IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
PARTRIDGE KNOLLS, INC., No. 1-87-01619
PARTRIDGE KNOLLS, INC.,
v. A.P. No. 1-87-0186
CONTINENTAL SAVINGS OF
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 _____________________