The Advanced Real Property Institute takes place on Wednesday, October 2, 2013. Paul Rieger, of First American Title, is speaking at the event on Avoiding Bankruptcy Roadblocks – Issues to Spot In Advance of Closing. Paul posts this follow-up to his article, “Will Bankruptcy Tank Your Real Estate Closing,” published in the July/August Maryland Bar Journal.
In the article I described eleven scenarios where bankruptcy could potentially delay or kill a real estate closing. Besides lavishing praise over the relative brevity of the article, friends and colleagues were quick to communicate the obvious response: “Great. Now, how do you work around these ‘so called’ issues?” Well, not every scenario includes a workaround, but here are some approaches for the title insurance underwriters visiting our Ground Rules Blog to consider.
An unauthorized transfer while the property is still part of the bankruptcy estate may be difficult to work around. But common foul-ups are often innocent and relate to timing: the Chapter 7 debtor has received a discharge, the asset has been valued as worthless to the estate, but the case has not been “closed” such that title has not re-vested back in debtor. Transferring title at this point results in a voidable conveyance. But because the case will, or should, be closed, imminently, a title insurer could take the calculated risk that oil will not be discovered on the property (or some other estate property) such as to cause the Trustee to revoke the “no asset” report and delay closing the case – or, worse yet, elect to sell the asset. But if the asset is not scheduled, or if the “no asset” report has not been filed, the insurer should beware. The Trustee will have a two-year period in which to avoid the transfer.
How about failure to wait-out the fourteen-day stay period following an order authorizing the sale of the property? Again, if the sale is uncontested or consensual, there will be little chance of an actual appeal and no prejudice to any party. The title insurer will face what should be a potential short-term title marketability issue. If the purchaser sells or refinances immediately following acquisition, a title examiner could raise the failure to conform to the fourteen-day stay, even if an appeal was not filed. (The rules are the rules). But, as is so often the case in the title world, time would typically heal this wound. Insuring a subsequent sale or refinance by the buyer just a few months later would probably not generate any title underwriting concern.
A recurring scenario is the lack of a lift stay when a bankruptcy is filed subsequent to the foreclosure sale. Yes, we all know that it is too late for that bankruptcy filing to have any substantive effect on the foreclosure sale. But the cases indicate that the stay should be lifted, anyway, to allow for the subsequent administration of the foreclosure case and conveyance of the property to the purchaser. Well, sometimes what should happen does not. One underwriting approach would be to review the bankruptcy filing. Does the debtor report the property as an asset, or merely as a former asset surrendered to the lender? If the latter, a title insurer could approach the situation as a “no harm, no foul.” If the debtor has quit the property and is not using the bankruptcy as an attempt to save the property, the failure to lift the stay should eventually fade into the ether as an unexciting technicality. But if the debtor occupies the property or claims the property as an asset, trouble could be brewing. Insuring the title under such scenario could result in the title insurer having to provide a legal defense to what will ultimately be an unsuccessful effort by the debtor to save the property following the foreclosure sale.
In Maryland, a joint tenancy is severed when a joint tenant debtor files a Chapter 7 bankruptcy, per In Re Panholzer. The consequences of such can be far reaching, as described in the article. But what about filing a Chapter 11 or Chapter 13? Does the same result apply? The language in Panholzer is fairly broad and is generally believed to apply to any bankruptcy filing. But there are no Maryland or Fourth Circuit precedents confirming such. (Many jurisdictions do not embrace the Panholzer approach at all, for any chapter). A title insurer could take the position that filing a Chapter 11 or 13 does not necessarily sever the debtor’s joint tenancy. One Connecticut case held that, in a Chapter 13, unlike a 7, there is no “presumed conveyance by the debtor” upon filing the petition because the “debtor remains in possession of all property of the estate.” The right of survivorship favoring a debtor was determined to be property of the estate and filing the Chapter 13 did not sever and destroy that property right. Matter of Cameron, 164 B.R. 428 (Bankr. D. Conn.1994).
Finally, there is the deed in lieu and attendant “preference” and “fraudulent transfer” concerns. If the deed in lieu is recorded within the 90-day preference period and enables the lender to receive more than it would have received in a Chapter 7 liquidation, the transfer is voidable. Because title insurance policies now include creditors’ rights coverage for “prior transfers,” title insurers must review the economics of the post deed in lieu transaction being insured. Presently, homes are routinely being sold by REO lenders for much less than their deed in lieu debt, which helps solve the concern. But inevitably, as the market corrects, sales exceeding the deed in lieu consideration will become more common, thus raising the possibility of subsequent bankruptcy challenges and additional creditors’ rights exceptions in title insurance policies.
Well, that’s all for now. Next month we’ll explore the doctrine of instantaneous seisen…