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To "perfect" an interest in real property under Washington law, a party must record a deed signed by the grantor. An unrecorded interest in property is not binding on a subsequent purchaser in good faith.
Appellant provided debtor with a line of credit. The credit limit was a percentage of debtor's inventory and eligible accounts receivable. Appellant eventually loaned debtor over $ 9 million, of which at least $ 6 million remained owing. In exchange, the debtor granted appellant a security interest in all its inventory and accounts receivable, including any proceeds from the sale of either. The debtor promised not to dispose of any of its secured assets without appellant’s permission. In 1985, the debtor obtained a parcel of real property located in Auburn, Washington in exchange of an account receivable. The appellant asked the debtor to record a deed of trust on the property in its favor. The debtor refused. Subsequently, the debtor declared bankruptcy under Chapter 11. It then sold the Auburn property for $ 1 million. The funds were placed in a segregated account. The appellant claimed that it has a priority interest in the proceeds of the sale of the Auburn property under two theories. First, the appellant claimed it has a perfected security interest in the Auburn property, as "proceeds" from the sale of the AFFS account. In the alternative, the appellant claimed that it has an equitable interest in the property, entitling it to a constructive trust and removing the property from the estate. The Bankruptcy Court rejected both theories. The appellant sought review.
The court found that appellant did not have a perfected security interest because the Uniform Commercial Code did not extend to real property and also because an unrecorded interest in property was not binding on a subsequent purchaser in good faith. The court further held that since appellee had no actual or constructive notice of appellant's claimed interest, the property remained part of the debtor's estate.