Anderson v. Suntrust; Case No. 09-02540; August 5th, 2010
Facts
This Chapter 11 case was before the court on the Trustee’s appeal of the bankruptcy court’s order and judgment in favor of Suntrust in which the court determined that under Florida law, constructive notice prevents the Trustee from using his strong-arm powers to avoid the Lender’s mortgages.
This bankruptcy case was filed on May 4th, 2006. Prior to that date, the debtor had a piece of property with four mortgages on it and a judgment. The debtor then sold the property to his father. Neither the transfer to the father, nor the mortgages the father took were recorded at the time the debtor filed. Subsequently, the debtors four mortgages and the judgment lien were released with the funds from the mortgages taken by the fathers mortage.
The Trustee argues that the mortgage lien from Suntrust is subordinate to his interest pursuant to the Bankruptcy Code §544(a)(3). Suntrust argues that the Trustee’s status as a hypothetical bona fide purchaser is defeated by the Trustee’s constructive notice of the Suntrust mortgages derived through the unsatisfied liens of record.
Analysis
As the facts were stipulated to, the Court reviews a bankruptcy court’s findings of law de novo.
Pursuant to §544(a), a trustee occupies the status of an ideal judicial lien creditor or a bona fide purchaser without actual knowledge of any outstanding claim, lien, or equity, without regard to the actual knowledge or notice of any actual creditor, the debtor, or the trustee. Crestar Bank v. Neal (In re Kitchin Equip. Co. of Virginia Inc.), 960 F. 2d 1242, 1245 (4th Cir. 1992). Although a bankruptcy trustee is innocent of knowledge as a matter of law, the definition of a trustee’s rights as a bona fide purchaser is a matter of state property law. The court then turns to Florida law to answer the question of whether a perfected mortgage of record puts a purchaser on inquiry notice with regard to any information that would be discovered if the purchaser were to contact the mortgagee to determine the status of the mortgage.
The court, after reviewing Florida law, decides that the prior unreleased mortgages does not defeat the hypothetical bona fide purchaser status of the Trustee.
In an interesting footnote, the court noted that because the Trustee’s bona fide purchaser status was not defeated by notice, the Court specifically did not reach the question of whether a broad inquiry notice rule conflicts with the language of §544, which accords bona fide purchaser status to the trustee “without regard to any knowledge of . . .any creditor.” Thus, suggesting that such a broad inquiry notice rule, if it does exist, may be trumped by the language in §544, which specifically holds the trustee innocent of any knowledge.
It is the humble author’s opinion that reliance on §544(a)(1) might be required instead of §544(a)(3) which uses the state law defined “bona fide purchaser” language. In most states, to be a “bona fide purchaser,” the knowledge of the party is essential to the definition of such purchaser. Relieving the trustee of any inquiry notice would gut the meaning of “bona fide purchaser” and turn that phrase, essentially, “any purchaser.”
