IN RE BROOKS, (B.A.P. 9th Cir. 1987)

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Docket Number

BAP No. WW 8-1321-AsEMe. Bankruptcy No. 86-00062.

Attorney(S)

Susan G. Loitz, Riddell, Williams, Bullitt Walkinshaw, Seattle, Wash., for appellant. Kathryn E. Cashin, Davis, Wright Jones, Seattle, Wash., for appellee.

Acts

Bankruptcy — Case Administration — Administrative Powers — Automatic Stay
Bankruptcy — Creditors, The Debtor, And The Estate — The Estate — Property Of The Estate
Bankruptcy — Creditors, The Debtor, And The Estate — The Estate — Postpetition Transactions

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Smart Summary

Factual and Procedural Background

Washington Mutual Savings Bank loaned approximately $60,000 to Wiley Dean Brooks and Elna Kay Brooks, husband and wife, on October 1, 1984, securing the loan with a deed of trust recorded on October 3, 1984. The bank later discovered a mistake in the legal description and re-recorded the deed on June 5, 1985, unaware that Wiley Brooks had filed for Chapter 7 bankruptcy on June 3, 1985, which triggered an automatic stay under Bankruptcy Code § 362.

The trustee in Wiley Brooks' bankruptcy did not object to the re-recordation, and Wiley Brooks was discharged on September 18, 1985. Wiley and Elna Brooks divorced in September 1986. Subsequently, Elna Brooks filed for bankruptcy on December 6, 1986, and her Chapter 7 trustee challenged the bank's re-recordation of the deed. The bankruptcy court held that the trustee could attack the deed only if it was void from inception, acknowledged Washington state law permitting unilateral re-recordation to correct mutual mistakes, and ruled that the bank’s re-recordation violated the automatic stay in Wiley Brooks' bankruptcy, thus allowing the trustee in Elna Brooks' bankruptcy to collaterally attack the lien. Washington Mutual Savings Bank appealed this decision.

Legal Issues Presented

Whether the re-recording of a deed of trust that technically violated the automatic stay imposed by Bankruptcy Code § 362 in the husband's bankruptcy case may be avoided by the trustee in the wife's subsequent bankruptcy case.
Whether a post-petition transfer made in violation of the automatic stay is absolutely void or voidable at the trustee's discretion.
Whether the trustee in a subsequent bankruptcy proceeding may collaterally attack a lien not avoided by the trustee in the original bankruptcy case.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In re Fuel Oil Supply and Terminaling, Inc., 30 B.R. 360 (Bankr.N.D.Tex. 1983)	Trustee's avoidance powers under § 549 are discretionary because the automatic stay benefits the debtor.	Supports the court’s view that a post-petition transfer violating the stay is voidable, not absolutely void.
In re Stivers, 31 B.R. 735 (Bankr.N.D.Cal. 1983)	Discretionary nature of trustee’s avoidance powers under § 549 and limits on third-party rights to attack stay violations.	Supports that only the debtor or trustee may invoke protections of § 362; others have no substantive or procedural rights to attack stay violations.
In re Gurs, 27 B.R. 163 (9th Cir. BAP 1983)	Trustees have no special bona fide purchaser rights under § 544(a)(3); must check public records like any purchaser.	Trustee’s personal knowledge of the recorded deed is irrelevant; public record notice suffices.
In re Marino, 813 F.2d 1562 (9th Cir. 1987)	Confirming that trustees must be aware of encumbrances in public records.	Reinforces that trustee knowledge is measured by public record notice.
In re Weiman, 22 B.R. 49 (9th Cir. BAP 1982); In re Wilson, 4 B.R. 605 (Bankr.E.D.Wash. 1980)	Actions to recover property must be commenced before case closure under § 549(d).	Since Wiley Brooks' bankruptcy closed nearly two years prior, the trustee’s time to avoid the re-recordation expired.
Household Finance Corp. of Kelso v. Corby, 61 Wn.2d 184, 377 P.2d 441 (1963)	Bankruptcy actions affect community property; agent of marital community can file petition binding both spouses.	The bankruptcy petition by Wiley Brooks bound the marital community property, including Elna Brooks' interest.
National Bank of Commerce of Seattle v. Green, 1 Wn. App. 713, 463 P.2d 187 (1969)	Rebuttable presumption that acts by an agent of marital community benefit the community.	Supports the presumption that Wiley Brooks’ bankruptcy petition affected community property.
In re Sambo's Restaurants, 754 F.2d 811 (9th Cir. 1985)	Actions in violation of automatic stay are generally void, but exceptions exist for certain procedural acts.	Supports that technical stay violations may not be absolutely void; flexible application applies to the bank’s re-recordation.
Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940)	Extreme violations of stay that disrupt debtor’s ability to reorganize are void.	Distinguishes the present case from severe stay violations; the bank's act was a technical violation, not a disruptive one.

