Opinion
Case No. 02-21010
December 31, 2002
MEMORANDUM OF DECISION
I. INTRODUCTION
In this chapter 13 case, several issues are presented regarding the claims and interests of Mortgage Electronic Registration Systems, Inc., ("Creditor"). They arise in the context of Creditor's Motion for Termination and Annulment of Automatic Stay, Doc. No. 22 (the "Motion"), and also in light of the proposed treatment of Creditor's claims by chapter 13 debtors, Kimrick and Mary Jay ("Debtors").
These matters were presented at a hearing on November 26, 2002. The parties have agreed to waive the need for an adversary proceeding, to the extent one is implicated under F.R.Bankr.P. 7001(2), and they present the issues for decision under the existing procedural posture, i.e., the Motion and Debtors' objection thereto. Having evaluated their submissions and arguments, the following constitute the Court's findings of fact and conclusions of law on the contested matter. F.R.Bankr.P. 7052, 9014.
II. BACKGROUND AND FACTS
The relevant facts are essentially undisputed and readily summarized.
Creditor was the beneficiary of a deed of trust executed by Debtors and recorded December 28, 2000 in the records of Kootenai County, Idaho. The deed of trust encumbered Debtors' residence. Following Debtors' default, Creditor commenced a non-judicial foreclosure pursuant to Idaho Code § 45-1501, et seq.
Pursuant to that process, a non-judicial foreclosure sale was scheduled for July 9, 2002. The sale was in fact held on July 9, and Creditor was the successful purchaser through a credit bid. A "trustee's deed" to Creditor from the deed of trust trustee, First American Title Company of Idaho, was executed that date.
On July 10, 2002, Debtors filed their voluntary petition for relief under chapter 13. A copy of the notice of bankruptcy filing was recorded in the Kootenai County real property records on that date.
On July 12, 2002, the trustee's deed was recorded in the Kootenai County records.
III. DISCUSSION AND DISPOSITION
A. Contentions of the parties
Briefly summarized, the parties' positions are as follows. Creditor argues that the July 9 pre-bankruptcy sale was complete and final, and that the sale foreclosed and terminated Debtors' interest in the property. Creditor views the recording of the trustee's deed as an act which merely confirmed of record the title it already had obtained through the foreclosure sale. It believes sufficient grounds exist under § 362(d) for termination of the automatic stay so it can obtain possession of the property, and it also seeks annulment of the stay in order to validate the July 12 recording of the trustee's deed.
Debtors contend that the recording of the trustee's deed was a void act. Further, they assert a right under § 522(h) to exercise the chapter 13 trustee's avoiding powers under § 544(a)(3). They believe doing so allows them to avoid any unrecorded transfer of interest to Creditor on July 9 resulting from the foreclosure sale. Debtors believe the ultimate consequence of this avoidance would be reinstatement of the underlying deed of trust. They would then seek to treat the secured claim of Creditor under their proposed chapter 13 plan pursuant to § 1325(a)(5)(B) and § 1322(b).
B. Post-petition recording of the trustee's deed.
The filing of the petition on July 10, 2002 gave rise to an automatic stay. § 362(a). The stay was operative whether or not Creditor knew of its existence. Absent annulment of the stay, an issue discussed later in this Decision, the recording of the trustee's deed was a void act. Schwartz v. United States, 954 F.2d 569, 571 (9th Cir. 1992).
C. Debtors' standing and lien avoidance.
Debtors correctly note that they have standing pursuant to § 522(h) to avoid certain transfers of property if such property could be claimed exempt. This Court has previously recognized the availability of § 522(h), and its potential use in chapter 13 proceedings. Young v. Washington Fed Sav Loan Ass'n (In re Young,), 156 B.R. 282, 284 (Bankr. D. Idaho 1993).
11 U.S.C. § 522(h) provides:
(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if —
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title, and
(2) the trustee does not attempt to avoid such transfer.
Debtors argue that the transfer of the residence to Creditor by way of purchase at the foreclosure sale would be avoidable by a hypothetical bona fide purchaser from Debtors on the date of the bankruptcy filing. See § 544(a)(3).
Section 544(a)(3) allows a trustee (or here a debtor under § 522(h)) to "avoid any transfer of property of the debtor . . . that is voidable by . . . a bona fide purchaser of real property . . . 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."
The Court in Young considered, but rejected, a similar § 544(a)(3) assertion. While Young presented a rather tortured procedural history, see 156 B.R. at 283-84, the critical factual circumstances are closely analogous to those in the instant case, and Young is controlling.
