Jackman v. Angela Tese-Milner, as Chapter 7 Trustee of the Es

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: FOR PUBLICATION
MARIA AIOLOVA, Chapter 7
Debtor. Case No. 11-10503 (BRL)
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CLIFFORD JACKMAN,
Plaintiff,
v. Adv. Pro. No. 12-02073 (BRL)
ANGELA TESE-MILNER, as Chapter 7 Trustee
for the estate of Maria Aiolova, and JPMORGAN
CHASE BANK, N.A., as purchaser of substantially
all of the assets of Washington Mutual Bank and as
successor by merger to Chase Home Finance, LLC,
Defendants.
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APPEARANCES:
THE LAW FIRM OF TESE & MILNER
One Minetta Lane
New York, New York 10012
Telephone: (212) 475-3673
Facsimile: (212) 598-5844
By: Angela Tese-Milner
Attorneys for the Chapter 7 Trustee, Angela Tese-Milner
TEITELBAUM & BASKIN, LLP
One Barker Avenue, 3rd Floor
White Plains, New York 10601
Telephone: (914) 437-7670
Facsimile: (914) 437-7672
By: Jay Teitelbaum
Dana Montone
Attorneys for JPMorgan Chase Bank, N.A., purchaser of assets of Washington Mutual Bank from
the FDIC as receiver for Washington Mutual Bank, and as successor by merger to Chase Home
Finance, LLC, as servicer and creditor
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PICK & ZABICKI LLP
369 Lexington Avenue, 12th Floor
New York, New York 10017
Telephone: (212) 695-6000
Facsimile: (212) 695-6007
By: Douglas J. Pick
Attorneys for Clifford Jackman
Before: Hon. Burton R. Lifland
United States Bankruptcy Judge
MEMORANDUM DECISION AND ORDER (I) GRANTING TRUSTEE’S MOTION
FOR SUMMARY JUDGMENT PURSUANT TO BANKRUPTCY RULE 7056 AND (II)
DENYING THE REQUEST OF THE TRUSTEE AND CHASE FOR SANCTIONS
AGAINST JACKMAN
Before the Court is the motion for summary judgment (the “Motion”) pursuant to Federal
Rule of Civil Procedure (“Rule”) 56(c), made applicable herein by Federal Rule of Bankruptcy
Procedure (“Bankruptcy Rule”) 7056, of Angela Tese-Milner (the “Trustee”), co-defendant in
the above-captioned adversary proceeding and Chapter 7 trustee for the estate of Maria Aiolova
(the “Debtor” or “Aiolova”), requesting that the Court grant summary judgment and declare that
Clifford Jackman (“Jackman”), the above-captioned plaintiff, has no legal or equitable interest in
the property located at 1565 Sag Harbor Bridgehampton Highway, Sag Harbor, New York (the
“Property”). Aiolova and Jackman were, at one time, prepetition business associates who were
romantically involved. It would appear that those relationships have been extinguished. In
addition, in their reply briefs, the Trustee and JPMorgan Chase Bank, N.A. (“Chase”), the other
co-defendant in the above-captioned adversary proceeding, request that sanctions be imposed
against Jackman.
More than a year ago, this Court entered an uncontested order authorizing the sale of the
Property. The implementation of that order, however, has been delayed inordinately due to
litigation brought by Jackman that has rendered a chill for potential purchasers of the Property.
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Specifically, Jackman filed a complaint seeking a declaration that he is the rightful owner of the
Property and requesting the imposition of a constructive trust over the Property for his benefit.
Although Jackman admits that he deeded the Property to Aiolova prepetition for $675,000, he
argues that he retains an equitable interest in the Property because Aiolova secretly promised to
reconvey the Property back to him. Jackman’s own actions, however, before this Court and
other tribunals, have repudiated the central allegations in the complaint. Not only has Jackman
twice tried to purchase the Property in which he claims to have an equitable interest, once from
Aiolova and once from the Trustee, he has also testified in a state court action that he never
requested that the Property be reconveyed to him.
