Kapila v. Farragut Mortgage Co. , 184 F.3d 1335 ( 1999 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
FILED
No. 98-5071 U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
________________________ 08/20/99
D.C. Docket No. 96-8208-CIV-LCN THOMAS K. KAHN
95-0577-BKC-PGH-A CLERK
IN RE: TAREK HALABI
a.k.a. Tito Halabi,
Debtor.
SONEET R. KAPILA,
Trustee in Bankruptcy,
Plaintiff-Appellant,
v.
ATLANTIC MORTGAGE AND INVESTMENT CORPORATION,
FEDERAL HOME LOAN MORTGAGE CORPORATION,
Defendants-Appellees.
_________________________
Appeal from the United States District Court
for the Southern District of Florida.
_________________________
(August 20, 1999)
Before BLACK and BARKETT, Circuit Judges, and CUDAHY*, Senior Circuit
Judge.
___________________
*Honorable Richard D. Cudahy, Senior U.S. Circuit Judge for the Seventh Circuit,
sitting by designation.
CUDAHY, Senior Circuit Judge:
Tarek Halabi owned real property in Palm Beach, Florida, which he
mortgaged to Republic Savings Bank. Republic properly perfected the mortgage
and note. Two years later, the mortgage and note were assigned to Farragut
Mortgage Co., Inc. which recorded the assignment in the public records. On
March 16, 1994, Farragut assigned the mortgage and note to Atlantic Mortgage &
Investment Corporation. On June 24, 1994 – after the mortgage had been assigned
to Atlantic but before Atlantic had recorded the assignment – Halabi filed for
bankruptcy protection. Atlantic eventually recorded its assignment in the public
records on August 11, 1994 and, thereafter, assigned the mortgage and note to
Federal Home Loan Mortgage Corporation. Evidently there is no record of this
last assignment.
The Bankruptcy Trustee, Soneet Kapila, obtained title to the real property by
way of an adverse proceeding. On May 5, 1995, in an effort to quiet title to the
property, the Trustee filed a complaint against several defendants, including
Atlantic and Federal. The Trustee moved for summary judgment seeking a
determination that any lien interest which Atlantic and Federal may claim was
inferior by virtue of the “strong-arm” powers vested in the Trustee under 11 U.S.C.
§ 544. In addition, the Trustee claimed that since Atlantic’s lien had been
2
perfected post-petition, the perfection should be set aside as a post-petition transfer
in accordance with 11 U.S.C. § 549. Atlantic and Federal filed a cross-motion for
summary judgment. The bankruptcy court denied the Trustee’s motion and
granted Atlantic’s and Federal’s motion. The district court affirmed. The Trustee
now appeals and we, in turn, affirm the decision of the district court.
The facts are not in dispute. This appeal focuses on the district court’s
conclusions of law (which, in turn, reflect the conclusions of the bankruptcy court),
which we review de novo. See General Trading, Inc. v. Yale Materials Handling
Corp., 119 F.3d 1485, 1494 (11th Cir. 1997); In re Chase & Sanborn Corp., 904
F.2d 588, 593 (11th Cir. 1990).
Section 544 of the Bankruptcy Code authorizes a bankruptcy trustee to stand
in the shoes of the debtor and exercise certain “strong-arm” powers. The purpose
of § 544 is to arm the trustee with sufficient powers to gather in the property of the
estate. Thus, the trustee is considered a bona fide purchaser of real property in the
bankruptcy estate and may avoid obligations of the debtor that are voidable by
such a purchaser. See 11 U.S.C. § 544(a)(3). He is also considered an ideal
hypothetical lien creditor armed with a judgment and may contest the validity of
certain liens. See 11 U.S.C. § 544(a)(1). However, as the Bankruptcy Code makes
plain, the trustee’s powers are necessarily limited to the actual or potential property
3
of the bankruptcy estate. The trustee’s strong arm reaches only so far as to enable
him to avoid “any transfer of property of the debtor or any obligation incurred by
the debtor . . .”. 11 U.S.C. § 544(a). See Bank of Marin v. England, 385 U.S. 99,
101, 87 S. Ct. 274, 17 L. Ed. 2d. 197 (1966) (“The trustee succeeds only to such
rights as the bankrupt possessed; and the trustee is subject to all claims and
defenses which might have been asserted against the bankrupt but for the filing of
the petition.”); In re Kemp, 52 F.3d 546, 553 (5th Cir. 1995) (“As a general rule,
bankruptcy estates enjoy the same rights that the debtor held immediately prior to
the filing of bankruptcy.”).
