United States Court of Appeals,
Fifth Circuit.
No. 96-20666.
In the Matter of: Charles HAMILTON, Jr., Debtor.
REALTY PORTFOLIO, INC., Appellant,
v.
Charles HAMILTON, Jr., Appellee.
Oct. 20, 1997.
Appeal from the United States District Court for the Southern
District of Texas.
Before KING and PARKER, Circuit Judges, and ROSENTHAL*, District
Judge.
ROSENTHAL, District Judge:
A debtor filed a Chapter 13 bankruptcy petition three days
after his homestead was sold in a foreclosure sale. When the
homeowner filed for bankruptcy protection, the foreclosure
purchaser had not filed the substitute trustee's deed. Indeed, the
purchaser failed to file and record the deed for another eleven
days. The debtor asked the bankruptcy court to avoid the transfer
of title to his homestead under 11 U.S.C. §§ 522(h) and 544(a)(3).
The bankruptcy court found that the debtor had standing to seek
such relief and voided the transfer; the district court affirmed.
This appeal presents the issue of whether a Chapter 13 debtor
may avoid a prepetition foreclosure conveyance when the purchaser
at the foreclosure sale fails to record the substitute trustee's
*
District Judge of the Southern District of Texas, sitting by
designation.
1
deed before the bankruptcy filing.
I. BACKGROUND
The facts are undisputed. On September 2, 1966, Charles
Hamilton, Jr. ("Hamilton"), plaintiff-appellee, executed a
promissory note payable to First Continental Corporation. The note
was secured by a deed of trust executed on the same date and
properly recorded in Harris County, Texas. The deed of trust gave
Federal National Mortgage Association ("FNMA") a first lien on
Hamilton's homestead property, described as Tracts 8A and 8E, Block
3 of Houston Gardens, in Harris County, Texas. FNMA was the owner
and holder of the note and deed of trust; Bank United of Texas,
FSB ("Bank United") was the servicing agent for FNMA.
In December 1994, Hamilton defaulted on his note payments and
Bank United accelerated the indebtedness. On May 2, 1995, on
behalf of Bank United, a substitute trustee conducted a nonjudicial
foreclosure sale of the property under the deed of trust. Notice
of the foreclosure sale was posted in the Harris County, Texas
courthouse. The sale was properly conducted under state law.
Defendant-appellant Realty Portfolio, Inc. ("Realty Portfolio")
purchased the foreclosed property at the sale.
On May 5, 1995, Hamilton filed personal bankruptcy under
Chapter 13. On May 16, 1995, Realty Portfolio recorded its
substitute trustee's deed in Harris County, Texas. Hamilton filed
this adversary proceeding to avoid the transfer to Realty Portfolio
and regain title to the property under 11 U.S.C. §§ 522(h) and
544(a)(3).
2
On October 17, 1995, following a bench trial, the bankruptcy
court divested Realty Portfolio of title to the property, revested
title in Hamilton, and awarded Realty Portfolio a lien on the
property in the amount of $3,600, the price Realty Portfolio paid
for the property at the foreclosure sale. The district court
affirmed the judgment of the bankruptcy court. Realty Portfolio
appeals.
II. THE STANDARD OF REVIEW
This court reviews the bankruptcy court's findings of fact
for clear error and its conclusions of law de novo. In re Kemp, 52
F.3d 546, 550 (5th Cir.1995), cited in Traina v. Whitney Nat'l
Bank, 109 F.3d 244, 245 (5th Cir.1997).
III. DISCUSSION
A. A CHAPTER 13 DEBTOR'S POWERS OF AVOIDANCE
The threshold issue is whether Hamilton, the Chapter 13
debtor, has standing to exercise the avoidance powers of a Chapter
13 trustee under the Bankruptcy Code. Section 544 of the Bankruptcy
Code grants Chapter 13 trustees strong-arm powers to avoid certain
prepetition property transfers. 11 U.S.C. § 544(a)(3).1 Section
1
Section 544(a) provides in pertinent part that:
(a) The trustee shall have, as of the commencement of the
case, and without regard to any knowledge of the trustee
or of any creditor, the rights and powers of, or may
avoid any transfer of property of the debtor or any
obligation incurred by the debtor that is voidable by—...
(3) a bona fide purchaser of real property, other
than fixtures, from the debtor, against whom
applicable law permits such transfer to be
perfected, that obtains the status of bona fide
purchaser at the time of the commencement of the
3
1303 of the Bankruptcy Code grants Chapter 13 debtors certain
powers otherwise reserved to trustees. 11 U.S.C. § 1303.2 Section
1303 does not include trustees' section 544 strong-arm avoidance
powers. There is no specific statutory provision generally
authorizing Chapter 13 debtors to exercise trustees' avoidance
powers.3
A number of bankruptcy courts have found that Chapter 13
debtors may exercise trustees' strong-arm avoidance powers. See
Freeman v. Eli Lilly Fed. Credit Union (In re Freeman), 72 B.R.
850, 854 (Bankr.E.D.Va.1987); Ottaviano v. Sorokin & Sorokin
(Matter of Ottaviano), 68 B.R. 238, 240 (Bankr.D.Conn.1986);
Einoder v. Mount Greenwood Bank (In re Einoder), 55 B.R. 319
(Bankr.N.D.Ill.1985); In re Boyette, 33 B.R. 10, 10-11
(Bankr.N.D.Tex.1983); In re Hall, 26 B.R. 10, 11
(Bankr.M.D.Fla.1982). In these cases, the courts emphasized the
"reality" of Chapter 13 bankruptcies, the limited role of Chapter
case, whether or not such a purchaser exists.
11 U.S.C. § 544(a)(3).
2
Section 1303 provides that "[s]ubject to any limitations on
a trustee under this chapter, the debtor shall have, exclusive of
the trustee, the rights and powers of a trustee under sections
363(b), 363(d), 363(e), 363(f) and 363(l ), of this title." 11
U.S.C. § 1303.
3
The absence of statutory authorization for Chapter 13 debtors
contrasts with the express statutory authorization for Chapter 11
debtors. As debtors-in-possession, Chapter 11 debtors have
standing to exercise avoidance powers as trustees. 11 U.S.C. §
1107; see also In re Redditt, 146 B.R. 693, 695-96
(Bankr.S.D.Miss.1992); Bruce v. Republicbank-South Austin (In re
Bruce), 96 B.R. 717, 719-20 (Bankr.W.D.Tex.1989); In re Driver,
133 B.R. 476, 477 (Bankr.S.D.Ind.1991).
4
13 trustees, and the perceived unfairness to Chapter 13 debtors of
denying them standing under section 544.4
4
The bankruptcy courts reaching this result relied heavily on
the legislative history of section 1303, including the following
floor comment:
[Section 1303] does not imply that the debtor does not
also possess other powers concurrently with the trustee.
For example, although Section 323 is not specified in
section 1303, certainly it is intended that the debtor
has the power to sue and be sued.
124 CONG. REC. H11106 (Sept. 28, 1978)(remarks of Rep.
Edwards); S. 17423 (Oct. 6, 1978).
The court in In re Einoder summarized the basis of these
holdings, as follows:
I agree with those courts that have extended the
trustee's full avoiding powers to Chapter 13 debtors....
[T]he Court should not be blind to the realities of
bankruptcy practice. It is clear that the Chapter 13
debtor is the most appropriate party to seek such a
recovery. While the trustee, as representative of the
estate, usually is the only party to have standing to
pursue the avoiding powers granted under the Bankruptcy
Code, see 11 U.S.C. §§ 323, 544-553, it is also clear
that in Chapter 13 cases the trustee rarely, if ever,
pursues such actions because the trustee reaps little
benefit for the amount of time and effort involved. The
trustee would have to hire an attorney and litigate the
action. Should the trustee succeed, any recovery becomes
property of the estate and goes to the debtor.... Any
other conclusion would be obviously unfair to the
debtors. To say the trustee is the representative of the
Chapter 13 estate is to raise legal formalism over
reality.... [I]t is only reasonable that the bankruptcy
court allow the debtor to exercise the avoiding powers
for his or her own benefit and for the creditors'
indirect benefit as the trustees are unlikely to pursue
those matters on their own. The trustees' inactivity in
this regard should not result in windfalls to those
creditors who have received avoidable transfers from
Chapter 13 debtors....
This is true despite the fact that Chapter 13 contains no
equivalent provision to § 1107.... The most logical
analysis is that the Chapter 13 trustee has some of the
trustee's powers, i.e. those necessary to carry out the
5
More recently, bankruptcy courts addressing the issue have
receded from their earlier opinions and refused to use section 544
to allow Chapter 13 debtors to exercise strong-arm powers reserved
for Chapter 13 trustees. See In re Redditt, 146 B.R. 693, 696-701
(Bankr.S.D.Miss.1992); In re Henderson, 133 B.R. 813, 816-17
(Bankr.W.D.Tex.1991); In re Tillery, 124 B.R. 127
(Bankr.M.D.Fla.1991); In re Coan, 134 B.R. 670
(Bankr.M.D.Fla.1991); In re Driver, 133 B.R. 476
(Bankr.S.D.Ind.1991); Bruce v. Republicbank-South Austin (In re
Bruce), 96 B.R. 717, 720-23 (Bankr.W.D.Tex.1989); In re Mast, 79
B.R. 981 (Bankr.W.D.Mich.1987). These courts have acknowledged the
"realities" of Chapter 13 bankruptcies and the trustees' limited
role, the factors emphasized by earlier courts. However, they have
also noted the lack of "explicit statutory foundation for the
debtor to seek avoidance." In re Redditt, 146 B.R. at 701; In re
Bruce, 96 B.R. at 720-21; cf. In re Pointer, 952 F.2d 82, 87-88
(5th Cir.), cert. denied, 505 U.S. 1222, 112 S.Ct. 3035, 120
L.Ed.2d 904 (1992) (relying on the "plain language of the Code,"
the court denied standing to a Chapter 11 creditor seeking to
trustee's assigned functions under § 15302, while the remaining
trustee's powers vest in the Chapter 13 debtor.
