In re Zubenko

528 B.R. 784, 73 Collier Bankr. Cas. 2d 820, 2015 Bankr. LEXIS 940, 2015 WL 1743295

• Court: United States Bankruptcy Court, E.D. California
• Decided: March 23, 2015
• Docket: Case No. 14-31853-B-13
• Status: Published

Opinion

MEMORANDUM DECISION ON MOTION FOR RELIEF FROM AUTOMATIC STAY

Christopher D. Jaime, UNITED STATES BANKRUPTCY JUDGE

Presently before the court is a motion for relief from the automatic stay of 11 U.S.C. § 362(a) filed by creditor Herbert U.S. Real Estate Company. Herbert seeks relief from the automatic stay in order to record a trustee’s deed upon sale it received from a pre-petition foreclosure sale of property formerly owned by debtor Peter Zubenko located at 22 Seacrest Court, Sacramento, CA (the “Sacramento Property”), and to proceed with an action for possession of the property. Herbert’s motion is opposed by the debtor. Herbert has replied to the debtor’s opposition. For the reasons set forth below, Herbert’s motion will be granted and the automatic stay of 11 U.S.C. § 362(a) will be terminated and vacated under 11 U.S.C. § 362(d)(1) to allow Herbert to record its trustee’s deed upon sale, and to allow Herbert to proceed with an action for possession of the Sacramento Property.

PROCEDURAL BACKGROUND

A hearing on Herbert’s motion was initially set for January 27, 2015, and noticed under Rule 9014-l(f)(2) of the court’s Local Rules. The debtor filed an opposition to the motion on January 26, 2015, and appeared at the hearing on January 27, 2015, to oppose the motion. Based on the debtor’s opposition and appearance, the court continued the hearing to February 25, 2015, at which time the court heard argument on the motion, the debtor’s opposition, and Herbert’s reply. At the conclusion of that hearing, the court further continued the matter to allow Herbert, the debtor, and the trustee to file post-hearing briefs on the issue of avoidance of Herbert’s unrecorded interest in the Sacramento property under 11 U.S.C. § 544(a)(3). Herbert and the debtor have filed supplemental briefs.

FACTS

The facts are not in dispute. The debt- or purchased the Sacramento Property on or about August 18, 2004. The Sacramento Property was encumbered by a note and deed of trust in the original amount of $378,850. The debtor eventually defaulted under that note and deed of trust.

A notice of default/election to sell was recorded with the Sacramento County Recorder on May 20, 2014. A notice of the trustee’s sale was also recorded with the Sacramento County Recorder on August 15, 2014. A sale of the Sacramento Property was initially set for September 10, 2014. That sale was subsequently postponed to November 24, 2014, at which time Herbert was the successful bidder and purchaser. Herbert received an unrecorded trustee’s deed upon sale on December 2, 2014.

Eleven days after the foreclosure sale and three days after Herbert received the trustee’s deed, the debtor filed a chapter 13 petition on December 5, 2014. Herbert learned of the debtor’s chapter 13 filing shortly after the petition was filed. Out of deference to the automatic stay, Herbert withheld recordation of its trustee’s deed and sought legal advice on how to proceed in light of the debtor’s intervening bankruptcy filing. Herbert’s trustee’s deed remains unrecorded.

JURISDICTION AND VENUE

Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334. This matter concerning the administration of the estate is a core proceeding that a bankruptcy judge may hear and determine. 28 U.S.C. §§ 157(b)(2)(A), (G) and (O). To the extent it may ever be determined to be a matter that a bankruptcy judge may not hear and determine without consent, the parties nevertheless consent to such determination by a bankruptcy judge. 28 U.S.C. § 157(c)(2). Venue is proper under 28 U.S.C. § 1409.

DISCUSSION

Herbert seeks relief from the automatic stay of § 362(a) for cause under § 362(d)(1) so that it may record a trustee’s deed it received upon conclusion of a pre-petition foreclosure sale and proceed with an action for possession of the Sacramento Property. Herbert maintains that the foreclosure sale was completed prepet-ition, that it holds the equitable interest in the Sacramento Property, and that the estate holds only bare legal title. Herbert further maintains that bare legal title is of no value to the estate.

