Opinion ID: 3065415
Heading Depth: 3
Heading Rank: 1

Heading: Trustee’s Strong Arm Power.

Text: [1] A bankruptcy trustee has the power to avoid any transfer that a hypothetical bona fide purchaser for value could have avoided under the law of the state in which the real property is located. What matters to this case is when the hypothetical bona fide purchaser is treated as having hypothetically purchased the property for value. The statutory language gives the answer “as of the commencement of the case.”4 The relevant portion of the statute says:
of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers 1 955 F.2d 623 (9th Cir. 1992). 2 Taxel v. Chase Manhattan Bank, USA (In re Deuel), 361 B.R. 509 (9th Cir. BAP 2006). 3 Beeler v. Jewell (In re Stanton), 303 F.3d 939, 941 (9th Cir. 2002). 4 11 U.S.C. § 544(a). IN THE MATTER OF DEUEL 1755 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 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.5 In this case the petition and the schedules were filed simultaneously by means of electronic filing. Does that mean that the trustee took with notice of the lien disclosed in the schedules? If we were talking about real people walking over to the bankruptcy court and looking at the documents, the answer would be yes, but we are not. As is often the case in property law, we speak not of the physical but of the metaphysical.6 The statute says that a chapter 7 bankruptcy is “commenced by the filing with the bankruptcy court of a petition,”7 so the petition and only the petition commences the case, regardless of what else happens at the same time. As the Bankruptcy Appellate Panel explained, the schedules “cannot be filed until there is a case in which to file them.”8 The trustee has not even been 5 11 U.S.C. § 544 (emphasis added). 6 “For who shall interest us in contingent remainders or the Statute of Uses, while Chinese metaphysics remain unexplored?” Frederic W. Maitland, 1 Collected Papers 190 (Fisher ed. 1911, Cambridge Univ. Press) (quoted in Cornelius J. Moynihan, Introduction to the Law of Real Property 199 n.1 (1962)). 7 11 U.S.C. § 301(a). The statute was amended in 2005 by dividing the statute into subsections (a) and (b). 8 Deuel, 361 B.R. at 515. 1756 IN THE MATTER OF DEUEL appointed when the petition is filed, and could not possibly be a bona fide purchaser for value without notice upon the filing of the petition, but he is treated by the statute as though he were. Chase Manhattan correctly argues that a real person buying the property and checking the court records would know from the schedules Deuel filed simultaneously with her petition that it had a lien. But we are talking about a metaphysical and not a real person. The trustee who is treated as a bona fide purchaser for value without notice as of the commencement of the case does not yet exist at the commencement of the case. The schedules may be filed simultaneously or within 15 days after the petition is filed,9 and there is no reason to condition the trustee’s strong arm power on whether they are filed earlier than they need to be. [2] As the Bankruptcy Appellate Panel correctly pointed out, the schedules must be filed “[i]n” a case, which exists only after the filing of a petition has “commenced” a case, so whatever the trustee may learn from the schedules and statement of financial affairs “came too late and is irrelevant” even though it was filed when the petition was filed.10 The petition and schedules are on different official forms.11 It cannot matter whether a hypothetical trustee who immediately read what was filed would have actual knowledge from the schedules of the lien, or even if the subsequently appointed trustee does have actual knowledge, because section 544 says that the strong arm power exists “without regard to any knowledge of the trustee.”12 9 Fed. R. Bankr. P. 1007(c). 10 Deuel, 361 B.R. at 514-15. 11 Compare Official Form 1 (voluntary petition) with Official Form 5 (involuntary petition). 