In Burkhart v. Coleman, (In re Tippett) --- F.3d ---, 2008 WL 4070690 (9th Cir. Sept. 4, 2008), the Ninth Circuit held that an unauthorized post-petition sale of real property may be upheld where: 1) the bankruptcy trustee failed to record the bankruptcy petition with the county recorder; and 2) a bona fide purchaser thereafter bought and recorded title in the property. As welcome as this news is to bona fide purchasers in California, the opinion raises interesting issues pertaining to acts arguably taken in violation of the automatic stay under section 362 of the Bankruptcy Code by holding that the automatic stay may not apply to sales or transfers of property initiated by the debtor under certain circumstances.
Mr. and Mrs. Tippett filed a Chapter 7 petition in May of 2001. On their schedules, the Tippetts listed their homestead as having a value of $140,000, with two liens against it totaling approximately $135,000. The bankruptcy Trustee did not abandon the bankruptcy estate's interest in the residence, but did not record the Tippetts' petition with the county recorder.
Without obtaining bankruptcy court approval, in November of 2002, the Tippetts sold their home to Seitu Coleman for $225,000. This sale resulted in the receipt by the Tippetts of over $75,000 after payment of all liens on the property. To purchase the property, Coleman signed purchase money notes in favor of two mortgage companies. These notes were secured by deeds of trust that were duly recorded. It was undisputed that Coleman was a bona fide purchaser of the property.
The Trustee filed an adversary proceeding against the Tippetts, Coleman, and the lenders seeking to recover the sale proceeds under 11 U.S.C. § 542, avoid the lenders' liens, and quiet title to Coleman. The bankruptcy court, however, ruled in favor of the Trustee, and held that the Tippetts' grant deed and the lenders' liens were void ab initio as violations of the automatic stay under 11 U.S.C. § 362. On appeal, the Bankruptcy Appellate Panel reversed and entered judgment in favor of Coleman, concluding that the Tippetts' unauthorized transfer of the residence to Coleman did not violate the automatic stay.
The Ninth Circuit affirmed the BAP decision and held that the Bankruptcy Code does not preempt California's bona fide purchaser status as it applied to the foregoing transaction. Additionally, the Court held it was "adher[ing] to the established proposition that the automatic stay triggered by a debtor's bankruptcy petition does not void transfers of estate property initiated by the debtor."
The Ninth Circuit found that California's Bona Fide Purchaser Statute was not preempted by the Bankruptcy Code. In making this determination, the Court found that Chapter 7 of the Code embodies two ideals: 1) giving a debtors a fresh start, and 2) equitably distributing a debtor's assets among competing creditors. The Court found that California's bona fide purchaser statute was "wholly consistent" with the second goal, and thus there was no federal preemption.
The Automatic Stay
The Trustee also contended that the automatic stay rendered the transfer of the real property to Coleman a nullity pursuant to 11 U.S.C. § 362. This argument would appear to persuasive as the Ninth Circuit has consistently stated that violations of the automatic stay are void, not merely voidable. However, the Court in In re Tippett concluded otherwise.
The Court's rationale was as follows: section 549 of the Bankruptcy Code, allows (but does not mandate) a trustee to avoid a transfer of property of the estate that occurs post-petition and without authorization. According to the Bankruptcy Court, the expansive definition of "transfer" in section 549 means that sections 362 and 549 of the Bankruptcy Code, at times, govern the same transactions. In addition, section 549 of the Bankruptcy Code implies that some transactions will be valid unless challenged by a trustee. Thus, the Court noted that some have argued section 362 of the Bankruptcy Code cannot be interpreted to void these overlapping transactions, for doing so would render section 549 of the Bankruptcy Code moot.
The Court also found that there was a key difference between section 549 and section 362: section 362 protects the debtor, not creditors, while section 549 is designed to protect creditors against unauthorized transfers by the debtor. Moreover, the Court cited Schwartz v. United States (In re Schwartz), 954 F.2d 569, 574 (9th Cir. 1992), for the proposition that in most circumstances, section 549 applies to transfers in which the debtor is a willing participant; in contrast, the automatic stay under section 362 does not apply to sales or transfers of property initiated by the debtor. As a result, the transfer from the Tippetts to Coleman was not rendered void by the automatic stay.
Unfortunately, the Court does not provide any analysis as to why section 362 does not apply to sales or transfers of property initiated by the debtor. Rather, the Court found itself bound by the principles of stare decisis, and concluded that "there is no question that the analysis and conclusion in Schwartz that the automatic stay did not apply to transfers by debtors was an important and focused part of the panel’s reasoning." The "analysis" in Schwartz, however, is non-existent, and Schwartz fails to include a single case in support of this proposition.
As a result, the few short paragraphs in the opinion that discuss the automatic stay add a further wrinkle to the well established Ninth Circuit authority that renders actions taken in violation of the automatic stay as "void," at least when the debtor is the one initiating the action. Although it is clear from reading the opinion that the automatic stay does not apply to transfers by debtors, at least under certain circumstances, the rationale for this proclamation is uncertain. As a result, it is unclear how future cases will apply section 362 if it involves transfers by the debtor.
If In re Tippett is held to its facts, the potential impact on the Ninth Circuit's interpretation of the automatic stay may be quite limited. However, the possibility that In re Tippett could be extended beyond its particular facts is one that creditor and debtor attorneys should be aware of.