Putting aside Jackman’s inconsistent arguments, drawing all reasonable inferences and
resolving all ambiguities in Jackman’s favor, as a court must do in a motion for summary
judgment, the Court still finds that the Trustee is entitled to summary judgment as a matter of
law. Jackman had a full and fair opportunity to object to the sale authorization order, but chose
not to. As such, res judicata prevents Jackman from avoiding the effects of that order by now
asserting an ownership interest in the Property in the instant proceeding. Further, the Trustee’s
status under section 544(a)(3) of the Bankruptcy Code, as a bona fide purchaser of real property
for value, defeats any secret interests Jackman may have in the Property. Accordingly, the
Motion for summary judgment is GRANTED, and Jackman’s Amended Complaint is
DISMISSED in its entirety with prejudice. In addition, the request of the Trustee and Chase for
the imposition of sanctions against Jackman is DENIED without prejudice.
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BACKGROUND
The essential facts, largely set forth in the pleadings and filed papers, are as follows.
The Debtor’s Bankruptcy
On February 9, 2011, Aiolova filed a voluntary petition for relief under Chapter 7 of the
United States Bankruptcy Code. She asserted a fee simple interest in the Property in her
schedules. See Petition (Case No. 11-10503, Dkt. No. 1), Schedule A.
On June 9, 2011, the Debtor moved to convert the case to Chapter 13, which was
subsequently denied by the Court. See Case No. 11-10503, Dkt. Nos. 25, 35. Jackman objected
to the motion to convert and argued that, although there was no formal agreement between
himself and the Debtor, there was a mutual understanding that the net sale proceeds of the
Property would be shared. See Conversion Objection (Case No. 11-10503, Dkt. No. 31), ¶ 2. He
did not allege, however, that the Debtor had promised to reconvey the Property to him. In fact,
in a decision (the “State Court Decision”) from the Supreme Court of the State of New York,
New York County,1 which Jackman attached as an exhibit to his objection, Jackman testified that
“he had never asked [the Debtor] to transfer title to the [P]roperty back to him.” See
Conversion Objection, Ex. B, p. 2 (emphasis added). Significantly, around the time of the 2007
Lawsuit, Jackman entered into a contract with a nominee of Aiolova to purchase the Property
back from her for $630,000. See Trustee Motion (Adv. Pro. No. 12-02073, Dkt. No. 25), Ex. A;
Jackman Aff. (Adv. Pro. No. 12-02073, Dkt. No. 32), ¶ 29. Jackman never tendered the
purchase price and the sale was never consummated. See Trustee Motion, ¶ 9; Jackman
Aff., ¶ 30.
1 The State Court Decision concerned a 2007 lawsuit (the “2007 Lawsuit”) brought by a party allegedly injured on
the Property against Aiolova and Jackman as joint owners thereof. The State Court Decision denied a motion by
Aiolova for summary judgment, and noted inconsistencies between the claims of Jackman and Aiolova regarding
ownership of the Property. See Conversion Objection, Ex. B, p. 2. (Adv. Pro. No. 12-02073, Dkt. No. 32), Ex. 9.
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On June 27, 2011, Jackman filed a proof of claim (the “Proof of Claim”) against the
Debtor, asserting a claim of $434,907.00 on account of mortgage payments and other expenses
made in connection with the Property. See Am. Compl.,2 ¶ 41. The Proof of Claim does not
allege any legal or equitable interest in the Property.
On November 18, 2011, the Trustee filed a motion to sell the Property free and clear of
all liens, claims and encumbrances. See Sale Motion (Case No. 11-10503, Dkt. No. 51). Chase,
as the holder of the first mortgage obligations secured by the Property, objected to the proposed
sale. See Chase Objections (Case No. 11-10503, Dkt. Nos. 55, 69). On notice to all creditors
and parties in interest, the Court so ordered a stipulation (the “Sale Authorization Order”)
consensually resolving the dispute between the Trustee and Chase. See Case No. 11-10503, Dkt.
Nos. 79, 84. The Sale Authorization Order, inter alia, authorized the Trustee to sell the Property
free and clear of all liens, claims, and encumbrances, other than those of Chase, and determined
that the amount due to Chase under the loan and secured by the Mortgage was $724,731.43. Id.
at ¶¶ 5–6. The Sale Authorization Order also noted that an offer by Jackman to purchase the
Property from the Trustee (the “Jackman Offer”) had been rejected as insufficient. See Sale
Authorization Order, p. 2; see also Jackman Aff., ¶ 26; Trustee Motion, ¶ 9. Jackman did not
object to the Sale Motion or the Sale Authorization Order.
