Memorandum of Decision Re: Date of Transfer

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re PARTRIDGE KNOLLS, INC.,                                       No. 1-87-01619      Debtor. ________________________/ PARTRIDGE KNOLLS, INC.,      Plaintiff,    v.                                                                                  A.P. No. 1-87-0186 CONTINENTAL SAVINGS OF AMERICA,      Defendant. ________________________/
Memorandum of Decision
     In December, 1984, debtor and plaintiff Partridge Knolls, Inc. borrowed $5 million from defendant Continental Savings; the obligation was secured by a deed of trust to a large tract of undeveloped property. Partridge defaulted a few months later, and filed a Chapter 11 petition on October 30, 1985, in order to avoid loss of the property by foreclosure.      In December, 1985, Partidge and Continental entered into an agreement whereby Continental would lend more money to develop the property. Partridge agreed to dismiss the Chapter 11 proceedings and deliver a deed in lieu of foreclosure to an escrow agent who was instructed to record and deliver it to Continental if Continental had not been paid in full by August 4, 1986. A memorandum of the agreement was recorded on December 27, 1985. Partridge did not pay off Continental, but the escrow holder did not deliver or record the deed in lieu until October 3, 1986. Partridge commenced the present Chapter 11 proceedings on October 2, 1987, and seeks to avoid the transfer of the property as either a preference or a fraudulent conveyance.      By the motion now before the Court, Continental seeks summary judgment in its favor on the narrow ground that the transfer took place when the memorandum was recorded on December 27, 1985, or when it became entitled to delivery of the deed on August 4, 1986, and not when the deed in lieu was actually delivered and recorded. For the reasons set forth below, the Court finds that the transfer, to the extent it was a transfer at all, took place when the deed was actually delivered and not when the agreement was recorded or Continental became entitled to delivery of the deed.      The agreement between Partridge and Continental set up an alternative means of foreclosure which then existed side-by-side with the remedies set forth in Continental's deed of trust. See Strike v. Trans-West Discount Corp. (1979) 92 Cal.App.3d 735, 743. The agreement was analogous to a deed of trust or other security device, and the delivery of the deed in lieu of foreclosure analogous to a trustee's sale, although without the opportunity for third party bidding. Continental's right to delivery of the deed did not constitute a transfer, any more than a beneficiary under a deed of trust can be said to own the property merely because he has met all the notice requirements and has the right to hold a trustee's sale if he so desires. Pursuant to section 101(50) of the Bankruptcy Code, a transfer takes place when there is a foreclosure of the debtor's equity of redemption. Partridge lost the right to redeem when the deed was delivered, not when Continental had a right to delivery.      The only way Continental could prevail in its motion would be to convince the Court that under California law once it had the right to the deed in lieu it could not have been compelled to accept a tender from Partridge of all monies owed in complete satisfaction of all its claims on the property, even though the deed had not yet been delivered. However, California law abhors both strict foreclosures and forfeitures. Cal.Civ.Code sections 2889, 3369. Moreover, it appears that California law would deem the agreement to be a mortgage which must be foreclosed judicially, meaning that Partridge still has a right to redeem. Beeler v. American Trust Co. (1944) 24 Cal.2d 1. The Court therefore finds that under California law Continental would have been obliged to accept full tender by Partridge at least until the deed was delivered.      The recording of the agreement had no more significance than the recording of a deed of trust; section 101(50) of the Code makes it clear that the transfer takes place when the debtor loses the ability to redeem. Since Partridge had the right to redeem up until the deed in lieu was delivered (and indeed may still have it), the transfer took place at the earliest on October 3, 1986, which is within one year before the petition was filed. Accordingly, Continental's motion must be denied.      Pursuant to Bankruptcy Rule 9021, counsel for Partridge shall submit an appropriate form of order.
Dated: March 17, 1988                                                                              _____________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy