Realtors need to know this about bankruptcy

Realtors may be asked to sell a house that is underwater; the amount owed on the mortgage is less than the value of the property. What is the best approach? First, find out everyone involved in the transaction and what they are doing – who is working on for the bank, does the bank have a release price, will the bank agree to allow enough time to market the property, or is the bank getting ready to do a foreclosure sale? Who is representing the homeowner and is the homeowner in bankruptcy?

If the homeowner is in bankruptcy, call the bankruptcy lawyer to find out whether a sale is possible and, most importantly, do not do any work unless and until the Bankruptcy Court approves your employment. Brokers that sell a house for a client in bankruptcy will not be paid unless the Bankruptcy Court has first reviewed and approved the sale contract. One other important consideration in bankruptcy – what happens if the client you get to buy the property is outbid in a bankruptcy sale? (more on bankruptcy sales in my next post.) Do you still get a commission even though your client did not buy the home? You can protect your commission in the event that the home is sold to someone other than your buyer by including a provision in your contract that your commission is earned so long as the property is sold for a sum in excess of the amount of your client’s bid. However, you may have to share your commission under these circumstances but that is far better than no commission at all. one other thing to think about in bankruptcy sales – what if the debtor is the winning bidder (i.e. perhaps the bidder has family members that will front the money necessary to buy the property)? Good drafting of your employment agreement can protect you in these circumstances as well. Being careful and informed are the keys to being successful when selling distressed real estate.

The Trouble with Trusts

Many attorneys and debtors alike are completely baffled by Trusts.  This post will provide you with the tools necessary to identify trust types, what your interest in a trust might be and how to protect it.  The following sections of the Bankruptcy Code are commonly applicable in cases involving trusts: 11 U.S.C. §541 (property of the estate); 11 U.S.C. §542 (turnover); and 11 U.S.C. §§544 and 548 (state and federal law fraudulent transfer avoidance). 11 U.S.C. §541(c)(2) specifically protects the debtor’s beneficial interest in a certain type of commonly encountered trust known as a “spendthrift trust.” In the absence of a spendthrift or discretionary clause in a trust, the beneficial interest of a debtor may be reachable by the bankruptcy trustee, a bad result.  Watch out also to be sure your trust has the correct “spendthrift” language required by your state. Trusts established by a debtor (so called “self-settled trusts) for their own benefit are usually not valid.  Be very careful to examine the powers of the Trustee of the Trust.  If the Debtor is also a Trustee of the Trust, those powers can be exercised by the bankruptcy trustee, another very bad result.  The following is a handy list of documents that will help to determine the type of trust you may have and how it will be  treated in bankruptcy:

  • Declaration of Trust or other similar document
  • Trustee Certificates
  • Schedule of Beneficiaries
  • Inventory of Trust property, Deed or Bill of Sale evidencing property owned by trust
  • Trust Bank Account Statements
  • Mortgages and other instruments evidencing the liabilities of the trust
  • Trust tax returns
  • Debtor and non-debtor beneficiary tax returns and K-1’s
  • Amendments to trust documents
  • Trustee Resignations
  • File of attorney that established the trust

Trust interests are quite complex and, for that reason, often overlooked.  Never file bankruptcy without first carefully reviewing the impact on a trust.

Mortgage Valid Despite Debtor's Two Last Names

                                                          Potato or Potatoe – Does the “e” Really Matter?

      In yet another decision addressing a potentially defective mortgage recorded in Massachusetts, Judge Boroff ruled that where a Debtor regularly used two last names spelled differently, either was legally sufficient.  Therefore, a mortgage recorded under either spelling provided constructive notice to a Chapter 7 Trustee and the mortgage could not be avoided.   The decision is Steven Weiss, Trustee vs. JPMorgan Chase Bank, N.A., Adversary Proceeding Number 14-3001 issued on September 29, 2014.

The Debtor, Yvette Thibault filed a Chapter 7 bankruptcy proceeding on October 30, 2013.  The Petition indicated that the Debtor was also known as Yvette Thibeault.  The Debtor and her husband acquired their principal residence in 1964.  The deed recited their last names as Thibeault.  Thereafter the Debtor and her husband entered into a series of 6 mortgages (5 of the mortgages had been discharged prior to case commencement), 5 under the name Thibeault and 1 under the name Thibault.  The sole remaining mortgage on the property at case commencement used the name Thibeault and this was the mortgage that the Trustee sought to avoid.  The Debtor and her husband also recorded a “Certificate of Correction in Name of Owner of Real Estate” stating “our present name is ‘George and Yvette Thibault.’”   The Debtor’s drivers’ license listed the Debtor’s last name as Thibault.

