## Facts

- A California residence owned by Damon Duncombe was encumbered by a deed of trust and was set for nonjudicial foreclosure.
- A trustee’s sale occurred at 11:00 a.m., and William Little was the successful bidder.
- After the sale, Duncombe filed a Chapter 13 petition and obtained a certified copy of the petition shortly before 2:00 p.m.
- Duncombe recorded notice of the bankruptcy at 3:21 p.m. the same day.
- Little obtained the trustee’s deed after the sale and recorded it at 4:01 p.m. the same day.
- Duncombe sought to avoid the foreclosure transfer using the bankruptcy estate’s strong-arm powers, asserting priority based on earlier recordation.

## Issues

1. Whether, under California’s race-notice recording system and 11 U.S.C. § 544(a)(3), a bankruptcy estate can avoid a foreclosure transfer when the debtor files bankruptcy and records notice before the foreclosure purchaser records the trustee’s deed.
2. Whether actual or constructive notice of the foreclosure sale defeats the trustee’s hypothetical bona fide purchaser status under § 544(a)(3).

## Decision

- The court held that the foreclosure purchaser did not prevail over the bankruptcy estate.
- Because the bankruptcy case was filed and notice was recorded before the trustee’s deed was recorded, the estate (standing as a hypothetical bona fide purchaser under § 544(a)(3)) had superior rights to the unrecorded foreclosure deed interest as of the petition date.
- The foreclosure transfer was avoidable under § 544(a)(3).

## Legal Principles

- Under California race-notice recording law, the first to record generally has priority over unrecorded interests unless the first recorder had notice of the competing interest.
- Under 11 U.S.C. § 544(a)(3), the bankruptcy trustee has, as of the commencement of the case, the rights and powers of a hypothetical bona fide purchaser of real property.
- The trustee’s hypothetical bona fide purchaser status under § 544(a)(3) is determined as of the petition date and is not defeated by actual or constructive notice attributed to the trustee or debtor for purposes of exercising the strong-arm power.
- A foreclosure purchaser remains vulnerable during the gap between sale and recordation; if bankruptcy is filed and a competing interest is recorded before the trustee’s deed is recorded, the estate may avoid the transfer.

## Conclusion

The court ruled that the bankruptcy estate could avoid the foreclosure transfer because the debtor’s bankruptcy filing and recorded notice preceded recordation of the purchaser’s trustee’s deed, and § 544(a)(3) gave the estate hypothetical bona fide purchaser rights superior to the unrecorded foreclosure deed interest at the petition date.


In re Duncombe, 143 B.R. 243 (Bankr. C.D. Cal. 1992)