In re Einoder, 55 B.R. at 322-24; see also In re Freeman, 72
B.R. at 854-55 ("[T]he [Chapter 13 debtors] are the true
representatives of the estate and should be given the broad
latitude essential to control the progress of their case[;]
... it would be inequitable to refuse the [debtors] the
opportunity to increase the value of their estate ... simply
because the trustee has failed to take the proper action.").
6
invoke avoidance powers under section 549 of the Bankruptcy Code).5
Under these cases, the debtor, Hamilton, would not have
standing through section 1303. However, Congress has specifically
authorized narrow exceptions to the general rule that Chapter 13
debtors lack standing to exercise the strong-arm powers of Chapter
13 trustees. In section 522(h), Congress granted debtors the
authority to exercise section 544 avoidance powers under specific
and limited circumstances.6
5
One court explained the change in position as follows:
As compelling, practical and intensely equitable as these
arguments [of the realities of Chapter 13 bankruptcies]
might be, they are at bottom well-meaning forays into
judicial legislation. They exceed the scope of a
bankruptcy judge's role, which is to interpret and apply
the statute, not to rewrite it. [internal citations
omitted].... By the statute's own terms, only the
trustee has standing to exercise the strong-arm avoidance
powers.... Legislative history, especially floor
comments, may augment but may not amend the statute's
straightforward language. Section 1303 simply does not
confer standing on the debtor to pursue avoidance
actions.... If Congress intended to grant avoidance
powers to a Chapter 13 debtor, it could have explicitly
done so.
In re Bruce, 96 B.R. at 720-21; see also In re Henderson, 133
B.R. at 816-17 ("The Bankruptcy Code unambiguously gives
avoidance powers to bankruptcy trustees and to Chapter 11 and
12 debtors, but not to Chapter 13 debtors.... Section 1303,
by its own terms, does not provide a Chapter 13 debtor with
any avoidance powers."); see also In re Driver, 133 B.R. at
480 ("Congress knew how to ... give a debtor the duties and
powers of a trustee, as it did in Chapter 11," but chose not
to do so in Chapter 13).
6
11 U.S.C. § 522(h) provides that:
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—
7
Section 522(h) specifically grants debtors standing to avoid
certain involuntary transfers of exempt property, such as
homesteads, if the trustees have not themselves attempted to avoid
the transfers. 11 U.S.C. § 522(h); see also DeMarah v. United
States (In re DeMarah), 62 F.3d 1248 (9th Cir.1995); cf. In re
Henderson, 133 B.R. at 817. The Ninth Circuit has identified a
five-part test, that generally tracks section 522(h), to determine
the power of a debtor to avoid a transfer of exempt property under
section 522(h): (1) the transfer was not a voluntary transfer of
property by the debtor; (2) the debtor did not conceal the
property; (3) the trustee did not attempt to avoid the transfer;
(4) the debtor seeks to exercise an avoidance power usually used by
the trustee, listed within § 522(h); and (5) the transferred
property is of a kind that the debtor would have been able to
exempt from the estate if the trustee had avoided the transfer
under one of the provisions in § 522(g). In re DeMarah, 62 F.3d at
1250. The bankruptcy courts addressing this issue have applied
section 522(h) to Chapter 13 debtors. See In re Elam, 194 B.R. 412
(Bankr.E.D.Tex.1996) (citing Young v. Washington Fed. Sav. & Loan
Ass'n (In re Young), 156 B.R. 282 (Bankr.D.Idaho 1993)); In re
Bruce, 96 B.R. at 721-22; Willis v. Borg-Warner Acceptance Corp.
(1) such transfer is avoidable 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.
