## Facts

- Oliver Plunkett formed and managed limited partnerships to acquire and operate commercial real estate, including a shopping-center leasehold.
- Limited partners contributed capital used to obtain and improve the leasehold.
- Record title to the leasehold was taken and recorded in Plunkett’s personal name, not in the partnerships’ names.
- Plunkett treated the leasehold as his own and made a collateral assignment of the leasehold to secure a $100,000 loan for his personal use.
- In 1982, Plunkett and his wife filed Chapter 11 petitions, and Ralph C. Belisle was appointed trustee.
- The limited partners filed an adversary proceeding seeking to quiet title in the partnerships and to establish equitable ownership (including claims resembling constructive or resulting trust theories).
- The trustee asserted that the leasehold was property of the estate and invoked 11 U.S.C. § 544(a) to avoid any unrecorded equitable interests.
- The bankruptcy court and district court ruled for the trustee; the limited partners appealed.

## Issues

1. Whether a bankruptcy trustee may use 11 U.S.C. § 544(a) to avoid limited partners’ unrecorded equitable/beneficial interests in a leasehold where the debtor holds record title.
2. Whether constructive trust, resulting trust, fiduciary duty, or partnership-property doctrines prevent the trustee from taking priority under § 544(a).
3. Whether state recording and notice rules would charge a hypothetical bona fide purchaser or lien creditor with notice of the partners’ interest, limiting § 544(a).

## Decision

- The Seventh Circuit affirmed judgment for the trustee.
- The trustee, exercising § 544(a) rights as a hypothetical bona fide purchaser (and/or lien creditor) as of the petition date, could avoid the limited partners’ unrecorded equitable interests.
- State-law equitable doctrines and partnership fiduciary-duty principles did not defeat the trustee’s priority because the asserted interests were not recorded or otherwise sufficient to bind a bona fide purchaser without notice under state law.
- The leasehold and associated benefits were treated as property of the bankruptcy estate, leaving the partners to pursue claims within the bankruptcy distribution scheme.

## Legal Principles

- Under 11 U.S.C. § 544(a), a bankruptcy trustee may avoid unperfected or unrecorded interests in real property to the extent a hypothetical bona fide purchaser or lien creditor would take free of those interests under applicable state law.
- Priority under § 544(a) is evaluated from the standpoint of the trustee’s hypothetical status as of the commencement of the case, not from the standpoint of the debtor’s misconduct.
- Constructive trust or similar equitable ownership claims, even if viable between the claimant and the debtor under state law, are ineffective against the trustee’s § 544(a) rights when the claimant failed to protect the interest through recording or other notice recognized by state law.
- Partnership or fiduciary-duty rules characterizing property as belonging in equity to the partnership do not bind third parties (including the trustee as hypothetical purchaser) absent record notice sufficient under state law.

## Conclusion

The court held that the trustee’s § 544(a) strong-arm powers prevailed over limited partners’ unrecorded equitable claims to a leasehold titled in the debtor’s name, bringing the leasehold into the bankruptcy estate and relegating the partners to creditor remedies rather than specific recovery of the property.


Belisle v. Plunkett, 877 F.2d 512 (7th Cir. 1989)