One week after this Court entered the Sale Authorization Order, the Trustee moved, by
order to show cause, for an order, subsequently granted by this Court, directing Jackman to
immediately remove his personal items and vacate the Property. See Case No. 11-10503, Dkt.
Nos. 85, 93. The Trustee argued that the Property did not have a certificate of occupancy and
2 Amended Complaint against Angela Tese-Milner, as Chapter 7 Trustee of the Estate of Maria Aiolova, JPMorgan
Chase Bank, N.A., as purchaser of substantially all of the assets of Washington Mutual Bank from the FDIC as
receiver for Washington Mutual Bank and as successor by merger to Chase Home Finance, LLC [hereinafter “Am.
Compl.”] (Adv. Pro. No. 12-02073, Dkt. No. 9).
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that Jackman’s presence could chill the marketing and sale of the Property. See Case No. 11-
10503, Dkt. No. 85, at ¶ 7. In an objection, Jackman argued that the Debtor and Jackman had an
understanding that they jointly owned the Property, even though title had passed from Jackman
to Debtor. See Vacatur of Property Opp. (Case No. 11-10503, Dkt. No. 88), ¶¶ 4–5. Once again,
Jackman did not allege that the Debtor had promised to reconvey the Property. See id.
The Instant Adversary Proceeding
More than five months after entry of the Sale Authorization Order and rejection of the
Jackman Offer, Jackman filed a complaint on December 21, 2012, initiating the instant adversary
proceeding against the Trustee, in her capacity as Chapter 7 Trustee of the Debtor’s estate. See
Adv. Pro. No. 12-02073, Dkt. No. 1. Therein, for the first time, Jackman alleges that the Debtor
promised to reconvey the Property to him. See id. at ¶¶ 22, 23. Jackman amended the complaint
on February 14, 2013, solely to add Chase, the mortgagee of the Property, as a defendant. See
Am. Compl.
According to the Amended Complaint, Jackman purchased the Property in 2000 for
$225,000. See Am. Compl., ¶ 11. Jackman and Aiolova began a personal relationship in June of
2001. See Am. Compl., ¶ 12. A year later, the Amended Complaint alleges, they began living
together on the Property with the intention of ultimately using the Property as their marital
residence.3 See Am. Compl., ¶ 16. Beginning in May 2004, Jackman, who constructed and
improved residential properties, and Aiolova, an architect and home designer, jointly invested in
the acquisition and development of residential properties. See Am. Compl., ¶¶ 13–15. In
furtherance of their joint investments, Jackman and Aiolova agreed that Aiolova would purchase
3 It should be noted that this allegation is inconsistent with Jackman’s previous deposition testimony, in the 2007
Lawsuit, in which he asserted that he and Aiolova “were never formally engaged, had never set a wedding date, and
had never previously lived together” and he could not recall when they had agreed to separate. See Conversion
Objection, Ex. B, p. 2.
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the Property from Jackman and obtain mortgage financing from a bank in order to acquire and
develop other properties. See Am. Compl., ¶ 23. Pursuant to a deed dated October 7, 2004 (the
“Deed”), and in consideration for $675,000, Jackman conveyed the Property to Aiolova
(the “2004 Sale”).4 See Am. Compl., ¶ 25. The Deed granted Aiolova:
[a]ll that certain plot, piece or parcel of land, with the buildings and improvements
thereon erected. Together with the appurtenances and all the estate and rights of
[Jackman] in and to said premises; To have and hold the premises herein granted unto
[the Debtor], the heirs or successors and assigns of [the Debtor] forever.
