United States Court of Appeals, Sixth Circuit
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Bankr. L. Rep. P 72,826
In re David A. CRABTREE, also known as West Knoxville
Investment Company, Incorporated, Debtor.
D. Broward CRAIG, Trustee of David A. Crabtree, also known
as West Knoxville Investment Company,
Incorporated, Plaintiff-Appellee,
v.
Swan SEYMOUR, individually and as General Partner of
Ponce
Inlet Development Company, a Florida general
partnership, Defendant-Third Party
Plaintiff-Appellant,
and
Federal Deposit Insurance Corporation, Third Party
Defendant.
No. 88-5112.
United States Court of Appeals,
Sixth Circuit.
Argued Oct. 12, 1988.
Decided March 27, 1989.
James S. Wallack, Mark C. Ellenberg (argued), Paul M. Bauch,
Cadwalader, Wickersham & Taft, Washington, D.C., John A. Walker, Jr.,
Walker & Walker, P.C., Knoxville, Tenn., for debtor and plaintiffappellee.
Kyle R. Weems (argued), Chattanooga, Tenn., for defendant-third party
plaintiff-appellant.
Bruce C. Taylor, Nancy R. Adler, Rodney Ray, Staff Atty., Federal
Deposit Ins. Corp., Knoxville, Tenn., for defendant.
Before KENNEDY, MARTIN, and NORRIS, Circuit Judges.
BOYCE F. MARTIN, Jr., Circuit Judge.
Swan Seymour appeals the district court's order affirming the judgment of the
bankruptcy court for bankruptcy trustee D. Broward Craig. We affirm the order
of the district court.
On April 9, 1979, Swan Seymour, David Crabtree, who also operated as West
Knoxville Investment Company, Inc., and DFP Sales Company, Inc., a whollyowned subsidiary of West Knoxville, formed, as equal one-third partners, a
Tennessee general partnership known as Ponce Inlet Development Company.
On June 22, 1979, Paul Kennedy conveyed to Crabtree by warranty deed a tract
of real property in Volusia County, Florida. Land records in Volusia County
showed the property to be owned by "David A. Crabtree, as Trustee," but the
trust beneficiaries were not identified in the deed.
An Agreement and Declaration of Trust was executed at some time a few
weeks following the conveyance of the Florida property. Under the Agreement
and Declaration of Trust, Crabtree agreed that title to the Florida property
would be held by him in trust for the benefit of himself, Seymour and DFB
Sales Company. The Agreement and Declaration of Trust was, however, never
recorded in the land records of Volusia County. Two years later, a document
entitled Declaration of Covenants and Restrictions and Creation of Property
Owners' Association was recorded in the Volusia County land records. This
document identified Crabtree as trustee of the Florida property, but failed to
identify the trust's beneficiaries and neglected to state the trust's nature and
purpose.
On July 14, 1983, an involuntary petition for bankruptcy was filed against
Crabtree. The bankruptcy court subsequently entered an order for relief, and D.
Broward Craig was appointed trustee of the Crabtree estate. On February 27,
1985, the bankruptcy court approved the sale of the Florida property by Craig
for $260,000, and the proceeds were brought into the bankruptcy estate.
Seymour filed suit against Craig claiming one-third of the proceeds obtained in
the sale of the Florida property, contending that the property was held by
Crabtree for the benefit of Ponce Inlet and that the Florida property and its
proceeds constituted property of Ponce Inlet and should not be considered as
property of the bankruptcy estate.
On January 2, 1987, the bankruptcy court entered a judgment and
memorandum opinion, holding that the Florida property was property of the
Crabtree bankruptcy estate and that Seymour was not entitled to any proceeds
from the sale of the Florida property. The district court affirmed the judgment
of the bankruptcy court. According to the district court, Fla.Stat.Ann. Sec.
689.07(1) created fee simple ownership in a party, such as Crabtree, who was
named as trustee in a deed without identification of trust beneficiaries or
purposes. Because Crabtree had fee simple title, Craig, the bankruptcy trustee,
obtained fee simple title to the Florida property. As a result, Seymour could
have no interest in the proceeds from the sale of the Florida property. Seymour
now appeals the district court's denial of a share of the sale proceeds.
6
On appeal, Seymour argues that, under Fla.Stat.Ann. Sec. 689.07(4), the
Agreement and Declaration of Trust between himself, Crabtree and DFB Sales
Company gave Seymour an equitable interest in the Florida property and that
Crabtree's fee simple title, and therefore Craig's fee simple title, was subject to
this equitable interest. Because Sec. 541(d) of the bankruptcy code (11 U.S.C.
Sec. 541(d)) should prevail over the bankruptcy trustee's "strong-arm" powers
under Sec. 544(a) (11 U.S.C. Sec. 544(a)) where state law confers an equitable
title on a third party prior to bankruptcy, Seymour's beneficial interest in the
Florida property is an equitable interest which cannot be altered or abrogated by
Sec. 544(a). See In re General Coffee Corporation, 828 F.2d 699 (11th
Cir.1987); Matter of Quality Holstein Leasing, 752 F.2d 1009 (5th Cir.1985).