12 11 U.S.C. § 544(a). IN THE MATTER OF DEUEL 1757 Chase Manhattan’s argument rests on our decision in Professional Investment. That was an involuntary bankruptcy filed by a creditor, the very creditor that held the unrecorded deed of trust from the debtor.13 The petition itself expressly referred to the deed of trust, because an involuntary petition requires the creditor filing it to state its name and address, amount of claim, and nature of claim.14 We held that because “the petition itself” gave notice of the lien to the trustee, the trustee could not be deemed a bona fide purchaser for value without notice.15 We adopted the view that the trustee’s status is determined “ ‘at the instant the petition is filed,’ ” so “we will only discuss the ramifications of the petition itself,”16 but held that where the trustee was put on notice “by the very petition”17 he could not be said to take without notice. [3] By its terms, Professional Investment is limited to involuntary petitions that give notice of an interest. The not yet existing trustee, under Professional Investment, cannot be a hypothetical bona fide purchaser without notice when the petition is filed where the duly filled out form of the petition itself gives notice. The trustee is then like a purchaser with notice. We need not address the controversy18 about whether Professional Investment was correctly decided, since it has no application to a voluntary petition. Voluntary and involuntary petitions operate differently in many respects: one is filed by the debtor, the other by a creditor; one does not list claims, the other states what interest the creditor filing it has; the com13 Professional Investment, 955 F.2d at 625. 14 Official Form 5. 15 Professional Investment, 955 F.2d at 627, 628. 16 Id. at 628 n.3 (quoting Saghi v. Walsh (In re Gurs), 27 B.R. 163 (9th Cir. BAP 1983)). 17 Id. at 628. 18 See Kohut v. Quicken Loans, Inc. (In re Wohlfeil), 322 B.R. 302, 30506 (Bankr. E.D. Mich. 2005); cf. Little v. Duncombe (In re Duncombe), 143 B.R. 243, 246 (Bankr. C.D. Cal. 1992) (characterizing Professional Investment as having found “a narrow exception” to Ninth Circuit law). 1758 IN THE MATTER OF DEUEL mencement of a voluntary case by a petition “constitutes an order”19 (the automatic stay), but an involuntary petition does not. [4] The conclusion we reach is not based solely on literalism and metaphysics. It is practical. The Bankruptcy Appellate Panel correctly pointed out that if schedules could defeat the trustee’s status as a bona fide purchaser for value without notice in a voluntary petition, a debtor could use simultaneous filing of petition and the schedules to favor one creditor over others. Sometimes creditors and debtors acting together before the bankruptcy have good reason to delay recording20 and may have a continuing reason after filing to keep assets from other creditors. A fundamental purpose of bankruptcy is fair distribution pro rata within the classes of creditors determined by Congress of a debtor’s inadequate assets.21 That purpose could be defeated if a debtor were able to jump an unrecorded security interest over the trustee’s status on behalf of other creditors by mentioning it when the debtor filed the petition. [5] State law controls whether the trustee’s status as a bona fide purchaser for value without notice defeats the rights of the person against whom the trustee seeks to assert his powers.22 California law provides that a conveyance, “from the time it is filed with the recorder for record is constructive notice of the contents thereof to subsequent purchasers and mortgagees.”23 Chase Manhattan did not record, so the trustee did not have constructive notice of its lien. Under California law, a conveyance is “void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good 19 11 U.S.C. § 301(b). 20 See, e.g., Washburn & Roberts, Inc. v. Park East (In re Washburn & Roberts, Inc.), 795 F.2d 870, 874 (9th Cir. 1986) (Tang, J., dissenting). 21 Begier v. I.R.S., 496 U.S. 53, 58 (1990). 22 Robertson v. Peters (In re Weisman), 5 F.3d 417, 420 (9th Cir. 1993). 23 Cal. Civ. Code § 1213. IN THE MATTER OF DEUEL 1759 faith and for a valuable consideration, whose conveyance is first duly recorded.”24 The strong arm clause enables the trustee to avoid an unrecorded lien as if he were “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 a bona fide purchaser and has perfected such transfer at the time of the commencement of the case.”25 That means that we are to deem the trustee not only to have purchased the property for value without notice of the unrecorded lien, but also to have recorded his deed when the petition was filed. It is as though he were shopping for a place to live, saw a classified ad, bought the condo after doing a title search, and recorded the deed, all at the instant the petition was filed. Under California law, such recording would render Chase Manhattan’s lien void.