Debtors recognize that Young is on point and adverse to their position. However, they argue that this Court should reconsider, and then decline to follow, this precedent. Debtors assume a significant burden in so urging the Court. See In re Estes, 254 B.R. 261, 263 (Bankr. D. Idaho 2000) (citing In re DeBoer, 99.3 I.B.C.R. 101, 103 (Bankr. D. Idaho 1999) (explaining obligations on parties seeking departure from this Court's prior decisional law)). The Court concludes that Debtors, having undertaken to meet this burden, are reasonably entitled to more than summary rejection of their contentions by virtue of Young, and the Court therefore writes further.
In Young, the trustee's sale of the debtor's residence was ultimately scheduled for 10:00 a.m. on June 10, 1992. The sale took place at that time, and the foreclosing creditor purchased the property by credit bid. The bankruptcy petition was filed later that afternoon. The trustee's deed, issued to the creditor by the deed of trust trustee, was recorded the following day, June 11. The debtor objected to the creditor's stay relief request and also asserted a right to transfer avoidance under § 544(a)(3). 156 B.R. at 284.
The Court stated:
This section [§ 544(a)(3)] allows the avoidance of any transfer of real property that is not perfected and enforceable under applicable law against a bona fide purchaser from the debtor as of the instant the bankruptcy petition is filed. The operation of the statute has previously been explained by the Court:
"The Bankruptcy Code, as a matter of federal law, bestows `BFP' status on the trustee/debtor. However, the extent of the rights assertable in such status is controlled by the substantive law of the state in which the subject property is located. Application of the `strong-arm' power in this state involves an interplay with the Idaho recording statutes. Idaho Code §§ 55-801, et seq. Section 544(a)(3) relieves the Debtors from any personal knowledge or information about [the subject] transaction with the creditors. However, Debtors will be charged with notice of whatever information appears on the relevant real property records as of the date of filing."
156 BR. at 285 (quoting In re Maidwell, 90 I.B.C.R. 322, 323 (Bankr. D. Idaho 1990)).
Young then proceeded to analyze the debtor's avoidance contentions under § 544(a)(3). 156 B.R. at 285-88. In doing so, it addressed two discrete but related concepts.
1. Effect of the non-judicial foreclosure sale.
Young held that Idaho Code § 45-1508 "effectively precludes a purchaser from the trust deed debtor from acquiring bona fide purchaser status after the trust deed sale has been conducted." 156 B.R. at 287. This Court concurs.
When a debtor files a petition for relief, all property or interests in property of that debtor become property of the estate pursuant to § 541. While property of the estate is a matter of federal law, bankruptcy courts must look to state law to determine the nature and extent of the debtor's interest in property. In re Pettit, 21 7 F.3d 1072, 1078 (9th Cir. 2000); see also In re Four Rose Plumbing, Inc., 99.2 I.B.C.R. 69, 72 (Bankr. D. Idaho 1999) (citing Butner v. United States, 440 U.S. 48, 54 n. 9 (1979)). Although all of Debtors' rights in the residence became property of their estate under § 541(a)(1), "the mere filing of bankruptcy does not expand these rights beyond what existed under applicable nonbankruptcy law at filing." Murphy v. Wray (In re Wray), 01.1 I.B.C.R. 15, 18 (Bankr. D. Idaho 2001) (citing In re Hyatt, 00.3 I.B.C.R. 131, 133 (Bankr. D. Idaho 2000) and In re Braker] 125 B.R. 798, 801 (9th Cir. BAP 1991)).
Here, Debtors' interests in and title to their residence were subject to the deed of trust they had granted in December 2000 to the benefit of Creditor. Creditor thereafter commenced and prosecuted a foreclosure of its deed of trust pursuant to Idaho Code § 45-1501, et seq. On July 9, prior to the filing of the bankruptcy petition, a non-judicial foreclosure sale was held by the deed of trust trustee, and the property was purchased by Creditor. Debtors have not alleged or contended that this sale was in any way irregular or not in compliance with applicable Idaho law or the parties' documents.
The consequences of a duly scheduled and held deed of trust foreclosure sale are set forth in Idaho Code § 45-1508, which in pertinent part provides:
A sale made by a trustee under this act shall foreclose and terminate all interest in the property covered by the trust deed of all persons to whom notice is given under Section 45-1506, Idaho Code, and of any other person claiming by, through or under such persons and such persons shall have no right to redeem the property from the purchaser at the trustee's sale[.]