Court's Reasoning and Analysis

The court analyzed whether the re-recording of the deed of trust, which violated the automatic stay in Wiley Brooks' bankruptcy, could be avoided by the trustee in Elna Brooks' subsequent bankruptcy. The court explained that the automatic stay benefits the debtor and that under Bankruptcy Code § 549, a post-petition transfer made in violation of the stay is voidable, not absolutely void, at the trustee's discretion. The trustee in Wiley Brooks' case had the opportunity to avoid the lien but did not, and the bankruptcy case was closed nearly two years before Elna Brooks filed bankruptcy, thus barring subsequent avoidance actions by Elna's trustee under § 549(d).

The court further reasoned that the trustee’s personal knowledge of the re-recordation is irrelevant since trustees must rely on public records. Washington state law treating community property as jointly managed by spouses means Wiley Brooks’ bankruptcy affected the community property including Elna’s interest. The court distinguished the case from more egregious violations of the stay, such as in Kalb v. Feuerstein, where actions disrupting the debtor's reorganization were held void. The flexible approach from In re Sambo's Restaurants supports that technical stay violations are not necessarily void.

Finally, the court noted that the Bankruptcy Code contemplates modification or conditioning of the stay, indicating that acts taken in violation of the stay are voidable rather than void, reinforcing the discretionary nature of trustee avoidance powers.

Holding and Implications

The court’s final decision is to REVERSE the bankruptcy court’s order voiding Washington Mutual Savings Bank’s interest in the debtor’s real property.

The holding means that because the trustee in Wiley Brooks' bankruptcy did not avoid the lien within the statutory period and the case was closed, the trustee in Elna Brooks' bankruptcy has no grounds to attack the bank's lien either directly or collaterally. This decision does not establish new precedent but clarifies that technical violations of the automatic stay are voidable, not void, and that avoidance powers are limited to the trustee of the bankruptcy case in which the violation occurred and only during the case's pendency.

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In re Elna Kay BROOKS, Debtor. WASHINGTON MUTUAL SAVINGS BANK, Appellant, v. Nancy JAMES, Trustee, Appellee.

OPINION

ASHLAND, Bankruptcy Judge:

Washington Mutual Savings Bank appeals from an order voiding its interest in the debtor's real property. We must decide whether the re-recording of a deed of trust which technically violated the stay imposed by Bankruptcy Code § 362 in a husband's bankruptcy may, on that ground, be avoided by the trustee in a wife's subsequent bankruptcy. We hold that the lien may not be avoided and reverse.

FACTS

On October 1, 1984 Washington Mutual Savings Bank loaned approximately $60,000 to Wiley Dean Brooks and Elna Kay Brooks, then husband and wife. The bank accepted a deed of trust on real property as security and recorded the deed on October 3, 1984.

Sometime after this transaction, the bank realized that a mistake regarding the legal description existed in the document. The bank corrected the mistake and re-recorded the deed on June 5, 1985. Unknown to the bank, on June 3, 1985, Wiley Brooks had filed a Chapter 7 bankruptcy, thereby invoking the automatic stay. 11 U.S.C. § 362.

The trustee in the Wiley Brooks bankruptcy did not object to the re-recordation by the bank. The bankruptcy court discharged Wiley Brooks on September 18, 1985.

In September 1986 Wiley and Elna Brooks divorced.

On December 6, 1986 Elna Brooks filed bankruptcy. The Chapter 7 trustee in this bankruptcy attacked the re-recordation by the bank. On March 13, 1987 the bankruptcy court held the following: the trustee could attack the deed only if it was void from its inception; Washington state law allows unilateral re-recordation to correct mutual mistakes; the act by the bank violated the automatic stay in the bankruptcy of Wiley Brooks, therefore collateral attack by Elna Brooks' trustee was allowed. The bank timely filed this appeal on March 23, 1987.

DISCUSSION

The automatic stay provision of Bankruptcy Code § 362 benefits the debtor. See, S.Rep. No. 95-989, 95th Cong., 2d Sess. 49 — 51 (1978). A Chapter 7 trustee has the option to avoid a lien which is created in violation of the automatic stay. Sections 541 through 549 outline the specific powers of the trustee to avoid liens and to retrieve property of the estate. 11 U.S.C. § 541-549.

The wording of § 549, which specifically addresses post-petition transfers, indicates that a transfer made in violation of the stay may be voidable at the trustee's discretion. "[T]he trustee may avoid a transfer of property of the estate — (1) that occurs after the commencement of the case; . . ." 11 U.S.C. § 549 (emphasis added). In re Fuel Oil Supply and Terminaling, Inc., 30 B.R. 360, 362 (Bankr.N.D.Tex. 1983), states that since the stay benefits the debtor, a trustee's avoidance powers should be viewed as discretionary. See, In re Stivers, 31 B.R. 735 (Bankr.N.D.Cal. 1983).