The Trustee urged the Court to find that the mortgage was defective because the mortgage was not recorded using the “legally correct” spelling of the Debtor’s last name, which in the Trustee’s view was Thibault – the name that appeared on the Bankruptcy Petition, on the Debtor’s drivers’ license and in the Certificate of Correction.  The Court disagreed, finding that under Massachusetts common law, “unless adopted for a fraudulent or nefarious purpose”, a person may be known by more than one name.  Because the Debtor regularly spelled her name with, and without, an “e”, both names were legally valid.  The Court cites a long line of Massachusetts cases for the proposition that “recording under any name by which a person is known constitutes constructive knowledge of the instrument” and, therefore, the mortgage in question, containing a correct spelling of one of the Debtor’s two last names, could not be avoided by the Trustee.

My sense is that a key fact in the case was that the surnames on the challenged mortgage matched the surnames on the Deed.  Indeed, in footnote 7 of the decision, the Court notes that its decision should not lead to “mischief” (e.g. debtor’s claiming multiple names) because M.G.L. ch. 184, Section 25 provides that “an instrument is ‘recorded in due course’ only if ‘so recorded in the registry of deeds . . . as to be indexed in the grantor index under the name of the owner of record.’” The lesson for counsel is clear – carefully review source documents to be sure spellings are accurate and for any hint that a party may be known by more than one name.

BEWARE THE VANISHING MASSACHUSETTS HOMESTEAD EXEMPTION

On August 6, 2014, Judge William Hillman issued a decision in In re Marybeth Bauer Williams, 14-10559-WCH, addressing an issue of great importance to consumer bankruptcy lawyers. Judge HIllman was presented with an issue of first impression in Massachusetts that required him to interpret Section 11 of the Massachusetts Homestead Law which provides protection for proceeds generated by the sale of homestead property. That Section provides in relevant part that if a home is sold, the proceeds received on account of the sale are entitled to the protection of the Homestead statue “for a period ending on the date on which the person benefited by the homestead either acquires another home the person intends to occupy as a principal residence or 1 year after the date on which the sale or taking occurred, whichever first occurs”. In Williams, the Chapter 7 Trustee asserted that the protection afforded homestead proceeds terminated because the proceeds were not reinvested within one year and Judge Hillman agreed with the Trustee.

 

The Facts – The Debtor owned a home with her spouse. The parties separated and agreed to sell their home and split the proceeds, which they did on March 29, 2013, each receiving $31,640.49. The Debtor filed Chapter 7 on February 13, 2014, within one year of the sale of the home, listing $29,000.00 in a bank account on Schedule B and claiming the funds as exempt proceeds from the sale of her home on Schedule C pursuant to the Massachusetts Homestead Statute. The one year period provided under Section 11 of the Homestead statute expired post-petition on March 29, 2014 and the Debtor had not yet re-invested the proceeds in a new home. The Chapter 7 Trustee filed an objection to the homestead exemption, asserting that the Debtor’s exemption claim had vanished by operation of law and that all the proceeds in the bank account were property of the estate available for distribution to the Debtor’s creditors.

 

The Ruling – The Debtor argued that her exemption was fixed on the petition date – the proceeds were exempt on the date the petition was filed and that could not change with the passage of time. The Court acknowledged the general rule that exemptions are determined when a petition is filed but noted that the scope of the exemption must be determined by state law. The Court first explored the nature and extent of the protection afforded proceeds generated by the sale of homestead property by the Massachusetts statute, stating that the “protection afforded sale proceeds is not absolute”.   The Court noted that the effect of the one year limitation in Section 11 was not to terminate the homestead exemption but rather to limit its term. The Court also found that the time limit in Section 11 did not conflict with the Bankruptcy Code. Therefore, the Court concluded that the temporal limitation in Section 11 of the Homestead Statute was enforceable and ruled that the protection afforded the Debtor’s proceeds by Section 11 had expired. However, because the Debtor’s divorce proceeding was not yet concluded, the Court continued the Trustee’s objection generally, finding that the proceeds were exempt under Section 6 of the Massachusetts Homestead Statute until the Probate proceedings were concluded and the parties rights to marital property were fixed.

 

Takeaway – The one year time limit in Section 11 of the homestead statute is enforceable post-petition. Proceeds generated by the sale of homestead property that are not invested in a new homestead within one year after the sale date, even if the expiry of the one year period occurs post-petition, are not exempt from creditor claims.