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Trustee May Sell Properties Allegedly Part of Debtor's Parents' Estate Plan

Wednesday, January 15, 2014
By Stephanie M. Acree

Jan. 13 --A debtor's interest in two residential properties was property of the estate despite the debtor's parents' intention that the properties were part of an estate plan and that the transfer of interest in the properties to the debtor should not occur until the parents' death, the U.S. Bankruptcy Court for the Northern District of Oklahoma held Dec. 30 (Soule v. Gragg (In re Harrison), 2013 BL 358060, Bankr. N.D. Okla., No. 4:13-ap-01010-M, 12/30/13).

Judge Terrence L. Michael found that even if the debtor held the properties in a resulting trust in favor of her parents, it would still not defeat the trustee's interest as a bona fide purchaser under Section 544(a)(3) of the Bankruptcy Code.

Quitclaim Deeds

Jimmy and Glenda Gragg, in an attempt to gift certain property upon their death or incapacity, executed deeds conveying an interest in two residential properties to their daughters, Angela Harrison and Melody Lavender. Harrison received her interest in the first property by a quitclaim deed dated June 21, 2011, wherein the Graggs were the grantors and Harrison and Lavender were the grantees. Harrison received her interest in the second property also by a quitclaim deed dated April 27, 2011, wherein four unrelated individuals were the grantors and the Graggs, Harrison, and Lavender were the grantees.

Harrison filed for Chapter 7 protection on Dec. 15, 2011, with unsecured creditors' claims totaling $35,232. A title search conducted by the Chapter 7 trustee showed that pursuant to the June 21 deed and the April 27 deed, title to the two properties was vested in the Graggs, Harrison, and Lavender as joint tenants with rights of survivorship. On her schedules, Harrison listed a 1/4 interest in fee simple in both properties with the following footnotes: “This is the [d]ebtor's parent's real estate and in their estate planning process, they had added the [d]ebtor and her sister to the legal title via quit claim deed … . Debtor did not derive any income from said property as possession, control and actual ownership remain in her parents.”

No Recognizable Ownership Interest

The trustee sought to liquidate the debtor's interest in the properties for the benefit of the estate's creditors. The Graggs and the debtor argued that the debtor had no recognizable ownership interest in the properties and therefore the trustee had no right to sell them. At trial, the Graggs presented evidence that they had received all rental income, paid all taxes, and took all tax deductions associated with the properties going back several years.

An appraiser testified that the current market values of the properties were approximately $63,000 and $120,000, respectively. The parties agreed that partition in kind of the properties was impracticable.

Hypothetical Bona Fide Purchaser

The court said that under Oklahoma law, a quitclaim deed is sufficient to “convey all the right, title and interest of the maker thereof in and to the premises therein described.” However, the court said, parties are allowed to present evidence that the deed does not accurately reflect what the parties intended to convey. The parties' intention generally controls as between the parties, but is not necessarily binding on a third party bona fide purchaser.

Section 544(a)(3) gives trustees the rights and powers of a hypothetical bona fide purchaser of a debtor's real property, which includes the right to obtain title free of certain unrecorded interests. The trustee is not constrained by any actual knowledge they may have regarding the property, but is charged with constructive notice of anything that appears in the conveyances constituting the chain of title as of the filing of the bankruptcy.

The trustee also has a duty to inquire about any person in possession of the property at the time of the bankruptcy filing if that person is someone other than the debtor and is charged with constructive notice of any facts gleaned from such an inquiry. If the inquiry reveals anything inconsistent with the record title, it triggers a duty to make additional inquiries.

Unrecorded Resulting Trust

In this case, the court said, nothing on the face of the deeds would put a bona fide purchaser on notice that any trust relationship existed between the grantors and grantees. Both properties were occupied by tenants who claimed only to have leasehold rights from the Graggs, which would be consistent with what was found in the recorded deeds. Therefore, there would be no duty to inquire further and a bona fide purchaser would not have discovered the alleged resulting trust.

Furthermore, the court said that even if it were to assume the existence of a resulting trust, it would still not defeat the title of a bona fide purchaser because under Oklahoma law, “no unrecorded trust, either express or implied in law, will defeat the title of a bona fide purchaser of real property.” Therefore, the court concluded that the trustee may sell the debtor's interest in the properties for the benefit of the estate.

Benefit vs. Detriment

Pursuant, to Section 363(h) of the Bankruptcy Code, a trustee may sell property of the estate held in joint tenancy with other non-debtors under certain conditions:

“(1)  partition in kind of such property among the estate and such co-owners is impracticable;

(2)  sale of the estate's undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners;

(3)  the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners; and

(4)  such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.”

The parties stipulated that both the first and fourth condition were satisfied. With regard to the third condition, the court said courts frequently take judicial notice that this condition is satisfied in the case of residential rental property. Finally, the court found that the benefit to the estate outweighed any detriment to the co-owners. The court said that the proceeds from the sale of the properties could potentially pay all of the unsecured claims, while the co-owners would receive the full value of their remaining 3/4 interest. Therefore, the court found that the trustee was permitted to sell the properties under Section 363(h).

To contact the reporter on this story: Stephanie M. Acree in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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