Belisle v. Plunkett

Oliver Plunkett (debtor) formed partnerships to raise money to buy a leasehold. Plunkett used partnership funds for the purchase, but he closed the deal and recorded the transfer of the leasehold in his own name. The partnerships had no recorded interest in the leasehold. Plunkett subsequently filed for bankruptcy. The bankruptcy trustee asserted that the leasehold was an asset of the bankruptcy estate, but the partnerships disagreed, asserting that Plunkett’s fraud gave the partnerships an equitable constructive trust in the leasehold under local law. The trustee countered that under 11 U.S.C. § 544(a)(3), the trustee had the rights and powers of a bona fide purchaser of the leasehold. Because a bona fide purchaser would take the leasehold over the partnerships’ unrecorded interest under local law, the trustee asserted that the leasehold was properly included in the estate. The bankruptcy court ruled in the trustee’s favor, and the district court affirmed. The partnerships appealed to the Seventh Circuit, arguing that under 11 U.S.C. § 541(d), a debtor’s bankruptcy estate cannot include property in which the debtor holds only legal title but not an equitable interest. The partnerships further argued that § 544(a)(3) gives the trustee a bona fide purchaser’s ability to avoid a transfer of property by the debtor, but Plunkett never transferred the leasehold. Two other appellate circuits had previously found a conflict between § 541(d) and § 544(a)(3), and the parties asked the Seventh Circuit to decide which statute controlled.