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In re Kasparek

April 5, 2010

IN RE JONATHON W. KASPAREK, ALSO KNOWN AS J. W. KASPAREK, AND MANDY K. KASPAREK, FORMERLY KNOWN AS MANDY K. HAWN, DEBTORS.
J. MICHAEL MORRIS, TRUSTEE, PLAINTIFF -- APPELLANT,
v.
WAYNE A. KASPAREK, JAMES KASPAREK, AND JONATHON W. KASPAREK, DEFENDANTS -- APPELLEES.



Bankr. No. 07-13019 Adv. No. 08-05085 Chapter 7 Appeal from the United States Bankruptcy Court for the District of Kansas.

The opinion of the court was delivered by: Rasure, Bankruptcy Judge.

PUBLISH

OPINION

Before CORNISH, Chief Judge, MICHAEL, and RASURE, Bankruptcy Judges.

Appellant J. Michael Morris, Chapter 7 Trustee ("Trustee") of the bankruptcy estate of Jonathon W. Kasparek ("Debtor" or "Jonathon"), appeals the bankruptcy court's Memorandum Opinion and Order Denying Trustee's Complaint to Sell Jointly Owned Property (the "Order"). The recorded deed to the real property at issue reflects that the property is held in joint tenancy by the Appellees herein: Debtor, his brother James Kasparek ("James"), and his father, Wayne A. Kasparek ("Wayne"). Only Wayne has filed a brief in this appeal.*fn2

The bankruptcy court concluded that (1) Wayne owned the entire equitable interest in the property at issue, (2) the estate acquired only the Debtor's bare legal title to the property, (3) the Trustee's strong-arm powers as a bona fide purchaser of real property under § 544(a)(3)*fn3 could not be exercised to avoid Wayne's equitable interest because the Debtor had not transferred the property to Wayne, and (4) even if § 544(a)(3) was applicable, the Trustee did not qualify as a bona fide purchaser under Kansas law. Accordingly, the bankruptcy court concluded that the Trustee could not sell the property under § 363(h).

For the reasons stated herein, we conclude that the Order should be REVERSED and the matter REMANDED to the bankruptcy court.

I. BACKGROUND

The material facts are not in dispute. In 2005, Wayne purchased approximately 80 acres of farmland in Kansas (the "Property"). At Wayne's direction, the seller of the Property executed a Kansas Warranty Deed to "Wayne A. Kasparek, Jonathon W. Kasparek, and James M. Kasparek, GRANTEE as joint tenants with the right of survivorship and not as tenants in common."*fn4 The deed was promptly recorded in the county land records.*fn5 Since 2005, the Property has been leased to an unrelated tenant on a crop-share basis. Wayne paid the entire purchase price for the Property, receives all of the landlord's share of income, and pays all of the landlord's share of expenses. At trial, all three joint tenants testified that in taking title in joint tenancy with his sons, Wayne did not intend to make a present gift to them, but instead intended to insure that upon Wayne's death, the Property would vest in his sons without probate proceedings.

On December 12, 2007, Jonathon and his wife filed a petition for relief under Chapter 7 of the Bankruptcy Code. In their schedules, they disclosed that Jonathon had a one-third fee simple interest in the Property and valued the Property at $63,760.*fn6 On April 3, 2008, the Trustee filed a Complaint to Sell Jointly Owned Property ("Complaint"), naming Jonathon, Wayne and James as Defendants, and alleging all elements of § 363(h) were met. Specifically, the Trustee alleged that Jonathon held a one-third interest in the Property, that partition of the Property among the joint tenants was impracticable, that the sale of the estate's undivided one-third interest would yield less to the estate than if all interests in the Property were sold, that the benefit to the estate outweighed the detriment to the other joint tenants, and that the Property was not used to produce or distribute energy.*fn7 In his answer, Wayne asserted that the Property "is entirely owned by [Wayne] and is not an asset of the bankruptcy estate under 11 U.S.C. § 541."*fn8

In the Pretrial Order, the following factual and legal questions were presented in connection with the Trustee's theories of recovery: (1) Could the estate avoid Wayne's alleged equitable interest in the Debtor's record one-third interest in the Property by virtue of the Trustee's rights as a hypothetical bona fide purchaser under § 544(a)(3)? (2) Could the Trustee prove all the elements required under § 363(h) to sell the estate's and the joint tenants' interests in the Property? and (3) Did James and Jonathon consent to the sale by failing to file an answer opposing it?*fn9 The issues relating to Wayne's affirmative defenses were presented as follows:

(1) What, if any, interest does the estate have in the real estate at issue?