The debtor, on the other hand, maintains that he holds the superior interest. The debtor bases his argument on California Civil Code § 292411(c).¹ The debtor maintains that Civil Code § 2924h(c) required Herbert to record its trustee’s deed within fifteen days of the foreclosure sale date and because Herbert did not (and cannot now do so because of the automatic stay) the debtor holds the superior interest in the Sacramento Property, he debtor relies primarily on In re Garner, 208 B.R. 698 (Bankr.N.D.Cal.1997), to support his argument.

In Garner, the purchaser at a pre-petition foreclosure sale recorded its trustee’s deed post-petition but, significantly, did so within the fifteen-day period of Civil Code § 2924h(c). Id. at 699. The court noted that the post-petition recordation of a pre-petition trustee’s deed normally would violate the automatic stay and be avoidable under § 549(a). Id. at 700. The court also noted, however, that when there is an intervening bankruptcy filing between a pre-petition foreclosure sale and post-petition recordation of a trustee’s deed, Civil Code § 2924h(c) creates an exception to § 362(a) through § 362(b)(3) and § 546(b) so long as the trustee’s deed is recorded within fifteen days of the foreclosure sale. Id. at 700-701. Gamer also went on to explain what happens when there is an intervening bankruptcy and a trustee’s deed obtained from a pre-petition foreclosure is not (and cannot because of the automatic stay be) recorded within the fifteen-day period of Civil Code § 2924h(c).

Gamer initially examined what appeared to be conflicting authority from the Southern District of California in In re Engles, 193 B.R. 23 (Bankr.S.D.Cal.1996).² In Engles, the court granted relief from the automatic stay and allowed purchasers at a pre-petition foreclosure sale to record their trustee’s deed post-petition and well beyond the fifteen-day period of Civil Code § 2924h(c). Garner, on the other hand, considered post-petition recordation within the fifteen-day period of Civil Code § 2924h(c) critical and determinative of the interests in property purchased at a pre-petition foreclosure sale. It explained:

[I]f the foreclosure sale purchaser fails to record its deed within fifteen days of the sale, the perfection will not relate back to the date of the sale. A contest between the foreclosure sale purchaser and a bona fide purchaser of the property from the owner will again depend on who records its deed first. As a result, the recordation of a foreclosure sale deed more than fifteen days of the sale after a bankruptcy petition is filed will not qualify for the section 362(b)(3) exception to the bar of the automatic stay and will not protect the purchaser from avoidance of its interest in the property under section 544(a)(3). Recordation of the deed within fifteen days of the sale appears to be critical to the outcome of a motion for relief under these circumstances.

208 B.R. at 701 (emphasis added).

Engles and Garner each find some support in the Bankruptcy Appellate Panel’s recent opinion in In re Cruz, 516 B.R. 594 (9th Cir. BAP 2014). Quoting from Civil Code § 2924h(e) and 4 Harry D. Miller & Marvin B. Starr, CAL. REAL ESTATE § 10:252 (3d ed.2013), Cruz confirms that under California law a pre-petition foreclosure sale is final upon acceptance of the last and highest bid. Id. at 602. It also recognizes that a purchaser at a prepetition foreclosure sale holds an interest in the purchased property even if the trustee’s deed remains unrecorded when the former owner files a bankruptcy petition, the trustee’s deed is not recorded within the fifteen-day period of Civil Code § 2924h(c), and the trustee’s deed remains unrecorded postpetition for a significant period well beyond the fifteen-day period. Id. In fact, the BAP labeled the debtor’s argument that she held a superior interest in property sold by foreclosure sale pre-petition where the trustee’s deed was not recorded within the fifteen-day period of Civil Code § 2924h(c) and the trustee’s deed remained unrecorded post-petition for a significant period of time (an argument not unlike the one the debtor makes here) a misinterpretation of California law. Id.

It is precisely the BAP’s confirmation that a foreclosure sale purchaser with an unrecorded trustee’s deed holds an interest in the property purchased at a pre-petition foreclosure sale even if the trustee’s deed remains unrecorded post-petition and more than fifteen days after the foreclosure sale that leads’ back to Gamer. Recall that Gamer refers to a “contest” between a “foreclosure sale purchaser” and a “bona fide purchaser” under “§ 544(a)(3)” when a foreclosure sale purchaser does not record its trustee’s deed ■within fifteen days of the sale and the automatic stay resulting from an intervening bankruptcy filing prevents it from doing so. Id. at 700. Gamer’s reference to these competing interests is hot without significance. In fact, they, accurately describe the interests that now exist in this case and in the Sacramento Property as a result of Herbert’s failure to record its trustee’s deed within fifteen days of the pre-petition foreclosure sale and the debt- or’s intervening chapter 13 petition, i.e., Herbert’s unrecorded interest versus the interests of a bona fide purchaser conferred upon the trustee under § 544(a)(3).³ Stated another way, in order to claim (and retain) an interest in the Sacramento Property superior to Herbert’s unrecorded interest, the trustee must be able to avoid Herbert’s unrecorded interest. The trustee’s ability to do that hinges on an ability to invoke the “strong arm powers” of § 544(a)(3) and that, in turn, hinges on the trustee’s ability to qualify as a bona fide purchaser under California law. The trustee (and thus the debtor) cannot satisfy this requirement.

Section 544(a)(3) of the Bankruptcy Code gives the 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 of the property from the debtor.⁴ In effect, it gives a trustee as'of the bankruptcy petition date, the status of a perfect bona fide purchaser under state law.

Although the question of whether a trustee qualifies under § 544(a)(3) is one of federal law, state law determines if the trustee’s status as a bona fide purchaser will defeat the rights of a person against whom the trustee seeks to assert those powers. In re Weisman, 5 F.3d 417, 420 (9th Cir.1993); In re Ireva Holdings, LLC, 2011 WL 10656544 at *2 (Bankr.E.D.Cal. 2011). Thus, California law applies and will determine who, in this case, holds the superior interest in the Sacramento Property.

California is a race-notice jurisdiction and requires every conveyance of real property to be recorded in order to be of value against a subsequent purchaser of the same property. Cal. Civ.Code § 1214.⁵ However, an unrecorded instrument is valid as between the parties thereto and those who have notice of it. Cal. Civ.Code § 1217.⁶ Although § 544(a)(3) creates the legal fiction of a perfect bona fide purchaser and explicitly renders the trustee’s actual notice of prior grantees irrelevant, the Ninth Circuit has long-recognized that constructive or inquiry notice obtained in accordance with Civil Code § 19 can defeat a trustee’s claim,⁷ Weisman, 5 F.3d at 420 (citing Probasco v. Eads (In re Probasco), 839 F.2d 1352, 1354 (9th Cir.1988)).

The question then becomes whether a prudent purchaser, in light of the information reasonably available on the petition date in this case, would have made an inquiry into the status of and/or title to the Sacramento Property and any transfer thereof. That means that if the circumstances on the petition date suggested to the trustee, as a prudent buyer, that he should have inquired as to whether an interest in the Sacramento Property had been transferred pursuant to a foreclosure sale, then Civil Code § 19 would charge the trustee with knowledge of Herbert’s unrecorded interest and that constructive knowledge would prevent the trustee from prevailing under § 544(a)(3) because the trustee would not qualify as a bona fide purchaser. See Weisman, 5 F.3d at 421 (citations omitted).

Herbert relies on the notice of default and notice of sale recorded with the Sacramento County Recorder to charge the trustee with constructive notice of its unrecorded interest under its pre-petition trustee’s deed and, thus, to defeat the trustee’s bona fide purchaser status under § 544(a)(3). Herbert’s argument has some merit to it because several courts have held that a recorded notice of default and/or notice of sale provide constructive notice of a property’s transfer and the existence of a prior unrecorded interest. See In re Grant, 303 B.R. 205, 211 (Bankr. D.Nev.2003) (so holding under Nevada law which is a race-notice state like California); see also In re Young, 156 B.R. 282 (Bankr.D.Idaho 1993) (recorded notice of default was constructive notice sufficient to preclude chapter 13 debtor from avoiding foreclosure sale). California law also instructs that an examination of recorded documents related to a prior sale may require an inquiry into any suspicious elements. See 612 South LLC v. Laconic Limited Partnership, 184 Cal.App.4th 1270, 1278, 109 Cal.Rptr.3d 780 (Cal.Ct. App.2010) (“The act of recording creates a conclusive presumption that a subsequent purchaser has constructive notice of the contents of the previously recorded document.”); Triple A. Mgmt. Co. v. Frisone, 69 Cal.App.4th 520, 530-532, 81 Cal. Rptr.2d 669 (Cal.Ct.App.1999) (purchasing party on inquiry notice to investigate ambiguities appearing in record title).

The debtor, on the other hand, relies on Walker v. California Mortgage Service (In re Walker), 861 F.2d 597 (9th Cir.1988), and In re Williams, 124 B.R. 311 (Bankr. C.D.1991), for the proposition that a recorded notice of default and/or a notice of sale are not constructive notice charged to a bankruptcy trustee. The debtor’s reliance on Walker and Williams is misplaced.