11 U.S.C. § 522(h).
8
(In re Willis), 48 B.R. 295 (Bankr.S.D.Tex.1985).7
In In re Elam, the court found that a Chapter 13 debtor had
standing under the "narrow exception" of section 522(h) to seek to
avoid the prepetition foreclosure of his homestead. 194 B.R. at
415. The court explained that:
Generally, Chapter 13 debtors may not exercise the statutory
avoiding powers, at least not without prior authorization of
the Court obtained after notice and a hearing and upon a
showing that the Chapter 13 Trustee has neglected or refused
to prosecute the action. In re Young, 156 B.R. 282, 284
(Bankr.D.Idaho 1993). However, there is a narrow exception to
the general rule. Section 522(h) of the Code specifically
grants a debtor standing to avoid certain involuntary
transfers of exempt property. 11 U.S.C. § 522(h); In re
Young, 156 B.R. at 284.... The transfer involved here was the
foreclosure of Debtor's homestead. This clearly falls within
the exception. Therefore, Debtor has standing to bring an
avoidance action under section[ ] ... 544.
In re Elam, 194 B.R. at 415.
In this case, as in In re Elam, the debtor's property was
exempt as his homestead; the foreclosure was an involuntary
transfer; and the Chapter 13 trustee did not attempt to avoid the
transfer. 11 U.S.C. § 522(h). Debtor Hamilton fits the narrow
exception under section 522(h) and has standing to seek avoidance
of his homestead's foreclosure sale under section 544(a)(3) of the
Bankruptcy Code.
7
As one court has noted, to recognize that " § 522 applies in
its entirety in Chapter 13 cases and that the Chapter 13 debtor has
the full panoply of rights thereunder .... accords with the
legislative intent both to encourage individual debtors to use
Chapter 13 rather than Chapter 7 and to afford a debtor a
reasonable chance for a fresh start in Chapter 13. A more generous
exemption policy in Chapter 7 as compared with Chapter 13 would
frustrate the congressional policy of encouraging consumer debtors
to use Chapter 13 in preference to Chapter 7." In re Einoder, 55
B.R. at 324 n. 17 (citations omitted).
9
B. CONSTRUCTIVE AND INQUIRY NOTICE: THE BONA FIDE PURCHASER
Section 544(a) provides in pertinent part that:
(a) The trustee shall have, as of the commencement of the
case, and without regard to any knowledge of the trustee or of
any creditor, the rights and powers of, or may avoid any
transfer of property of the debtor or any obligation incurred
by the debtor that is voidable by—...
(3) a bona fide purchaser of real property, other than
fixtures, from the debtor, against whom applicable law
permits such transfer to be perfected, that obtains the
status of bona fide purchaser at the time of the
commencement of the case, whether or not such a purchaser
exists.
11 U.S.C. § 544(a)(3). Section 544(a)(3) allows the avoidance of
a transfer of real property that is not perfected and enforceable
against a bona fide purchaser at the time the bankruptcy petition
is filed. In re Elam, 194 B.R. at 416; In re Young, 156 B.R. at
285.8
While the Bankruptcy Code creates the status of a
hypothetical bona fide purchaser, state law defines that status.
Mutual Benefit Life Ins. Co. v. Pinetree, Ltd. (In re Pinetree,
Ltd.), 876 F.2d 34, 36 (5th Cir.1989); In re Elam, 194 B.R. at
416. Under Texas law, a "bona fide purchaser is one who acquires
(apparent) legal title to property in good faith for a valuable
8
One court has found that the Chapter 13 debtor cannot
exercise the section 544(a)(3) powers of the Chapter 13 trustee
because "[a]t the moment a foreclosure sale concludes, the debtor
is fully divested of all legal and equitable interest in the
foreclosed property." In re Applewhite, 106 B.R. 468, 469
(Bankr.S.D.Miss.1989). By its own terms, section 544(a)(3) allows
a party to avoid a foreclosure sale, and therefore to avoid the
transfer that divested debtor of title to the foreclosed property,
revesting title in the debtor. 11 U.S.C. § 544(a)(3); see also In
re Elam, 194 B.R. at 415; see generally Gaudet v. Babin (Matter of
Zedda), 103 F.3d 1195, 1200-01 (5th Cir.1997).
10
consideration without ... notice of an infirmity in the title."
Williams v. Jennings, 755 S.W.2d 874, 881 (Tex.App.—Houston [14th
Dist.] 1988, writ denied); see also Strong v. Strong, 128 Tex.
470, 98 S.W.2d 346, 347 (1936). A conveyance of an interest in
real property, including a deed of trust, is void as to a
subsequent purchaser if the interest was not recorded at the time
of the subsequent purchase and the purchaser paid valuable
consideration without notice of the unrecorded interest. See TEX.
