*District Judge of the Southern District of Texas, sitting by

designation. 

1

United States Court of Appeals,

Fifth Circuit.

No. 96-20666.

In the Matter of: Charles HAMILTON, Jr., Debtor.

REALTY PORTFOLIO, INC., Appellant,

v.

Charles HAMILTON, Jr., Appellee.

Oct. 20, 1997.

Appeal from the United States District Court for the Southern

District of Texas.

Before KING and PARKER, Circuit Judges, and ROSENTHAL*, District

Judge.

ROSENTHAL, District Judge:

A debtor filed a Chapter 13 bankruptcy petition three days

after his homestead was sold in a foreclosure sale. When the

homeowner filed for bankruptcy protection, the foreclosure

purchaser had not filed the substitute trustee's deed. Indeed, the

purchaser failed to file and record the deed for another eleven

days. The debtor asked the bankruptcy court to avoid the transfer

of title to his homestead under 11 U.S.C. §§ 522(h) and 544(a)(3).

The bankruptcy court found that the debtor had standing to seek

such relief and voided the transfer; the district court affirmed.

This appeal presents the issue of whether a Chapter 13 debtor

may avoid a prepetition foreclosure conveyance when the purchaser

at the foreclosure sale fails to record the substitute trustee's
2

deed before the bankruptcy filing.

I. BACKGROUND

The facts are undisputed. On September 2, 1966, Charles

Hamilton, Jr. ("Hamilton"), plaintiff-appellee, executed a

promissory note payable to First Continental Corporation. The note

was secured by a deed of trust executed on the same date and

properly recorded in Harris County, Texas. The deed of trust gave

Federal National Mortgage Association ("FNMA") a first lien on

Hamilton's homestead property, described as Tracts 8A and 8E, Block

3 of Houston Gardens, in Harris County, Texas. FNMA was the owner

and holder of the note and deed of trust; Bank United of Texas,

FSB ("Bank United") was the servicing agent for FNMA.

In December 1994, Hamilton defaulted on his note payments and

Bank United accelerated the indebtedness. On May 2, 1995, on

behalf of Bank United, a substitute trustee conducted a nonjudicial

foreclosure sale of the property under the deed of trust. Notice

of the foreclosure sale was posted in the Harris County, Texas

courthouse. The sale was properly conducted under state law.

Defendant-appellant Realty Portfolio, Inc. ("Realty Portfolio")

purchased the foreclosed property at the sale.

On May 5, 1995, Hamilton filed personal bankruptcy under

Chapter 13. On May 16, 1995, Realty Portfolio recorded its

substitute trustee's deed in Harris County, Texas. Hamilton filed

this adversary proceeding to avoid the transfer to Realty Portfolio

and regain title to the property under 11 U.S.C. §§ 522(h) and

544(a)(3).
 

1Section 544(a) provides in pertinent part that:

(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 bona fide

purchaser at the time of the commencement of the

3

On October 17, 1995, following a bench trial, the bankruptcy

court divested Realty Portfolio of title to the property, revested

title in Hamilton, and awarded Realty Portfolio a lien on the

property in the amount of $3,600, the price Realty Portfolio paid

for the property at the foreclosure sale. The district court

affirmed the judgment of the bankruptcy court. Realty Portfolio

appeals.

II. THE STANDARD OF REVIEW

This court reviews the bankruptcy court's findings of fact

for clear error and its conclusions of law de novo. In re Kemp, 52

F.3d 546, 550 (5th Cir.1995), cited in Traina v. Whitney Nat'l

Bank, 109 F.3d 244, 245 (5th Cir.1997).

III. DISCUSSION

A. A CHAPTER 13 DEBTOR'S POWERS OF AVOIDANCE

The threshold issue is whether Hamilton, the Chapter 13

debtor, has standing to exercise the avoidance powers of a Chapter

13 trustee under the Bankruptcy Code. Section 544 of the Bankruptcy

Code grants Chapter 13 trustees strong-arm powers to avoid certain

prepetition property transfers. 11 U.S.C. § 544(a)(3).1 Section
case, whether or not such a purchaser exists.

11 U.S.C. § 544(a)(3). 

 

2Section 1303 provides that "[s]ubject to any limitations on

a trustee under this chapter, the debtor shall have, exclusive of

the trustee, the rights and powers of a trustee under sections

363(b), 363(d), 363(e), 363(f) and 363(l ), of this title." 11

U.S.C. § 1303. 

