Buyers of, and lenders upon, distressed California real property can sleep a little better following a recent U.S. Ninth Circuit Court of Appeals decision: In the Matter of Craig L. Tippett, 2008 U.S. App. LEXIS 18914 (September 4, 2008). In Tippett, the Court upheld the California bona fide purchaser statute against a federal preemption claim and declined to find a violation of the Bankruptcy Code’s automatic stay provision in order to affirm an unauthorized real property sale by the Chapter 7 debtor.

In a fact scenario likely to be repeated often in today’s difficult real estate market, Mr. and Mrs. Tippett filed a Chapter 7 bankruptcy and, thereafter, without the consent of, or even notice to, the Chapter 7 trustee or the Bankruptcy Court, sold their residence to Coleman, who purchased with the assistance of first and second mortgage loans. After paying off the existing secured debt, presumably through an escrow, Mr. And Mrs. Tippett pocketed over $76,000. Upon discovery of the unauthorized transfer, the Chapter 7 trustee sought to avoid the transfer to Coleman. The first and second loans notwithstanding, both Coleman and the lenders were bona fide purchasers for value without actual or constructive notice of the bankruptcy filing since the trustee neglected to file notice of the bankruptcy in the local real estate records.

The Chapter 7 trustee argued persuasively at the Bankruptcy Court level that; (i) upon bankruptcy filing by the Tippetts, pursuant to U.S.C. Section 541, the property vested in the trustee and the Tippetts had no remaining property interest left to sell to Coleman; (ii) the California good faith purchaser statute, California Civil Code Section 1214, is preempted and rendered inapplicable by the Federal Bankruptcy Code, and; (iii) the transfer to Coleman was void as a violation of the automatic stay provision of 11 U.S.C. Section 362. On appeal to the Bankruptcy Appellate Panel (BAP), and as affirmed by the Ninth Circuit in Tippett, the trial court’s judgment was reversed, and the transfer to Coleman and the first and second mortgage loans were upheld.

In affirming the BAP decision and validating the transactions, the Tippett court held that (a) the California good faith purchaser statute expressly sought to protect transferees from unrecorded prior transfers, such as the statutory transfer of the property from the debtor to the trustee upon the filing of a Chapter 7 bankruptcy; (b) protection of good faith purchasers is consistent with other provisions of the Bankruptcy Code (e.g. 11 U.S.C. Section 549) so that implied preemption could not be justified; and (c) the automatic stay provision of 11 U.S.C. 362 does not apply to transfers by the debtor.

This decision makes clear that in California, buyers, lenders, and others dealing in good faith with, and providing value to, unscrupulous property owners are protected, at least in part, against such property owners’ unknown and undisclosed prior bankruptcy filings.