32 Collier bankr.cas.2d 1813, Bankr. L. Rep. P 76,399 in Re Jereld Joe Michael, A/K/A Jerry Michael in Re Shirley Kay Michael, Debtors. Jereld J. Michael Shirley K. Michael v. Craig D. Martinson, Trustee32 Collier bankr.cas.2d 1813, Bankr. L. Rep. P 76,399 in Re Jereld Joe Michael, A/K/A Jerry Michael in Re Shirley Kay Michael, Debtors. Jereld J. Michael Shirley K. Michael v. Craig D. Martinson, Trustee
Craig D. Martinson, Billings, MT, for respondent-appellee.
Appeal from the United States District Court for the District of Montana.
Before: BROWNING, WRIGHT, and CANBY, Circuit Judges.
PER CURIAM:
In this adversary proceeding, the bankruptcy court ruled that Jereld J. and Shirley K. Michael could not claim a homestead exemption because they failed to record a declaration of homestead as required by Montana law before filing their bankruptcy petition. The district court affirmed, and the Michaels appeal. We vacate and remand.
I
When the Michaels filed their voluntary Chapter 7 bankruptcy petition, they had not yet recorded a declaration of homestead as required by
II
Section 544(a) of the Bankruptcy Code, the “strong arm clause,” grants the trustee certain powers under state law with respect to the debtor‘s property.1 See Probasco v. Eads (In re Probasco), 839 F.2d 1352, 1354 (9th Cir.1988). Sections 544(a)(1) and (2) arm the trustee with the rights and powers of a lien creditor or judgment creditor. See Gitts v. Arkison (In re Gitts), 116 B.R. 174, 179 (9th Cir. BAP 1990), aff‘d and adopted, 927 F.2d 1109 (9th Cir.1991). Section 544(a)(3) confers on the trustee the status of a bona fide purchaser of the debtor‘s real property. See National Bank of Alaska v. Erickson (In re Seaway Express Corp.), 912 F.2d 1125, 1128 (9th Cir.1990).
The parties agree that the trustee could not use his powers under section 544(a)(1) or (2) to defeat the Michaels’ homestead exemption. See Gitts, 116 B.R. at 179-80. The trustee contends, however, that he may use his status as a hypothetical bona fide purchaser of the Michaels’ real property to defeat the homestead exemption. Gitts did not address this question. Id. at 179 n. 9.
“While whether a trustee qualifies under section 544(a)(3) is a question of federal law, state law determines whether the trustee‘s status as a [bona fide purchaser] will defeat the rights of the person against whom the trustee seeks to assert his powers.” Robertson v. Peters (In re Weisman), 5 F.3d 417, 420 (9th Cir.1993). On the facts of this case, the plain language of section 544(a)(3) prevents the trustee from avoiding the Michaels’ homestead exemption.
Section 544(a)(3) empowers the trustee to avoid transfers of the debtor‘s real property and obligations or debts incurred by the debtor that would be voidable by a subsequent bona fide purchaser—for example, unrecorded debts, mortgages, and liens. See id. at 419-20. However, section 544(a)(3) permits the trustee to assume the status of a bona fide purchaser with respect to a particular transfer only if “applicable law permits such transfer to be perfected” against a bona fide purchaser.2
That is the situation here. Under Montana law, a homestead exemption can never be perfected against a subsequent purchaser of the homestead property, even if a declaration of homestead is properly recorded before the sale. A hypothetical purchaser of the debtor‘s homestead property (whether bona fide or not) would take the purchased property free of all homestead rights—the hypothetical sale itself would transfer the property free of the exemption.
Second, under Montana law, “[a] homestead can be abandoned ... by a declaration of abandonment or a grant thereof.”
Under Montana law, a homestead claimant can do nothing to protect his exemption from a subsequent bona fide purchaser, because the transfer of the homestead property in and of itself eliminates that exemption. Even if the Michaels had properly recorded their declaration of homestead prior to the date of their bankruptcy petition, a bona fide purchaser of their homestead property on that date would have taken the property free of any homestead exemption. Therefore, section 544(a)(3) by its express terms prevents the trustee from assuming the status of bona fide purchaser, because “applicable law” does not permit a homestead exemption to be perfected against a bona fide purchaser. Compare Seaway Express Corp., 912 F.2d at 1129 (“Here, the law of the State of Washington not only permits perfection of an interest such as [the creditor‘s], it provides clear procedures for attaining that goal....“).
Section 544(a)(3), a new provision in the 1978 Bankruptcy Code, vests the trustee with sweeping powers to defeat competing interests in the debtor‘s real property. It is clear that in enacting that section, Congress intended to prevent the trustee from using his powers as bona fide purchaser to defeat interests which by their very nature could never be perfected against such a purchaser—interests such as the Michaels’ homestead exemption. To permit the trustee to use his powers under section 544(a)(3) to defeat the Michaels’ homestead exemption would be to “require [the Michaels] to perform the impossible in order to perfect [their] interest.” 124 Cong.Rec. H11089 (Sept. 28, 1978) (statement of Rep. Edwards), reprinted in 1978 U.S.C.C.A.N. 6436, 6456.
III
The trustee may not use any of his “strong arm” powers under section 544(a) to defeat the Michaels’ homestead exemption. The fact remains, however, that the Michaels did not amend their bankruptcy schedules to claim the exemption until more than a year after filing their petition. When they did so, the trustee objected. Because the bankruptcy court ruled—incorrectly—that section 544(a)(3) prevents the Michaels from claiming a homestead exemption after the petition date, it did not reach the separate question whether the Michaels could amend their schedules under the Federal Rules of Bankruptcy Procedure. Therefore we VACATE the order of the district court and REMAND to permit consideration of this issue.
Notes
Section 544(a) reads in full:
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, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(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 a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
The hypothetical bona fide purchaser of section 544(a)(3) has been described as
a person who (1) at the instant the bankruptcy petition is filed purchases from the debtor; (2) for value; (3) in good faith; (4) without actual knowledge of any defect or limitation in title; (5) every interest in real property the debtor could have purported to convey without the terms of the conveyancing itself evidencing irregularity; (6) by an instrument that adheres to all formal requisites usually and regularly followed in the relevant jurisdiction; (7) as of the moment of purchase takes all unilateral steps to perfect the conveyance.
Weisman, 5 F.3d at 420 n. 6 (citing Gurs v. Walsh (In re Gurs), 27 B.R. 163, 165 (9th Cir. BAP 1983)).