Memorandum of Decision Re: 544(a)(3)
In 1988, plaintiff Ross Mayfield and his two brothers, Brent and Rick Mayfield, were the shareholders of defendant Arrow Paving, Inc., a construction contracting firm. Arrow was a tenant of the commercial real property located at 500 C Pinoleville Road, Ukiah, California, which was owned jointly by plaintiffs and debtors in possession Ross and Paula Mayfield and by Brent and Tamara Mayfield. In late 1988, all three brothers and a third party decided to form a new corporation, defendant Warrior Industries, Inc., for the purpose of taking on a large job in Southern California. They all agreed that the third party would contribute cash, Rick would contribute equipment, and Ross and Brent, along with their wives, would contribute their interests in the Ukiah property. Legal documents were drawn up, and some were signed. Brent and Tamara deeded their interest in the real property to Warrior. However, Ross and Paula did not execute a deed even though they accepted the 50,000 shares of stock in Warrior they had agreed to accept in return for their interest in the property. Even though there was no deed, Warrior assumed responsibility for the payments on the obligations secured by the property and the property taxes. In late 1989, Ross had a falling out with his brothers and stopped working with them; he formally resigned as an officer of Warrior in 1990. He and Paula filed their Chapter 11 petition in 1992, and remain in possession of their estate. By this adversary proceeding, they seek to establish that their half of the real property belongs to their bankruptcy estate, and that Warrior has no interest in it. Ross and Paula raise three arguments: that there never was a meeting of the minds sufficient to form a contract, that enforcement of any contract is barred by the statute of frauds, that the contract is not enforceable because Paula did not sign, and that section 544(a)(3) bars any equitable claims to the property which Warrior might have. The court finds none of these arguments persuasive.
II. Formation and Enforceability of Contract
The court finds, from a preponderance of the evidence, that there was a valid and enforceable contract whereby Ross and Paula agreed to transfer their interest in the property in return for 50,000 shares of Warrior. The court finds particularly compelling the facts that Brent and Tamara transferred their interest in the property to Warrior, that Ross accepted 50,000 shares of stock from Warrior, and that thereafter all of the rights and obligations of ownership were exercised and performed by Warrior. While there is no formal written agreement, there are more than sufficient writings to take the agreement outside the statute of frauds. Most importantly, minutes of a Warrior board of directors meeting of December 30, 1988, signed by Ross, recite that 50,000 shares are to be issued to Ross "in consideration of the contribution by him to the corporation of his 50% share in land and 50,000 shares to Brent Mayfield in consideration of the contribution by him to the corporation of his 50% share of the same land."
III. Failure of Paula to Sign
Ross and Paula argue that section 5127 of the California Civil Code makes the agreement unenforceable because Paula did not sign anything. However, it was clear from the evidence that Paula was involved in the business and assented in the agreement to the same degree as Ross. Section 5127 protects nonconsenting spouses, by requiring instruments to bear both spouses' signatures. It is irrelevant where the court is determining equitable rights rather than the validity of an instrument. The minutes referred to above are not an instrument, but merely a writing sufficient to satisfy the statute of frauds.
IV. Section 544(a)(3)
Section 544(a)(3) of the Bankruptcy Code gives the bankruptcy estate the same rights in real property as a bona fide purchaser. Ross and Paula argue that since nothing of record showed that Warrior had equitable rights in the real property, their bankruptcy estate takes the property free of any interest of Warrior. However, Arrow was clearly in possession of part of the property, with signs and marked equipment in plain view. Since there was no recorded lease in favor of Arrow, its possession was not consistent with record title and a potential purchaser would have been under a duty to ask it about its rights. Basch v. Tidewater etc. Co., 49 Cal.App.2d Supp. 743, 748-49 (1942); Annot. 17 A.L.R.2d 331 (1951). Such an inquiry would have revealed Warrior's claim of ownership, as the principals of Arrow were also principals of Warrior. Accordingly, section 544(a)(3) does not bar Warrior's equitable claims.
Ross and Paula agreed to transfer their ownership of their half of the real property to Warrior in return for 50,000 shares of Warrior stock. They received the stock, and Warrior is accordingly the owner, in equity, of the real property; pursuant to section 541(d) of the Code, the bankruptcy estate holds only bare legal title and not an equitable interest. The minutes of the board of directors meeting signed by Ross are sufficient to satisfy the statute of frauds, as is full performance by Warrior. The estate does not have the rights of a bona fide purchaser because a purchaser would have had a duty to ask tentants with unrecorded leases about their interests and such an inquiry would have revealed Warrior's claim to the ownership of the entire parcel. Accordingly, Ross and Paula will take nothing by their complaint. Warrior shall be entitled to a judgment that it is the sole owner of the property and that Ross and Paula have no right, title, or interest in it. Warrior and Arrow shall also recover their costs of suit. This memorandum constitutes the court's findings and conclusions. Counsel for Warrior shall immediately submit an appropriate form of judgment.
Dated: June 29, 1993 _______________________ Alan Jaroslovsky U.S. Bankruptcy