Debtors were parties to whom notice was given pursuant to § 45-1506 and, thus, the sale acted to "foreclose and terminate all [Debtors'] interest in the property covered by the trust deed." Idaho Code § 45-1508. Moreover, § 45-1508 specifically forecloses and terminates the interests of any "person claiming by, through or under" the Debtors. It also makes clear that none of these parties has a redemptive right. Young determined that § 45-1508 protects the successful purchaser at the trustee's sale from avoidance of its interest by a hypothetical purchaser from Debtor:
Debtors believe the sale to Creditor was not complete, notwithstanding § 45-1508. They rely on Idaho Code § 45-1506(9), which states:
The purchaser at the sale shall forthwith pay the price bid and upon receipt of payment the trustee shall execute and deliver the trustee's deed to such purchaser, provided that in the event of any refusal to pay purchase money, the officer making such sale shall have the right to resell or reject any subsequent bid as provided by law in the case of sales under execution.
(emphasis added). They therefore argue that a foreclosure sale is not final until the trustee's deed is transferred and recorded, and further contend that, because no deed was here recorded, their residence became property of the estate. Although not specifically cited, Debtors would appear to also that they have the ability under § 1322(c)(1) to cure default on their principal residence because such right exists "until such residence is sold at a foreclosure sale."
However, the Court is not confronted with an inchoate sale to a third party purchaser who fails to pay the purchase price. Instead, as in Young, the successful purchaser here was the Creditor pursuant to a credit bid. The Court expresses no opinion regarding dissimilar or distinguishable factual scenarios.
[Idaho Code § 45-1508] effectively precludes a purchaser from the trust deed debtor from acquiring bona fide purchaser status after the trust deed sale has been conducted. The statute subordinates the rights of a subsequent purchaser of the property, as such rights are claimed "through" the debtor. Put another way, the purchaser at the trust deed sale, is an entity under a specific local law against whom a subsequent bona fide purchaser cannot perfect an interest, notwithstanding the provisions of the general recording laws. Therefore, the rights of the purchaser, as of the time of the sale, cannot be avoided under Section 544(a)(3).
156 B.R. at 287. This analysis is equally applicable here, and Debtors cannot avoid Creditor's rights through use of § 544(a)(3).
2. Constructive and inquiry notice
Young also determined that there was an alternative basis for rejecting the debtor's § 544(a)(3) arguments, concluding that "there was adequate information in the public record as of the date of the bankruptcy to put a reasonably diligent person on inquiry notice of [the creditor's] interest as a purchaser of the property at the foreclosure sale." 156 B.R. at 287. This Court also concurs with this alternative holding in Young, and finds it applicable here.
Under Idaho's race-notice recording statutes, parties are "charged with notice of whatever information appears on the relevant real property records as of the date of the bankruptcy filing." Maidwell, 90 I.B.C.R. at 322. And they are also deemed to be on notice of other obvious or apparent matters, since Idaho law makes it clear that a party cannot blindly rely on the real property record alone if there is information available which would "`excite the attention of a man of ordinary prudence and prompt him to further inquiry."' Young 156 B.R. at 285 (quoting Farrell v. Brown, 729 P.2d 1090, 1096 (Idaho App. 1986)); see also, Wray, 01.1 I.B.C.R. at 18-19 (addressing constructive notice issues). The principles of constructive and inquiry notice under Idaho state law have long been accepted and recognized by this bankruptcy court in applying § 544(a)(3). See, e.g, Young, 156 B.R. at 285-86, and Wray, 01.1 I.B.C.R. at 18 (both citing Fitzgerald v. Thornley (In re Lewis), 82 I.B.C.R. 70, 71 (Bankr. D. Idaho 1982)).
When the Court applied these principles to the facts before it in Young, it concluded that someone reviewing the documents of record, including those related to the impending non-judicial foreclosure sale, "could not reasonably ignore the presence of these documents, nor the important information they contained[.]" 156 B.R. at 287. Such a party would be "duty-bound to make inquiry" concerning the foreclosure process and the results of the scheduled sale. Id The reasoning is equally persuasive here.
On July 10, the date of Debtors' petition, the result of the July 9 non-judicial foreclosure sale was not a matter of public record. However, the existence of the claims and interests of Creditor were of record. So, too, was the fact that a nonjudicial foreclosure sale had been scheduled and noticed for July 9. This information placed the hypothetical BFP on notice, not just of Creditor's secured rights under the deed of trust but also of all matters which could reasonably be determined through inquiry.
For this reason, too, Debtors cannot use the status of a hypothetical BFP under § 544(a)(3) to defeat the interest of Creditor as successful purchaser at the foreclosure sale. See Young, 156 B.R. at 285-88. Accord, In re Samaniego, 224 B.R. 154, 160-61 (Bankr. ED.Wa. 1998).
