## Facts

- Theodore Dlott filed a bankruptcy case in the U.S. Bankruptcy Court for the District of Massachusetts.
- Before the bankruptcy filing, Dlott was involved in a Massachusetts real-estate conveyance with James W. Clark and another party appearing in the title history (Kahn).
- The parties reached an agreement about how ownership of the property (or interests in the property) would be allocated, but the recorded deed did not accurately state that agreement.
- Clark contended the deed’s error was the product of mutual mistake and sought equitable reformation so that the instrument would reflect the transaction the parties actually intended.
- The bankruptcy trustee opposed Clark’s request, asserting the trustee’s “strong-arm” rights as a hypothetical bona fide purchaser of real property under 11 U.S.C. § 544(a)(3).
- The dispute came before the bankruptcy court as an adversary proceeding to determine the parties’ respective rights in the property and whether the estate had any interest superior to Clark’s claim.

## Issues

1. Whether the deed could be reformed under Massachusetts law on the ground of mutual mistake so that it reflected the parties’ true agreement.
2. Whether the bankruptcy trustee’s rights as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3) defeated Clark’s claim for reformation and allowed the estate to take the property interest free of Clark’s equitable rights.

## Decision

- The court found that the deed failed to express the parties’ real agreement because of mutual mistake.
- The court ruled that equity permitted reformation of the deed to correct that mistake.
- The court rejected the trustee’s argument that § 544(a)(3) automatically cut off Clark’s claim, holding that the trustee’s bona fide purchaser status is measured by what a bona fide purchaser would receive under applicable Massachusetts law.
- The court concluded that, on the facts shown, the trustee did not have an interest superior to Clark’s right to reformation.
- The court granted relief for Clark and ordered the deed corrected and the trustee (and thus the estate) to release any claimed interest inconsistent with the reformed instrument.

## Legal Principles

- A Massachusetts court sitting in equity may reform a deed when, because of mutual mistake, the writing does not state the parties’ actual agreement.
- Reformation requires convincing proof of the mistake and of the intended terms.
- Under 11 U.S.C. § 544(a)(3), a bankruptcy trustee has the rights of a hypothetical bona fide purchaser of real property as of the petition date, but those rights are defined and limited by state property and recording law.
- A trustee invoking § 544(a)(3) cannot obtain greater rights than a bona fide purchaser would have under state law when equitable claims (such as reformation for mutual mistake) would be effective against such a purchaser on the facts of the case.

## Conclusion

In *In re Dlott*, the bankruptcy court held that a deed could be reformed for mutual mistake to reflect the parties’ true agreement and that the trustee’s § 544(a)(3) bona fide purchaser powers did not give the estate priority over Clark’s equitable right to reformation; the court therefore ordered the deed corrected and the estate’s contrary claim released.


In re Dlott, 43 B.R. 789 (1983)