Opinion
NOT FOR PUBLICATION
Argued at Pasadena, California; December 6, 2007, Submitted, November 28, 2007
Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Robert N. Kwan, Bankruptcy Judge, Presiding. Bk. No. SA 04-17523-RK. Adv. No. SA 05-01226-RK.
Before: MONTALI, DUNN and BAUM, [ Bankruptcy Judges.
Hon. Redfield T. Baum, Sr., Chief Judge of the U.S. Bankruptcy Court for the District of Arizona.
MEMORANDUM
After trial, the bankruptcy court entered a judgment avoiding a deed of trust lien as a fraudulent transfer pursuant to 11 U.S.C. § 544 and California Civil Code section 3439 (" CC § 3439") et seq., holding that the debtor executed the deed of trust with actual intent to hinder, delay or defraud his creditors. After the judgment was entered and while this appeal was pending, the trustee abandoned the property encumbered by the deed of trust and also abandoned the estate's interest in the judgment and the avoided transfer. In light of this abandonment, and for the reasons discussed below, we VACATE the judgment.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, Apr. 20, 2005, 119 Stat. 23.
I. FACTS
On or about September 22, 1988, Debtor Souhill Z. Achi (" Debtor") acquired fee title to certain real property located in Buena Park, California (the " Property"). In March 2000, Debtor purportedly prepared (but did not sign or have notarized) a deed of trust (the " Bchara DOT") encumbering the Property in favor of his brother, appellant Bchara Achi (" Appellant").
On December 13, 2004, Debtor filed his chapter 7 petition. Appellee Thomas S. Casey was appointed as the trustee (" Trustee") of Debtor's estate. Trustee filed a complaint against Appellant to avoid the Bchara DOT and to preserve the avoided lien for the benefit of the estate.
On January 12, 2007, the bankruptcy court held the trial in the adversary proceeding. Four days later, the court issued an oral ruling setting forth its findings and conclusions and indicating that it would issue a judgment avoiding the Bchara DOT on the grounds of actual fraud (CC § 3439.04(a)(1)) but not on the grounds of constructive fraud (CC § 3439.04(a)(2)). On February 16, 2007, the bankruptcy court entered its judgment avoiding the Bchara DOT and preserving it for the benefit of Debtor's estate. Appellant filed his timely notice of appeal on February 23, 2007.
While the appeal was pending, Trustee filed a motion to abandon the Property and the judgment. The bankruptcy court entered an order granting this motion on December 6, 2007. The bankruptcy court's order authorizes abandonment of not only the Property, but also the " cause of action to avoid trust deed." Trustee also filed a motion for waiver of appearance at the oral argument before us, stating that if the judgment is affirmed, " the Bchara [DOT], as an interest of the Bankruptcy Estate, will be abandoned to [Debtor]."
II. DISCUSSION
In light of the order abandoning the Property, we will vacate the judgment because (1) upon abandonment, property of the estate revests in the debtor with all of the rights and obligations existing prior to the petition date and (2) allowing the debtor to benefit personally from the lien avoidance circumvents both the Bankruptcy Code and California state law, which do not allow a transferor who participated voluntarily in a transfer to avoid or attack that transfer.
A. Effect of Abandonment
" Upon abandonment, the debtor's interest in the property is restored nunc pro tunc as of the filing of the bankruptcy petition." Catalano v. Comm'r of Internal Revenue, 279 F.3d 682, 685 (9th Cir. 2002) (emphasis added). While the Ninth Circuit did not describe the ramifications of this retroactive application of abandonment, other courts and commentators have stated that " [u]pon abandonment, property of the estate revests in the debtor with all of the rights and obligations existing prior to the bankruptcy filing, or as if the property had never been held by the trustee as part of the estate." 8A Corpus Juris Secundum Bankruptcy § 651 (updated November 2007), citing White v. Coon (In re Purco), 76 B.R. 523 (Bankr. W.D. Pa. 1987) (" The effect of abandonment is that ownership and control of the asset is reinstated in the debtor with all rights and obligations as before filing a petition in bankruptcy."); The Huntington Nat'l Bank v. Hunter (In re Hunter), 76 B.R. 117, 118 (Bankr. S.D. Ohio 1987) (" if the property has been abandoned in accordance with the applicable provisions of the Bankruptcy Code and Rules, the title to the property revests back to the debtor as if it had never been held by the trustee.").
Because, upon abandonment, the Property is revested nunc pro tunc to the petition date with all obligations that existed as of that date, the Bchara DOT (an obligation on the Property that existed as of the petition date) must exist post-abandonment. We therefore VACATE the judgment to return the Property to its status as of the petition date.
B. Debtor Should Not Benefit From Avoidance of the Bchara Deed of Trust
Trustee admitted that, following abandonment, only Debtor would benefit, if at all, from the avoidance of the Bchara DOT. And while the abandonment order purports to permit abandonment of " a cause of action to avoid trust deed, " a debtor lacks standing to pursue such an action, as discussed below. Allowing the Debtor to benefit from the avoidance of the Bchara DOT or to recover Trustee's right to pursue a " cause of action to avoid" the Bchara DOT is contrary to the spirit of both the Bankruptcy Code and California law, which do not allow a transferor who acted voluntarily to attack a transfer as fraudulent. Tognazzi v. Wilhelm, 6 Cal.2d 123, 125, 56 P.2d 1227, 1228 (1936). (" '[H]e who executes a conveyance of property for the purpose of hindering, delaying, or defrauding his creditors cannot by an action in equity obtain a reconveyance from his grantee, nor can anyone claiming under him, except an innocent purchaser.'"); see also Jones v. Re-Mine Oil Co., 119 P.2d 219, 47 Cal.App.2d 832 (1941) (one who has transferred his property to defraud his creditors cannot thereafter recover from his grantee that which he has conveyed).
It is also contrary to the spirit of section 544(b) and CC § 3439, the statutes upon which the judgment is based. Section 544(b) confers on Trustee the power to avoid transfers of an interest of the debtor that is voidable under state law by a creditor holding an allowable unsecured claim. 11 U.S.C. § 544(b); Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221, 232 (9th Cir. BAP 2007). California state law permits creditors (present and future) to seek avoidance of actually fraudulent transfers. Cal. Civ. Code § 3439.04(a)(1). Debtor -- the only entity who would now benefit from the judgment -- is not a " creditor" and would, under ordinary circumstances, be denied standing to pursue such a judgment.
Moreover, while section 522(h) allows a debtor under certain circumstances to avoid a transfer that would otherwise be avoidable by a trustee under section 544, a debtor can only exercise that power if he could have exempted the property under section 522(g). Here, Debtor would not be able to exempt the property under section 522(g) because the transfer was a voluntary transfer by him. Thus Debtor cannot take advantage of section 522(h), and should not be able to reap its benefits because of Trustee's abandonment. We construe the December 6 order approving abandonment of the cause of action as approval of Trustee's decision to give up any attempt to monetize it, nothing more.
III. CONCLUSION
In light of the foregoing, we are entering an order that the bankruptcy court's judgment entered on February 16, 2007, avoiding the Bchara DOT be VACATED without prejudice to any creditor pursuing whatever avoidance actions it may have with respect to the Bchara DOT under state law and in state court.