## Facts

- Miriam H. McCannon contracted in 1973 to buy a condominium unit and an interest in common areas in the Drake Hotel condominium project in Philadelphia.
- The contract was contingent on the property being validly submitted to Pennsylvania’s Unit Property Act, which occurred in 1973.
- McCannon paid a $500 deposit toward a $17,988 price, moved into the unit in April 1975, and remained in continuous possession.
- No closing occurred, and McCannon never recorded her agreement for sale.
- The seller/debtor filed for Chapter 11 bankruptcy in November 1979.
- McCannon filed an adversary complaint seeking relief from the automatic stay and specific performance of the purchase agreement.
- The bankruptcy trustee opposed, asserting the power under 11 U.S.C. § 544(a)(3) to avoid McCannon’s unrecorded equitable interest as a hypothetical bona fide purchaser of real property.

## Issues

1. Whether 11 U.S.C. § 544(a)(3) allows a bankruptcy trustee, as a hypothetical bona fide purchaser “without regard to any knowledge,” to avoid an unrecorded equitable interest when the claimant is in open possession that would give constructive notice under Pennsylvania law.
2. Whether 11 U.S.C. § 365(i) protects a purchaser in possession under an executory real estate contract (and, if so, whether it controls the result).

## Decision

- The Third Circuit reversed the district court’s affirmance of the bankruptcy court.
- Section 544(a)(3) eliminates the relevance of the trustee’s actual knowledge, but it does not override state-law rules that charge a purchaser with constructive or inquiry notice.
- Under Pennsylvania law, open, notorious, and exclusive possession by someone other than the record owner puts a purchaser on inquiry notice of the possessor’s rights.
- McCannon’s continuous possession of the condominium unit constituted constructive notice sufficient to bind a hypothetical bona fide purchaser under Pennsylvania law.
- Because a bona fide purchaser would take subject to McCannon’s rights, the trustee could not avoid her equitable interest under § 544(a)(3).
- Having resolved the case under § 544(a)(3), the court found it unnecessary to rely on § 365(i).

## Legal Principles

- A trustee’s avoidance power under 11 U.S.C. § 544(a)(3) confers the rights of a hypothetical bona fide purchaser as defined by applicable state law.
- The phrase “without regard to any knowledge” in § 544(a)(3) negates only actual knowledge; it does not negate constructive or inquiry notice imputed by state law.
- State-law doctrines treating a non-record owner’s open possession as constructive notice limit what a hypothetical bona fide purchaser can acquire, and therefore limit the trustee’s § 544(a)(3) power.
- In Pennsylvania, open and notorious possession generally imposes a duty of inquiry on purchasers and can preserve an unrecorded equitable interest against later purchasers.

## Conclusion

The Third Circuit held that the trustee could not use § 544(a)(3) to avoid McCannon’s unrecorded equitable interest because her open possession of the unit would have given constructive notice to a hypothetical bona fide purchaser under Pennsylvania law, placing her interest beyond the trustee’s strong-arm reach.


McCannon v. Marston, 679 F.2d 13 (3d Cir. 1982)