 

3The absence of statutory authorization for Chapter 13 debtors

contrasts with the express statutory authorization for Chapter 11

debtors. As debtors-in-possession, Chapter 11 debtors have

standing to exercise avoidance powers as trustees. 11 U.S.C. §

1107; see also In re Redditt, 146 B.R. 693, 695-96

(Bankr.S.D.Miss.1992); Bruce v. Republicbank-South Austin (In re

Bruce), 96 B.R. 717, 719-20 (Bankr.W.D.Tex.1989); In re Driver,

133 B.R. 476, 477 (Bankr.S.D.Ind.1991). 

4

1303 of the Bankruptcy Code grants Chapter 13 debtors certain

powers otherwise reserved to trustees. 11 U.S.C. § 1303.2 Section

1303 does not include trustees' section 544 strong-arm avoidance

powers. There is no specific statutory provision generally

authorizing Chapter 13 debtors to exercise trustees' avoidance

powers.3

A number of bankruptcy courts have found that Chapter 13

debtors may exercise trustees' strong-arm avoidance powers. See

Freeman v. Eli Lilly Fed. Credit Union (In re Freeman), 72 B.R.

850, 854 (Bankr.E.D.Va.1987); Ottaviano v. Sorokin & Sorokin

(Matter of Ottaviano), 68 B.R. 238, 240 (Bankr.D.Conn.1986);

Einoder v. Mount Greenwood Bank (In re Einoder), 55 B.R. 319

(Bankr.N.D.Ill.1985); In re Boyette, 33 B.R. 10, 10-11

(Bankr.N.D.Tex.1983); In re Hall, 26 B.R. 10, 11

(Bankr.M.D.Fla.1982). In these cases, the courts emphasized the

"reality" of Chapter 13 bankruptcies, the limited role of Chapter
 

4The bankruptcy courts reaching this result relied heavily on

the legislative history of section 1303, including the following

floor comment:

[Section 1303] does not imply that the debtor does not

also possess other powers concurrently with the trustee.

For example, although Section 323 is not specified in

section 1303, certainly it is intended that the debtor

has the power to sue and be sued.

124 CONG. REC. H11106 (Sept. 28, 1978)(remarks of Rep.

Edwards); S. 17423 (Oct. 6, 1978).

The court in In re Einoder summarized the basis of these

holdings, as follows:

I agree with those courts that have extended the

trustee's full avoiding powers to Chapter 13 debtors....

[T]he Court should not be blind to the realities of

bankruptcy practice. It is clear that the Chapter 13

debtor is the most appropriate party to seek such a

recovery. While the trustee, as representative of the

estate, usually is the only party to have standing to

pursue the avoiding powers granted under the Bankruptcy

Code, see 11 U.S.C. §§ 323, 544-553, it is also clear

that in Chapter 13 cases the trustee rarely, if ever,

pursues such actions because the trustee reaps little

benefit for the amount of time and effort involved. The

trustee would have to hire an attorney and litigate the

action. Should the trustee succeed, any recovery becomes

property of the estate and goes to the debtor.... Any

other conclusion would be obviously unfair to the

debtors. To say the trustee is the representative of the

Chapter 13 estate is to raise legal formalism over

reality.... [I]t is only reasonable that the bankruptcy

court allow the debtor to exercise the avoiding powers

for his or her own benefit and for the creditors'

indirect benefit as the trustees are unlikely to pursue

those matters on their own. The trustees' inactivity in

this regard should not result in windfalls to those

creditors who have received avoidable transfers from

Chapter 13 debtors....

This is true despite the fact that Chapter 13 contains no

equivalent provision to § 1107.... The most logical

analysis is that the Chapter 13 trustee has some of the

trustee's powers, i.e. those necessary to carry out the

5

13 trustees, and the perceived unfairness to Chapter 13 debtors of

denying them standing under section 544.4
trustee's assigned functions under § 15302, while the remaining

trustee's powers vest in the Chapter 13 debtor.

In re Einoder, 55 B.R. at 322-24; see also In re Freeman, 72

B.R. at 854-55 ("[T]he [Chapter 13 debtors] are the true

representatives of the estate and should be given the broad

latitude essential to control the progress of their case[;]

... it would be inequitable to refuse the [debtors] the

opportunity to increase the value of their estate ... simply

because the trustee has failed to take the proper action.").

