The bankruptcy court granted summary judgment on behalf of Robert N. Fischer (the “Trustee”), trustee of the estate of Samir B. Tleel and Lupana Tleel (“debtors”). The Bankruptcy Appellate Panel (“BAP”) affirmed,
*770 BACKGROUND
Debtors, Chbat, and two other parties acquired the Property in August of 1978. A month later, debtors bought out the interests of the co-owners and sold the Property to a third party (the “Purchaser”) by entering into a land sale contract. 1 Under the contract, debtors retained legal title to the Property and the Purchaser was required to make installment payments totaling $400,000.
In December of 1984, debtors filed a Chapter 11 petition. After apparently instituting nonjudicial foreclosure proceedings because of the Purchaser’s failure to make payments under the land sale contract, debtors sought the bankruptcy court’s authorization to sell the Property free and clear of all liens. On July 31, 1985, the court approved the debtors’ request to sell the property free and clear without prejudice to the rights of the Trustee to proceed with foreclosure proceedings. The Property was sold on June 20, 1986, for $465,000. The debtors’ equity in the Property was $225,000.
Meanwhile, in 1980, Chbat filed a complaint in state court, alleging an oral partnership with the debtors entitling Chbat to a constructive trust on half the proceeds of the land sale contract. When the debtors filed for bankruptcy, the state proceeding was stayed. Prior to the Trustee’s appointment in July of 1985, Chbat filed an adversary action (or, in the alternative, a proof of claim in bankruptcy), requesting a constructive trust on the proceeds from the sale of the Property. 2 In August of 1986, the bankruptcy court granted the Trustee’s motion for summary judgment in the adversary action. The BAP affirmed.
DISCUSSION
I. Applicability of 11 U.S.C. § 544(a)(3).
Under section 544(a)(3)
3
, the trustee of a bankruptcy estate may avoid any transfer of real property or obligation of the debtor that would be voidable under state law by a bona fide purchaser of real property from the debtor.
In re Marino,
Chbat contends that the land sale contract entered into by the debtors and the Purchaser is not an interest in “real property” covered by section 544, but rather is an “executory contract” governed by 11 U.S. C. § 365. Section 365 gives the trustee power to reject or assume an executory contract. Unless and until rights under an executory contract are timely and affirmatively assumed by the trustee, they do not become property of the debtor’s estate.
In re Lovitt,
Whether or not the land sale contract was executory, the bankruptcy court’s order permitting the Trustee to sell
*771
the property free and clear of all liens or to proceed to foreclosure sale operated as an assumption of the contract. Section 365 and Bankruptcy Rules 6006(a) and 9014 require the debtor to file a formal motion to assume, providing reasonable notice and an opportunity for a hearing.
Sea Harvest Corp. v. Riviera Land Co.,
Chbat also argues that the debtors’ interest in the Property under the land sale contract is not an interest in “real property” for purposes of section 544(a)(3). This contention is without merit. Under the land sale contract, the seller/debtors retained legal title to the Property until the Purchaser paid $400,000 in installments. See Cal.Civ.Code § 2985. Legal title is plainly an interest in real property. 5
II. Application of Section 544(a)(3).
We have had occasion to discuss the effect of constructive trust claims upon bankruptcy estates. In
In re North American Coin & Currency, Ltd.,
While we agree that any constructive trust that is given effect must be a creature of [state] law, we cannot accept the proposition that the bankruptcy estate is automatically deprived of any funds that state law might find subject to a constructive trust. A constructive trust is not the same kind of interest in property as a joint tenancy or a remainder. It is a remedy, flexibly fashioned in equity to provide relief where a balancing of interests in the context of a particular case seems to call for it ... Moreover, in the case presented here it is an inchoate remedy; we are not dealing with property that a state court decree has in the past placed under a constructive trust. We necessarily act very cautiously in exercising such a relatively undefined equitable power in favor of one group of potential creditors at the expense of other creditors, for ratable distribution among all creditors is one of the strongest policies behind the bankruptcy laws.
(citations omitted). We held that the state law applied in this context must be consistent with federal bankruptcy law. Id.
In this case, however, we do not need to determine whether Chbat is entitled to a constructive trust under California law and whether such an entitlement is consistent with federal bankruptcy law. Even if it is assumed that Chbat’s interest could qualify for a constructive trust, the Trustee, as a *772 bona fide purchaser of the Property, had no actual or constructive notice of Chbat’s alleged interest under California law. Therefore, the Trustee could take priority over Chbat’s interest. The BAP’s analysis is sound.
The powers of a bona fide purchaser for purposes of section 544(a) are defined by state law.
The Trustee therefore had no constructive or inquiry notice. Cal.Civ.Code §§ 19, 1213.