This suggests that a post-petition transfer in violation of the stay is not absolutely void once committed, but rather voidable. Subsections (b) and (c) of § 549 describe specific instances when the trustee may not avoid certain actions. Section 549 would have no purpose if post-petition transactions were treated as absolutely void.

Moreover, even if the trustee of Wiley Brooks had no knowledge of the recorded deed, his personal knowledge is not relevant. See, In re Gurs, 27 B.R. 163 (9th Cir. BAP 1983). In Gurs the court stated that the Code does not create any extra "bona fide purchaser" rights for trustees under § 544(a)(3). A trustee must still check the public records and be aware of encumbrances as would any purchaser. See, In re Marino, 813 F.2d 1562, 1565 (9th Cir. 1987).

Section 549(d) states that an action to recover property may not be commenced after the case has been closed. 11 U.S.C. § 549(d)(2). See, In re Weiman, 22 B.R. 49 (9th Cir. BAP 1982); In re Wilson, 4 B.R. 605 (Bankr.E.D.Wash. 1980). Wiley Brooks' bankruptcy closed almost two years ago. Therefore, even if this court were to find the re-recordation invalid under the facts of this case, the time to avoid it has expired. The validity of the bank's lien went uncontested by Wiley Brooks' trustee thus the statute of limitations has run on the trustee's avoidance powers. Other parties affected by the stay are afforded no substantive or procedural rights under these provisions of the Bankruptcy Code. In re Stivers, 31 B.R. 735 (Bankr.N.D.Cal. 1983). Consequently, if the debtor or the trustee chooses not to invoke the protections of § 362, no other party may attack any acts in violation of the automatic stay.

Furthermore, Washington is a community property state in which property "acquired after marriage by either husband or wife or both is community property. Either spouse, acting alone, may manage and control community property, . . . ." Wash.Rev. Code Ann. § 26.16.030 (1986). In Household Finance Corp. of Kelso v. Corby, 61 Wn.2d 184, 377 P.2d 441 (1963), the court stated that actions in bankruptcy court can have effects on the community property.

The marital community, consisting of the husband and wife, having the capacity under the laws of Washington to incur debts, has the right to have them discharged in bankruptcy. The agent of the marital community has the authority to file a petition in bankruptcy on behalf of the community. The petition filed by Corby (the husband) gave the bankruptcy court jurisdiction of Corby and his wife, . . . and therefore, the discharge by the bankruptcy court was valid.

Household, 377 P.2d at 442-43. Additionally, a rebuttable presumption exists that actions by an agent of the marital community are for the benefit of the community. Household, 377 P.2d at 443; see, National Bank of Commerce of Seattle v. Green, 1 Wn. App. 713, 463 P.2d 187, 190 (1969). Moreover, the community property of Wiley and Elna Brooks became property of the estate in the Wiley Brooks bankruptcy. § 541(a)(2).

The trustee cites In re Sambo's Restaurants, 754 F.2d 811 (9th Cir. 1985), for the proposition that violations of stay are absolutely void. A closer look at the case reveals that it actually supports the idea that a technical violation of stay will not necessarily make that violation void. In Sambo's, the claimant filed a wrongful death action in a district court of Alabama. Unknown to her, Sambo's had previously filed a Chapter 11 bankruptcy in California. When the claimant learned of the bankruptcy action, she attempted to join the bankruptcy action with her proof of claim but the court dismissed it. The appellate court held that the complaint should be accepted as an informal proof of claim, despite the violation of stay.

The general rule is that actions taken in violation of the automatic stay are void. . . . But this rule usually is applied to transfers of property and the like. No case has been cited to us nor are we aware of any case that has discussed whether the automatic stay precludes such a complaint from being an amendable informal proof of claim.

Sambo's at 816-17.

The flexible reasoning expressed in Sambo's applies to this case. The bank merely cured a defect in a trust deed given as security for a loan. Wiley Brooks' trustee allowed the case to close without attacking the re-recording of the bank's lien. Elna Brooks' trustee is now barred from contesting the lien.

The facts of Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940), distinguish it from the authority cited above and the present case. In Kalb a state court allowed a foreclosure sale and eviction of the debtors during the pendency of the bankruptcy. This extreme situation is much more than a technical violation of a stay. It exceeded the authority of the state court and was void for that reason. It disrupted the ability of the debtors to reorganize and discharge their debts.

Bankruptcy Code § 362(d) permits a court to grant relief from stay by "terminating, annually, modifying, or conditioning such stay —." These varying powers show a Congressional intention that acts taken in violation of the stay are not void but voidable. Otherwise, there would be nothing to modify or condition.

CONCLUSION

The violation of the automatic stay was voidable by the trustee of Wiley Brooks within the time period given by the Bankruptcy Code § 362(c)(2)(C). That trustee chose not to avoid the lien. Therefore, the trustee of Elna Brooks has no grounds, either directly or collaterally, for attacking the bank's security trust deed. Accordingly, the decision of the bankruptcy court is reversed.