Summary of a Recent
Judicial Development in
Bankruptcy

Trustee's Right as Bona Fide Purchaser Trumps State Court Order

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Pina, 363 B.R. 314 (Bankr. D. Mass. 2007), the United States Bankruptcy Court for the District of Massachusetts held that a co-tenant/creditor's unrecorded, equitable interest in real property was trumped by the trustee's right as bona fide purchaser of the property.

Background

In obtaining confirmation of her previous Chapter 12 plan, the Debtor claimed that she was a licensed equine professional and that she had purchased property in 1998 to operate an American Quarter Horse breeding farm. Id. at 316. The Debtor borrowed money from KAC Associates to pay off her creditors and received a discharge in the Chapter 12 case, and entered into a joint tenancy with KAC which owned a 49% interest in the property. Id. at 317. KAC subsequently filed a complaint to compel the Debtor to sell them her remaining 51% interest after she rejected their buyout offer. Id. The Superior Court later granted KAC's motion to compel conveyance of the Debtor's remaining property, but the Debtor refused to comply with the court order. Id. at 318. Debtor filed her current Chapter 7 petition in June 2006, and failed to list her three prior bankruptcy cases. Id. at 319. KAC did not seek to obtain or record an attachment or notice of lis pendens, nor did it record the judgment. Id.

Arguments

KAC argued that it held "equitable title" to the property from the date on which Debtor rejected its buyout proposal, thereby making it "irrevocably obligated" to purchase her co-tenancy interest. Id. at 320.

The Trustee argued that the state court orders were directed to the Debtor rather than to him, and that he had no obligation under state or federal law to perform under the orders. He further argued that enforcement of the state court orders would arbitrarily and unfairly penalize the creditors of the Debtor's bankruptcy estate because an arms-length sale would generate more money for the estate, and so his rights as trustee under the Bankruptcy Code (particularly his status as a bona fide purchaser of real estate without notice under 11 U.S.C. 544(a)(3)) warranted a determination that the Superior Court orders were unenforceable. Id. at 321.

Analysis and Holdings

The principal issue before the court was whether the Trustee's status as a bona fide purchaser under 11 U.S.C. § 544(a)(3) was superior to KAC's rights under the judgment. The court held that KAC had failed to establish that it obtained a constructive trust that arose before the commencement of Debtor's case, and if so whether, under Mass. Gen. Laws ch. 183 § 43, its rights yielded to those of the trustee. Id. at 325. The court concluded that the trustee's status as a bona fide purchaser gave him the power to avoid KAC's unrecorded equitable interest in the property arising out of the orders of the Superior Court. Id. at 330. Moreover, the court concluded that granting the co-tenant relief from stay to enforce its state court judgment would be highly prejudicial to the Debtor's unsecured creditors. Id. at 335. Thus the court denied KAC's motion to compel. Id. at 336.

The case was decided on March 6, 2007.