Court Allows Sale of Property in Joint Tenancy with Non-Debtors

Posted by NCBRC - January 29, 2014

When it comes to estate planning (and carpentry) “use the right tool for the job.” This was the ultimate message in Soule v. Gragg (In re Harrison), No. 11-13580, A.P. No. 13-1010 (Bankr. N.D. Okla. Jan. 23, 2014). In that case, the debtor’s parents, the Graggs, quitclaimed a ¼ portion of two rental properties to the debtor and ¼ to the debtor’s sister. The title to the properties listed the debtor, her sister, and her parents as joint tenants with right of survivorship. The Graggs retained all the benefits and responsibilities of ownership including collecting rent and paying taxes and expenses.

When the debtor filed chapter 7 bankruptcy she described the two properties in a footnote as follows: “This is the Debtor’s parent’s real estate and in their estate planning process, they had added the Debtor and her sister to the legal title via quit claim deed dated April 28, 2011. Debtor did not derive any income from said property as possession, control and actual ownership remain in her parents.” Nonetheless, the trustee moved to liquidate the properties, divide the proceeds between the four owners, and use the debtor’s portion for the benefit of the bankruptcy estate under section 363(h). The parents objected to the sale of the properties.

While, under Oklahoma law, a quitclaim deed “convey[s] all the right, title and interest of the maker thereof in and to the premises therein described,” the court noted that state law permits flexibility in interpretation of a deed when the parties intended to convey something else. But that flexibility relates to issues as between the parties. Here, the trustee argued that under section 544(a)(3) he stands not in the debtor’s shoes but in the shoes of an innocent bona fide purchaser (BFP), therefore the parties’ actual intent with respect to the deed was not relevant.

The court agreed but only insofar as the BFP would not have had constructive notice of the parties’ intent. Taking as true that the deed was intended to create only a resulting trust rather than a current beneficial interest in the properties, the court nonetheless found that the properties were not protected from sale by the trustee. Nothing in the deeds themselves would have put a BFP on notice that there was a trust relationship between the debtor and her parents with respect to the properties Nor did the fact that the properties were not in the debtor’s possession trigger the trustee’s obligation to inquire past the interest of the lessee into the relationship between lessors. Finally, the court rejected the debtor’s argument that the mere fact that the deed at issue was a quitclaim deed puts the purchaser on notice to inquire further finding that, while that may be the case under some state law (Kansas in particular), it is not the case under Oklahoma law. The fact that, because of the bankruptcy filings, the trustee actually knew that the debtor’s interest was intended as a trust in favor of the Graggs, was not relevant because a BFP would not have had that information.

Turning to whether the trustee should be permitted to sell the property in its entirety, the court looked to the requirements of section 363(h). It found that division of the property for sale of only the debtor’s portion was impracticable. With respect to the impact on the co-owners the court said, “The Defendants make no cognizable argument regarding how the sale of the Properties will cause a detriment to their interests. The Defendants will essentially be made whole because they will receive the full value of their remaining 3/4 interest in the Properties after the sale under § 363(h).”

Harrison opinion



Post a Comment

Your email is never shared. Required fields are marked *