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In re Cates

United States Bankruptcy Appellate Panel of the Tenth Circuit

August 24, 2018

IN RE DIANN MARIE CATES, Debtor.
v.
L. EDMUND CATES and JANN REDELE CATES, Defendants-Appellees. JARED WALTERS, Plaintiff-Appellant, Adv. No. 16-1202

          Appeal from the United States Bankruptcy Court for the District of Colorado

          David V. Wadsworth (Aaron J. Conrardy with him on the brief) of Wadsworth Warner Conrardy, P.C., Denver, Colorado, for Plaintiff - Appellant.

          Randall B. Pearce of RBP, LLC, Grand Junction, Colorado, for Defendants - Appellees.

          Before CORNISH, JACOBVITZ, and HALL, Bankruptcy Judges.

          OPINION

          JACOBVITZ, BANKRUPTCY JUDGE.

         Diann Marie Cates filed a voluntary petition under Chapter 7 of the Bankruptcy Code on August 11, 2015 (the "Petition Date"). Jared Walters, the Chapter 7 Trustee (the "Chapter 7 Trustee") filed an adversary proceeding against L. Edmund Cates and Jann Redele Cates ("Edmund and Jann Cates") to recover a preferential transfer pursuant to 11 U.S.C. § 547 to avoid a deed of trust granted in favor of Edmund and Jann Cates.[1]Edmund and Jann Cates and the Chapter 7 Trustee filed cross motions for summary judgment on the issue of when the transfer in question occurred for preferential transfer purposes. Edmund and Jann Cates argued that the transfer occurred on March 4, 2013, well outside the applicable preference period.[2] The Chapter 7 Trustee argued the transfer occurred within the preference period, on August 3, 2015. The bankruptcy court agreed with Edmund and Jann Cates that the transfer occurred on March 4, 2013 and granted summary judgment in their favor. The bankruptcy court also denied the Chapter 7 Trustee's cross-motion for summary judgment and dismissed the adversary proceeding. Because we conclude the transfer occurred outside of the preference period, we affirm.

         I. Facts

         Approximately three years prior to filing her Chapter 7 bankruptcy petition, Diann Marie Cates (the "Debtor") executed a $135, 000 promissory note in favor of Edmund and Jann Cates. The Debtor, who is related to Edmund and Jann Cates, [3] executed the note on August 1, 2012.[4] In conjunction with the note, the parties also drew up a deed of trust on August 1, 2012 (the "Deed of Trust"), which encumbered a condominium at 308 Hillcrest, Unit 404, Durango, Colorado 81301 (the "Property") to secure payment of the note.[5] The Debtor executed the Deed of Trust on October 10, 2012.

         On January 24, 2013, the Debtor created a revocable one-party living family trust, named The Diann M. Cates Family Trust (the "Family Trust").[6] The Debtor is the settlor, trustee, and sole beneficiary of the Family Trust, which was created under Arizona law. The Debtor executed and recorded a quitclaim deed, quitclaiming her interest in the Property to the Family Trust on February 4, 2013.[7] Edmund and Jann Cates recorded the Deed of Trust with the La Plata County, Colorado county recorder on March 4, 2013.

         Eight days before the Petition Date, on August 3, 2015, the Debtor caused the Family Trust to execute and record a quitclaim deed, quitclaiming the Family Trust's interest in the Property back to the Debtor.[8] Prior to this transaction, legal and record title to the Property vested in the Family Trust for approximately two and a half years.

         A timeline of the relevant dates includes:

DATE

EVENT

08/01/2012

Debtor executes the $135, 000 promissory note payable to Edmund and Jann Cates

10/03/2012

Debtor executes the Deed of Trust in favor of Edmund and Jann Cates

01/24/2013

Debtor creates the self-settled revocable Family Trust

02/04/2013

Debtor conveys the Property to the Family Trust by a quitclaim deed executed and recorded that same day

03/04/2013

Edmund and Jann Cates record the Deed of Trust

08/03/2015

Family Trust conveys the Property back to Debtor; quitclaim deed recorded the same day

08/11/2015

Debtor files the Chapter 7 bankruptcy case

         In her bankruptcy case, the Debtor listed the Property in Schedule A of her Schedules of Assets and Liabilities, valuing it at $187, 000.[9] The Debtor listed Edmund and Jann Cates as secured creditors with a claim of $135, 000 in Schedule D.[10]

         II. Jurisdiction and Standard of Review

         "With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from 'final judgments, orders, and decrees' of bankruptcy courts within the Tenth Circuit."[11] "An order granting summary judgment disposing of the plaintiff's claims against the defendant is a final order for purposes of appeal."[12] Neither Edmund and Jann Cates nor the Chapter 7 Trustee elected for this appeal to be heard by the United States District Court pursuant to 28 U.S.C. § 158(c). Accordingly, this Court has jurisdiction over this appeal.

         The grant or denial of summary judgment is reviewed de novo, applying the same standard used by the bankruptcy court under Federal Rule of Bankruptcy Procedure 7056 and Federal Rule of Civil Procedure 56.[13] "Summary judgment is appropriate if 'there is no genuine dispute as to any material fact' and the party moving for summary judgment is 'entitled to judgment as a matter of law.'"[14] Furthermore, as the Ninth Circuit Bankruptcy Appellate Panel concludes, "[t]he determination of when a transfer occurs for purposes of § 547 is a question of law which we review de novo."[15]

         III. Analysis

         The issue on appeal is when the transfer of an interest in the Deed of Trust occurred for preferential transfer purposes. Both parties agree the transfer occurred when the lien created by the Deed of Trust was perfected.

