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Actions Taken In Violation Of The Automatic Stay May Not Be As Void As You Think…

In Burkhart v. Coleman (In re Tippett), --- F.3d ---, 2008 WL 4070690 (9th Cir. Sept. 4, 2008), the Ninth Circuit held that Bankruptcy Code Section 549(c) protects a bona fide purchaser of real property where the Trustee failed to record notice of bankruptcy, even though the sale violates the automatic stay. The opinion serves as a warning to trustees to record the notice of bankruptcy where the debtor holds real property, and it confirms that the automatic stay may not apply to transfers of property initiated by the debtor under certain circumstances.

Mr. and Mrs. Tippett filed a voluntary Chapter 7 petition in May of 2001. They listed their homestead as having a value of $140,000, with two liens against it in the total amount of approximately $135,000. The Trustee did not record the petition or notice of bankruptcy with the County Recorder’s office. In November of 2002, the Tippetts sold their home to Seitu Coleman for $225,000 without obtaining approval from the bankruptcy court, and the Tippets received net proceeds of over $75,000. Coleman financed the purchase with two purchase money loans secured by deeds of trust. It was undisputed that Coleman was a bona fide purchaser of the property in that he had no notice of the bankruptcy.

The Trustee filed an adversary proceeding against the Tippetts, Coleman, and the lenders who held the deeds of trust, seeking to recover the sale proceeds, avoid the lenders' liens, and quiet title on the grounds that the sale violated the automatic stay under Bankruptcy Code Section 362 and 542. The Trustee also sought to revoke the Tippetts' discharge for knowingly and fraudulently selling an asset of the estate under Bankruptcy Code Section 727(d). The bankruptcy court ruled in favor of the Trustee. On appeal, the Bankruptcy Appellate Panel reversed and entered judgment in favor of Coleman, concluding that the Tippetts' unauthorized transfer of the residence to Coleman did not violate the automatic stay.

The Ninth Circuit affirmed the BAP decision and upheld the sale. The Court ruled that California's bona fide purchaser statute was not preempted by the Bankruptcy Code because it is consistent with the Bankruptcy Code’s policies of giving debtors a fresh start and equality of distribution of a debtor's assets among creditors. The court also ruled that the Bankruptcy Code provides a defense to bona fide purchasers against actions brought under Bankruptcy Code Section 549. In support of this conclusion, the court reaffirmed its controversial holding in Schwartz v. United States (In re Schwartz), 954 F.2d 569, 574 (9th Cir. 1992), that the automatic stay does not apply to transfers initiated by the debtor.