In the present case, the assignment of the mortgage, once the original grant
by the mortgagor to the mortgagee has been perfected, does not involve a “transfer
of the property of the debtor” that would activate the Trustee’s strong-arm powers
under § 544. The Trustee is seeking to avoid the transfer of the perfected mortgage,
in which the debtor has no interest. The transaction under scrutiny here does not
involve the transfer of the debtor’s real property, to which the mortgage attaches.
That the perfected mortgage is neither actually nor potentially the property
of the debtor is confirmed by § 541(d) which provides that property in which the
debtor holds only legal title and not an equitable interest (such as a mortgage)
becomes property of the estate only to the extent of the debtor’s interest. Section
4
541(d) gives as an example a mortgage secured by real property. See 5 COLLIER
ON BANKRUPTCY (15th rev. ed.) (Lawrence P. King, ed. 1999) at ¶ 541.27
(“[Section 541(a)(1)] reiterates the general principle that an interest that is limited
in the hands of the debtor is equally limited in the hands of the estate, and
therefore, where the debtor holds bare legal title without any equitable interest, the
estate acquires bare legal title without any equitable interest in the property.”). See
also NORTON BANKRUPTCY LAW & PRACTICE, 2d § 51:17 (1997) (“The purpose of
the section is to insure that secondary mortgage market sales as they are currently
structured are not subject to challenge by trustees in bankruptcy . . .”). Here, the
Trustee is attempting to challenge the secondary sales of the mortgage by the
original mortgagee (Republic) and its successors. But the assignment of the
perfected mortgage – from Republic to Farragut, from Farragut to Atlantic and,
finally, from Atlantic to Federal -- did not involve the transfer of any property
belonging to the debtor or to the debtor’s estate. In each instance, the assignment
was merely the transfer of one mortgagee’s interest to a successor mortgagee.
Similarly, § 549 – on which the Trustee also relies – authorizes a trustee to
avoid certain post-petition transfers which are not authorized by the bankruptcy
court or by a court of appropriate jurisdiction. But again, a trustee can only invoke
such powers “to avoid a transfer of the property of the estate” that occurs after the
5
commencement of the bankruptcy proceeding. 11 U.S.C. § 549. In other words,
the trustee can only exercise such avoidance powers to recover the debtor’s interest
in the property which subsequently becomes property of the estate. The
assignments at issue in the present case – specifically, between Farragut and
Atlantic or between Atlantic and Federal – did not involve a transfer of the
debtor’s interest in the real property or a transfer of property of the debtor’s estate.
In addition to deciding that the Trustee was not authorized to act under §§
544 and 549 of the Bankruptcy Code, the bankruptcy court rejected the Trustee’s
reliance on state law to defeat the rights of the appellees. Fla. Stat. § 701.02provides:
(1) No assignment of a mortgage upon real property or of any interest
therein, shall be good or effectual in law or equity against creditors or
subsequent purchasers, for a valuable consideration, and without notice,
unless the assignment is contained in a document which, in its title, indicates
an assignment of mortgage and is recorded according to law.
