In re Varner
RUSSELL, J.
The debtor filed a complaint to avoid a creditor's abstract of judgment under 544(a)(3). n2 The bankruptcy court entered judgment in favor of the debtor, and the creditor appeals. For the reasons set forth below, we REVERSE the bankruptcy court's judgment.
I. FACTS
The material facts are not in dispute. Appellant Carrol G. Varner ("Varner") owned a one-half interest in certain commercial real property in San Rafael, California ("real property"). Appellee A.O. Smith Water Products Co. ("Smith") obtained a judgment in the amount of $23,836.15 against Varner in 1992 in connection with a trade debt, and recorded an abstract of judgment in the Official Records of the County of Marin.
Varner filed a chapter 11 case in September 1996, and at all times has acted as a debtor in possession in the case. He filed a complaint in March 1997 against Smith and six additional defendants, including Accurate Heating & Cooling, Inc. ("Accurate Heating"), to determine the validity of the defendants' liens and to assert avoidance powers under [Bankr. Code] 544. The complaint alleged that all of the defendants' abstracts of judgment were void because they failed to set forth Varner's social security number and/or driver's license number, as required by California Code of Civil Procedure 674. All of the defendants except Smith either settled or had their default entered prior to trial.
Varner and Smith stipulated to the following facts for trial:
1. Defendant A.O. Smith Water Products Co. is a corporation duly authorized to conduct business in the State of California.
2. At all relevant times, Plaintiff has been the owner of a 1/2 fee simple interest in the real property commonly known as 516 - 536 Irwin St./55 De Luca Pl., San Rafael, CA. ("the subject real property").
3. On October 21, 1992, judgment was entered in favor of Defendant A.O. Smith Water Products Co. against Plaintiff in the amount of $23,836.15 in the action A.O. Smith Water Products Co. v. Varner Supply et al, Marin County Municipal Court Case No. V921589. This judgment remains wholly unsatisfied at this time, and represents a valid obligation of the Plaintiff.
4. On December 28, 1992, Defendant A.O. Smith Water Products Co. caused to be recorded a document entitled "Abstract of Judgment" in the Official Records of the County of Marin as Document No. 92103279. The "Abstract of Judgment" was on a standard form prescribed by the Judicial Council of the State of California. If valid, the Abstract of Judgment would create a judgment lien against Plaintiff's interest in the subject real property.
5. The "Abstract of Judgment" did not contain the Social Security Number or Driver's License Number of the Plaintiff. Instead, Defendant marked the boxes for this information as being "unknown". Plaintiff contends that this is a defect in the Abstract of Judgment. Plaintiff agrees that the "Abstract of Judgment" is valid in all other respects.
6. At no time prior to the filing of the Petition for Relief did the Defendant have actual knowledge of the Social Security Number or Driver's License Number of the Plaintiff.
7. On September 16, 1996, Plaintiff filed a Chapter 11 petition in this Court. Plaintiff remains a debtor-in-possession.
Prior to trial, Varner filed a request for judicial notice of Smith's abstract of judgment and of the abstract of judgment recorded by defendant Accurate Heating, both of which were recorded in the Marin County Recorder's Office. Smith objected to the request for judicial notice of Accurate Heating's abstract of judgment. Smith asserted that the basis for the request was Varner's contention that Smith had constructive notice of Varner's social security number because the number was listed on Accurate Heating's abstract of judgment, but that the concept of constructive notice was inapplicable and Accurate Heating's abstract of judgment was therefore irrelevant and inadmissible.
The bankruptcy court conducted a trial on July 30, 1997. At the conclusion of the trial, the court took the matter under submission to consider the impact of In re Kim, 161 B.R. 831 (9th Cir. BAP 1993), on the merits of the case. The court issued a Memorandum of Decision on August 4, 1997, in which it concluded as a matter of law that Varner was entitled to avoid Smith's abstract of judgment under 544(a)(3) and the holding in Kim. On August 19, 1997, the court entered a judgment in favor of Varner that avoided Smith's lien under 544(a)(3), preserved the lien for the benefit of the estate under 551, and awarded Varner costs of suit. Smith appeals.