PROP.CODE ANN. § 13.001(a).9
Under Texas law, a hypothetical purchaser would gain good
title to Hamilton's property after it was sold at a valid
foreclosure sale but before the substitute trustee's deed was
recorded, unless the purchaser had notice of the foreclosure
purchase. See TEX. PROP.CODE ANN. § 13.001(a). Under section 544,
the actual knowledge of the trustee is not relevant. 11 U.S.C. §
544(a). The issue is therefore whether a hypothetical purchaser
would be charged with implied knowledge of the foreclosure
purchase, by constructive or inquiry notice.
1. Constructive Notice
Under Texas law, constructive notice is notice given by
9
Section 13.001 of the Texas Property Code provides in
pertinent part that:
A conveyance of real property or an interest in real
property or a mortgage or deed of trust is void as to a
creditor or to a subsequent purchaser for a valuable
consideration without notice unless the instrument has
been acknowledged, sworn to, or proved and filed for
record as required by law.
TEX. PROP.CODE ANN. § 13.001(a).
11
properly recorded instruments and charged to a person as a matter
of law, regardless of the person's actual knowledge. Mooney v.
Harlin, 622 S.W.2d 83, 85 (Tex.1981); TEX. PROP.CODE ANN. § 13.002.
The deed of trust to the Hamilton property was properly recorded in
Harris County, Texas, in 1966. "An instrument that is properly
recorded in the proper county is notice to all persons of the
existence of the instrument." TEX. PROP.CODE ANN. § 13.002. As a
matter of law, a hypothetical purchaser of the Hamilton property
had constructive notice of the deed of trust and would purchase the
property subject to the deed of trust. See Inwood North
Homeowners' Ass'n v. Harris, 736 S.W.2d 632, 635 (Tex.1987); Seals
v. First Nat'l Bank (In re Church & Institutional Facilities Dev.
Corp.), 122 B.R. 958 (Bankr.N.D.Tex.1991); cf. Smith v. Morris &
Co., 694 S.W.2d 37 (Tex.App.—Corpus Christi 1985, writ ref'd
n.r.e.) ("[W]here a deed of trust was on record, a purchaser of
land is chargeable with notice of the deed of trust and takes title
subject to the rights of the mortgagee under the deed of trust.").
The substitute trustee's deed to Realty Portfolio was not
recorded by the date of the bankruptcy petition filing. On the
date of the bankruptcy petition, a hypothetical purchaser could not
be charged with constructive notice of the substitute trustee's
deed, as a matter of law. TEX. PROP.CODE ANN. §§ 13.001, 13.002;
see also In re Elam, 194 B.R. at 415-16; cf. McEvoy v. Watkins,
105 B.R. 362, 365 (Bankr.N.D.Tex.1987).
Realty Portfolio argues that constructive notice of the deed
of trust would trigger a duty of inquiry that would place a
12
hypothetical purchaser on inquiry notice of the foreclosure
purchase. The first issue is whether the deed of trust placed the
hypothetical purchaser on inquiry notice. If so, the second issue
is whether the hypothetical purchaser is chargeable with inquiry
notice of the foreclosure purchase.
2. Inquiry Notice
Texas law recognizes the doctrine of inquiry notice,
triggered by notice of facts that would put a reasonably prudent
person on a duty of inquiry. See Woodward v. Ortiz, 150 Tex. 75,
237 S.W.2d 286, 289 (1951); Prewitt v. United States, 792 F.2d
1353, 1358-59 (5th Cir.1986); Teofan v. Cools (In re Spring Creek
Invs.), 71 B.R. 157, 159-60 (Bankr.N.D.Tex.1987); T-Vestco Litt-
Vada v. Lu-Cal One Oil Co., 651 S.W.2d 284 (Tex.App.—Austin 1983,
writ ref'd n.r.e.). Under Texas law, constructive notice of a
recorded deed of trust in the chain of title puts a subsequent
purchaser under a duty to make a reasonable inquiry into the status
of the deed of trust. See Lumpkin v. Adams, 74 Tex. 96, 11 S.W.
1070, 1073 (1889); accord Olsen v. Bank One (In re Bruder), 207
B.R. 151, 159 (N.D.Ill.1997).
The bankruptcy and district courts in this case reasoned that
although state law determines whether a hypothetical purchaser is
a bona fide purchaser without notice for the purpose of section
544(a), bankruptcy law precludes the application of inquiry notice
because inquiry notice refers to actual knowledge. Under Texas
law, however, inquiry notice is a form of implied knowledge; it is
not actual, personal knowledge of the type made irrelevant under
13
section 544(a). See Woodward, 237 S.W.2d at 289 ("[T]hose things
which a[n] ... inquiry ... would have discovered.") (emphasis
added); cf. Exxon Corp. v. Raetzer, 533 S.W.2d 842, 846
(Tex.Civ.App.—Corpus Christi 1976, writ ref'd n.r.e.) ("implied
notice"). A hypothetical purchaser on inquiry notice is chargeable
with implied knowledge of facts that would be discovered by a
reasonably diligent inquiry. To find inquiry notice inapplicable
to a hypothetical purchaser or trustee under section 544(a) would
place the hypothetical purchaser or trustee in a better position
than other purchasers under state law. Section 544(a)(3) does not
give Chapter 13 trustees any greater rights than bona fide
purchasers have under state law. Maine Nat'l Bank v. Morse (In re
Morse), 30 B.R. 52, 54 (1st Cir.BAP1983); Calcasieu v. Marine
Nat'l Bank (In re Quirk), 119 B.R. 99, 100 (W.D.La.1990).
