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New Bankruptcy Bill / McConville Background: February 2005

February 10, 2005

   Related Information
Bankruptcy Abuse Prevention and Consumer Protection Act
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The American Land Title Association supports the provisions in the Senate Bankruptcy Reform Act to clarify In re McConville. Amendments clarifying McConville have been included in Bankruptcy Technical Corrections legislation since 1997. They are also in the Senate version of S 256 this year’s "Bankruptcy Abuse Prevention and Consumer Protection Act."

State and local real property recording acts provide all parties with a single, comprehensive method to search title and ascertain the existence of interests in real property. Bankruptcy Code section 549(c) was specifically intended to preserve the integrity of the state recording acts by protecting buyers, lenders, lessees and other parties who, in return for their interest in real property, advance new value in good faith without knowledge of a bankruptcy filing. Using the state recording system, constructive knowledge of a bankruptcy filing is provided to all parties by recordation of a copy of the bankruptcy petition by the bankruptcy estate in the counties where the bankruptcy estate owns real property.

This practical system of deference to the state real property recording acts as envisioned by section 549(c) was undermined by the decision of the Ninth Circuit in In re McConville, 110 F. 3d 47_ (9th Cir.1996) cert denied 118 S. Ct. 412,139 L.Ed 2d 315(1997) 77 W.L. 136529 (9th Cir. 1997) (decided March 26, 1997 and withdrawing prior decisions reported at 84 F.3d 340 (9th Cir. 1996) and at 97 F.3d 316 (9th Cir. 1996)). In McConville, a purchase-money lender, without knowledge that the debtor had recently filed an undisclosed chapter 11 case, funded the debtor's acquisition of an apartment complex, and simultaneously recorded its purchase-money deed of trust. On these facts, the Ninth Circuit failed to apply section 549(c), instead limiting the application of section 549(c) to transfers of fee interests only and holding that a bona fide encumbrancer for value was not within the protection afforded by section 549(c). In its last decision, the court, attempting equity, applied Sec. 364 of the Code, and found it breached. The court remanded with direction to modify to give the lenders a limited lien, which the trustee paid.

Limiting section 549(c) to transfers of fee interests only, puts at risk every real property lessee, easement grantee, and lender who provides consideration or extends credit in return for its interest in real property in reliance upon the state real property recording acts. Because it is a practicable impossibility for the title insurance industry to search contemporaneously bankruptcy filings in bankruptcy court in all 50 states at the time of closing, were the decision in McConville allowed to stand, the existence of an undisclosed bankruptcy case places the risk of loss on the lending, leasing and development industries, potentially chilling credit availability.

McConville is solved by simple amendments to clarify the law enacted in 1978. First, with respect to the Automatic Stay, section 362(b) of the Bankruptcy Code should be amended to clarify that postpetition transfers required to be perfected under section 549(c) and which are otherwise immune from attack under section 549 would not be void or violable as made in violation of the automatic stay (Sec 311 of S. 256). Second, with respect to postpetition transactions, section 549(c) should be clarified to apply to "transfers of interests in real property, including a security interest in real property" where the purchaser has given fair equivalent value without notice of the pendency of the bankruptcy case and has perfected that interest timely (Sec. 1201). To clarify that section 549(c) of the Bankruptcy Code applies to encumbrancers, the definition of "transfer" in section 101(54) should be amended by inserting "the creation of a lien." (Sec. 1204).

For additional information, please contact Ann vom Eigen, ALTA Legislative and Regulatory Counsel, at 202-296-3671, ext. 214, or ann_vomeigen@alta.org.



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