II. ISSUE
Whether an abstract of judgment recorded pursuant to California Code of Civil Procedure 674(a), which listed the judgment debtor's social security and driver's license numbers as "unknown," may be avoided under 544(a)(3) when the judgment creditor had no actual knowledge of those numbers at the time it recorded the abstract of judgment or at any time prior to the bankruptcy filing.
III. STANDARD OF REVIEW
A bankruptcy court's interpretations of bankruptcy statutes and state law are conclusions of law which are reviewed de novo. [Citation omitted.] The material facts are not in dispute. Lien avoidance power is a question of law, and thus the ability to avoid a lien is reviewed de novo. [Citation omitted.]
IV. DISCUSSION
Section 544(a), the "strong arm clause," gives a bankruptcy trustee special powers to set aside transfers or liens against property of the bankruptcy estate. 11 U.S.C. 544(a). n3 [Citation omitted.] Although 544 specifically gives avoidance powers only to a "trustee," 1107 n4 gives a debtor in possession all of the rights, powers and duties of a trustee, with certain exceptions not relevant to this case. The powers of a hypothetical bona fide purchaser for purposes of 544(a) are determined by state law. [Citation omitted.] California Code of Civil Procedure 674 (West 1998) ("CCP 674") n5 is the applicable California statute that governs abstracts of judgment.
The bankruptcy court concluded as a matter of law that Varner was entitled to avoid Smith's abstract of judgment under 544(a)(3) and In re Kim. The court's Memorandum of Decision stated, in pertinent part, as follows:
Section 544 (a)(3) of the Bankruptcy Code gives the representative of the bankruptcy estate the rights of a bona fide purchaser of real property. California Code of Civil Procedure section 674(b) makes it clear that an abstract of judgment is junior in priority to the rights of a bona fide purchaser. Accordingly, any judgment lien created by an abstract of judgment not containing a Social Security or driver's license number is avoidable pursuant to section 544(a)(3). In re Kim, 161 B.R. 831 (9th Cir.BAP 1993).
The court finds no merit to A.O. Smith's argument that Kim is limited to cases where the creditor actually knew an identifying number and failed to use it. Neither Kim nor the California statute makes the reason for failure to include a number relevant. If a bona fide purchaser takes title to real estate without actual notice of an abstract of judgment which does not include an identifying number, his rights are superior to those of the judgment creditor. Since the terms of section 544 make the debtor's actual knowledge irrelevant (Kim, at 835), the rights of the bankruptcy estate are superior to the rights of any judgment creditor whose abstract of judgment fails to list an identifying number. The creditor can protect itself only by filing an Amendment to Abstract, pursuant to the California statute, before the filing of the bankruptcy.
Smith contends the bankruptcy court erred as a matter of law in concluding that "California Code of Civil Procedure section 674(b) makes it clear that an abstract of judgment is junior in priority to the rights of a bona fide purchaser." Smith argues in essence that the bankruptcy court's ruling ignored the fact that CCP 674(b), which provides a mechanism for correcting a defective abstract of judgment, is not triggered unless an abstract of judgment is first found to be defective under the provisions of CCP 674(a). Smith contends that the court's application of CCP 674(b) to this case was unnecessary and incorrect given the parties' stipulation that Smith's abstract of judgment was valid at all times under CCP 674(a).
Specifically, Smith asserts that CCP 674(a) requires that an abstract of judgment contain a judgment debtor's social security and/or driver's license numbers only if those numbers are known to the judgment creditor at the time an abstract of judgment is recorded, and that an abstract of judgment is void only if a judgment creditor possesses the required information but withholds it at the time the document is recorded. The parties stipulated that Smith did not have actual knowledge of Varner's social security or driver's license numbers at the time its abstract of judgment was recorded and thus its abstract of judgment was valid at all times under CCP 674(a).
. . .
A careful reading of Kim reveals that Smith has accurately characterized the difference between the issue in this case and the issue under consideration in Kim, and has accurately described the factual distinction between the two cases.
