Opinion ID: 473101
Heading Depth: 1
Heading Rank: 3

Heading: RETROACTIVE APPLICATION OF SECTION 544(a)(3)

Text: 16 The defendants' second contention is that, even if the trustee might otherwise be able to avoid the transfer of the Terrace Heights property under section 544(a)(3), he does not have the power to do so in this case because the transfer occurred in the so-called gap period between the enactment date, November 6, 1978, and the effective date, October 1, 1979, of the Bankruptcy Code of 1978. Park East claims that Congress did not intend that section 544 be applied retroactively, and that even if it did, retroactive application would violate the Fifth Amendment to the Constitution. 4 17 First, it is clear that Congress intended the challenged provision to apply to the gap period. Congress provided that in any bankruptcy case commenced after October 1, 1979, the old Bankruptcy Act of 1898 would not apply. Accordingly, section 70 of the 1898 Act, which provided the trustee's avoiding powers, would not be applicable in such cases. Thus, unless section 544 applies retroactively, transactions occurring during the gap period could never be avoided, if the bankruptcy petition was filed after October 1, 1979. We do not believe Congress intended to immunize transactions occurring during the gap period from the avoidance powers of a bankruptcy trustee. See In re Webber, 674 F.2d 796, 801 n. 10 (9th Cir.1982); see also In re Caro Products, 746 F.2d 349 (6th Cir.1984). Accordingly, we conclude that Congress intended section 544(a)(3) to apply retroactively. 18 Second, retroactive application of section 544(a)(3) during the gap period would violate the Fifth Amendment only if it would be so arbitrary or unreasonable to impute to Park East knowledge of the Bankruptcy Code of 1978 after it was enacted, but before it became effective, that due process would be denied. Webber, 674 F.2d at 804. We do not believe the imputation of such knowledge is that unreasonable or arbitrary here. The parties were engaged in a sophisticated real estate transaction, and the record reflects that at least one of the partners in Park East was an attorney who was well aware of the risks of not recording. Our conclusion is buttressed by the fact that Congress could have constitutionally made section 544(a)(3) applicable to all transactions occurring after the enactment date. It is hardly arbitrary or unreasonable for Congress to be more lenient and give the public time to become familiar with the new Code before it became effective. See Webber, 674 F.2d at 804 (Schroeder, J., concurring). Accord Caro Products, 746 F.2d at 352. 19 Accordingly, we conclude that section 544(a)(3) can constitutionally be applied to the transaction at issue here. See Webber; Caro Products.