See Chase Summary Judgment Statement, Ex. A. The Deed was recorded in the Suffolk County
land records on October 19, 2004 at Liber D00012349, p. 734. See id. The Deed made no
mention of any promise by Aiolova to reconvey the Property to Jackman, nor was there a
contract of sale accompanying the transfer of the Deed. Nevertheless, Jackman alleges that it
was always understood and agreed between Aiolova and him that, at some future date, she would
reconvey the Property, and that, in the interim, Aiolova “would only hold ‘bare legal title’ to the
[Property] for the benefit of Jackman as the equitable owner thereof.” See Am. Compl., ¶24.
On February 17, 2006, Aiolova executed a promissory note in favor of Washington
Mutual Bank, F.A. in the principal amount of $600,000 (the “Note”). See Sale Authorization
Order, p. 1. The Note was secured by a mortgage (the “Mortgage”) on the Property, recorded in
the Suffolk County Clerk’s office on June 7, 2006 as Liber M00021313, p. 427. See id. Chase is
the current owner and holder of the Note and Mortgage. Id.; see also Am. Compl., ¶ 45.
Subsequent to the 2004 Sale, Jackman claims to have paid the mortgage, tax, utility and other
ongoing obligations of the Property (collectively, the “Ongoing Obligations”). See Am.
Compl., ¶ 31.
4 The Deed is attached as exhibit A to Chase’s Summary Judgment Statement. See Chase Summary Judgment
Statement (Adv. Pro. No. 12-02073, Dkt. No. 28), Ex. A.
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In November 2006, the personal relationship between Jackman and Aiolova ended. See
Am. Compl., ¶ 35; Jackman Aff., ¶ 19. Shortly thereafter, Aiolova vacated the Property, while
Jackman remained and claims to have continued paying the Ongoing Obligations. See
Am. Compl., ¶ 35. In 2007, Jackman allegedly paid Aiolova $45,000 for reimbursement of her
expenditures on the Property. See Jackman Aff., ¶ 19.
Given that Jackman alleges that the Debtor promised to reconvey the property to him,
Jackman argues that the Debtor merely held legal title to the Property in trust for Jackman’s
benefit and the Property is therefore not property of the Chapter 7 estate. See Am. Compl., ¶¶
48–51. Accordingly, in the Amended Complaint, Jackman seeks a declaration that he is the
rightful owner of the Property and the imposition a constructive trust over the Property for his
benefit. See Am. Compl., ¶¶ 52, 58.
The Motion for Summary Judgment
The Trustee filed the instant Motion on June 7, 2013. See Trustee Motion (Adv. Pro. No.
12-02073, Dkt. No. 33). Chase filed the Chase Summary Judgment Statement in support of the
Motion on June 24, 2013. On July 15, 2013, Jackman filed his opposition to the Motion, see
Jackman Opp. (Adv. Pro. No. 12-02073, Dkt. No. 33), which included the Jackman Affidavit.
The Trustee and Chase replied on July 22, 2013. See Trustee Reply (Adv. Pro. No. 12-02073,
Dkt. No. 35); Chase Reply (Adv. Pro. No. 12-02073, Dkt. No. 36). A hearing on the instant
matter was held on July 31, 2013.
STANDARD FOR SUMMARY JUDGMENT
Rule 56 provides that summary judgment shall be granted “if the movant shows that there
is no genuine dispute as to any material fact.” FED. R. CIV. P. 56(a); FED. R. BANKR. P. 7056.
The court’s role in ruling on a summary judgment motion “is not to resolve disputed issues of
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fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and
drawing reasonable inferences against the moving party.” Robinson v. Sanctuary Record Grps.,
Ltd., No. 03-CIV-10235, 2011 WL 5282680, at *2 (S.D.N.Y. Nov. 2, 2011) (quoting Knight v.
U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986)). The moving party bears the initial burden of
showing that the undisputed facts entitle it to judgment as a matter of law. See Rodriguez v. City
of New York, 72 F.3d 1051, 1060–61 (2d Cir. 1995). If the movant carries this initial burden,
“[t]he non-moving party may defeat the summary judgment motion by producing sufficient
specific facts to establish that there is a genuine issue of material fact for trial.” Lipton v. Nature
Co., 71 F.3d 464, 469 (2d Cir. 1995) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322–23
(1986)).
