By: Scott B. Riddle, Esq.

 Watts v. Argent Mortgage Company, LLC, Adv. No. 06-6235 (Bankr. N.D. Ga. February 23, 2007)(Bonapfel).   The facts are briefly summarized as follows. On July 8, 2004, Debtor purchased a home from Bellwood Homes.  To finance the purchase, Debtor executed two deed to secure debt in favor of Argent Mortgage Company for $132,720 and $33,180, respectively.  It was intended by the parties that the funds advanced by Argent would pay the purchase price to Bellwood and satisfy an existing security deed in favor of United Community Bank (UCB).

None of the documents were timely recorded.  The UCB security deed was not canceled of record until August 15, 2004. The second-priority deed to secure debt in favor of Argent was presented for recording on August 19, 2004 and actually recorded on August 24, 2004.  The warranty deed and first-priority deed to secure debt were presented for recording on September 22, 2004 and recorded on September 30, 2004.  Debtor filed a Chapter 7 petition on October 18, 2004, and the trustee sought to set aside the Argent security deeds as preferential transfers.  Summary Judgment was granted to Argent.

Judge Bonapfel noted that Georgia law (O.C.G.A. §44-2-1) was a "race notice" statute, and the real property records would not have provided constructive notice to a bona fide purchaser, such as a trustee), of Argent’s security deeds.  However, the Court found that the trustee was on inquiry notice —

Here, a purchaser’s search of record title to the property immediately prior to the
recordation of the first of Argent’s two security deeds would have revealed record title in
Bellwood and the cancelled security deed in favor of the Bank. The Debtor’s lack of record title was clearly sufficient to trigger a duty of inquiry on the part of a subsequent purchaser. A subsequent purchaser’s initial obvious question to Bellwood would be how the Debtor acquired the title, and the Trustee would have the duty to inquire stop there. But the discrepancy between the Debtor’s actual title and Bellwood’s recorded title poses a serious problem that underscores the need for more serious inquiry. Common sense would induce a person of ordinary prudence intent on conducting such a serious inquiry to go further and to ask Bellwood about the circumstances of the conveyance, including how the transaction was closed and how the purchase price was paid. Given the existence of the security deed in favor of the Bank and its satisfaction in these circumstances, the inquiry would have sought confirmation that it had actually been paid. A reasonable inquiry would have led to discovery of the now known fact that the Debtor paid the purchase price to Bellwood as the result of a closing that including financing of the transaction by Argent, the execution and delivery of the two security deeds to secure that financing, and the use of those proceeds in part to satisfy the security deed held by the Bank
 . . .

Under the inquiry requirement of Georgia law, a subsequent purchaser would have
inquiry notice of Argent’s security deeds. In a dispute between Argent and a purchaser of the Debtor’s unrecorded interest in the residence, therefore, Argent as a matter of Georgia law would prevail.

Under this standard, Argent’s security deeds were perfected within the meaning of
§ 547(e)(1)(A) from the time they were executed and delivered until the recordation of the warranty deed conveying the property to the Debtor. By the time the Debtor’s title was recorded, Argent’s second priority security deed had been recorded, and its first priority security deed was recorded at the same time. The recordation of the security deeds, of course, perfected Argent’s interests under the security deeds for purposes of § 547(e)(1)(A). It follows that, because Argent’s interests in the property under its security deeds were perfected when they were executed and delivered at the closing and remained perfected thereafter by virtue of their recordation prior to or simultaneously with recordation of the warranty deed to the Debtor, the transfers took place at closing under § 547(e)(2), and there was no antecedent debt. As such, the transfers are not avoidable under § 547(b).

The trustee proposed an alternative argument —

The Trustee contends, however, that § 547(e)(1)(A) requires a different result. Noting
that the statute provides that a transfer is perfected only when a bona fide purchaser cannot acquire an interest superior to the transferee, the Trustee reasons that perfection does not occur for purposes of § 547 if a subsequent purchaser could prevail under any set of circumstances. The Trustee contends, and Argent agrees, that, under Georgia law, a subsequent purchaser for value who conducted an actual inquiry but did not discover the existence of Argent’s security deeds because false information was supplied would prevail over the unrecorded security deeds. Because it is thus possible that an inquiring purchaser of the Debtor’s unrecorded title who received false information would prevail over the unrecorded security deeds, the Trustee concludes that Argent’s unrecorded security deeds are subject to the rights of a bona fide purchaser within the meaning of § 547(e)(1)(A). Under this view, Argent did not perfect its security deeds until they were recorded weeks after the transaction and, therefore, the transfers did not occur until those times and were on account of antecedent debt.

The Court disagreed –

The principle is that the status of a bona fide purchaser under state law for § 547(e)(1)(A)
(or § 544(a)(3)) purposes is governed by application of the state law’s objective standards to the facts as they existed at the time in the light of what the facts are ultimately shown to be. The applicable Georgia law that determines whether a bona fide purchaser can acquire a superior interest to the transferee under § 547(e)(1)(A) imposes a duty of inquiry notice. If the inquiry duty arises and no inquiry has occurred, Georgia law establishes an objective standard for determining whether a reasonable inquiry would have led to discovery of the prior unrecorded interest. The bankruptcy statutes do not contemplate that a hypothetical bona fide purchaser be deemed to have conducted an inquiry without discovery of a prior unrecorded interest any more than they charge such a purchaser with actual knowledge of all the facts.
…
The amicus trustee characterizes this result as improperly charging a bankruptcy trustee
with negligence. Although it is true that the failure to conduct a required inquiry could be
construed as negligence, it is also true that the statute makes state law rules determinative of the issue. The standard for bona fide purchaser status under Georgia law includes a requirement for inquiry and imposes consequences based on an objective determination of what that inquiry should have been and what it would have revealed. Section 547(e)(1)(A) incorporates those standards, whether or not they are characterized as “negligence.” In this sense, the statute does not attribute “negligence” to a bankruptcy trustee, but merely makes the § 547 claims she asserts subject to the same standards that would apply to determine the status of a bona fide purchaser under state law. The hypothetical status of the trustee cannot be augmented with an assumption that Georgia law does not make.

Note: This order has been appealed to District Court.  See also Judge Bonapfel’s Order On Motion to Alter or Amend.