State Law on Bona Fide Purchaser is Not Preempted by Bankruptcy Law

In Tippett v. Coleman (In re Tippett), 542 F.3d 684 (C.A. 9, Sept. 4 2008) the debtors filed for Chapter 7 bankruptcy, but then sold their home to without telling the bankruptcy Trustee of the sale, and without telling the buyer of the bankruptcy. Although it was undisputed that the buyer was a _bona fide_ purchaser under California law, the Trustee sued to quiet title to the property in favor of the bankruptcy estate. The bankruptcy court ruled in the Trustee’s favor. The Bankruptcy Appellate Panel reversed and entered judgment in favor of the buyer. Under California law the unrecorded transfer to the bankruptcy estate was void as to a good faith purchaser for value who recorded the purchase. The court opined that unless California law was preempted, the transfer to Coleman was effective. The Court found that it wasn’t. Noting that preemption occurs when state law is inconsistent with the goals and purposes of federal bankruptcy law, it determined that the goal of the California statute was not inconsistent with the Bankruptcy court’s goal of equally distributing a debtor’s assets to creditors. The Court noted that because the proceeds of the sale became part of the bankruptcy estate there should be little or no reduction of total assets. It also observed that an analogous federal statute, 11 U.S.C. §549(a), provides protection to _bona fide_ purchasers, suggesting no incompatibility with the intent of Congress. The Court also held that the automatic stay did not nullify the conveyance, because the stay was intended to protect the debtor against his creditors. Consequently, the stay did not automatically void a transaction in which the debtor was a willing participant.

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