6

More recently, bankruptcy courts addressing the issue have

receded from their earlier opinions and refused to use section 544

to allow Chapter 13 debtors to exercise strong-arm powers reserved

for Chapter 13 trustees. See In re Redditt, 146 B.R. 693, 696-701

(Bankr.S.D.Miss.1992); In re Henderson, 133 B.R. 813, 816-17

(Bankr.W.D.Tex.1991); In re Tillery, 124 B.R. 127

(Bankr.M.D.Fla.1991); In re Coan, 134 B.R. 670

(Bankr.M.D.Fla.1991); In re Driver, 133 B.R. 476

(Bankr.S.D.Ind.1991); Bruce v. Republicbank-South Austin (In re

Bruce), 96 B.R. 717, 720-23 (Bankr.W.D.Tex.1989); In re Mast, 79

B.R. 981 (Bankr.W.D.Mich.1987). These courts have acknowledged the

"realities" of Chapter 13 bankruptcies and the trustees' limited

role, the factors emphasized by earlier courts. However, they have

also noted the lack of "explicit statutory foundation for the

debtor to seek avoidance." In re Redditt, 146 B.R. at 701; In re

Bruce, 96 B.R. at 720-21; cf. In re Pointer, 952 F.2d 82, 87-88

(5th Cir.), cert. denied, 505 U.S. 1222, 112 S.Ct. 3035, 120

L.Ed.2d 904 (1992) (relying on the "plain language of the Code,"

the court denied standing to a Chapter 11 creditor seeking to
 

5One court explained the change in position as follows:

As compelling, practical and intensely equitable as these

arguments [of the realities of Chapter 13 bankruptcies]

might be, they are at bottom well-meaning forays into

judicial legislation. They exceed the scope of a

bankruptcy judge's role, which is to interpret and apply

the statute, not to rewrite it. [internal citations

omitted].... By the statute's own terms, only the

trustee has standing to exercise the strong-arm avoidance

powers.... Legislative history, especially floor

comments, may augment but may not amend the statute's

straightforward language. Section 1303 simply does not

confer standing on the debtor to pursue avoidance

actions.... If Congress intended to grant avoidance

powers to a Chapter 13 debtor, it could have explicitly

done so.

In re Bruce, 96 B.R. at 720-21; see also In re Henderson, 133

B.R. at 816-17 ("The Bankruptcy Code unambiguously gives

avoidance powers to bankruptcy trustees and to Chapter 11 and

12 debtors, but not to Chapter 13 debtors.... Section 1303,

by its own terms, does not provide a Chapter 13 debtor with

any avoidance powers."); see also In re Driver, 133 B.R. at

480 ("Congress knew how to ... give a debtor the duties and

powers of a trustee, as it did in Chapter 11," but chose not

to do so in Chapter 13). 

 

611 U.S.C. § 522(h) provides that:

The debtor may avoid a transfer of property of the debtor

or recover a setoff to the extent that the debtor could

have exempted such property under subsection (g)(1) of

this section if the trustee had avoided such transfer,

if—

7

invoke avoidance powers under section 549 of the Bankruptcy Code).5

Under these cases, the debtor, Hamilton, would not have

standing through section 1303. However, Congress has specifically

authorized narrow exceptions to the general rule that Chapter 13

debtors lack standing to exercise the strong-arm powers of Chapter

13 trustees. In section 522(h), Congress granted debtors the

authority to exercise section 544 avoidance powers under specific

and limited circumstances.6
(1) such transfer is avoidable under section 544,

545, 547, 548, 549, or 724(a) of this title or

recoverable by the trustee under section 553 of

this title; and

(2) the trustee does not attempt to avoid such

transfer.

11 U.S.C. § 522(h). 

8

Section 522(h) specifically grants debtors standing to avoid

certain involuntary transfers of exempt property, such as

homesteads, if the trustees have not themselves attempted to avoid

the transfers. 11 U.S.C. § 522(h); see also DeMarah v. United

States (In re DeMarah), 62 F.3d 1248 (9th Cir.1995); cf. In re

Henderson, 133 B.R. at 817. The Ninth Circuit has identified a

five-part test, that generally tracks section 522(h), to determine

the power of a debtor to avoid a transfer of exempt property under

section 522(h): (1) the transfer was not a voluntary transfer of

property by the debtor; (2) the debtor did not conceal the

property; (3) the trustee did not attempt to avoid the transfer;

(4) the debtor seeks to exercise an avoidance power usually used by

the trustee, listed within § 522(h); and (5) the transferred

property is of a kind that the debtor would have been able to

exempt from the estate if the trustee had avoided the transfer

under one of the provisions in § 522(g). In re DeMarah, 62 F.3d at

1250. The bankruptcy courts addressing this issue have applied

section 522(h) to Chapter 13 debtors. See In re Elam, 194 B.R. 412

(Bankr.E.D.Tex.1996) (citing Young v. Washington Fed. Sav. & Loan

Ass'n (In re Young), 156 B.R. 282 (Bankr.D.Idaho 1993)); In re

Bruce, 96 B.R. at 721-22; Willis v. Borg-Warner Acceptance Corp.
 

