Court Opinion

ID: 3065415
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:31:26.008293+00
Date Added: 2024-06-11T07:38:21.584831
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

In the Matter of: JILL C. DEUEL,      
                            Debtor,        No. 07-55266
                                            BAP Nos.
CHASE MANHATTAN BANK, USA,                 SC-06-01063-
N.A.,                                       MoSnK
                       Appellant,          SC-06-01132-
              v.                             MoSnK
HAROLD S. TAXEL, Trustee,                   OPINION
                        Appellee.
                                      
              Appeal from the Ninth Circuit
                Bankruptcy Appellate Panel
 Klein, Montali, and Snyder, Bankruptcy Judges, Presiding

              Argued September 11, 2008 and
              Submitted September 29, 2009
                   Pasadena, California

                  Filed January 28, 2010

 Before: Alex Kozinski, Chief Judge, Andrew J. Kleinfeld
        and Johnnie B. Rawlinson, Circuit Judges.

                Opinion by Judge Kleinfeld

                           1749
1752               IN THE MATTER OF DEUEL

                         COUNSEL

James C. Mitchell, Mitchell & Gilleon, San Diego, California,
for the appellant.

Michael Y. MacKinnon, Kathleen A. Cashman-Kramer, Pyle
Sims Duncan & Stevenson, APC, San Diego, California, for
the appellee.

                         OPINION

KLEINFELD, Circuit Judge:

   We address the “strong-arm power” of the bankruptcy
trustee under 11 U.S.C. § 544(a)(3) in the context of an unre-
                   IN THE MATTER OF DEUEL                 1753
corded deed of trust. The question comes down to whether a
bona fide purchaser for value without notice can take ahead
of an unrecorded lien, and once the question is put that way,
the answer is obviously “yes.”

                          I.   Facts

   The case arises out of repeated home refinancing to take
advantage of rising real estate values. Debtor Jill Deuel and
her ex-husband Will Deuel bought a condominium in Califor-
nia in 1999. They borrowed $106,700 from North American
Mortgage Company, secured by a duly recorded deed of trust.
Two years later, on June 6, 2001, they refinanced, this time
borrowing $122,400 from American Mortgage Express Finan-
cial Corp., again secured by a duly recorded deed of trust. The
Deuels used this loan to pay off the prior North American
loan. This second loan was assigned to Chase Manhattan in
May 2002, and the assignment was duly recorded.

   The problem giving rise to this case arises from the Deuel’s
third loan, the second time they refinanced and drew more
equity out of their condo, in 2002. This time they borrowed
$136,000 from Chase Manhattan and gave Chase Manhattan
a deed of trust to secure their note. Somehow Chase Manhat-
tan failed to get the deed of trust recorded. What did get
recorded was the deed of reconveyance from the previous
loan, which was paid off in full out of the new loan. Thus as
far as anyone could tell from the county records, the condo
had been paid off and there was no longer a lien against it.

   The next year, in 2003, Ms. Deuel filed for a chapter 13
bankruptcy. That case was dismissed on the motion of the
chapter 13 trustee. A year later, in 2004, she again filed for
bankruptcy, this time under chapter 7. This 2004 case is the
one before us. The appellee, Taxel, is the trustee for Deuel’s
chapter 7 bankruptcy. Deuel filed electronically. Along with
her petition, she filed her schedules, listing Chase Manhat-
tan’s secured debt.
1754                  IN THE MATTER OF DEUEL
   Chase Manhattan filed a complaint to quiet title to its lien,
and prevailed in Bankruptcy Court on the theory that under
our decision in Briggs v. Kent (In re Professional Investment
Properties. of America)1 her schedules provided constructive
notice to the bankruptcy trustee of Chase Manhattan’s unre-
corded lien, and alternatively, that it was subrogated to its
own previous recorded lien because it had used the new loan
to pay it off. The Bankruptcy Appellate Panel reversed, ruling
in favor of the trustee, distinguishing Professional Investment,
and rejecting the subrogation theory.2 Chase Manhattan
appeals.

                           II.   Analysis

   We review the Bankruptcy Appellate Panel’s decision de
novo.3 Our conclusion is that its reasoning is correct, and we
affirm.

