Memorandum of Decision Re: Defective Deed of Trust

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re KING COLE HOMES, INC.,                                     No. 93-10877      Debtor. ___________________________/ KING COLE HOMES, INC.,      Plaintiff,    v.                                                                              A.P. No. 93-1126 LANDSING PACIFIC FUND, et al.,      Defendants. ______________________________/
Memorandum of Decision
     Defendant Landsing Pacific Fund holds deeds of trust to real property owned by debtor in possession King Cole Homes, Inc. Whoever prepared the deeds of trust forgot to attach as "Exhibit A" the metes and bounds descriptions of the property. In this adversary proceeding, King Cole argues that this defect renders the Landsing security interests avoidable under bankruptcy law.      The deeds of trust did contain a reference to another deed of trust to the same property containing a proper description. In addition, after the deeds of trust were signed but before they were recorded the assessor's parcel numbers were written on them. Also, notices of default containing the proper description were recorded. In addition, a lis pendens was recorded by Landsing.      Both sides seem to make the mistake of assuming that section 544(a)(3) of the Bankruptcy Code pertains to this action. That section cannot possibly apply, because of the state of the public records on the date of filing. A debtor cannot use the preference provisions of section 547 to "erase" the record and make section 544(a)(3) applicable. In re Gurs, 34 B.R. 755, 757 (9th Cir.BAP 1983).      However, California real property perfection laws are still at the heart of this case. Section 547(e)(1)(A) of the Bankruptcy Code provides that for preference purposes a transfer of an interest in real property occurs when a bona fide purchaser cannot acquire an interest superior to the transferee. Thus, if Landsing's security interests were perfected as to third parties within the preference period and not contemporaneously with its loan (section 547(c)(1)), then they are avoidable under section 547 without reference to section 544.      The lis pendens was recorded within the 90-day preference period. If no other recording is sufficient to give Landsing rights superior to those of a bona fide purchaser, its liens are avoidable under section 547 because the consideration for the liens was given long before and the transfer would be deemed to have occurred during the preference period pursuant to section 547(e)(1)(A).        The notice of defaults were recorded outside the 90-day preference period. King Cole, citing Owens v. Palos Verdes Monaco, 142 Cal.App.3d 855 (1983), argues that since a notice of default is not a conveyance or an instrument, it does not impart constructive notice to a bona fide purchaser. However, that case dealt with a recorded document where no statute authorized its recording. 142 Cal.App.3d at 868. Recording of a notice of default is authorized by California Civil Code section 2924. One of the purposes of requiring notices of default to be recorded is clearly to put potential purchasers on notice that foreclosure proceedings are pending. Thus, Landsing's security interests were perfected against bona fide purchasers at least as of the recording of the notices of default.      Moreover, the deeds of trust are not so defective as to fail to give notice by themselves. Even disregarding the assessor's parcel numbers, they expressly refer to a prior deed of trust on the same property by beneficiary and date of recording. King Cole's argument that Lansing's collateral might only be a part of the collateral described in the other deed of trust is without merit; the reference at the very least is sufficient to put a purchaser on notice that inquiry must be made. An instrument need not be exactly accurate in order to impart constructive notice, but only accurate enough to require inquiry as to its inaccuracies. 3 Augustine & Zarrow, California Real Estate Law & Practice, section 82.14[2], citing Leonard v. Osborne, 169 Cal.157, 161 (1915).      The court is also not convinced that the assessor's parcel numbers must be ignored because they were written on the deeds of trust after execution. The numbers accurately describe the property, and would have been noted by anyone checking title. Under proper equitable circumstances, even forged deeds may be given legal effect. 3 Augustine & Zarrow, California Real Estate Law & Practice, section 80.35. There is certainly no equity in ignoring a true and accurate property description which properly reflects the agreement of the transferor.      For the foregoing reasons, Landsing's deeds of trust will be deemed to be valid and unavoidable, without need for reformation. Counsel for Landsing shall submit an appropriate form of judgment.
Dated: October 7, 1993                                                                           _______________________                                                                                                                Alan Jaroslovsky                                                                                                                U.S. Bankruptcy