7As one court has noted, to recognize that " § 522 applies in

its entirety in Chapter 13 cases and that the Chapter 13 debtor has

the full panoply of rights thereunder .... accords with the

legislative intent both to encourage individual debtors to use

Chapter 13 rather than Chapter 7 and to afford a debtor a

reasonable chance for a fresh start in Chapter 13. A more generous

exemption policy in Chapter 7 as compared with Chapter 13 would

frustrate the congressional policy of encouraging consumer debtors

to use Chapter 13 in preference to Chapter 7." In re Einoder, 55

B.R. at 324 n. 17 (citations omitted). 

9

(In re Willis), 48 B.R. 295 (Bankr.S.D.Tex.1985).7

In In re Elam, the court found that a Chapter 13 debtor had

standing under the "narrow exception" of section 522(h) to seek to

avoid the prepetition foreclosure of his homestead. 194 B.R. at

415. The court explained that:

Generally, Chapter 13 debtors may not exercise the statutory

avoiding powers, at least not without prior authorization of

the Court obtained after notice and a hearing and upon a

showing that the Chapter 13 Trustee has neglected or refused

to prosecute the action. In re Young, 156 B.R. 282, 284

(Bankr.D.Idaho 1993). However, there is a narrow exception to

the general rule. Section 522(h) of the Code specifically

grants a debtor standing to avoid certain involuntary

transfers of exempt property. 11 U.S.C. § 522(h); In re

Young, 156 B.R. at 284.... The transfer involved here was the

foreclosure of Debtor's homestead. This clearly falls within

the exception. Therefore, Debtor has standing to bring an

avoidance action under section[ ] ... 544.

In re Elam, 194 B.R. at 415.

In this case, as in In re Elam, the debtor's property was

exempt as his homestead; the foreclosure was an involuntary

transfer; and the Chapter 13 trustee did not attempt to avoid the

transfer. 11 U.S.C. § 522(h). Debtor Hamilton fits the narrow

exception under section 522(h) and has standing to seek avoidance

of his homestead's foreclosure sale under section 544(a)(3) of the

Bankruptcy Code.
 

8One court has found that the Chapter 13 debtor cannot

exercise the section 544(a)(3) powers of the Chapter 13 trustee

because "[a]t the moment a foreclosure sale concludes, the debtor

is fully divested of all legal and equitable interest in the

foreclosed property." In re Applewhite, 106 B.R. 468, 469

(Bankr.S.D.Miss.1989). By its own terms, section 544(a)(3) allows

a party to avoid a foreclosure sale, and therefore to avoid the

transfer that divested debtor of title to the foreclosed property,

revesting title in the debtor. 11 U.S.C. § 544(a)(3); see also In

re Elam, 194 B.R. at 415; see generally Gaudet v. Babin (Matter of

Zedda), 103 F.3d 1195, 1200-01 (5th Cir.1997). 

10

B. CONSTRUCTIVE AND INQUIRY NOTICE: THE BONA FIDE PURCHASER

 Section 544(a) provides in pertinent part that:

(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 bona fide purchaser at the time of the

commencement of the case, whether or not such a purchaser

exists.

11 U.S.C. § 544(a)(3). Section 544(a)(3) allows the avoidance of

a transfer of real property that is not perfected and enforceable

against a bona fide purchaser at the time the bankruptcy petition

is filed. In re Elam, 194 B.R. at 416; In re Young, 156 B.R. at

285.8

While the Bankruptcy Code creates the status of a

hypothetical bona fide purchaser, state law defines that status.

Mutual Benefit Life Ins. Co. v. Pinetree, Ltd. (In re Pinetree,

Ltd.), 876 F.2d 34, 36 (5th Cir.1989); In re Elam, 194 B.R. at

416. Under Texas law, a "bona fide purchaser is one who acquires

(apparent) legal title to property in good faith for a valuable
 

9Section 13.001 of the Texas Property Code provides in

pertinent part that:

A conveyance of real property or an interest in real

property or a mortgage or deed of trust is void as to a

creditor or to a subsequent purchaser for a valuable

consideration without notice unless the instrument has

been acknowledged, sworn to, or proved and filed for

record as required by law.

TEX. PROP.CODE ANN. § 13.001(a). 

11

consideration without ... notice of an infirmity in the title."

Williams v. Jennings, 755 S.W.2d 874, 881 (Tex.App.—Houston [14th

Dist.] 1988, writ denied); see also Strong v. Strong, 128 Tex.

470, 98 S.W.2d 346, 347 (1936). A conveyance of an interest in

real property, including a deed of trust, is void as to a

subsequent purchaser if the interest was not recorded at the time

of the subsequent purchase and the purchaser paid valuable

consideration without notice of the unrecorded interest. See TEX.