  A.    Trustee’s Strong Arm Power.

   [1] A bankruptcy trustee has the power to avoid any trans-
fer that a hypothetical bona fide purchaser for value could
have avoided under the law of the state in which the real prop-
erty is located. What matters to this case is when the hypo-
thetical 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:

      (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
  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 simulta-
neously 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 bank-
ruptcy 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. Mait-
land, 1 Collected Papers 190 (Fisher ed. 1911, Cambridge Univ. Press)
(quoted in Cornelius J. Moynihan, Introduction to the Law of Real Prop-
erty 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 pur-
chaser 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 ear-
lier 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 state-
ment 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 mat-
ter 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 Pro-
fessional 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 peti-
tion”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 com-
  13
     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, 305-
06 (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 literal-
ism and metaphysics. It is practical. The Bankruptcy Appel-
late 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 deter-
mined by Congress of a debtor’s inadequate assets.21 That pur-
pose 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 mortga-
gees.”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 commence-
ment of the case.”25 That means that we are to deem the
trustee not only to have purchased the property for value with-
out notice of the unrecorded lien, but also to have recorded his
deed when the petition was filed. It is as though he were shop-
ping 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.

  B.    Equitable Subrogation

   [6] Chase Manhattan offers an alternative theory, equitable
subrogation. If a junior lienor pays off a senior lien, it may be
subrogated to the senior lienor’s position against other credi-
tors, most typically when a surety pays its principal’s obliga-
tion and steps into the principal’s shoes against third parties.26
Chase Manhattan would have us treat its current lien as subro-
gated to its own previous lien, since it used the money from
the Deuels’ third refinancing of their condominium to pay off
its own loan from the second refinancing, and that note was
secured by a recorded deed of trust.

   [7] Equitable subrogation traditionally enables “[o]ne who
pays, otherwise than as a volunteer, an obligation for which
another is primarily liable,” to be “given by equity the protec-
tion of any lien or other security for the payment of the debt
to the creditor,” and to “enforce such security against the prin-
  24
     Id. § 1214.
  25
     11 U.S.C. § 544(a)(3).
  26
     See, e.g., Mort v. United States, 86 F.3d 890, 893-94 (9th Cir. 1996).
1760                   IN THE MATTER OF DEUEL
cipal debtor or collect the obligation from him.”27 California
has adopted the traditional doctrine.28

    Equitable subrogation does Chase Manhattan no good for
three reasons. First, the creditor whose debt it paid off, itself
has no lien, having discharged it by a recorded deed of recon-
veyance. Though there may be circumstances where a lien can
be revived, they do not pertain where revival would prejudice
senior or equal equities.29 Second, “the right to subrogation
will not be enforced to the injury of those having the legal
title and an equal equity.”30 The California phrasing is that the
doctrine only operates where it does “not work any injustice
to the rights of others.”31 Equitable subrogation cannot operate
here, because the trustee is treated as though he were a bona
fide purchaser for value without notice of Deuel’s condomin-
ium, later surprised by an unrecorded lien based on a dis-
charged lien claimed by Chase Manhattan. A bona fide
purchaser for value of the Deuel condo would learn from a
title search that Chase Manhattan had discharged its lien, not
that it still had one.

   [8] No court would burden a home buyer with paying off
some creditor of the seller who had not recorded a lien, much
less one who had recorded discharging a lien, and the trustee
is deemed by section 544 to be in the position of that home
buyer. Here equitable subrogation would work an injustice, by
jumping Chase Manhattan over other creditors who may have
extended credit without record notice of Chase Manhattan’s
unrecorded lien.
  27
     McClintock on Equity 332 (2d ed. 1948).
  28
     See Golden Eagle Ins. Co. v. First Nationwide Financial Corp., 31
Cal. Rptr. 2d 815, 821 (Cal. Ct. App. 1994).
  29
     Lawyers Title Ins. Corp. v. Feldsher, 49 Cal. Rptr. 2d 542, 546 (Cal.
Ct. App. 1996).
  30
     McClintock on Equity 334.
  31
     Golden Eagle, 31 Cal. Rptr. 2d at 821.
                       IN THE MATTER OF DEUEL                      1761
   [9] Third, California courts give priority to a bona fide pur-
chaser over one claiming equitable subrogation.32 Likewise, in
National Bank of Alaska v. Erickson (In re Seaway Express
Corp.), we held that “[w]hen a creditor claims an inchoate
equitable interest in real property owned by the debtor at the
commencement of the case, which interest is not evidenced by
a recorded instrument and not yet granted by a state court, the
trustee as bona fide purchaser prevails.”33

                          CONCLUSION

 The judgement of the Bankruptcy Appellate Panel is
AFFIRMED.

  32
     See, e.g., J.G. Boswell Co. v. W.D. Felder & Co., 230 P.2d 386, 389-
90 (Cal. Ct. App. 1951).
  33
     912 F.2d 1125, 1128-29 (9th Cir. 1990).