Smith v. MixonSmith v. Mixon
In thеse consolidated appeals Clarence G. Mixon and Orie L. Mixon appeal from an order of the district court that reversed the bankruрtcy court and held that the trustee of the bankrupt estate of John Thomas Mixon was entitled to an interest in certain property.
This action was brought by the trustee to set aside a transfer of property by the debtor, John Thomas Mixon, and to recover the property, not from the initial transferee, Clarence G. Mixon, but from a subsequent transferee, Orie L. Mixon. We hold that the trustee cannot recover because the subsequent transfereе, Orie L. Mixon, acquired the property “for value ... in good faith, and without knowledge of the voida-bility of the transfer avoided.”
I
On July 8, 1982, Clarence G. Mixon recоrded a fraudulent deed of trust on North Carolina real property he owned. He named his brother, John Thomas Mixon, as the secured party. The deеd purported to secure payment for a $70,000 debt that Clarence owed John Thomas. However, no debt existed. This action was taken solely to shield Clarence’s property from his creditors.
John Thomas later encountered financial difficulties of his own. On October 17, 1983, in order to release John Thomas’s interest in Clarence’s property, Clarence signed a promissory note dated July 8, 1982; as evidence of the debt ostensibly secured by the deed of trust. John Thomas immediately marked the note satisfied.
Also on October 17, Clarence transferred the encumbered property to his father, Orie Mixon. This transfer was made in satisfaction of past loans from Orie and as consideration for future advances. The deed was recorded оn October 17, 1983. Orie did not
On October 19, 1983, the county registrar, relying on the note that had been marked satisfied, released the deed of trust.
On October 21, 1983, John Thomas petitioned for bankruptcy.
The bankruptcy judge held that John Thomas’s estate in bankruptcy included the interest created by the fraudulent deed of trust. He also held that the release of the deed to Clarence could be avoided both as a preferential transfer and as a transfer made with the intent to defraud John Thomas’s creditors. See
The district court accepted the bankruptcy judge’s findings of fact. It also agreed with the bankruptcy judge that the trustee could not recover the property pursuant to
II
Actually, this case involves a contest betwеen Clarence’s creditors, who are pressing their claims in other proceedings, and John Thomas’s creditors, whose surrogate is the trustee in bankruрtcy. Whether Clarence’s creditors can divest Orie of the property must await the outcome of proceedings that are not beforе us. We can decide only the trustee’s claim.
In agreement with the bankruptcy judge, we conclude that the trustee’s right to recover property frоm transferees of the debtor is limited by
The trustee argues, however, that he is entitled to enforce the deed of trust against Orie within the confines of the bankruptcy code. He contends that because Orie had constructive notice of the deеd of trust, he took the property with “knowledge of the voidability of the transfer avoided.”
Although “knowledge” as used in
Moreover, even if one were to accept the trustee’s argument that “knowledge” includes “constructive notice,” Orie should prevail. Constructive notice of the existence of the deed of trust does not encompass constructive notice of thе fraudulent nature of the trust and its release. Consequently, the state recording statutes did not charge Orie with contractive notice of “the voidability оf the transfer.”
The judgment of the district court is reversed, and this case is remanded with instructions to dismiss the trustee’s complaint.
REVERSED AND REMANDED.
Notes
.
(a) Except as otherwise prоvided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, or 724(a) of this title, the trustee may recover, for the benefit of the estatе, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whоse benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
(b) The trustee may not recover under sеction (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in gоod faith, and without knowledge of the voidability of the transfer avoided; ...
. The meaning of “knowledge” in the context of
To be protected undersection 550(b)(1) , a subsequent transfereе must take "without knowledge of the voidability of the transfer avoided.” Neither the Code nor the legislative history interprets this standard. The language apрears to be derived from section 4-609(b)(1) of the Commission’s bill, and was included as surplusage to illustrate a transferee that could not be in good faith. The Cоmmission intended the standard to mean "if the transferee knew facts that would lead a reasonable person to believe that the property [transferred] was recoverable.” With respect to prepetition transfers that are recoverable only if a petition seeking reliеf' under the Bankruptcy Code is filed, the transferee should be held to have knowledge of the void-ability of the transfer if, inter alia, he has reasonable cause to believe that a petition may be filed, (footnotes omitted)