A hypothetical purchaser of Hamilton's property on the date
of the bankruptcy filing would be on inquiry notice resulting from
constructive notice of the recorded deed of trust and the
information contained therein. "[A] purchaser is bound by every
recital, reference and reservation contained in or fairly disclosed
by any instrument which forms an essential link in the chain of
title under which he claims.... The rationale of the rule is that
any description, recital of fact, or reference to other documents
puts the purchaser upon inquiry, and he is bound to follow up this
inquiry, step by step, from one discovery to another and from one
instrument to another, until the whole series of title deeds is
exhausted and a complete knowledge of all the matters referred to
14
and affecting the estate is obtained." Westland Oil Dev. Corp. v.
Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex.1982) (citations omitted);
see also In re Spring Creek Invs., 71 B.R. at 159-60; FRED A. LANGE
& ALOYSIUS A. LEOPOLD, LAND TITLES AND TITLE EXAMINATION § 886 (West 1992)
("[A] purchaser of land is not only put upon notice of the contents
of a prior recorded deed, but of any fact contained therein which
would put a reasonable man upon inquiry, so that while a recorded
deed is constructive notice only of the facts which it recites, yet
a party is chargeable with notice of what a reasonably prudent
person, with knowledge of the facts, would have ascertained by
inquiry[;] ... a purchaser of land must search records since they
are the primary source of information as to the title and he is
charged with knowledge of the existence and contents of recorded
instruments affecting title, and a purchaser is charged with notice
of the contents and legal effect of instruments which are in his
chain of title although he may never have had any actual knowledge
thereof.").
The duty of inquiry is governed by standards of
reasonableness, extending to "those things which a reasonably
diligent inquiry and exercise of the means of information at hand
would have discovered." Woodward, 237 S.W.2d at 289; see also
Prewitt, 792 F.2d at 1359 ("a reasonably diligent inquiry and
exercise of the means of information at hand ") (emphasis added);
In re Spring Creek Invs., 71 B.R. at 160 ("the duty does not extend
to exhaustive inquiry or investigation of speculation and
conjecture"); Westland, 637 S.W.2d at 908 ("diligent inquiry and
15
search") (emphasis added); Flack v. First Nat'l Bank, 148 Tex.
495, 226 S.W.2d 628, 631 (1950); Hobbs v. Hutson, 733 S.W.2d 269,
272 (Tex.App.—Texarkana 1987, writ denied) (citing Miles v. Martin,
159 Tex. 336, 321 S.W.2d 62 (1959)); cf. Briggs v. Kent (In re
Professional Inv. Props.), 955 F.2d 623, 627 (9th Cir.1992), cert.
denied, Miller v. Briggs, 506 U.S. 818, 113 S.Ct. 63, 121 L.Ed.2d
31 (1992) ("[W]here a purchaser has knowledge of information of
facts which are sufficient to put an ordinarily prudent man upon
inquiry, and the inquiry, if followed with reasonable diligence,
would lead to the discovery of defects in the title ... the
purchaser will be held chargeable with knowledge thereof.")
(emphasis added).
Courts have found that a purchaser's reasonably diligent
inquiry, through information at hand, can lead to a purchaser's
implied knowledge of a foreclosure sale under a recorded deed of
trust, even in the absence of a recorded substitute trustee's deed.
See Clarkson v. Ruiz, 140 S.W.2d 206, 210 (Tex.Civ.App.—San Antonio
1940, writ dism'd) (purchasers on notice of an unreleased deed of
trust "would have [been] put upon inquiry, which, if diligently
pursued, would have in all probability, [led] to a discovery of the
foreclosure under the power of the deed of trust"); see also
Chavis v. Gibbs, 198 Va. 379, 94 S.E.2d 195, 201 (1956) ("[I]f
reasonable and prudent inquiry had been made and full answers
obtained, [the purchaser] would have discovered that because of
default in the payment of the notes, the property had been sold in
accordance with the provisions of the deed of trust."); cf.
