. He did so by refinancing and using the loan as the purchase price. However, the lender required Sheila Weisman, who had married debtor Marc Weisman in November 1985, to remain on the title to the property.

As a result of the refinancing transaction, title to the Campbell residence was transferred from Marc Peters and Sheila Peters, as community property, to Marc Peters and Sheila Weisman (a married woman), as tenants in common. ² The deed reflecting the transfer was dated June 23, 1986, and was recorded July 2, 1986. Marc Weisman then executed a quit claim deed in favor of Sheila Weisman on June 24, 1986, which was also recorded on July 2, 1986. After receiving payment from Marc Peters for her interest in their former home, Sheila Weisman executed a quit claim deed in favor of him on June 25, 1986. The deed was delivered on August 27, 1986, but was not recorded until December 8, 1988. Marc Peters married Nianne Neergaard in August 1986 and the couple has lived in the Campbell residence since that time.

In August 1988, Sheila Weisman and her second husband, Marc Weisman, filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code (liquidation). A trustee, plaintiff Jerome Robertson, was appointed. After learning that Sheila Weisman was a record title holder to the Campbell residence, the trustee filed a complaint against Marc Peters for authorization to sell that property, as permitted by the Bankruptcy Code. ³ After hearing oral argument, the bankruptcy court found for defendant Peters. The district court reversed the bankruptcy judge's finding as clearly erroneous and entered judgment for the trustee. Peters appealed and the trustee cross-appealed to this court. ⁴ Because both the bankruptcy court and district court decisions were final, we have jurisdiction under 28 U.S.C. section 158(d). We independently review the bankruptcy court's decision and do not give deference to the district court's determinations. Briggs v. Kent (In Re Professional Investment Properties of Am.), 955 F.2d 623, 626 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 63, 121 L.Ed.2d 31 (1992). We apply a clearly erroneous standard to the bankruptcy court's findings of fact and review its conclusions of law de novo. Id.

II. Analysis

The Bankruptcy Code, 11 U.S.C. section 544(a)(3), ⁵ gives a bankruptcy trustee "strong arm powers" to avoid transfers of real property of the debtor that would be voidable under state law by a bona fide purchaser (BFP) of the property from the debtor. Professional Investment, 955 F.2d at 627; Tleel v. Chbat (In Re Tleel), 876 F.2d 769, 770 (9th Cir.1989); Probasco v. Eads (In Re Probasco), 839 F.2d 1352, 1354 (9th Cir.1988). While whether a trustee qualifies under section 544(a)(3) is a question of federal law, state law determines whether the trustee's status as a BFP will defeat the rights of the person against whom the trustee seeks to assert his powers. 4 Collier on Bankruptcy, p 544.02, p. 544-8 to 11 (Lawrence P. King ed., 15th ed. 1992); Tleel, 876 F.2d at 772; Gurs v. Walsh (In Re Gurs), 27 B.R. 163, 165 (Bankr. 9th Cir.1983). ⁶ Here, California law applies and will determine whether the trustee can set aside Sheila Weisman's (hereinafter "Weisman") unrecorded transfer of all of her interests in the house to Marc Peters (hereinafter "Peters").

California is a race-notice jurisdiction and requires every conveyance of real property to be recorded in order to be valid against a subsequent purchaser of the same property. Cal.Civil Code Sec. 1214. ⁷ However, an unrecorded instrument is valid as between the parties thereto and those who have notice of it. Cal.Civil Code Sec. 1217. Although 11 U.S.C. section 544(a)(3) creates the legal fiction of a perfect BFP and explicitly renders the trustee's actual notice of prior grantees irrelevant, Professional Investment Properties, 955 F.2d at 627 n. 2, we have held that constructive or inquiry notice obtained in accordance with California Civil Code section 19 can defeat a trustee's claim. Probasco, 839 F.2d at 1354-56.

The resolution of this case turns on California Civil Code section 19. It provides:

Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.

In this context the question is whether a prudent purchaser, in light of the information reasonably available to him on the date the Weismans filed their bankruptcy petition, would have made an inquiry into the possibility that Peters owned his residence outright. A "prudent purchaser" describes someone who is shrewd in the management of practical affairs and whose conduct is marked by wisdom, judiciousness, or circumspection. See Probasco, 839 F.2d at 1356. Such a purchaser will be charged with knowledge of 1) the nature of the property; 2) its current use; 3) the identities of the persons occupying it; 4) the relationship among them; and, 5) the relationship between those in possession and the person whose purported interest in the property the purchaser intended to acquire. See id. at 1354-56; Huber v. Danning (In re Thomas), 147 B.R. 526, 530-31 (Bankr. 9th Cir.1992). In this connection, he is charged with knowledge of information that a reasonable inspection of the property would have revealed. 3 Harry D. Miller & Marvin B. Starr, Current Law of California Real Estate, Sec. 8.65 at 393 (2d ed. 1989).

Whether the circumstances are sufficient to require inquiry as to another's interest in property for the purposes of section 19 is a question of fact, even where there is no dispute over the historical facts. Probasco, 839 F.2d at 1355; see also Natural Resources, Inc., v. Wineberg, 349 F.2d 685, 690 (9th Cir.1965) (under California law whether possession is such to require inquiry is question of ultimate fact), cert. denied, 382 U.S. 1010, 86 S.Ct. 617, 15 L.Ed.2d 525 (1966). If, under the circumstances, the trustee should have made an inquiry as to whether Weisman had transferred all of her interests in the Campbell residence to Peters, then section 19 charges the trustee with knowledge of the unrecorded deed that did just that. Such knowledge would prevent the trustee from prevailing in this strong arm action. See Probasco, 839 F.2d at 1354-56.

Resolution of the question whether the trustee was under a duty to make an inquiry depends in part on the interplay of several long established and related principles of California real estate law:

1) Open, notorious, exclusive, and visible possession of real property by one other than the vendor is notice sufficient to put a prospective purchaser on inquiry of any rights held by the occupant, unless there is no duty under the circumstances to make inquiry. ⁸

2) There is no duty to inquire upon a subsequent purchaser regarding any unknown claims or interests by a person in possession of real property where the occupant's possession is consistent with the record title. ⁹

3) Where possession is inconsistent with the record title and thereby creates a duty to inquire, a prospective purchaser is charged with constructive notice of all facts that would be revealed by a reasonably diligent inquiry, regardless of whether the purchaser has ever seen the property. ¹⁰

The essential dispute between the parties is whether Peters' and Neergaard's possession of the house was consistent or inconsistent with the record title in Peters' and Weisman's names. The trustee argues that the possession was consistent because, as a cotenant, Peters had the right to possess the whole of the property. The trustee maintains it was immaterial that Weisman lived elsewhere and that Neergaard resided on the property. Peters contends possession was inconsistent with title because of a combination of 1) the change in title from Marc Peters and Sheila Peters to Marc Peters and Sheila Weisman, a married woman, demonstrating that the couple had divorced and Sheila had remarried, and 2) the presence of Peters' second wife, Neergaard, on the property with him. Peters argues that knowledge of these facts would have caused a prudent purchaser to conduct an inquiry.

The trustee places great reliance on the...