(2) Whether it was the intention of Wayne Kasparek to add Defendants Jonathon and James Kasparek to the deed for estate planning purposes only?

(3) Can Defendants rebut the presumption of equal ownership of the real estate?*fn10 A trial on the merits was held on December 15, 2008. On July 29, 2009, the bankruptcy court issued the Order, concluding as follows:

The Court holds that the estate does not have an interest in the Farm Property for purposes of a sale under § 363(h). Pursuant to § 541(d), the estate's interest is limited to Debtor's bare legal title. The Court holds that the strong-arm powers of § 544(a)(3) are limited to recovery of transfers made by a debtor and do not include recovery of an equitable interest in real property held by the Debtor's joint tenant. Further, assuming that the scope of § 544(a)(3) would allow the avoidance of such equitable interests, the Trustee as a purchaser of Debtor's interest would have notice of Wayne Kasparek's equitable interest in the Farm Property and would therefore not be a bona fide purchaser for value who could purchase Debtor's interest in the Farm Property free of Wayne Kasparek's equitable interest.*fn11

Accordingly, the bankruptcy court denied the Trustee's request to sell the Property under § 363(h). The Trustee timely appealed the Order.

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.*fn12

Neither party elected to have this appeal heard by the United States District Court for the District of Kansas. The parties have therefore consented to appellate review by this Court.

A decision is considered final "if it 'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'"*fn13 Here, the bankruptcy court's order concluded the adversary proceeding, and thus the Order is final for purposes of review.

III. STANDARD OF REVIEW

The Trustee does not take issue with any finding of fact established by the bankruptcy court.*fn14 Therefore, only conclusions of law, i.e., the bankruptcy court's statutory construction and its application of bankruptcy law and Kansas law to the undisputed facts, are appealed. Legal questions are reviewed de novo.*fn15

De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision.*fn16

IV. DISCUSSION

The Trustee presents three issues on appeal. First, he argues that the bankruptcy court erred in determining that Wayne possessed "100% of the equitable interest" in the Property and in holding that the Property was excluded from the estate under § 541(d). The Trustee asserts that "the only cognizable theory for deviating from the equal ownership established by the deed would appear to be a resulting trust," but Wayne did not defend on that basis, and the bankruptcy court did not make findings required by statute to impose a resulting trust.*fn17

Second, the Trustee contends that even if Wayne had established a resulting trust for his benefit, the bankruptcy court erred in holding that § 544(a)(3) would not allow the Trustee to avoid Wayne's unrecorded trust interest on the grounds that only transfers by a debtor are avoidable under § 544(a)(3), and the Debtor had not transferred the Property to Wayne. The Trustee argues that the majority of courts that have been presented with such an interpretation of § 544(a)(3) have rejected it, and instead hold that an actual transfer of property by the debtor is not a prerequisite to the exercise of the trustee's rights and powers under § 544(a)(3).

Finally, the Trustee asserts that the bankruptcy court erred in concluding that, in any event, the Trustee could not avoid Wayne's unrecorded trust interest under ยง 544(a)(3) as a hypothetical bona fide purchaser of the Debtor's recorded undivided one-third interest because under Kansas law, such a purchaser would have had "inquiry notice" that Wayne was the sole equitable owner and therefore would have acquired the Property subject to Wayne's trust interest. While conceding that inquiry notice of an unrecorded claim or interest would defeat a trustee's status as a bona fide purchaser, the Trustee contends that in this case, facts revealed by a hypothetical purchaser's diligent inquiry would have been consistent with the Debtor's joint tenancy interest of record and would not have imposed a duty to inquire further ...


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