## Facts

- Bill J. Eads owned undeveloped land known as Quail Meadows, consisting of three parcels, with most acreage in Parcel 1.
- Eads agreed to convey William R. Probasco a one-half interest in all of Quail Meadows in exchange for Probasco’s agreement to jointly execute a $600,000 promissory note secured by a deed of trust on the property.
- Due to an escrow/preparation mistake, the deed and deed of trust omitted the legal description for Parcel 1 and included only Parcels 2 and 3.
- Probasco’s interest was recorded as to Parcels 2 and 3 but not as to Parcel 1.
- Eads and Probasco jointly subdivided and improved Quail Meadows, including Parcel 1; the property was enclosed by a single perimeter fence with no internal fencing, and survey stakes/subdivision markers appeared across all parcels.
- In 1982, Eads and Probasco filed separate Chapter 11 petitions.
- Eads, as debtor in possession, filed an adversary proceeding to avoid Probasco’s unrecorded one-half interest in Parcel 1 under 11 U.S.C. § 544(a)(3).
- Probasco contended that the visible condition and use of the property created constructive (inquiry) notice under California law, defeating hypothetical bona fide purchaser status.

## Issues

1. Whether, under California law, the physical condition, use, and possession of Quail Meadows provided constructive notice of Probasco’s unrecorded one-half interest in Parcel 1, preventing avoidance under 11 U.S.C. § 544(a)(3).
2. Whether the bankruptcy court had authority to sell Probasco’s interest in an adjacent sewer easement.
3. Whether additional theories (equitable relief; preference or fraudulent transfer) affected the result.

## Decision

- The Ninth Circuit reversed the judgment allowing Eads to avoid Probasco’s unrecorded one-half interest in Parcel 1 under § 544(a)(3) and remanded.
- The court held that Probasco’s visible use and possession of Quail Meadows created constructive notice under California law sufficient to defeat a hypothetical bona fide purchaser.
- The court affirmed the bankruptcy court’s authority to sell Probasco’s interest in the sewer easement.
- The court declined to reach remaining arguments after resolving the constructive-notice issue.

## Legal Principles

- Under California law, open and visible possession and acts consistent with ownership can place a purchaser on inquiry notice, which operates as constructive notice of unrecorded interests.
- A trustee or debtor in possession’s strong-arm power under 11 U.S.C. § 544(a)(3) confers only the rights of a hypothetical bona fide purchaser as defined and limited by applicable state law notice rules.
- If state law would charge a purchaser with constructive notice from the property’s condition or possession, § 544(a)(3) cannot be used to avoid the unrecorded interest.

## Conclusion

Because the property’s unified fencing, subdivision activity, and joint development would have prompted a reasonable purchaser to inquire about Probasco’s rights, California constructive-notice principles defeated § 544(a)(3) bona fide purchaser status, so Eads could not avoid Probasco’s unrecorded one-half interest in Parcel 1; the sale of the sewer easement interest was upheld.


Probasco v. Eads, 839 F.2d 1352 (9th Cir. 1988)