In Kim, the creditor received a judgment against the debtor in February 1988, and recorded an abstract of judgment in that same month to establish a judgment lien against certain real property. The initial filing did not contain the debtor's driver's license and social security numbers. After the debtor filed her chapter 11 petition in 1991, the creditor filed an Amendment to Abstract of Judgment that included the necessary information. 161 B.R. at 832.
The debtor filed a complaint to avoid the judgment lien under 545(2) on the grounds the initial filing was void because it lacked certain information required by CCP 674, and alleged the Amendment to Abstract of Judgment was void as a violation of the automatic stay. The debtor filed a motion for summary judgment based on these legal theories. The creditor opposed the motion, contending that (1) the abstract of judgment was not automatically void under CCP 674 simply because it lacked the debtor's social security and driver's license numbers, (2) CCP 674 should not be interpreted to permit the lien to be avoided for the benefit of creditors unless they obtained an interest in the property and did not have actual notice of the creditor's interest, and (3) the automatic stay did not prohibit or void the filing of the Amendment to Abstract of Judgment. Id. at 833.
At the hearing on a summary judgment motion filed by the debtor, the trial court sua sponte raised the issue of the applicability of 544(a)(3), which permits a trustee to avoid a lien without regard to any actual knowledge of the trustee or any creditor. The creditor contended that the debtor's actual knowledge of the existence of the abstract of judgment prevented it from avoiding the lien under 544. The BAP then merely noted that "Findings of fact and conclusions of law entered by the trial judge found the initial judgment lien failed to note the social security number and driver's license number of the debtor, and thus the lien was void and unenforceable." Id.
It is true that the BAP did not specifically state whether the trial court, in reaching its determination that the lien was void and unenforceable, considered the state of the judgment creditor's knowledge when the creditor filed its original abstract of judgment. The BAP appears to have assumed that the factual basis for the trial court's determination was obvious. That not being the case, the only reasonable inference to be drawn is that the social security and driver's license numbers were known to the creditor in Kim at the time it recorded its abstract of judgment. Its Amendment to Abstract of Judgment reflected that knowledge and attempted to validate an abstract of judgment that was invalid when originally recorded. n6
We believe the BAP in Kim accepted the trial court's "threshold" determination that the judgment creditor's abstract of judgment was defective under applicable state law, and proceeded to focus on the issue of whether a bona fide purchaser could avoid the defective abstract of judgment under 544(a). This is reflected by the BAP's characterization of the issue on appeal as "Whether a debtor in possession with actual knowledge of an abstract of judgment lacking certain information required under California law may nonetheless avoid a lien as a bona fide purchaser under section 544(a)(3) . . . ." Id. The BAP's characterization of the issue in this manner reflects its assumption that the abstract of judgment was void. n7
We therefore conclude that the bankruptcy court's reliance on Kim was misplaced. Kim holds that CCP 674(b) allows a bona fide purchaser priority over a defective abstract of judgment, i.e., one that does not comply with the requirements of CCP 674(a). The parties stipulated that Smith had no actual knowledge of Varner's social security or driver's license number at any time prior to the bankruptcy filing and, thus, its abstract of judgment was valid under the provisions of CCP 674(a). Given the validity of the abstract of judgment under CCP 674(a), the provisions of 674(b) regarding correction of a defective abstract of judgment were inapplicable. n8 The bankruptcy court's inquiry need have gone no further than a determination of the validity of Smith's abstract of judgment, based on the state of Smith's knowledge of Varner's social security and driver's license numbers at the time it recorded its abstract of judgment. n9
V. CONCLUSION
We conclude as a matter of law that a debtor in possession cannot avoid a judgment creditor's lien under 544(a)(3) when the creditor recorded its abstract of judgment pursuant to California Code of Civil Procedure 674(a), listed the debtor's social security and driver's license numbers as "unknown," and had no knowledge of the social security and driver's license numbers at the time the abstract was recorded or at any time prior to the bankruptcy filing. Accordingly, we REVERSE and direct the bankruptcy court to enter judgment in favor of the creditor.