VALIDITY OF POST-PETITION TRANSFERS OF REAL PROPERTY: WHO DOES THE BANKRUPTCY CODE'S SECTION 549(c) PROTECT?, THE

Real Property, Probate and Trust Journal, Spring 2005 by Culpin, Kelly

Editors' Synopsis: This Article discusses whether a good faith purchaser's post-petition purchase of a debtor's real property will be protected under Bankruptcy Code section 549 in light of recent case law denying protection based on a violation of Bankruptcy Code section 362's automatic stay. To address this question, the author traces the history of early bankruptcy law, including the development of and the policy behind the automatic stay. Examining recent case law, the author concludes that the good faith purchaser should be protected, in certain circumstances, despite a violation of the automatic stay. This conclusion is supported by the author's analysis of the interplay between the relevant Bankruptcy Code sections, as well as a review of legislative history of the Code sections. Finally, the author suggests that courts should use a fact-intensive approach when determining whether the good faith purchaser exception should apply and provides a framework with which courts could make this determination.

I. INTRODUCTION

Post-petition purchasers of a debtor's real property have long faced uncertainty with regard to what protection, if any, the bankruptcy laws afford them. The introduction of a statutory automatic stay prohibiting any transfer of the debtor's property after commencement of the case has exacerbated this uncertainty. In theory, the automatic stay halts all post-petition transfers made without permission of the bankruptcy court and allows courts to hold violators in contempt. In practice, however, creditors often proceed with involuntary foreclosure sales or tax sales of the debtor's real property, creating the opportunity for an "innocent" party-one without knowledge of the pending bankruptcy case-to purchase the property. In all likelihood, the bankruptcy court will declare such a purchase void as a transaction conducted in violation of the automatic stay. Fortunately, the Bankruptcy Code (the "Code")' provides a mechanism that courts have used for decades to protect the innocent purchaser from this eventuality.

Code section 549, which governs a debtor's post-petition transactions, provides in subsection (c) an express exception to the trustee's powers to avoid unauthorized post-petition transfers of property.2 This exception permits a person who has purchased the debtor's real property in good faith with no knowledge of a pending proceeding and who has paid fair and equivalent value, to obtain the debtor's interest in the property.3 In the past, some courts have interpreted this subsection to work as an exception to the voiding effect of the automatic stay, which protects the transaction in cases in which the purchaser meets the subsection's requirements.4 In a growing trend, however, bankruptcy courts are holding a transaction cannot be both in violation of the stay and controlled by section 549. These holdings make section 549(c)'s good faith purchaser protection inapplicable to a transfer made in violation of the automatic stay.5

In its recent decision in 40235 Washington Street Corp. v. Lusardi,6 the Ninth Circuit became the first appellate court to deny the Code's protection to a post-petition good faith purchaser of real property based on this theory.7 The Lusardi court held the exception to the trustee's power to avoid post-petition transfers did not apply to a post-petition tax sale of the debtor's property because the sale violated the section 362(a) automatic stay and was therefore void.8 The court reasoned that any void act, deemed not to have taken place, never could qualify as a transfer within the meaning of section 549.9 The court found Congress designed subsection (c), an exception to the bankruptcy trustee's power to avoid post-petition transfers, only to protect innocent parties from being defrauded in a debtorinitiated transaction, and that Congress intended the automatic stay to protect the debtor and his creditors.10 The court reasoned that because Congress designed the sections to protect different parties, an exception to one would not apply to the other.11 Although the court attempted to reconcile the two Code sections by assigning independently meaningful functions, the Ninth Circuit's conclusion actually cut against an integrated Bankruptcy Code.

Because the United States Supreme Court denied certiorari to the Ninth Circuit's decision and bankruptcy courts have followed the Lusardi interpretation,12 the issue of the Code's protection of good faith purchasers is ripe for examination and resolution. This Article proposes that for reasons of certainty and predictability, and based on the plain meaning of the Code, courts should abandon the new trend, which seeks to retract the protection afforded good faith purchasers of real property in post-petition transfers that violate the automatic stay.

Part I of this Article offers an overview of the early bankruptcy law provisions that preserved the bankruptcy estate, thus protecting both debtors and creditors via the automatic stay. Part I also introduces Congress's response to the stay's potential unfairness through the introduction of a limited form of statutory protection for good faith purchasers of real estate.