## Facts

- Douglas and Ann Hassell owned two adjacent lots in West Islip, New York: 151 Sequams Lane West (Tax Lot 5) and 155 Sequams Lane West (Tax Lot 4), their residence.
- On August 22, 1997, the Hassells sold 151 Sequams to Mario Rodriguez, with the transaction intended to include a purchase-money mortgage in favor of the Hassells.
- The deed and mortgage were delivered to the title insurer for recording, but neither was recorded until June 15, 1998.
- Rodriguez filed a Chapter 11 bankruptcy petition on May 28, 1998; the case was later converted to Chapter 7.
- The conveyancing documents contained scrivener’s errors: the deed referenced the metes-and-bounds description for Tax Lot 4 (155 Sequams) while also describing the property as “151 Sequams Lane.”
- The Chapter 7 trustee brought an adversary proceeding to avoid the Hassells’ unrecorded mortgage under 11 U.S.C. § 544(a)(3), asserting bona fide purchaser status as of the petition date.
- The bankruptcy court granted summary judgment to the Hassells, concluding that a reasonable inquiry would have revealed the mortgage, and also reformed the deed and mortgage to correct the descriptive errors.

## Issues

1. Whether a Chapter 7 trustee exercising 11 U.S.C. § 544(a)(3) may avoid an unrecorded purchase-money mortgage when, under New York law, a hypothetical purchaser would be on inquiry notice of the mortgage as of the petition date.
2. What circumstances constitute inquiry notice under New York recording and bona fide purchaser doctrine for purposes of the trustee’s § 544(a)(3) powers.

## Decision

- The district court affirmed the bankruptcy court’s order granting summary judgment to the Hassells and denying the trustee’s § 544(a)(3) avoidance claim.
- The court held that, under New York law, a hypothetical purchaser would have been on inquiry notice of the Hassells’ mortgage as of the petition date.
- Because reasonable inquiry would have disclosed the mortgage, the trustee could not avoid the lien notwithstanding the mortgage’s post-petition recording.

## Legal Principles

- Under 11 U.S.C. § 544(a)(3), a bankruptcy trustee has the rights of a hypothetical bona fide purchaser of the debtor’s real property as of the petition date, but the scope of those rights is determined by state law.
- Under New York law, an unrecorded mortgage is ineffective against a bona fide purchaser without notice, but “notice” includes inquiry notice triggered by suspicious facts.
- A purchaser on inquiry notice is charged with knowledge of facts that a reasonable investigation would reveal; failure to investigate defeats bona fide purchaser status.
- Discrepancies in conveyancing documents (including scrivener’s errors in property descriptions) may trigger a duty to inquire and can bar bona fide purchaser protection.

## Conclusion

Affirming summary judgment for the mortgagees, the court ruled that the trustee’s § 544(a)(3) strong-arm powers were limited by New York inquiry-notice doctrine: as of the petition date, a hypothetical purchaser would have been required to investigate irregularities and would have discovered the unrecorded purchase-money mortgage, preventing avoidance.


In re Rodriguez, 261 B.R. 92 (E.D.N.Y. 2001)