Although the debtor correctly notes that in Walker the court rejected the argument that a recorded notice of default provided constructive notice to defeat bona fide purchaser status, the debtor overlooks that the court expressly noted that the notice of default in that case was recorded some sixteen months before the notice of bankruptcy was recorded. Walker, 861 F.2d at 600. Williams relied on Walker to reach the same conclusion that notices of default and sale recorded some two years and eighteen months, respectively, before the bankruptcy filing were similarly insufficient to provide the trustee with constructive notice of the property’s status. See Williams, 124 B.R. at 315 (notice of default recorded February 1988, notice of sale recorded June 1988, chapter 7 notice recorded February 1990; chapter 7 case thus filed two years after notice of default and eighteen months after notice of sale).

The concerns in Walker and Williams are not present here. Unlike Walker and Williams where the recorded documents and the bankruptcy filing were from sixteen months to two years apart, the recorded notice of default and sale and the bankruptcy filing in this case are separated by, at most, a little over six months. The notice of sale and the initial sale date were also a little over three weeks apart. Under these factually distinct circumstances, and given the relevance of constructive notice under California law recognized in Weisman, the court concludes that like Grant and Young, supra, the recorded notices of default and sale in this case are not so remote from the debtor’s bankruptcy filing so as to be considered “stale”, they are sufficient to charge the trustee with constructive notice of Herbert’s unrecorded interest under its pre-petition trustee’s deed, and consequently they defeat the trustee’s bona fide purchaser status under § 544(a)(3).⁸

Lacking bona fide purchaser status, the trustee cannot assert his “strong arm powers” under § 544(a)(3) to avoid Herbert’s unrecorded interest in the Sacramento Property. And without the ability to avoid that interest, the estate’s legal title to the Sacramento Property that became property of the estate under § 541(d) when the debtor filed his petition is of no value to the estate because the estate lacks the ability to acquire the equitable interest from Herbert. Therefore, based on the foregoing, the court concludes that cause exists under § 362(d)(1) to grant Herbert’s motion and to terminate the automatic stay of § 362(a) so that Herbert may record its prepetition trustee’s deed and proceed with an action for recovery of the property.

The 14-day stay of Federal Rule of Bankruptcy Procedure 4001(a)(3) will also be waived.

A separate order will enter.

1 . California Civil Code § 2924h(c) states:

For purposes of this subdivision, the trustee’s sale shall be deemed final upon the acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual date of sale if the trustee’s deed is recorded within 15 calendar days after the sale, or the next business day following the 15 th day if the county recorder in which the property is located is closed on the 15th day.

2 . Engles and Gamer agree that under California law a prepetition foreclosure sale is complete when the highest and last bid is accepted. 208 B.R. at 700 (citing Engles). Gamer departs from Engles over the effect of Civil Code § 2924h(c) and the need to record a trustee’s deed within fifteen days when there is an intervening bankruptcy filing. Id.

3 . Although a chapter 13 debtor may exercise avoidance powers concurrent with the chapter 13 trustee and any recovery remains property of the estate even if a confirmed plan provides that property of the estate revests in the debtor upon confirmation as may be the case here, In re Cohen, 305 B.R. 886 (9th Cir. BAP 2004), the court will refer to the trustee herein for purposes of uniformity.

4 . 11 U.S.C. § 544(a) (3) states:

(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 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 . California Civil Code § 1214 states:

Every conveyance of real property or an estate for years therein, other than a lease for a term not exceeding one year, is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded, and as against any judgment affecting the title, unless the conveyance shall have been duly recorded prior to the record of notice of action.

6 . California Civil Code § 1217 states:

An unrecorded instrument is valid as between the parties thereto and those who have notice thereof.

7 .California Civil Code § 19 states:

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.

8 . Walker and Williams are also distinguishable from this case in at least two other significant respects. Both cases were decided before Weisman and, in that respect, both cases overlook the relevance of constructive notice the Ninth Circuit recognized in Weis-man as defeating a trustee's claim under § 544. Walker was also decided under § 549(c) which is an exception to — and does not apply outside the context of — a § 549(a) avoidance action. In re Mitchell, 279 B.R. 839, 843. (9th Cir. BAP 2002). The potential avoidance action here exists under § 544(a)(3), not § 549(a).