DISCUSSION
In opposing summary judgment, Jackman principally argues that summary judgment is
not appropriate because questions of fact remain regarding the elements of a constructive trust
under New York law. Even assuming arguendo that Jackman is correct and there are
outstanding questions of fact regarding constructive trust, the Trustee is nevertheless entitled to
summary judgment. First, res judicata bars Jackman from raising arguments that could and
should have been raised at the time of the Sale Authorization Order. Second, section 544(a)(3)
of the Bankruptcy Code (“Section 544(a)(3)”) protects the Trustee from any unrecorded interest
Jackman may have in the Property.
I. RES JUDICATA BARS JACKMAN FROM ASSERTING AN
OWNERSHIP INTEREST IN THE PROPERTY
Res judicacta bars parties from relitigating issues that were or could have been raised in
prior actions. See Proctor v. LeClaire, 715 F.3d 402, 411 (2d Cir. 2013). It protects against “the
expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters
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reliance on judicial action by minimizing the possibility of inconsistent decisions.” Montana v.
United States, 440 U.S. 147, 153–54 (1979). As the Second Circuit has held, “[t]hese virtues
have no less value in the bankruptcy context; this is particularly true in a Chapter 7 liquidation
where it is desirable that matters be resolved as expeditiously and economically as possible.”
EDP Med. Computer Sys., Inc. v. United States, 480 F.3d 621, 624 (2d Cir. 2007).
Res judicata may be properly applied only if certain prerequisites are met. Specifically,
res judicata bars litigation if an earlier decision was “(1) a final judgment on the merits, (2) by a
court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4)
involving the same cause of action.” Id. Here, as discussed below, all four elements have been
satisfied. Accordingly, even assuming that the Debtor promised to reconvey the Property, the
res judicata effect of the Sale Authorization Order precludes Jackman from now asserting any
interest in the Property in the current proceeding.
(a) The Sale Authorization Order Constituted a Final Judgment on the Merits by a Court
of Competent Jurisdiction
The first two elements of res judicata have been met because the Sale Authorization
Order was a final judgment on the merits and was issued by a court of competent jurisdiction.
First, it is uncontested that the Sale Authorization Order constituted a final judgment on the
merits. See Bank of Lafayette v. Baudoin (In re Baudoin), 981 F.2d 736, 742 (5th Cir. 1993)
(“[B]ankruptcy court orders authorizing the sale of part of the estate or confirming such sale are
final judgments on the merits for res judicata purposes, even though the order neither closes the
bankruptcy case nor disposes of any claim.”) (quotation and citation omitted); Gazes v. DelPrete
(In re Clinton Street Food Corp.), 254 B.R. 523, 530 (Bankr. S.D.N.Y. 2000) (“A bankruptcy
court order approving a sale of assets is a final order for res judicata purposes.”); see also
Lawrence v. Wink (In re Lawrence), 293 F.3d 615, 621 (2d Cir. 2002) (emphasizing importance
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of res judicata in preventing “future litigation attacking the final orders of sale in a bankruptcy
court proceeding, a forum where finality of court orders is particularly important”). Second, a
bankruptcy court has the jurisdiction to entertain and enter orders authorizing the sale of estate
assets and therefore qualifies as a court of competent jurisdiction. See 11 U.S.C. § 363; see also
EDP Med. Computer Sys., 480 F.3d at 624 (explaining that res judicata “applies with full force
to matters decided by the bankruptcy courts”).
(b) The Same Parties are Involved in Both the Instant Adversary Proceeding and the Sale
Authorization Order
The third element of res judicata has also been satisfied, as both Jackman and the Trustee
are parties in the instant proceeding and were parties to the adjudication of the Sale Motion as
well. In the bankruptcy context, all creditors of a debtor have the opportunity to be heard in
proceedings within that debtor’s case. As such, for res judicata purposes, a creditor is a party in
interest to orders entered in the administration of the bankruptcy proceeding, even if the creditor
fails to object or participate in a matter. See Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II,
Ltd.), 898 F.2d 1544, 1550–51 (11th Cir. 1990) (“A party, for the purposes of former
adjudication, includes all who are directly interested in the subject matter and who have a right to
make defense, control the proceedings, examine and cross-examine witnesses and appeal from
the judgment if an appeal lies.”) (citation and quotations omitted); HSBC Bank USA, N.A. v.
