Probasco v. Eads

Bill Eads (debtor) owned 76.61 acres of undeveloped land known as Quail Meadows. Roughly 75 percent of the acreage was in Parcel 1, and 25 percent of the acreage was in Parcels 2 and 3. In 1981, Eads agreed to give William Probasco (debtor) a one-half interest in 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. Probasco and Eads executed the note as agreed, but unbeknownst to Probasco and Eads, the escrow company that prepared the deed conveying Probasco’s interest and the deed of trust did not attach a legal description of Parcel 1 to the documents. Instead, the documents contained descriptions only of Parcels 2 and 3. Accordingly, Probasco’s interest in Parcel 1 was unrecorded. Eads and Probasco subsequently proceeded with subdividing Quail Meadows. Eads and Probasco separately filed for Chapter 11 bankruptcy in 1982. After both petitions were filed, Eads and Probasco discovered that the description of Parcel 1 was missing from the deed and deed of trust. Eads, in his capacity as debtor-in-possession, brought an adversary proceeding against Probasco seeking to avoid Probasco’s unrecorded one-half interest in Parcel 1 under 11 U.S.C. § 544(a)(3)’s strong-arm clause. That provision gave a debtor-in-possession the right to avoid any transfer of property that would have been voidable by a bona fide purchaser of real property as of the time of the commencement of the bankruptcy case. Probasco asserted that Eads could not have taken title as a bona fide purchaser under California law because, at the time Eads filed for bankruptcy, Eads had constructive notice of Probasco’s ownership interest in Parcel 1 due to the property’s physical condition and the subdivision activities. Among other things, there was a perimeter fence around all three parcels together and no fencing dividing the parcels, and there were surveyor’s stakes across all three parcels. The bankruptcy court rejected Probasco’s argument and allowed Eads to avoid Probasco’s interest in Parcel 1. The bankruptcy appellate panel affirmed, and Probasco appealed to the Ninth Circuit.