Seymour additionally contends that Crabtree held the Florida property in
constructive trust for the benefit of himself and Ponce Inlet and that his rights as
a constructive trust beneficiary should prevail over the bankruptcy trustee's Sec.
544(a) strong-arm powers. General Coffee Corporation, 828 F.2d 699; Quality
Holstein Leasing, 752 F.2d 1009; In re N.S. Garrott & Sons, 772 F.2d 462 (8th
Cir.1985). We disagree with Seymour's contentions.
The arguments made by Seymour raise a question concerning the operation of,
and possible conflict between, sections 541(d) and 544(a) of the bankruptcy
code. Section 544(a) gives a bankruptcy trustee the rights and powers of a
judicial lien creditor or a bona fide purchaser of real property and allows the
trustee to avoid any transfer of property of the debtor or any obligation incurred
by the debtor that is voidable by a judicial lien creditor or a bona fide purchaser
of real property. This section therefore permits the trustee to bring property of
the debtor into the bankruptcy estate. Conversely, Sec. 541(d) excludes certain
equitable interests from the bankruptcy estate; it provides that property in
which the debtor holds only legal title and not an equitable interest (such as a
mortgage) becomes property of the estate only to the extent of the debtor's legal
title to such property, but not to the extent of any equitable interest in such
property that the debtor does not hold. Seymour claims an equitable interest in
the Florida property under Fla.Stat.Ann. Sec. 689.07(4) and contends that this
equitable interest should, under Sec. 541(d), prevail over the Sec. 544(a)
strong-arm powers of the trustee, thereby preventing Craig from bringing the
Florida property into the bankruptcy estate.
8
Courts have differed in their resolution of the apparent conflict between Sec.
544(a) and Sec. 541(d). Some courts have held, as Seymour argues, that Sec.
541(d) prevails over the trustee's strong-arm powers under Sec. 544(a). See,
e.g., Quality Holstein Leasing, 752 F.2d at 1013. Other courts have rejected this
approach, holding that sections 541(d) and 544(a) operate independently;
specifically, these courts have reasoned that Sec. 541(d) does not limit the
trustee's avoidance powers under Sec. 544(a) but instead qualifies Sec. 541(a),
which specifies the interests of the debtor in property that comprise the
bankruptcy estate. For a discussion, see General Coffee, 828 F.2d at 705.
Several commentators have agreed with such an interpretation of sections
544(a) and 541(d), arguing that Sec. 541(d) clarifies Sec. 541(a) and was
intended merely to recognize the inviolability of bona fide secondary mortgage
market transactions. See, e.g., 1 W.H. Drake and A.L. Mullins, Bankruptcy
Practice Sec. 5.04 (1988); 4 L.P. King (ed.), Collier on Bankruptcy p 541.24
(15th ed. 1988). We, however, do not need to resolve the alleged conflict
between Sec. 544(a) and Sec. 541(d) of the bankruptcy code because this case
may be decided by reference to Florida state law. We therefore do not reach and
we express no opinion on the federal bankruptcy issues presented in this case.
In addition, Seymour's claim that his rights as a constructive trust beneficiary
should prevail over Craig's Sec. 544(a) strong-arm powers is not supportable
because, even if Seymour's argument were valid, he failed to plead the remedy
of a constructive trust in proceedings below.
Regardless of the operation of Sec. 544(a) and Sec. 541(d) of the bankruptcy
code, Seymour's appeal must fail because, under Florida state law, he had no
equitable interest in the Florida property. Fla.Stat.Ann. Sec. 689.07(1) provides
that a deed or conveyance of real estate "in which the words 'trustee' or 'as
trustee' are added to the name of the grantee, and in which no beneficiaries are
named nor the nature and purposes of the trust, if any, are set forth," grants "a
fee simple estate" with "both the legal and beneficial interest in the real estate
conveyed," provided that no declaration of trust is recorded. Because the deed
conveying the Florida property to Crabtree "as trustee" did not name the trust's
beneficiaries nor state the trust's nature or purpose and because the Agreement
and Declaration of Trust was never recorded, Crabtree became the fee simple
owner of the property. Craig, as bankruptcy trustee, succeeded to Crabtree's fee
simple interest in the Florida property. Although Fla.Stat.Ann. Sec. 689.07(4)
does provide that Sec. 689.07 should not prevent any beneficiary under an
unrecorded declaration of trust from enforcing the terms thereof against the
trustee, this provision does not give Seymour any equitable interest in the
Florida property which would be enforceable against Craig, who obtained fee
simple title to the property from Crabtree. Because Craig, as bankruptcy
trustee, possessed fee simple title to the Florida property under Florida law, he
is entitled to all proceeds from the sale of the property.
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