November 24, 2014

Tenth Circuit: Filing Lis Pendens Does not Create a Transfer of Interest in Property Under Bankruptcy Code

The Tenth Circuit Court of Appeals published its opinion in Ute Mesa Lot 1, LLC v. First-Citizens Bank & Trust on Monday, November 25, 2013.

Ute Mesa is a real estate developer in Colorado. In October 2007, it received a $12 million loan from Defendant-Appellee United Western Bank (“Bank”) to finance the construction of a single family home. First-Citizens Bank & Trust acquired United’s interest in the loan and state court claims. To secure the loan, the Bank prepared a deed of trust incorrectly identifying Ute Mesa’s sole member as the owner rather than Ute Mesa. Because the grantor under the deed of trust was not the owner of the property, the deed of trust was ineffective in giving the Bank a lien on the property.

In May 2010, the Bank filed suit in Colorado state court seeking reformation of the deed of trust and a declaration that it had a first priority lien on the property. Two days later, the Bank filed a notice of lis pendens in the Pitkin County real property records. In August 2010, Ute Mesa petitioned for Chapter 11 bankruptcy relief. Ute Mesa continued as debtor in possession of the property. In April 2011, Ute Mesa filed an adversary proceeding against the Bank seeking to avoid the lis pendens as a preferential transfer. The bankruptcy court granted the Bank’s motion to dismiss, and the federal district court affirmed.

Ute Mesa argued that under 11 U.S.C. § 547(e)(1)(A), a “transfer of an interest in property” occurs when a bona fide purchaser cannot acquire an interest superior to that of a creditor. According to Ute Mesa, because the lis pendens prevents a bona fide purchaser from acquiring an interest in the property superior to the Bank’s interest, the lis pendens qualifies as a transfer of an interest in the property. The Bank argued that the first and only step of the analysis is to determine whether an underlying property interest exists under state law. Because a lis pendens is merely a notice and does not constitute a lien, no transfer occurred. The Tenth Circuit agreed with the Bank and affirmed.

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