PROP.CODE ANN. § 13.001(a).9

Under Texas law, a hypothetical purchaser would gain good

title to Hamilton's property after it was sold at a valid

foreclosure sale but before the substitute trustee's deed was

recorded, unless the purchaser had notice of the foreclosure

purchase. See TEX. PROP.CODE ANN. § 13.001(a). Under section 544,

the actual knowledge of the trustee is not relevant. 11 U.S.C. §

544(a). The issue is therefore whether a hypothetical purchaser

would be charged with implied knowledge of the foreclosure

purchase, by constructive or inquiry notice.

1. Constructive Notice

Under Texas law, constructive notice is notice given by
12

properly recorded instruments and charged to a person as a matter

of law, regardless of the person's actual knowledge. Mooney v.

Harlin, 622 S.W.2d 83, 85 (Tex.1981); TEX. PROP.CODE ANN. § 13.002.

The deed of trust to the Hamilton property was properly recorded in

Harris County, Texas, in 1966. "An instrument that is properly

recorded in the proper county is notice to all persons of the

existence of the instrument." TEX. PROP.CODE ANN. § 13.002. As a

matter of law, a hypothetical purchaser of the Hamilton property

had constructive notice of the deed of trust and would purchase the

property subject to the deed of trust. See Inwood North

Homeowners' Ass'n v. Harris, 736 S.W.2d 632, 635 (Tex.1987); Seals

v. First Nat'l Bank (In re Church & Institutional Facilities Dev.

Corp.), 122 B.R. 958 (Bankr.N.D.Tex.1991); cf. Smith v. Morris &

Co., 694 S.W.2d 37 (Tex.App.—Corpus Christi 1985, writ ref'd

n.r.e.) ("[W]here a deed of trust was on record, a purchaser of

land is chargeable with notice of the deed of trust and takes title

subject to the rights of the mortgagee under the deed of trust.").

The substitute trustee's deed to Realty Portfolio was not

recorded by the date of the bankruptcy petition filing. On the

date of the bankruptcy petition, a hypothetical purchaser could not

be charged with constructive notice of the substitute trustee's

deed, as a matter of law. TEX. PROP.CODE ANN. §§ 13.001, 13.002;

see also In re Elam, 194 B.R. at 415-16; cf. McEvoy v. Watkins,

105 B.R. 362, 365 (Bankr.N.D.Tex.1987).

Realty Portfolio argues that constructive notice of the deed

of trust would trigger a duty of inquiry that would place a
13

hypothetical purchaser on inquiry notice of the foreclosure

purchase. The first issue is whether the deed of trust placed the

hypothetical purchaser on inquiry notice. If so, the second issue

is whether the hypothetical purchaser is chargeable with inquiry

notice of the foreclosure purchase.

2. Inquiry Notice

Texas law recognizes the doctrine of inquiry notice,

triggered by notice of facts that would put a reasonably prudent

person on a duty of inquiry. See Woodward v. Ortiz, 150 Tex. 75,

237 S.W.2d 286, 289 (1951); Prewitt v. United States, 792 F.2d

1353, 1358-59 (5th Cir.1986); Teofan v. Cools (In re Spring Creek

Invs.), 71 B.R. 157, 159-60 (Bankr.N.D.Tex.1987); T-Vestco LittVada v. Lu-Cal One Oil Co., 651 S.W.2d 284 (Tex.App.—Austin 1983,

writ ref'd n.r.e.). Under Texas law, constructive notice of a

recorded deed of trust in the chain of title puts a subsequent

purchaser under a duty to make a reasonable inquiry into the status

of the deed of trust. See Lumpkin v. Adams, 74 Tex. 96, 11 S.W.

1070, 1073 (1889); accord Olsen v. Bank One (In re Bruder), 207

B.R. 151, 159 (N.D.Ill.1997).

The bankruptcy and district courts in this case reasoned that

although state law determines whether a hypothetical purchaser is

a bona fide purchaser without notice for the purpose of section

544(a), bankruptcy law precludes the application of inquiry notice

because inquiry notice refers to actual knowledge. Under Texas

law, however, inquiry notice is a form of implied knowledge; it is

not actual, personal knowledge of the type made irrelevant under
14

section 544(a). See Woodward, 237 S.W.2d at 289 ("[T]hose things

which a[n] ... inquiry ... would have discovered.") (emphasis

added); cf. Exxon Corp. v. Raetzer, 533 S.W.2d 842, 846

(Tex.Civ.App.—Corpus Christi 1976, writ ref'd n.r.e.) ("implied

notice"). A hypothetical purchaser on inquiry notice is chargeable

with implied knowledge of facts that would be discovered by a

reasonably diligent inquiry. To find inquiry notice inapplicable

to a hypothetical purchaser or trustee under section 544(a) would

place the hypothetical purchaser or trustee in a better position

than other purchasers under state law. Section 544(a)(3) does not

give Chapter 13 trustees any greater rights than bona fide

purchasers have under state law. Maine Nat'l Bank v. Morse (In re

Morse), 30 B.R. 52, 54 (1st Cir.BAP1983); Calcasieu v. Marine

Nat'l Bank (In re Quirk), 119 B.R. 99, 100 (W.D.La.1990).