16
Parker v. Wear, 230 S.W. 75, 78 (Mo.1921) ("[I]t was immaterial
that the purchaser at the foreclosure had not then filed his deed
from the trustee, where not only was the deed of trust on record,
but [the purchaser's] deed itself recited the outstanding
incumbrance, as these facts put plaintiff on inquiry which, if it
had been followed, would have disclosed that her grantor at that
time had no title."). The determination of whether a purchaser may
be charged with such knowledge depends on the facts of each case.
See Miles, 321 S.W.2d at 69 ("[W]hether a diligent search would
have led to a discovery of the [facts is an] issue[ ] to be
determined by the trier of fact under all the evidence."), quoted
in Hobbs, 733 S.W.2d at 272.
A reasonably prudent hypothetical purchaser of the Hamilton
property, on constructive notice of the deed of trust, two days
after the foreclosure sale but before the substitute trustee's deed
was recorded, would have made a reasonable inquiry into whether the
deed of trust had been released, extended, renewed, or foreclosed,
using information at hand. See Lumpkin, 11 S.W. at 1073 (if the
purchaser had notice of the mortgage "at the time of his purchase,
he would be put on inquiry, and would be required to exercise
reasonable diligence to ascertain the facts constituting any change
in or renewal of the mortgage, reasonable diligence to inform
himself if the mortgage had been satisfied, and, if satisfied, how
it had been satisfied"). Inquiring into the real property records
of the chain of title, the hypothetical purchaser would have found
no record that the deed of trust had been extinguished. A
17
hypothetical purchaser, acquiring the property subject to an
unreleased deed of trust, would inquire further into the status of
the lien, exercising other available means of information readily
at hand.10
The deed of trust, properly filed and recorded, and within the
hypothetical purchaser's constructive knowledge, revealed that FNMA
was the holder of the deed of trust and Bank United its servicing
agent. The records showed no transfer of ownership of the deed of
trust. A hypothetical reasonably diligent purchaser would have
inquired of FNMA or Bank United as to the status of the deed of
trust.11 The record does not disclose whether such an inquiry would
10
Before the foreclosure sale, notice of the pending sale was
posted in the Harris County, Texas courthouse. TEX. PROP.CODE ANN.
§ 51.002(b); cf In re Burns, 183 B.R. 670, 671 (Bankr.D.R.I.1995).
After the foreclosure sale, no posted or filed records were
required. See TEX. PROP.CODE ANN. § 51.002(f) ("[T]he clerk may
dispose of the notices after the date of sale specified in the
notice has passed."). There is no indication that the foreclosure
notice was a means of information at hand after the foreclosure
sale occurred in this case.
11
Knowledgeable persons may be sources of information at hand.
See Dodd v. First State Bank & Trust Co., 64 S.W.2d 1021, 1023
(Tex.Civ.App.—Amarillo 1933, no writ) ("[I]n order to become a bona
fide purchaser or a bona fide mortgagee of real property when the
party has notice that prior liens and incumbrances are outstanding,
it is necessary that such party should inquire of reliable and
disinterested persons as to the status, the ownership, and validity
of the notes or bonds evidencing such prior indebtedness.... [A]ll
... reasonable and available sources of information must be
exhausted.") (citations omitted); see also Lumpkin, 11 S.W. at
1073 (had the purchaser inquired, "the facts could have been easily
ascertained, as [a former owner] was alive"); Allen v. Green, 229
Va. 588, 331 S.E.2d 472, 474-76 (1985) (purchasers inquiring into
a deed reservation in their chain of title "had a duty to inquire
as to sources of information reasonably disclosed by matters of
record. At the time of their purchase ..., [the original grantor]
was still alive and residing on the property conveyed.... By their
own testimony, they chose to ignore those readily available sources
of information whose knowledge was made obvious by the recorded
18
have led to the discovery of facts sufficient to charge the
hypothetical purchaser with inquiry notice of the foreclosure sale
and substitute trustee's deed.
Under Texas law, constructive notice of a recorded deed of
trust does not trigger a duty to monitor litigation announcements
and all other sources potentially containing information about real
property to learn of any unrecorded extensions, renewals, releases,
or foreclosure sales. Such a duty of investigation would be more
exhaustive and burdensome than the duty of "reasonable and diligent
inquiry" required under Texas law. See In re Spring Creek Invs.,
71 B.R. at 159-60 ("[T]he duty does not extend to exhaustive
inquiry or investigation."). A hypothetical purchaser is only
under a duty of reasonable inquiry, by exercise of the means of
deeds. Means of knowledge, with the duty of using them, are
equivalent to knowledge itself"); cf. Hopper v. Tancil, 3 S.W.2d
67 (Tex.Com.App.1928) (once suspicions were raised by a letter, the
purchaser should have inquired into the property by contacting the
letter writer "or anyone else," replying to the letter, or
examining the district court records); In re Professional Inv.
