A hearing on the parties' cross motions for summary judgment was held on April 18, 2001. Eugenia Sleeper appeared on behalf of the plaintiff, Larry Compton. Melvin Stephens appeared on behalf of the defendant, Patrick Stelzer. Having reviewed the motions, oppositions and replies, considered the comments of counsel made at the hearing, and taken judicial notice of the papers and pleadings on file in In re Troxell, Main Case No. A98-01177-DMD,

IT IS ORDERED:

1) The defendant's motion for summary judgment, filed on February 26, 2001, is granted.

2) The plaintiff's motion for summary judgment, filed on February 23, 2001, is denied.

Judgment will be entered accordingly.

        7 ABR 105 

Discussion

The material facts in this proceeding are not in dispute. The debtors owned a 65-foot vessel which needed significant repairs. In the summer of 1997, they made arrangements with the defendant, Patrick Stelzer, to have the repair work done. It was initially estimated that the labor and materials required for the vessel repair would cost no more than $90,000.00.

The debtors didn't have the funds to pay Stelzer on an ongoing basis and could not qualify for a loan to finance the work. They agreed to pay for all the repairs upon completion by refinancing the vessel, which was encumbered by a first preferred maritime marine mortgage in favor of First National Bank of Anchorage ("FNBA"). Although FNBA wouldn't lend the debtors the money needed to repair the vessel, it did agree to loan Stelzer the necessary funds. He borrowed against his business account receivables to finance the job. Stelzer agreed to take a promissory note and deed of trust against the debtor's home to secure repayment of the repair work. Their arrangement was reduced to a written "Memorandum of Agreement for Repair Services and Security of Payment," which was signed by Stelzer on July 25, 1997 and by the Troxells on August 14, 1997. The agreement provided:

1. Subject of Contract. Troxells are the owners of the Spirit of Adventure, a 65 foot vessel, Official Number 680 737. Owners are in the process of renovating the vessel to be used as a charter vessel and have hired Kodiak Boat Repairs [Stelzer] to provide certain services in connection with the renovation.

. . . .

9. Promissory Note. The parties acknowledge that Kodiak Boat Repair is borrowing funds against its accounts receivables in order to perform this agreement and the Owners shall secure the payments due under this agreement by executing         7 ABR 106  a promissory note (Exhibit 2) in the amount not to exceed the aggregate of $90,000.

. . . .

12. Deed of Trust. Troxells agree that in order to secure their obligations under the promissory note, they will execute and record a Deed of Trust (Exhibit 3) securing such note with their property more particularly described as follows:

LOT ONE (1), UNTIED [sic] STATES SURVEY NUMBER 5695, according to the Plat thereof, located in the Kodiak recording District, Third Judicial District, State of Alaska. ⁽¹⁾

Consistent with the terms of the agreement, the Troxells executed a promissory note and a deed of trust to secure the obligation to Stelzer. Both documents referenced the debt to Stelzer as being "in the aggregate amount not to exceed NINETY THOUSAND DOLLARS ($90,000.00)." ⁽²⁾ The deed of trust was not immediately recorded.

The repairs to the vessel were more extensive than expected. When Stelzer finished the work in November of 1997, the final bill was $158,360.14. The Troxells were unable to refinance the vessel to pay Stelzer, and subsequently defaulted on their marine mortgage to FNBA. On February 13, 1998, Stelzer filled out and recorded a form "Claim of Lien" in the Kodiak Recording District. ⁽³⁾ The claim of lien was captioned "Patrick R. Stelzer dba Kodiak Boat Repair, Inc., vs. Nick and Sally Troxell dba M/V Spirit of Adventure," and further stated:

        7 ABR 107 

NOTICE IS HEREBY GIVEN that on the 13th day of February, 1998, at the request of and under contract with Nick and Sally Troxell, whose address is P.O. Box 3510, Kodiak, AK 99615, _______ commenced to perform labor, services, or to furnish materials or to supply equipment, to be used upon vessel M/V Spirit of Adventure, located in boat harbor in Kodiak, Alaska, and legally described as:

House and property;

U.S. Survey #5695
Lot #1

At Anton Larsen,

Kodiak Island

Kodiak Recording District

of which property the owner, or reputed owner, is Nick and Sally Troxell. The contract prices [sic] is $158,360.14. The description of the labor, services, materials, or equipment furnished is as follows: labor and materials to finish out entire interior of vessel including all woodwork, laminate, electrical, plumbing and flooring, the performance of which labor, services, or the furnishing of which materials, or the supplying of which equipment, ceased on the 24th of November, 1997; that said labor, services, material or equipment was of the value of $158,360.14, for which labor, services, material, or equipment, the undersigned claims a lien upon the property herein described for the sum of $158,360.14, (and interest at 10 ½ % per annum beginning 2/24/98 . . . ). ⁽⁴⁾

The claim of lien was signed by Stelzer, and also contained his mailing address and telephone number.

