Burkart v. Coleman (In re Tippett)
9th Circuit Case No. 6-15411
Sept. 4, 2008
A recent Bankruptcy Bulletin on this website (entitled "New 9th Circuit Opinion Adjusts the Line Between Void & Voidable Transfers in Violation of the Automatic Stay: Bona Fide Purchaser Defeats Trustee," dated 9/8/08) summarized this Burkart opinion and but reserved discussion about the federal preemption argument there for this Litigation Report.
The key rationale of the 9th Circuit panel was that the automatic stay of § 362 which generally makes post-petition transfers "void, not voidable" does not apply to transfers BY DEBTORS. Those transfers are instead addressed by § 549(a), which gives the trustee power to "avoid a transfer of property of the estate . . . that occurs after commencement of the case, and . . . that is not authorized under [the Code] or by the court." § 549(c) exempts bona fide purchasers (BFP's) from this trustee avoidance power. Because the postpetition sale by debtors of their residence without trustee or court approval, and without the buyer's knowledge of the bankruptcy, was not covered by the automatic stay, the sale was valid and so the BFP prevailed over the trustee.
In the midst of this analysis the Court also had to ask whether the state BFP statute was preempted by federal bankruptcy law to the extent that this statute conflicted with the bankruptcy court's authority over bankruptcy estate assets. Since the relevance of this opinion to Oregon is affected by the similarity of the Oregon BFP statute to the California BFP statute at issue in the opinion, let's compare them:
* Cal. Civ. Code § 1214: "Every conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded . . . ."
* ORS 93.640: "Every conveyance . . . affecting the title of real property within this state which is not recorded as provided by law is void as against any subsequent purchaser in good faith and for a valuable consideration of the same real property, or any portion thereof, whose conveyance . . . thereof is first filed for record . . . ."
They appear to be substantially the same, each with virtually the same elements. So it seems that the 9th Circuit's federal preemption holding as to California's statute would apply equally to Oregon's.
The Court did not cite any other opinions that addressed preemption of state BFP statutes. It referred to two kinds of preemption: "field" and "direct-conflict". The direct-conflict type "arises, if at all, from the operation of the automatic stay. Accordingly, the direct-conflict inquiry collapses into the statutory analysis of the automatic stay provision" which I addressed in my 9/08/08 Bulletin and briefly summarized above. The Court's preemption discussion focused on the "field" type.
The "field" occupied by the Bankruptcy Code at issue here is "the field of title transfers initiated by Chapter 7 debtors." The issue was whether "the scheme of federal regulation is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it."
In its analysis the Court looked at the purpose of bankruptcy law and whether the BFP statue is consistent with that purpose. Beyond the general purposes of Chapter 7 in giving debtors a fresh start and fairly dividing debtors' assets, the more focused purposes of the automatic stay: "it provides debtors with protection from hungry creditors" and "assures creditors that the debtor's other creditors are not racing to various courthouses to pursue independent remedies to drain the debtor's assets." The Court discussed only the last of these purposes as the only one applicable to the situation, and decided that the BFP "statute is wholly consistent with this congressional goal."
First, because the proceeds of sale become property of the estate and valid prepetition liens on the property get paid as appropriate, "neither the total value of the assets available to the creditors through the estate nor the equity of the distribution among creditors is markedly affected." (Not that this neglects the reality that the debtors here pocketed the sale proceeds of $76,583, well beyond their homestead exemption, and depending on the extent to which those funds have been dissipated, practically speaking the assets readily available to the creditors may well have been "markedly affected.")The key rationale of the 9th Circuit panel was that the automatic stay of § 362 which generally makes post-petition transfers "void, not voidable" does not apply to transfers BY DEBTORS. Those transfers are instead addressed by § 549(a), which gives the trustee power to "avoid a transfer of property of the estate . . . that occurs after commencement of the case, and . . . that is not authorized under [the Code] or by the court." § 549(c) exempts bona fide purchasers (BFP's) from this trustee avoidance power. Because the postpetition sale by debtors of their residence without trustee or court approval, and without the buyer's knowledge of the bankruptcy, was not covered by the automatic stay, the sale was valid and so the BFP prevailed over the trustee.
In the midst of this analysis the Court also had to ask whether the state BFP statute was preempted by federal bankruptcy law to the extent that this statute conflicted with the bankruptcy court's authority over bankruptcy estate assets. Since the relevance of this opinion to Oregon is affected by the similarity of the Oregon BFP statute to the California BFP statute at issue in the opinion, let's compare them:
* Cal. Civ. Code § 1214: "Every conveyance of real property . . . is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded . . . ."
* ORS 93.640: "Every conveyance . . . affecting the title of real property within this state which is not recorded as provided by law is void as against any subsequent purchaser in good faith and for a valuable consideration of the same real property, or any portion thereof, whose conveyance . . . thereof is first filed for record . . . ."
They appear to be substantially the same, each with virtually the same elements. So it seems that the 9th Circuit's federal preemption holding as to California's statute would apply equally to Oregon's.
The Court did not cite any other opinions that addressed preemption of state BFP statutes. It referred to two kinds of preemption: "field" and "direct-conflict". The direct-conflict type "arises, if at all, from the operation of the automatic stay. Accordingly, the direct-conflict inquiry collapses into the statutory analysis of the automatic stay provision" which I addressed in my 9/08/08 Bulletin and briefly summarized above. The Court's preemption discussion focused on the "field" type.
The "field" occupied by the Bankruptcy Code at issue here is "the field of title transfers initiated by Chapter 7 debtors." The issue was whether "the scheme of federal regulation is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it."
In its analysis the Court looked at the purpose of bankruptcy law and whether the BFP statue is consistent with that purpose. Beyond the general purposes of Chapter 7 in giving debtors a fresh start and fairly dividing debtors' assets, the more focused purposes of the automatic stay: "it provides debtors with protection from hungry creditors" and "assures creditors that the debtor's other creditors are not racing to various courthouses to pursue independent remedies to drain the debtor's assets." The Court discussed only the last of these purposes as the only one applicable to the situation, and decided that the BFP "statute is wholly consistent with this congressional goal."
Second, with § 549(a) providing trustees power to avoid unauthorized transfers, but not as to BFP's, this "suggests that Congress is sufficiently comfortable with the protection of bona fide purchasers within the bankruptcy scheme that an implied preemption is not in order."
And last, a trustee who was concerned about a potential transfer by a debtor or simply whenever she wished to protect potential equity for creditors, "can simply protect the estate and its creditors" by recording the bankruptcy or a notice of it at the recorder's office.
Since the BFP statute was not meaningfully inconsistent with the federal purposes of the automatic stay, the 9th Circuit held that the California BFP statute is not federally preempted, and thus the Oregon BFP statute is not either.
By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com
© 2008 Bankruptcy Litigation Support for Attorneys
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