Adelphia Commc’ns Corp., No. 07–CV–553A, 2009 WL 385474, at *11 (W.D.N.Y. Feb. 12,
2009); see also Christo v. Padgett, 223 F.3d 1324, 1339 (11th Cir. 2000) (order approving a
settlement is a final order and is afforded res judicata effect to all creditors who were noticed
and had an opportunity to object); In re Borders Group, Inc., No. 11-10614, 2011 WL 1795604,
at *5 (Bankr. S.D.N.Y. May 12, 2011) (stating that “[u]nder section 363(f)(2), a lienholder who
receives notice of a sale but does not object within the prescribed time period is deemed to
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consent to the proposed sale, and assets thereafter may be sold free and clear of liens”). Here,
not only was Jackman a duly noticed creditor at the time of the Sale Authorization Order and
therefore afforded a suitable opportunity to raise the arguments he raises now, but he also
actively participated in the sale process by engaging in negotiations with the Trustee and Chase
to purchase the Property. Therefore, Jackman was a party to the Sale Authorization Order for res
judicata purposes.
(c) The Sale Authorization Order and the Adversary Proceeding Involve the Same Cause
of Action
The fourth prong of res judicata is satisfied because the Sale Authorization Order and the
Adversary Proceeding involve the same cause of action. Two proceedings contain the same
cause of action where the same transaction, evidence, and factual issues are involved in both
cases. See Corbett v. MacDonald Moving Servs., Inc., 124 F.3d 82, 89 (2d Cir. 1997); see also
In re USN Commc’ns, Inc., 280 B.R. 573, 586 (Bankr. D. Del. 2002) (explaining that two
proceedings address the same cause of action where “the factual underpinnings, theory of the
case, and relief sought against the parties to the proceeding are so close to a claim actually
litigated in the bankruptcy that it would be unreasonable not to have brought them both at the
same time in the bankruptcy forum”). Moreover, proceedings include the same cause of action
“if an independent judgment in a separate proceeding would impair or destroy rights or interests
established by the judgment entered in the first action.” Sure-Snap Corp. v. State Street Bank
and Trust Co., 948 F.2d 869, 874 (2d Cir. 1991) (quotations and citation omitted).
Here, the Amended Complaint is based upon the identical arguments and claims that
Jackman should have raised in connection with the Sale Authorization Order. In the Amended
Complaint, Jackman alleges that he has an equitable interest in the Property. He did not make
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such allegations in connection with the Sale Authorization Order, which determined the estate’s
interest in the Property, authorized its sale free and clear of all interests therein other than those
of Chase, and thus, implicitly found that no entity other than Chase had an equitable interest in
the Property. But Jackman did not object in connection with that order. To the contrary, he
attempted to purchase the Property from the Trustee. It was only after his negotiations failed that
Jackman filed the Amended Complaint and asserted an equitable interest in the Property. This is
nothing more than an attempt by Jackman to end-run the Sale Authorization Order and obtain the
Property without offering compensation. Indeed, in Jackman’s own words, “[s]ince I was unable
to consummate any sale contract with the Trustee, I commenced the instant action seeking a
declaration that I owned the Sag Harbor Property by virtue of the imposition of a constructive
trust . . . .” See Jackman Aff., ¶ 27. As Jackman had the opportunity to effectively litigate his
claim during the Sale Motion, “the proper medium for a challenge to the original bankruptcy
court’s order is through a direct challenge of that order. The collateral attacks brought later are
barred by res judicata.” Hendrick v. Avent, 891 F.2d 583, 587 (5th Cir. 1993).
Accordingly, as all four prongs of res judicata have been met, the Trustee is entitled to
summary judgment as a matter of law.