In July, 1998, FNBA foreclosed its marine mortgage in the Troxell's vessel. Stelzer received $22,498.63 from the sale proceeds, which sum should be credited against the total amount of his claim. Stelzer subsequently consulted with an attorney and showed him the original deed of trust he had gotten from the Troxells. The deed of trust         7 ABR 108  was recorded at Book 159, Page 229 in the Kodiak Recording District on September 2, 1998.

The Troxells filed their chapter 7 petition on October 20, 1998. The chapter 7 trustee obtained court authority to sell the Troxell's home and initiated this adversary proceeding to avoid Stelzer's deed of trust lien against the property under 11 U.S.C. §§ 544(a)(3) and 547(b). Stelzer contends that his security interest in the Troxell residence cannot be avoided because his previously recorded lien was sufficient to put third parties on inquiry notice of his claim against the property.

Analysis

Under 11 U.S.C. § 547(b), the trustee may avoid a transfer of an interest of the debtor in property:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made -

(A) on or within 90 days before the date of the filing of the petition, . . . and

(5) that enables such creditor to receive more than such creditor would receive if -

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

        7 ABR 109 

The trustee must prove these elements by a preponderance of the evidence. ⁽⁵⁾ Further, for the purposes of § 547, a transfer of real property "is perfected when a bona fide purchaser of such property from the debtor against whom applicable law permits such transfer to be perfected cannot acquire an interest that is superior to the interest of the transferee." ⁽⁶⁾

Under § 544(a)(3), the trustee holds the status of a bona fide purchaser of real property from the debtor and can avoid transfers which would be voidable by one holding that status. The issue of whether an interest in real property has been perfected is determined under state law. ⁽⁷⁾ State law also determines whether the trustee holds the status of a bona fide purchaser under 11 U.S.C. § 544(a)(3). ⁽⁸⁾ This status is determined "as of the commencement of the case." ⁽⁹⁾

In this case, Stelzer's deed of trust was recorded within 90 days of the date the Troxells filed their petition. Stelzer has raised no defenses to the trustee's avoidance of the deed of trust under § 547(b), relying instead upon his earlier recorded mechanic's lien to preserve his security interest in the realty. Resolution of this case hinges on the effect of the earlier recorded claim of lien. In Alaska, from the time a document is recorded in the records of the recording district where real property is located, it gives constructive notice of its contents to subsequent purchasers and holders of a security         7 ABR 110  interest in the same property. ⁽¹⁰⁾ Additionally, Alaska law recognizes the concept of inquiry notice, and a purchaser having inquiry notice of a prior interest in property will take the property subject to that prior interest. ⁽¹¹⁾ "If [a] purchaser has notice of an encumbrance to his title, he is charged with knowledge of its extent and nature if such were discoverable by reasonable inquiry." ⁽¹²⁾

[Inquiry] notice may be found where the later conveyee knew of facts or circumstances which should have induced further investigations, which investigations, if prosecuted, would have produced actual knowledge of the prior conveyance. When the facts suffice to impose the duty of investigation, the purchaser is charged with notice of what a proper investigation would have discovered, whether the investigation was, or was not, made. It follows that there is no 'notice' when either a reasonable inquiry reveals nothing, or a search, though not conducted, was certain to be futile. ⁽¹³⁾

The first step in an inquiry notice analysis is to determine whether unusual facts or circumstances exist which would cause a reasonably prudent person to initiate an investigation. I find that Stelzer's lien would have induced a reasonable person to make further investigation. Although the document is a form mechanic's lien, the information on the form is atypical. It describes a claim for services performed in renovating a vessel, rather than making improvements to real property, but also somehow relates to the Troxell's residence. The lien identifies the Troxells as both the owners of the realty and vessel, and it mentions that the work on the vessel was performed under a contract with the Troxells. Additionally, the lien discloses a very sizeable claim, $158,360.14. In fact, the claim exceeds the fair market value of the Troxell property. ⁽¹⁴⁾ Finally, the lien had been recorded only 9 months before the Troxells filed bankruptcy. A bona fide purchaser, as of the date the petition was filed, could not reasonably consider the lien to represent a stale or abandoned claim. Nor would it be prudent to simply dismiss the document as being a claim solely against the vessel. Such claims are not usually found in the real property records.

The trustee has argued that, because a mechanic's lien only binds real property for 6 months, ⁽¹⁵⁾ Stelzer's lien expired before the petition was filed and can therefore be avoided under § 544(a)(3). I disagree with this analysis. Because of the unusual information contained on Stelzer's claim of lien, it would be unreasonable to assume that Stelzer's claim was, in fact, a mechanic's lien. The lien must be viewed from         7 ABR 112  the perspective of a reasonably prudent layperson, not from the perspective of an attorney with knowledge of the lien duration provisions of the Alaska statutes. The contents of Stelzer's lien were sufficient to give a reasonably prudent layperson good reason for further investigation. "[W]here there are matters of record giving constructive notice of a competing interest . . . or an inquiry notice of a prior claim, the trustee is precluded from using the avoiding powers." ⁽¹⁶⁾ The trustee cannot rely on the Alaska mechanic's lien provisions to defeat Stelzer's lien, because the lien is clearly not a mechanic's lien. ⁽¹⁷⁾

Conclusion

The trustee cannot avoid Stelzer's security interest in the Troxell residence in accordance with 11 U.S.C. §§ 544(a)(3) and 547(b) because the lien recorded by Stelzer on February 13, 1998, gave inquiry notice of his claim. Summary judgment will be granted in favor of Stelzer. This proceeding will be dismissed, with prejudice. A judgment will be entered accordingly.