 A hypothetical purchaser of Hamilton's property on the date

of the bankruptcy filing would be on inquiry notice resulting from

constructive notice of the recorded deed of trust and the

information contained therein. "[A] purchaser is bound by every

recital, reference and reservation contained in or fairly disclosed

by any instrument which forms an essential link in the chain of

title under which he claims.... The rationale of the rule is that

any description, recital of fact, or reference to other documents

puts the purchaser upon inquiry, and he is bound to follow up this

inquiry, step by step, from one discovery to another and from one

instrument to another, until the whole series of title deeds is

exhausted and a complete knowledge of all the matters referred to
15

and affecting the estate is obtained." Westland Oil Dev. Corp. v.

Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex.1982) (citations omitted);

see also In re Spring Creek Invs., 71 B.R. at 159-60; FRED A. LANGE

& ALOYSIUS A. LEOPOLD, LAND TITLES AND TITLE EXAMINATION § 886 (West 1992)

("[A] purchaser of land is not only put upon notice of the contents

of a prior recorded deed, but of any fact contained therein which

would put a reasonable man upon inquiry, so that while a recorded

deed is constructive notice only of the facts which it recites, yet

a party is chargeable with notice of what a reasonably prudent

person, with knowledge of the facts, would have ascertained by

inquiry[;] ... a purchaser of land must search records since they

are the primary source of information as to the title and he is

charged with knowledge of the existence and contents of recorded

instruments affecting title, and a purchaser is charged with notice

of the contents and legal effect of instruments which are in his

chain of title although he may never have had any actual knowledge

thereof.").

The duty of inquiry is governed by standards of

reasonableness, extending to "those things which a reasonably

diligent inquiry and exercise of the means of information at hand

would have discovered." Woodward, 237 S.W.2d at 289; see also

Prewitt, 792 F.2d at 1359 ("a reasonably diligent inquiry and

exercise of the means of information at hand ") (emphasis added);

In re Spring Creek Invs., 71 B.R. at 160 ("the duty does not extend

to exhaustive inquiry or investigation of speculation and

conjecture"); Westland, 637 S.W.2d at 908 ("diligent inquiry and
16

search") (emphasis added); Flack v. First Nat'l Bank, 148 Tex.

495, 226 S.W.2d 628, 631 (1950); Hobbs v. Hutson, 733 S.W.2d 269,

272 (Tex.App.—Texarkana 1987, writ denied) (citing Miles v. Martin,

159 Tex. 336, 321 S.W.2d 62 (1959)); cf. Briggs v. Kent (In re

Professional Inv. Props.), 955 F.2d 623, 627 (9th Cir.1992), cert.

denied, Miller v. Briggs, 506 U.S. 818, 113 S.Ct. 63, 121 L.Ed.2d

31 (1992) ("[W]here a purchaser has knowledge of information of

facts which are sufficient to put an ordinarily prudent man upon

inquiry, and the inquiry, if followed with reasonable diligence,

would lead to the discovery of defects in the title ... the

purchaser will be held chargeable with knowledge thereof.")

(emphasis added).

Courts have found that a purchaser's reasonably diligent

inquiry, through information at hand, can lead to a purchaser's

implied knowledge of a foreclosure sale under a recorded deed of

trust, even in the absence of a recorded substitute trustee's deed.

See Clarkson v. Ruiz, 140 S.W.2d 206, 210 (Tex.Civ.App.—San Antonio

1940, writ dism'd) (purchasers on notice of an unreleased deed of

trust "would have [been] put upon inquiry, which, if diligently

pursued, would have in all probability, [led] to a discovery of the

foreclosure under the power of the deed of trust"); see also

Chavis v. Gibbs, 198 Va. 379, 94 S.E.2d 195, 201 (1956) ("[I]f

reasonable and prudent inquiry had been made and full answers

obtained, [the purchaser] would have discovered that because of

default in the payment of the notes, the property had been sold in

accordance with the provisions of the deed of trust."); cf.
17

Parker v. Wear, 230 S.W. 75, 78 (Mo.1921) ("[I]t was immaterial

that the purchaser at the foreclosure had not then filed his deed

from the trustee, where not only was the deed of trust on record,

but [the purchaser's] deed itself recited the outstanding

incumbrance, as these facts put plaintiff on inquiry which, if it

had been followed, would have disclosed that her grantor at that

time had no title."). The determination of whether a purchaser may

be charged with such knowledge depends on the facts of each case.