See In re Gurs,
At oral argument, Chbat relied on
In re Matter of Torrez,
III. Relationship Between Section 544(a)(3) and Section 541(d).
Section 541(d) provides:
Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage ... becomes property of the estate ... *773 only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
11 U.S.C. § 541(d). This section was adopted by Congress to address bona fide secondary mortgage market transactions. Chbat contends that because the debtors held only legal title to the Property, while Chbat had an equitable interest by virtue of his alleged constructive trust, under section 541(d) his equitable interest was never a part of the estate subject to the Trustee’s avoidance powers under section 544(a)(3). We reject this argument.
A number of cases have held that a trustee’s section 544(a)(3) “strong arm” powers take preference over equitable limitations imposed on a bankrupt’s estate under section 541(d).
In re Cascade Oil Co.,
Th[is] Court is primarily persuaded by the analysis of §§ 541 and 544 set out in In re Great Plains Western Ranch Co., Inc.,38 B.R. 899 (Bankr.C.D.Cal.1984). In that case Judge Ayer carefully reviewed both §§ 541 and 544 and their antecedents in the Bankruptcy Act of 1898 and concluded that some equitable limits were imposed upon the property to which a debtor trustee succeeded under § 541, but that any equitable claims could be avoided under § 544(a)(3).
Great Plains, a limited partnership, had record title to two ranches in Mississippi and Texas upon the filing of its Chapter 11 in California. The limited partners asserted rights in the land under various theories, including a constructive trust. While assuming the fraud necessary to support the imposition of a constructive trust, Judge Ayer concluded that the trustee’s powers under § 544(a)(3) allowed Great Plains to avoid any claim of the limited partners under constructive trust principles or otherwise.... Judge Ayer rather succinctly summarized his conclusions as follows:
Even conceding that the property rights of the estate are derivative from the property rights of the debtor, still the trustee enjoys additional powers quite independent of his powers under Section 541, and in no way derivative from the debtor’s rights at state law. Failure to consider section 544 together with section 541 may lead to misleading generalizations and sometimes to unsound results, [citations omitted.]
Chbat’s contention that under section 541(d) all beneficial or equitable owners of property may exempt their property from the debtor’s estate in all circumstances, notwithstanding the debtor’s legal title and the avoidance powers of section 544, goes too far. This interpretation would open the door to allegations of secret deals resulting in constructive trusts and thereby shelter some unsecured claims from avoidance. This result was not intended by the Bankruptcy Code and is contrary to the policy goal of ratable distribution among creditors. On the other hand, it is not necessary for us to go as far as the BAP, which held that section 541(d) applies only to those beneficial owners whose interests cannot be otherwise avoided under section 544. A fair reading of the statutes in this context mandates only that section 544(a)(3) prevail in this and similar instances. Chbat’s asserted constructive trust clearly represents the kind of inchoate claim that section 544(a)(3) was designed to cut off.
Holding that section 544(a)(3) “overrides” section 541(d) as a matter of law in this case is consistent with
In re Lewis W. Shurtleff Inc.,
The decision of the Bankruptcy Appellate Panel is AFFIRMED.
Notes
. Debtors sold the property to Robert Mooney who apparently transferred his interest to Richard and Verla V. Vandenberg sometime between 1979 and 1985. In this memorandum, both Mooney and the Vandenbergs will be referred to as the Purchaser.
. Chbat filed a lis pendens on the property at about this time, which was subsequently ordered expunged by the bankruptcy court. No lis pendens was ever filed in connection with the state court proceeding.
. All references to sections in this opinion refer to sections of Title 11 of the United States Code unless otherwise indicated.
Section 544(a)(3) provides:
(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 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.
. In his written opposition to debtors' motion, Chbat stated that he did not receive notice of debtors’ intention to sell which was purportedly sent to all creditors on April 9, 1985. He did, however, admittedly receive the subsequent Motion to Sell/Transfer Interests in Real Property on or about April 26, 1985. The hearing on the motion was held more than 2 Vi months later and Chbat appeared. The bankruptcy court’s order specifically addressed Chbat’s concerns. Chbat was not prejudiced by any failure to receive the first notice.
. Chbat relies on
In re Columbia Pacific Mortgage, Inc.,
. Paragraph 8 of Chbat’s first amended complaint states:
In November of 1978, plaintiffs and debtor Samir B. Tleel entered into an oral partnership agreement wherein it was agreed that each of them would have a fifty percent (50%) ownership interest in the partnership, that the partnership would obtain a loan to improve the real property, and that it would be resold.
. Even if we were to read Torrez as broadly as Chbat suggests, resulting trusts and constructive trusts are distinguishable. Under California law, “a resulting trust is implied by operation of law whenever a party pays the purchase price for a parcel of land and places the title to that land in the name of another. Cal.Civ.Code Section 853.” Id. at 754. (footnote omitted). A resulting trust carries out the parties’ intentions. 7 Witkin, Summary of California Law, Trusts § 123 (8th ed. 1984). In contrast, a constructive trust is a discretionary equitable remedy to avoid a wrongdoing. Id. at § 123. In this case, where a constructive trust has only been requested by Chbat and has not even been imposed by a state court, a claim of a constructive trust may not represent as firm an interest in property as a resulting trust.
.
In re Columbia Pacific Mortgage, Inc.,