Props., 955 F.2d at 629 (the bankruptcy petition "indicated the
very people who instigated the bankruptcy proceedings had a deed of
trust[; t]his petition should have raised the trustee's suspicions
and compelled him to inquire further[;] ... the trustee need only
have contacted [the party that filed the petition] to determine
their specific interest"); Massachusetts Bonding & Ins. Co. v.
Knox, 220 N.C. 725, 18 S.E.2d 436, 440 (1942) ("[O]ne who purchases
premises covered by an undischarged mortgage cannot claim to be a
purchaser without notice of the equities of the mortgagee ... and
inquiry of the mortgagee would have elicited information that the
mortgage was still in force as between the original parties.")
(citations omitted); Nichol v. Howard, 112 Md.App. 163, 684 A.2d
861, 866, 863 (1996) (if an address does not appear in the records,
inquiry into a correct address for the purpose of issuing a
mortgagee's notice could have included asking the "the tenants
where they mailed the rent," or asking the mortgagees "where they
mailed payment notices, premium books, escrow accounts and other
correspondence").
19
information at hand, including a search of the real property
records in the chain of title, and if the deed of trust remained
unsatisfied, to inquire of the mortgage company identified in the
recorded deed of trust. If such an inquiry would not disclose the
foreclosure sale and substitute trustee's deed, then the
hypothetical purchaser could rely on the absence of any record of
the substitute trustee's deed in the chain of title and acquire the
Hamilton property without notice of the foreclosure sale.
The bankruptcy and district courts in this case reasoned that
to require a bankruptcy court to make a determination as to inquiry
notice would impose an "onerous burden" on the court to make a
factual determination based on "hypothetical facts" or the actual
knowledge of the trustee. A determination of whether a reasonable
inquiry into the status of the recorded deed of trust would lead to
knowledge of the foreclosure sale depends on the actual facts of
the case, the actual documents in the real property records, the
sources of information fairly suggested by those records, and the
means of information actually at hand, such as the identity of the
mortgage company. The determination depends neither on the actual
knowledge of the trustee nor on hypothetical facts.
The court notes that had Realty Portfolio not delayed in
recording its substitute trustee's deed, the problem in this case
would not have arisen. A purchaser of real property at a
foreclosure sale has the ability to protect the newly-acquired
property interest by promptly recording the deed. Cf. Little v.
Duncombe (In re Duncombe), 143 B.R. 243, 246-47
20
(Bankr.C.D.Cal.1992) (a "foreclosing secured creditor can ...
deliver a deed immediately upon the completion of the sale[; a]
purchaser ... can ... record the deed immediately").
IV. CONCLUSION
For the foregoing reasons, we REVERSE and REMAND to the
bankruptcy court for a determination of whether, based on the
narrow facts of this case, a reasonably diligent inquiry into the
recorded deed of trust in the purchaser's chain of title and
exercise of the means of information at hand on the date of the
bankruptcy filing would have disclosed facts sufficient to place a
hypothetical purchaser of the Hamilton property on notice of the
foreclosure sale and substitute trustee's deed.12
12
The bankruptcy court may ultimately take into account
principles of equity and fairness in its determination of whether
to allow the exercise of the strong-arm powers of avoidance. See
Momentum Mfg. Corp. v. Employees Creditors Comm. (In re Momentum
Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir.1994) ("[I]t is well
settled that bankruptcy courts are courts of equity, empowered to
invoke equitable principles to achieve fairness and justice in the
reorganization process."); cf. Butner v. United States, 440 U.S.
48, 55-56, 99 S.Ct. 914, 918-19, 59 L.Ed.2d 136 (1979) ("[T]he
equity powers of the bankruptcy court play an important part in the
administration of bankrupt estates in countless situations in which
the judge is required to deal with particular, individualized
problems."). The facts in the record support the conclusion that
avoidance of the foreclosure would be equitable. Debtor Hamilton
paid Bank United in March 1995 in an attempt to cure the default
and relied on a statement of a Department of Veterans Affairs
employee that the March payment had cured the default. The
bankruptcy court valued Hamilton's homestead at $40,000; Realty
Portfolio purchased the property for $3,600. However, these
equitable considerations do not substitute for, or inform, the
threshold analysis of whether a hypothetical bona fide purchaser
"without notice" exists under the facts of the case. See United
States v. Sutton, 786 F.2d 1305, 1308 (5th Cir.1986) (section 105
of the Bankruptcy Code, granting bankruptcy courts supplemental
equitable powers, "does not authorize the bankruptcy courts to
create substantive rights that are otherwise unavailable under
applicable law, or constitute a roving commission to do equity").
21
The bankruptcy court must first resolve the issue of inquiry
notice.
22