II. THE STRONG-ARM POWERS UNDER THE CODE PROTECT THE
TRUSTEE FROM UNRECORDED INTERESTS
As one of the strong-arm powers enunciated in the Bankruptcy Code, a trustee is given
the status of a hypothetical bona fide purchaser of real property. See In re Potter, 313 F.3d 93,
95 (2d Cir. 2002). The purpose of this status is “to cut off unperfected security interests, secret
liens and undisclosed prepetition claims against the debtor’s property as of the commencement
of the case.” In re Canney, 284 F.3d 362, 374 (2d Cir. 2002) (quoting COLLIER ON
BANKRUPTCY ¶ 544.03 (15th ed. rev. 2001)). Specifically, Section 544(a)(3) provides:
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The trustee shall have, as of the commencement of the case, and without regard to any
knowledge of the trustee or of any other creditor, the rights and powers of, or may avoid
any transfer of property of the debtor or any obligation incurred by the debtor that is
voidable by . . . a bona fide purchaser of real property . . . from the debtor . . . that obtains
the status of a bona fide purchaser and has perfected such transfer at the time of the
commencement of the case, whether or not such a purchaser exists.
See 11 U.S.C. § 544(a)(3). In evaluating the trustee’s rights as a hypothetical bona fide
purchaser of real property, the court looks to the substantive state law pertaining to the property
that is the subject of the proceeding, in this case the law of New York. See Mosello v. ALI, Inc.
(In re Mosello), 190 B.R. 165, 170 (Bankr. S.D.N.Y. 1995).
Under New York law, a bona fide purchaser is protected from any prior, unrecorded
interests in the purchased property. See N.Y. RPL § 291; see also Simonds v. Simonds, 45
N.Y.2d 233, 242 (1978) (“A bona fide purchaser of property upon which a constructive trust
would otherwise be imposed takes free of the constructive trust, but a gratuitous donee, however
innocent, does not.”). To qualify for such status, a purchase must be made in good faith, without
notice of any adverse interests in the property, and for valuable consideration. See N.Y. RPL §
291.
As a bona fide purchaser must be “without notice” of any adverse interests, a purchaser
of real property is held to what may be revealed by an examination of the record and “reasonable
inquiry on the basis of all the circumstances.” See Kennedy Inn Assocs. v. Perab Realty Corp.
(In re Kennedy Inn Assocs.), 221 B.R. 704, 713 (Bankr. S.D.N.Y. 1998). Accordingly, a
purchaser is deemed to be aware of any notice in the record. In re Mosello, 190 B.R. at 170 (“A
bona fide purchaser is one who would have checked the appropriate recording office for real
estate transfers and who would not have learned of any impairment in the transferor’s title.”)
(citations and quotations omitted).
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In the instant case, the Trustee took title to the Property free of Jackman’s purported and
unrecorded interest because a bona fide purchaser at the time of the commencement of the case
would not have been on record notice of Jackman’s interest. Indeed, there was no record notice
of Jackman’s purported interest in Property because a purchaser would not have learned of any
such interests in the Property by searching the real estate records in the Suffolk County Clerk’s
Office. The Deed, recorded in the Clerk’s office, transferred the entirety of the Property to the
Debtor and did not include any rights or interests reserved by Jackman. See Chase Summary
Judgment Statement, Ex. A. Therefore, the Trustee was not on record notice of any adverse
interest.
In addition, a purchaser will not be protected from an unrecorded interest if he had
constructive or inquiry notice of such interest, which arises when a purchaser has knowledge of
facts that would lead a reasonably prudent person to investigate. See Anderson v. Blood, 152
N.Y. 285, 293 (1987); Stoneybrook Realty, LLC v. Cremktco, Inc., 675 N.Y.S.2d 749, 751 (App.