See Miles, 321 S.W.2d at 69 ("[W]hether a diligent search would

have led to a discovery of the [facts is an] issue[ ] to be

determined by the trier of fact under all the evidence."), quoted

in Hobbs, 733 S.W.2d at 272.

 A reasonably prudent hypothetical purchaser of the Hamilton

property, on constructive notice of the deed of trust, two days

after the foreclosure sale but before the substitute trustee's deed

was recorded, would have made a reasonable inquiry into whether the

deed of trust had been released, extended, renewed, or foreclosed,

using information at hand. See Lumpkin, 11 S.W. at 1073 (if the

purchaser had notice of the mortgage "at the time of his purchase,

he would be put on inquiry, and would be required to exercise

reasonable diligence to ascertain the facts constituting any change

in or renewal of the mortgage, reasonable diligence to inform

himself if the mortgage had been satisfied, and, if satisfied, how

it had been satisfied"). Inquiring into the real property records

of the chain of title, the hypothetical purchaser would have found

no record that the deed of trust had been extinguished. A
 

10Before the foreclosure sale, notice of the pending sale was

posted in the Harris County, Texas courthouse. TEX. PROP.CODE ANN.

§ 51.002(b); cf In re Burns, 183 B.R. 670, 671 (Bankr.D.R.I.1995).

After the foreclosure sale, no posted or filed records were

required. See TEX. PROP.CODE ANN. § 51.002(f) ("[T]he clerk may

dispose of the notices after the date of sale specified in the

notice has passed."). There is no indication that the foreclosure

notice was a means of information at hand after the foreclosure

sale occurred in this case. 

 

11Knowledgeable persons may be sources of information at hand.

See Dodd v. First State Bank & Trust Co., 64 S.W.2d 1021, 1023

(Tex.Civ.App.—Amarillo 1933, no writ) ("[I]n order to become a bona

fide purchaser or a bona fide mortgagee of real property when the

party has notice that prior liens and incumbrances are outstanding,

it is necessary that such party should inquire of reliable and

disinterested persons as to the status, the ownership, and validity

of the notes or bonds evidencing such prior indebtedness.... [A]ll

... reasonable and available sources of information must be

exhausted.") (citations omitted); see also Lumpkin, 11 S.W. at

1073 (had the purchaser inquired, "the facts could have been easily

ascertained, as [a former owner] was alive"); Allen v. Green, 229

Va. 588, 331 S.E.2d 472, 474-76 (1985) (purchasers inquiring into

a deed reservation in their chain of title "had a duty to inquire

as to sources of information reasonably disclosed by matters of

record. At the time of their purchase ..., [the original grantor]

was still alive and residing on the property conveyed.... By their

own testimony, they chose to ignore those readily available sources

of information whose knowledge was made obvious by the recorded

18

hypothetical purchaser, acquiring the property subject to an

unreleased deed of trust, would inquire further into the status of

the lien, exercising other available means of information readily

at hand.10

The deed of trust, properly filed and recorded, and within the

hypothetical purchaser's constructive knowledge, revealed that FNMA

was the holder of the deed of trust and Bank United its servicing

agent. The records showed no transfer of ownership of the deed of

trust. A hypothetical reasonably diligent purchaser would have

inquired of FNMA or Bank United as to the status of the deed of

trust.11 The record does not disclose whether such an inquiry would
deeds. Means of knowledge, with the duty of using them, are

equivalent to knowledge itself"); cf. Hopper v. Tancil, 3 S.W.2d

67 (Tex.Com.App.1928) (once suspicions were raised by a letter, the

purchaser should have inquired into the property by contacting the

letter writer "or anyone else," replying to the letter, or

examining the district court records); In re Professional Inv.

Props., 955 F.2d at 629 (the bankruptcy petition "indicated the

very people who instigated the bankruptcy proceedings had a deed of

trust[; t]his petition should have raised the trustee's suspicions

and compelled him to inquire further[;] ... the trustee need only

have contacted [the party that filed the petition] to determine

their specific interest"); Massachusetts Bonding & Ins. Co. v.

Knox, 220 N.C. 725, 18 S.E.2d 436, 440 (1942) ("[O]ne who purchases

premises covered by an undischarged mortgage cannot claim to be a

purchaser without notice of the equities of the mortgagee ... and

inquiry of the mortgagee would have elicited information that the

mortgage was still in force as between the original parties.")