The bankruptcy court held that Fla. Stat. § 701.02's recording requirement is
applicable only to (and enforceable by) competing creditors or subsequent bona
fide purchasers of the mortgagee, not by the mortgagor. This construction was
based in part on the court’s reading of a related provision, Fla. Stat. § 679.03:
If a secured party assigns a perfected security interest, no filing under this
chapter is required in order to continue the perfected status of the security
6
interest against creditors of and transferees from the original debtor.1
We think this reading of the Fla. Stat. § 701.02 accords with common sense. The
recording requirement is not intended to protect one claiming under a mortgagor –
against whose property there is already a perfected mortgage -- with respect to
subsequent assignments of the mortgage. The mortgagor has actual notice of the
original mortgage, and anyone claiming under the mortgagor has constructive
notice if the mortgage is recorded. From the point of view of the mortgagor or
someone standing in his shoes, a subsequent assignment of the mortgagee’s interest
– whether recorded or not – does not change the nature of the interest of the
mortgagor or someone claiming under him. Nor should a failure to record any
subsequent assignment afford the mortgagor or the trustee standing in his shoes an
opportunity to avoid the mortgage. See In re Troy, 490 F.2d 1061, 1064 (6th Cir.
1974) (“the Bankruptcy Trustee stands in the shoes of the Bankrupt . . . He is not
1
The bankruptcy court also relied on Bradley et al. v. Forbs et al., 116 Fla. 350, 156 So. 716(1934) in which the Florida Supreme Court held that the predecessor of Fla. Stat. § 701.02 applied
only to creditors or subsequent purchasers of a mortgagee. The Trustee asserts that Hulet v.
Denison, 146 Fla. 478, 481-82, 1 So. 2d 467 (1941) represents an implicit retreat from this position.
In Hulet, the Florida Supreme Court suggested in passing that a bona fide purchaser of the
underlying property without notice could avail of the section. The Court did not mention Bradley
and it is unclear whether it intended to disturb its previous holding. But, in any event, as the
appellees point out, the key issue in Hulet was notice. Since, in the present case, the Trustee had
constructive notice of a mortgage by whomever held, he cannot assume the status of a bona fide
purchaser without notice. See also Smith v. F.D.I.C., 61 F.3d 1552 (11th Cir. 1995) (purchaser at
foreclosure sale under second mortgage could not benefit from the protection of the Florida
recording statute where he had notice of first mortgage).
7
an innocent holder for value, but takes title to property of the Bankrupt subject to
all liens and equities.”); In re Union Packing Co. of Omaha, 62 B.R. 96, 100 (D.
Neb. 1986) (“The bankruptcy trustee has actual knowledge that there is an
encumbrance of record. Just because he thinks the encumbrance cannot be
enforced, does not give him the right to disregard it and does not place him in a
priority position ahead of one who is the true holder of the encumbrance.”).2
In the present case, it is undisputed that Republic properly recorded the
mortgage and that no satisfaction of the mortgage has taken place. The debtor had
actual knowledge – and the Trustee (at least) constructive knowledge – of the
unsatisfied mortgage. While each subsequent assignment had a bearing on the
rights of the mortgagees inter se, it did not affect the rights or interests of the
debtor or the debtor’s estate in the manner suggested by the Trustee. Thus, it is
incorrect that by virtue of Atlantic’s failure to record the assignment prior to the
debtor’s filing for bankruptcy protection, the Trustee was entitled to avoid the
mortgage.
2
The bankruptcy court declined to follow In re Lakeside I Corp., 120 B.R. 213 (M.D. Fla.
1990) in which another bankruptcy court held that knowledge of a mortgage did not bar the exercise
of a trustee’s strong-arm powers under § 544. The appellees contend that Lakeside is factually
distinguishable from the present case, principally because the mortgage was not of record when the
bankruptcy petition was filed. To the extent that Lakeside may stand – as the Trustee suggests –
for the proposition that a trustee may rely on Fla. Stat. § 701.02 to prevail against improperly
recorded assignments of a duly recorded mortgage, we endorse the decision of the bankruptcy court
to steer a different course.
8
For the foregoing reasons, the decision of the district court affirming the
orders of the bankruptcy court is AFFIRMED.
9