Term 1998). Under New York law, possession by a third party that is open and notorious and
inconsistent with the record title places a purchaser on inquiry notice of the possible existence of
the possessor’s prior rights. See Wardell v. Older, 418 N.Y.S.2d 196, 198 (App. Div. 1979); see
also Tompkins County Trust Co. v. Talandis, 690 N.Y.S.2d 330, 333 (App. Div. 1999) (noting
that purchaser has duty to examine where person in open and notorious possession of the
property is inconsistent with the title of the owner of record). However, where a grantor remains
in possession of the property granted, a subsequent purchaser is not placed on inquiry notice by
the grantor’s retained possession because such possession is not inconsistent with the rights of
the person to whom he has conveyed. A purchaser is justified in relying on the title conferred by
the deed and can assume that the grantor's continued possession is merely permissive, and not in
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antagonism to the grant. See Buhecker v. R.B. Petersen & Sons Const. Co., 929 P.2d 937, 939
(Nev. 1996) (“[P]ossession of land by a vendor will not impart notice to a purchaser since a party
remaining in possession is estopped from impeaching or contradicting his own deed, or denying
that he granted the premises which his deed purports to convey.”); Cook v. Travis, 20 N.Y. 400
(1859) (finding that continued presence of prior owner did not provide inquiry notice because
“continued occupancy would naturally lead to an inference that those who had acquired title
under the sheriff’s sale did not choose to disturb his possession; that he remained on his farm as
their tenant or by their indulgence,” especially since the records disclosed that all of the prior
owner’s rights had been divested by the sale). This is even more so where the grantor and
grantee remain in shared possession of the property granted. See Pope v. Allen, 90 N.Y. 298
(1882) (“In the present case defendant’s possession was equivocal and consistent with N. B.
Pope’s title on the record, since Pope was also in possession and there was nothing to indicate
that defendant’s possession was not subordinate to his, or suggest hostility to the record-title.”);
see also Diamond v. Wasserman, 185 N.Y.S.2d 411, 413–14 (App. Div. 1959).
Here a purchaser would not have been placed on inquiry notice because Jackman’s
possession of the Property was not inconsistent with the Deed conveying the entirety of the
Property to the Debtor. This is because after the 2004 Sale, the grantor, Jackman, continued to
occupy the Property, first, with Aiolova, then individually. Such occupation does not put a
purchaser on inquiry notice of Jackman’s interests so as to undermine its status as a bona fide
purchaser under the above-discussed New York law. As such, the Trustee’s status as a bona fide
purchaser for value protects her from Jackman’s unrecorded interests. See Turner v. Emmons &
Wilson, Inc. (In re Minton Group, Inc.), 28 B.R. 774, 788 (Bankr. S.D.N.Y. 1983) (“Even if the
defendants were able to establish that under Connecticut law they held recognizable equitable
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interests, either by virtue of a resulting or a constructive trust, the trustee, nevertheless, possesses
superior rights under Code § 544(a)(3) as a hypothetical bona fide purchaser of real property
from the debtor . . . .”).
Accordingly, as the Trustee was a bona fide purchaser of the Property under Section
544(a)(3), she is entitled to summary judgment as a matter of law.
III. SANCTIONS
In their replies to Jackman’s Opposition, the Trustee and Chase, for the first time, request
the imposition of sanctions against Jackman, pointing out that the record is replete with
inconsistencies, issues of credibility, and there have been numerous delays in the implementation
of the Sale Authorization Order.5 See Trustee Reply, ¶¶ 11–13; Chase Reply, ¶¶ 23–27.
However, “[d]ue process requires that courts provide notice and opportunity to be heard before
imposing any kind of sanctions.” See Schlaifer Nance & Co., Inc. v. Estate of Warhol, 194 F.3d
323, 334 (2d Cir. 1999) (quotations and citations omitted); see also In re Truong, No. 07-12194,
2008 WL 1776227, at *6 (Bankr. S.D.N.Y. Apr. 14, 2008) (“When a court intends to impose
sanctions, the target of those sanctions is entitled to notice of the behavior the court finds
actionable and the specific authority under which the court intends to impose the sanctions.”).
As such, the request for sanctions is DENIED without prejudice to be renewed upon appropriate
motion.
5 Indeed, at argument, counsel for Jackman acknowledged the superior legal and economic position of Chase, and,
nevertheless, failed to articulate what economic benefit would inure to his client should he obtain ownership of the
Property, other than speculating that unnamed government programs may be beneficial to such owner.
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CONCLUSION
In light of the foregoing, the Trustee’s Motion for summary judgment is GRANTED, and
the Amended Complaint is DISMISSED in its entirety with prejudice. In addition, the request of
the Trustee and Chase for the imposition of sanctions against Jackman is DENIED without
prejudice to be renewed by appropriate motion.
IT IS SO ORDERED.
Dated: New York, New York
August 1, 2013
/s/ Burton R. Lifland 0
United States Bankruptcy Judge
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