         The Chapter 7 Trustee argues that under Colorado law, considered in the manner prescribed by § 547(e)(1)(A), a lien created by the Deed of Trust can only be perfected when: (i) the Debtor could have conveyed the Property to a hypothetical bona fide purchaser; (ii) the lien created by the Deed of Trust could have been perfected against the bona fide purchaser; and (iii) the bona fide purchaser could not acquire an interest superior to the Deed of Trust. The Chapter 7 Trustee asserts that these requirements can only be satisfied when both (a) the Deed of Trust is recorded and (b) the grantor of the Deed of Trust (here the Debtor) holds record title to the Property encumbered by the Deed of Trust. Under the Chapter 7 Trustee's logic, because the Family Trust (not the Debtor) held legal and record title to the Property on the date the Deed of Trust was recorded, the lien created by the Deed of Trust was not perfected at that time. Instead, the lien created by the Deed of Trust was perfected within the preference period when the Family Trust quitclaimed the Property back to the Debtor, which is the first time the Debtor held record title to the Property after recordation of the Deed of Trust.

         The bankruptcy court determined and Edmund and Jann Cates on appeal argue that: (i) under Colorado law the Debtor retained an ownership interest in the Property during the time the Debtor's revocable self-settled Family Trust owned and held record title to the Property; (ii) the Debtor's ownership interest in the Property was subject to the Deed of Trust when it was recorded on March 4, 2013; and (iii) under §§ 547(e)(2)(B) and (e)(3), because the Debtor had an ownership interest in the Property on the date the Deed of Trust was recorded, the transfer occurred on that date rather than the recording date of the quitclaim deed from the Family Trust to the Debtor.

         Because we conclude that the transfer in question occurred upon recordation of the Deed of Trust regardless of whether the Debtor held any rights in the Property on that date, we will affirm the bankruptcy court without addressing what rights the Debtor had in the Property as of the date of recording of the Deed of Trust. We agree the transfer occurred on March 4, 2013, outside the preference period, and therefore affirm.

         a. Application of Section 547(e)(1) and (2)

         With exceptions not applicable here, section 547(b) entitles a Chapter 7 trustee to avoid any "transfer" of an interest in the debtor's property: (a) to or for the benefit of a creditor; (b) made on account of an antecedent debt of the debtor; (c) made while the debtor was insolvent; (d) made within ninety days of the petition date (or one year if the creditor qualifies as an insider) (the "preference period"); and (e) that allows the creditor to receive more than the creditor would receive if the transfer had not been made and the debtor had filed a Chapter 7 case on the date the transfer in fact was made.[16]

         The only issue on appeal is whether the "transfer" under § 547(b) occurred within the preference period. "'What constitutes a transfer [for purposes of § 547] and when it is complete' is a matter of federal [bankruptcy] law."[17] Section 547(e)(2) contains three alternative scenarios that determine whether a transfer is made during the preference period. First, a transfer is made "at the time such transfer takes effect between the transferor and the transferee, if such transfer is perfected at, or within 30 days after such time."[18] Alternatively, a transfer is made "at the time such transfer is perfected, if such transfer is perfected after such 30 days."[19] Finally, a transfer is made "immediately before the date of the filing of the petition, if such transfer is not perfected at the later of - the commencement of the case; or 30 days after such transfer takes effect between the transferor and the transferee."[20]

         The parties agree that the middle scenario applies here; therefore, the time of transfer is governed by § 547(e)(2)(B) and the transfer occurred when the transfer was perfected.[21] The parties disagree on when the transfer was perfected.

         Section 547(e)(1)(A) governs the time of perfection of an interest in real property. It provides:

a transfer of real property other than fixtures, but including the interest of a seller or purchaser under a contract for the sale of real property, is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee.[22]

         Under §§ 547(e)(1)(A) and 547(e)(2)(B), for purposes of avoiding the transfer under § 547(b), the transfer occurred when the lien created by the Deed of Trust was perfected. As applied to the transfer at issue, the transfer was perfected when a bona fide purchaser of the Property from the Debtor, against whom Colorado law permits such transfer to be perfected, cannot acquire an interest that is superior to the interest of the transferees under the Deed of Trust, Edmund and Jann Cates. Section 547(e)(3) provides further that for purposes of § 547(e), "a transfer is not made until the debtor has acquired rights in the property transferred."[23]

         (1) Colorado law on bona fide purchasers of real property applied in the context of section 547(e)

         In accordance with § 547(e)(1)(A), to determine when the transfer was perfected, we turn to Colorado law, which is the applicable law governing when a bona fide purchaser of the Property from the Debtor cannot acquire an interest that is superior to the interest of Edmund and Jann Cates.[24] In other words, when, under Colorado law, could a bona fide purchaser of the Property from the Debtor not obtain an interest superior to the rights of Edmund and Jann Cates in the Deed of Trust?

         First, we note that the properly executed but unrecorded Deed of Trust created a lien against the Property.[25] The Debtor executed the Deed of Trust at a time the Debtor owned the Property in fee simple. As such, the lien became effective between the Debtor and Edmund and Jann Cates when the Deed of Trust was executed on October 3, 2012.

         Colorado's race-notice recording statute[26] governs when third parties were put on constructive notice of the lien. Colorado's race-notice recording statute requires "a secured party properly to record his interest in real property with the clerk and recorder of the county in which the property is located in order to protect his interest against those who subsequently claim interests in the same property."[27] "The statute protects a later grantee with rights in real property against a prior executed but unrecorded instrument to which it is not a party, if the later grantee lacks notice of the prior unrecorded instrument and records first."[28] The purpose of the recording "statute is to protect 'purchasers of real property against the risk of prior secret conveyances by the seller [and] to permit a purchaser to rely on the condition of title as it appears of record.'"[29] "[P]roper recording of documents provides constructive notice of interests ...


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