As noted above, Debtors have argued that the Court erred in Young They have pointed to certain case law, particularly Walker v. California Mortgage Serv. (In re Walker), 861 F.2d 597 (9th Cir. 1988) (addressing California law). However, Walker was considered and addressed in Young. See 156 BR. at 287-88. The Court has, in the instant case, evaluated this contention along with the balance of Debtors' critique of Young and finds the same unpersuasive. Accord Value T Sales, Inc. v. Mitchell (In re Mitchell), 279 B.R. 839 (9th Cir. BAP 2002).
D. Annulment of stay.
The Court has the ability to grant stay relief "by terminating, annulling, modifying, or conditioning such stay" either under § 362(d)(1) for cause or under § 362(d)(2), with respect to a stay of an act against property, if the debtor does not have equity in that property and the same is not necessary for an effective reorganization. Annulment (sometimes called "retroactive termination") would render the stay terminated as of the moment it arose at the petition's filing, and the availability of this potential remedy in proper circumstances has been judicially recognized. See Schwartz, 954 F.2d at 572; Aheong v. Mellon Mortgage Co. (In re Aheong), 276 BR. 233, 250 (9th Cir. BAP 2002); see also In re Hegel, 00.2 I.B.C.R. 103, 104-5 (Bankr. D. Idaho 2000) (quoting Mataya v. Kissinger (In re Kissinger), 72 F.3d 107, 108-09 (9th Cir. 1995)).
The Court has hereinabove concluded that, pursuant to Idaho Code § 45-1508, Creditor obtained a paramount interest in the residence as a result of the purchase at the foreclosure sale. Operation of that statute "foreclose[d] and terminate[d]" Debtors' interest, as well as the interests of those who might claim by, through or under Debtors. The mere filing of the bankruptcy did not operate to increase Debtors' interest, nor did it diminish or reduce the interest acquired by Creditor as the successful purchaser of the property by credit bid at the July 9 sale. The Court therefore concluded that Debtors' invocation of § 544(a)(3) powers was unavailing. It now also concludes that sufficient grounds exist for entry of stay relief pursuant to § 362(d).
Since the trustee's deed had not yet been recorded, Debtors' interest in the residence on the date of filing consisted of only (1) possession and (2) bare legal or record title (though subject to Creditor's recorded deed of trust). Section 541(d) provides that:
[p]roperty in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest . . . becomes property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the extent of equitable interest in such property that the debtor does not hold.
Debtors' continued possession, as the deed of trust grantors, following the conclusion of the foreclosure sale which under § 45-1508 terminated and foreclosed their interests in the property, is a severely circumscribed sort of claim. The successful purchaser at a duly scheduled and regularly held foreclosure sale is entitled to issuance of a trustee's deed and to obtain possession of the property.
The Idaho Supreme Court recently issued its decision in Taylor v. Just, No. 28105, 2002 WL 31628028 (Idaho Nov. 22, 2002). It held that a trustee's sale was void by reason of an agreement which had been reached prior to sale between the grantor and the beneficiary pursuant to which there no longer existed any default. In the absence of default, the Court concluded that the sale was improperly held and, therefore, the successful purchaser at sale was not entitled to issuance of a trustee's deed or possession. The decision provides, by necessary implication, support for the proposition that a purchaser at a properly and regularly conducted foreclosure sale will gain the rights provided under § 45-1508 and will be entitled to a trustee's deed and to seek possession of the purchased property. See Idaho Code § 45-1506 (11).
Similar sorts of issues were presented in Samaniego. The court there considered a situation where the debtors real property was subject to a statutory tax foreclosure sale, and the debtors filed their petition for relief some 5 days after the sale. The tax deeds to the successful purchasers, however, were recorded after the bankruptcy commenced. That court concluded that § 544(a)(3) was unavailable to the debtors. 224 B.R. at 160-61. It further concluded that, where the debtors held bare legal title alone, and retained no redemptive right nor any other interest in the property of benefit to themselves or their estate, cause existed to lift the stay to allow the equitable owner to obtain legal title. 224 B.R. at 165. In particular, the creditor was entitled to annulment of the stay, which would validate the delivery and recording of the tax deeds, events that had occurred following the filing of the petition. Id (citing In re Engles 193 BR. 23, 26 (Bankr. S.D. Cal. 1996)).
This Court today reaches the same conclusion. Debtors' interest in the residence was effectively and completely foreclosed by the July 9 sale. Idaho Code § 45-1508. They have no redemptive or similar right. Id. Neither possession nor the limited interests of record provide Debtors with sufficient interest to defeat the purchaser's claim or its entitlement to stay relief.
IV. CONCLUSION
The Court will therefore grant Creditor's Motion. The stay will be annulled, thus validating the July 12 recording of the trustee's deed. The stay is also terminated in order that Creditor can proceed as necessary under applicable nonbankruptcy law to gain possession of the property. Counsel for Creditor shall lodge an appropriate form of order.