In these consolidated appeals Clarence G. Mixon and Orie L. Mixon appeal from an order of the district court that reversed the bankruptcy court and held that the trustee of the bankrupt estate of John Thomas Mixon was entitled to an interest in certain property.

This action was brought by the trustee to set aside a transfer of property by the debtor, John Thomas Mixon, and to recover the property, not from the initial transferee, Clarence G. Mixon, but from a subsequent transferee, Orie L. Mixon. We hold that the trustee cannot recover because the subsequent transferee, Orie L. Mixon, acquired the property "for value ... in good faith, and without knowledge of the voidability of the transfer avoided." 11 U.S.C. Sec. 550(b)(1) (1982).

* On July 8, 1982, Clarence G. Mixon recorded a fraudulent deed of trust on North Carolina real property he owned. He named his brother, John Thomas Mixon, as the secured party. The deed purported to secure payment for a $70,000 debt that Clarence owed John Thomas. However, no debt existed. This action was taken solely to shield Clarence's property from his creditors.

John Thomas later encountered financial difficulties of his own. On October 17, 1983, in order to release John Thomas's interest in Clarence's property, Clarence signed a promissory note dated July 8, 1982, as evidence of the debt ostensibly secured by the deed of trust. John Thomas immediately marked the note satisfied.

Also on October 17, Clarence transferred the encumbered property to his father, Orie Mixon. This transfer was made in satisfaction of past loans from Orie and as consideration for future advances. The deed was recorded on October 17, 1983. Orie did not conduct a title search before accepting the property.

On October 19, 1983, the county registrar, relying on the note that had been marked satisfied, released the deed of trust.

On October 21, 1983, John Thomas petitioned for bankruptcy.

The bankruptcy judge held that John Thomas's estate in bankruptcy included the interest created by the fraudulent deed of trust. He also held that the release of the deed to Clarence could be avoided both as a preferential transfer and as a transfer made with the intent to defraud John Thomas's creditors. See 11 U.S.C. Secs. 547(b), 548(a)(1)(2). The judge ruled, however, that even though the transfer from John Thomas to Clarence could be avoided, the trustee could not recover the property from Orie. The judge found that Orie had taken the property in good faith and for value. He also found that Orie did not know of the deed of trust or of John Thomas's financial difficulties at the time he acquired the property. Therefore, Orie lacked knowledge of the voidability of the release of the deed of trust. Accordingly, Orie was entitled to the protection of 11 U.S.C. Sec. 550(b)(1).1 In reaching this conclusion, the bankruptcy judge expressed the opinion that the authority of the trustee to recover property transferred in the circumstances presented by this case is governed by the express provisions of Sec. 550 and not by state law.

The district court accepted the bankruptcy judge's findings of fact. It also agreed with the bankruptcy judge that the trustee could not recover the property pursuant to 11 U.S.C. Sec. 550. However, the court noted that although Orie lacked actual knowledge of the deed of trust, he had constructive notice because he acquired the property two days before the deed was released. See N.C.Gen.Stat. Sec. 47-20 (1984). Accordingly, the district court, reversing the bankruptcy court, held that John Thomas's trustee could recover the property.

Actually, this case involves a contest between Clarence's creditors, who are pressing their claims in other proceedings, and John Thomas's creditors, whose surrogate is the trustee in bankruptcy. Whether Clarence's creditors can divest Orie of the property must await the outcome of proceedings that are not before us. We can decide only the trustee's claim.

In agreement with the bankruptcy judge, we conclude that the trustee's right to recover property from transferees of the debtor is limited by Sec. 550(b)(1). That section provides that "[t]he trustee may not recover ... from--(1) a [subsequent] transferee that takes for value ... in good faith, and without knowledge of the voidability of the transfer avoided...." The bankruptcy judge found that Orie satisfied these conditions. The district court accepted these findings. The findings bind us because they are not clearly erroneous.

The trustee argues, however, that he is entitled to enforce the deed of trust against Orie within the confines of the bankruptcy code. He contends that because Orie had constructive notice of the deed of trust, he took the property with "knowledge of the voidability of the transfer avoided." Therefore, the trustee asserts, Orie does not qualify under Sec. 550(b)(1).

Although "knowledge" as used in Sec. 550(b)(1) is not defined in the Code or in the legislative history, we conclude that it does not mean "constructive notice." As several courts have noted when analyzing Sec. 544 of the bankruptcy code, "[t]he term 'notice' may include either actual or constructive notice, while the term 'knowledge' includes only actual notice. That Congress selected the term 'knowledge' is significant." In re Richardson, 23 B.R. 434, 439 (Bankr.D.Utah 1982); accord In re Euro-Swiss International Corp., 33 B.R. 872, 881 (Bankr.S.D.N.Y.1983); In re Kelly, 29 B.R. 708, 710 (Bankr.D.Me.1983); see also McCannon v. Marston, 679 F.2d 13, 16-17 (3d Cir.1982) (error to equate knowledge with notice). We believe that this reasoning applies with equal force to Sec. 550(b)(1) of the Code.2 Therefore, Orie is entitled to the protection of Sec. 550(b)(1) notwithstanding his constructive notice of the deed of trust.

Moreover, even if one were to accept the trustee's argument that "knowledge" includes "constructive notice," Orie should prevail. Constructive notice of the existence of the deed of trust does not encompass constructive notice of the fraudulent nature of the trust and its release. Consequently, the state recording statutes did not charge Orie with contructive notice of "the voidability of the transfer."

The judgment of the district court is reversed, and this case is remanded with instructions to dismiss the trustee's complaint.

REVERSED AND REMANDED.