(citations omitted); Nichol v. Howard, 112 Md.App. 163, 684 A.2d

861, 866, 863 (1996) (if an address does not appear in the records,

inquiry into a correct address for the purpose of issuing a

mortgagee's notice could have included asking the "the tenants

where they mailed the rent," or asking the mortgagees "where they

mailed payment notices, premium books, escrow accounts and other

correspondence"). 

19

have led to the discovery of facts sufficient to charge the

hypothetical purchaser with inquiry notice of the foreclosure sale

and substitute trustee's deed.

Under Texas law, constructive notice of a recorded deed of

trust does not trigger a duty to monitor litigation announcements

and all other sources potentially containing information about real

property to learn of any unrecorded extensions, renewals, releases,

or foreclosure sales. Such a duty of investigation would be more

exhaustive and burdensome than the duty of "reasonable and diligent

inquiry" required under Texas law. See In re Spring Creek Invs.,

71 B.R. at 159-60 ("[T]he duty does not extend to exhaustive

inquiry or investigation."). A hypothetical purchaser is only

under a duty of reasonable inquiry, by exercise of the means of
20

information at hand, including a search of the real property

records in the chain of title, and if the deed of trust remained

unsatisfied, to inquire of the mortgage company identified in the

recorded deed of trust. If such an inquiry would not disclose the

foreclosure sale and substitute trustee's deed, then the

hypothetical purchaser could rely on the absence of any record of

the substitute trustee's deed in the chain of title and acquire the

Hamilton property without notice of the foreclosure sale.

The bankruptcy and district courts in this case reasoned that

to require a bankruptcy court to make a determination as to inquiry

notice would impose an "onerous burden" on the court to make a

factual determination based on "hypothetical facts" or the actual

knowledge of the trustee. A determination of whether a reasonable

inquiry into the status of the recorded deed of trust would lead to

knowledge of the foreclosure sale depends on the actual facts of

the case, the actual documents in the real property records, the

sources of information fairly suggested by those records, and the

means of information actually at hand, such as the identity of the

mortgage company. The determination depends neither on the actual

knowledge of the trustee nor on hypothetical facts.

The court notes that had Realty Portfolio not delayed in

recording its substitute trustee's deed, the problem in this case

would not have arisen. A purchaser of real property at a

foreclosure sale has the ability to protect the newly-acquired

property interest by promptly recording the deed. Cf. Little v.

Duncombe (In re Duncombe), 143 B.R. 243, 246-47
 

12The bankruptcy court may ultimately take into account

principles of equity and fairness in its determination of whether

to allow the exercise of the strong-arm powers of avoidance. See

Momentum Mfg. Corp. v. Employees Creditors Comm. (In re Momentum

Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir.1994) ("[I]t is well

settled that bankruptcy courts are courts of equity, empowered to

invoke equitable principles to achieve fairness and justice in the

reorganization process."); cf. Butner v. United States, 440 U.S.

48, 55-56, 99 S.Ct. 914, 918-19, 59 L.Ed.2d 136 (1979) ("[T]he

equity powers of the bankruptcy court play an important part in the

administration of bankrupt estates in countless situations in which

the judge is required to deal with particular, individualized

problems."). The facts in the record support the conclusion that

avoidance of the foreclosure would be equitable. Debtor Hamilton

paid Bank United in March 1995 in an attempt to cure the default

and relied on a statement of a Department of Veterans Affairs

employee that the March payment had cured the default. The

bankruptcy court valued Hamilton's homestead at $40,000; Realty

Portfolio purchased the property for $3,600. However, these

equitable considerations do not substitute for, or inform, the

threshold analysis of whether a hypothetical bona fide purchaser

"without notice" exists under the facts of the case. See United

States v. Sutton, 786 F.2d 1305, 1308 (5th Cir.1986) (section 105

of the Bankruptcy Code, granting bankruptcy courts supplemental

equitable powers, "does not authorize the bankruptcy courts to

create substantive rights that are otherwise unavailable under

applicable law, or constitute a roving commission to do equity").

21

(Bankr.C.D.Cal.1992) (a "foreclosing secured creditor can ...

deliver a deed immediately upon the completion of the sale[; a]

purchaser ... can ... record the deed immediately").

IV. CONCLUSION

For the foregoing reasons, we REVERSE and REMAND to the

bankruptcy court for a determination of whether, based on the

narrow facts of this case, a reasonably diligent inquiry into the

recorded deed of trust in the purchaser's chain of title and

exercise of the means of information at hand on the date of the

bankruptcy filing would have disclosed facts sufficient to place a

hypothetical purchaser of the Hamilton property on notice of the

foreclosure sale and substitute trustee's deed.12
The bankruptcy court must first resolve the issue of inquiry

notice. 

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