DATED: June 4, 2001

BY THE COURT


DONALD MacDONALD IV
United States Bankruptcy Judge

N O T E S:


1.      Parties' Ex. 1, attached to Stipulated Briefing Schedule and Undisputed Facts, filed Feb. 23, 2001 (Docket No. 10).
2.      Parties' Ex. 2 and 3.
3.      The claim of lien was recorded in Book 154 at Pages 727-728 of the records of the Kodiak Recording District. Parties' Ex. 4.
4.      Parties' Ex. 4.
5.      11 U.S.C. § 547(g); Arrow Elecs., Inc. v. Justus (In re Kaypro), 218 F.3d 1070, 1073 (9th Cir. 2000).
6.      11 U.S.C. § 547(e)(1)(A).
7.      Hurst Concrete Prod., Inc. v. Lane (In re Lane), 980 F.2d 601, 604 (9th Cir. 1992).
8.      Weisman v. Robertson (In re Weisman), 5 F.3d 417, 419-20 (9th Cir. 1993).
9.      11 U.S.C. § 544(a).
10.      AS 40.17.080(a).
11.      Methonen v. Stone, 941 P.2d 1248, 1252 (Alaska 1997) (existence of well and water lines running to adjoining lots can create inquiry notice of community water system agreement); Rosenberg v. Smidt, 727 P.2d 778, 784 (Alaska 1986) (purchaser at Trustee's sale under deed of trust has inquiry notice if trustee's deed contains nothing more than mere recitals); First Nat'l Bank of Anchorage v. Dent, 683 P.2d 722, 724 (Alaska 1984) (mechanics lien claimant filed lien against real property but failed to file lis pendens after commencing suit to foreclose the lien; subsequent purchaser on inquiry notice of mechanics lien claim); Burnett, Waldock & Padgett Inv. v. C.B.S. Realty, 668 P.2d 819, 822 (Alaska 1983) (where junior lienholder had litigation report which indicated senior lienholder had issued notice of default and commenced foreclosure proceeding, junior lienholder had inquiry notice of the senior's foreclosure sale); Lown v. Nichols Plumbing & Heating, Inc., 634 P.2d 554, 561 (Alaska 1981), Rabinowitz C.J., dissenting. (prior recorded donee of land made valuable improvements only after lender's deed of trust recorded, lender retains priority; dissent-unusual circumstances surrounding transfer did not place donee on inquiry notice of deed of trust recorded in the wrong district); Fikes v. First Fed. Sav. & Loan Ass'n of Anchorage, 533 P.2d 251, 259 (Alaska 1975) (construction lender knew of buyer's $2,500.00 earnest money; lender is not a bonafide purchaser within the meaning of recording statute due to notice); Modrok v. Marshall, 523 P.2d 172, 174 (Alaska 1974) (ex-husband's possession of property purchased by third party gives rise to need for reasonable inquiry; inquiry satisfied by buyer's review of quit claim deed signed by husband and discussion with attorneys for ex-husband and wife).
12.      Methonen, 941 P.2d at 1252 n.6.
13.      Lown, 634 P.2d at 561 (Rabinowitz, C.J. dissenting), citing 6A R. Powell, The Law of Real Property 916, at 289-90 (Rohan rev. ed. 1986).
14.      The Troxell residence was sold by the trustee for $127,000.00.
15.      AS 34.35.080(a) provides that a mechanic's lien doesn't bind real property for more than 6 months from the time it is recorded unless, within that time, an action is commenced to enforce the lien or an extension of lien is recorded.
16.      5 Collier on Bankruptcy ¶ 544.03 at p. 544-7 - 544-8 (15th ed. revised 2001).
17.      I found the trustee's Exhibits 5 and 6 (consisting of copies of commitments for title insurance, dated August 18, 1999 and November 16, 1999, respectively, with reference to the Troxell property) unpersuasive support for the trustee's argument that Stelzer's lien should not be found to give inquiry notice. While neither of these exhibits listed Stelzer's lien as being of record against the property, they also failed to reflect Stelzer's deed of trust. Additionally, a trustee's sale guarantee prepared on June 5, 1998, with reference to the Troxell property did list the Stelzer lien as an encumbrance. See Ex. A to Aff. of Timothy J. Hurley, filed on June 28, 2000, as an attachment to Response to Trustee's Obj. to Claim No. 1 [Docket No. 57] in Main Case No. A98-01177-DMD.