1976, May, Pg. 607. Marketable Title After Bankruptcy.

• Author: by John D. Weber

5 Colo.Law. 607

Colorado Lawyer

1976.

1976, May, Pg. 607.

Marketable Title After Bankruptcy

607Vol. 5, No. 5, Pg. 607Marketable Title After Bankruptcyby John D. WeberWith increasing frequency during the past several years examiners of titles to real property have been confronted with the appearance of bankruptcy documents in chains of title. The title questions which arise in a bankruptcy proceeding are similar to those in other estate proceedings wherein the law allows for the transfer of title to real property by methods other than deed. Furthermore, estate proceedings generally require the recording of additional documents in order to eliminate the interests of creditors and other parties in the property.

The basic question which confronts the examiner upon discovery of a bankruptcy proceeding is, "What documents must be recorded in order to establish a marketable title of record after bankruptcy?" The following comments are designed as a basic guide to a title examiner in dealing

608with various documents and problems which might be encountered. These are arranged in the order they would most likely arise in examining a chain of title rather than in the order of their importance.Petition or Decree of AdjudicationThe first document an examiner might find of record is a petition or a decree of adjudication. When either or both of these instruments are recorded in the county records without any additional documents, title should be considered unmarketable. It is important to recognize that although the recording of these documents gives record notice that bankruptcy proceedings have commenced, they do not pass title to the trustee, as of the date of filing the petition of the bankrupt's estate. Rather, record title remains vested in the bankrupt, subject to being vested in the trustee upon recording of the additional documents discussed below.(fn1) Accordingly, any transfer of the property by the bankrupt after the petition or decree of adjudication has been recorded is affected by constructive notice of the bankruptcy proceedings, and thus is subject to the jurisdiction of the court and the right of the trustee to acquire title.

No Trustee AppointedIn many cases a trustee is not appointed because of the insufficiency of nonexempt assets available for creditors.(fn2) In fact, the recent practice of the bankruptcy courts in Colorado has been to determine at the first meeting of creditors whether there are sufficient assets to warrant the appointment of a trustee. If not, the court may immediately abandon nonexempt property and enter its order of discharge. If this occurs the only recorded document necessary to clear title in the name of the bankrupt is a certified copy of the order of abandonment by the court.(fn3)

Passage of Title to the TrusteeIf there are sufficient assets in the bankrupt estate the next logical link in the chain is the transfer of title to a specific trustee in bankruptcy. This occurs by operation of law upon qualification of the trustee and the approval of his bond. The only document necessary to be recorded to evidence passage of title to the trustee is a certified copy of the Bankruptcy Court's order approving trustee's bond.(fn4) Once recorded, this order is evidence of the trustee's title to the property.(fn5) The Bankruptcy Act imposes the responsibility upon the trustee to record this order in each county wherein the bankrupt owns real property, except that county in which the original records of the bankruptcy are kept.(fn6) Since a Federal Bankruptcy Court acquires jurisdiction over all property of the bankrupt wherever located, an order recorded in Colorado may have been entered by a court in some other district.(fn7)

609The examiner should consider the effect of recording this order as though a deed has been executed, delivered and recorded, conveying all of the bankrupt's property to the trustee as of the date the petition was filed.(fn8)In the event the trustee fails to record any of the bankruptcy documents or the order approving trustee's bond, a bona fide purchaser or lienor, without actual knowledge of the bankruptcy proceeding, who acquires his interest in consideration of a present fair equivalent value, takes title to such property free of the trustee's interest.(fn9) Remember, this rule presently applies in all Colorado counties, except Denver.(fn10) Although some trustees in Colorado will record the order in Denver, this practice is not consistent and should not be relied upon. In Colorado, the Bankruptcy Court, at the present time, convenes only in the counties of Denver, Pueblo and Mesa. However, since no original records are kept in Pueblo or Mesa counties, only title to property located in Denver would require an examination of the Bankruptcy Court file in addition to the records in the office of the county clerk and recorder.

Nature of Trustee's TitleThe extent of the interest which passes to the trustee is all that property which the bankrupt, prior to filing the petition, "could have transferred, or which might have been levied on or sold under judicial process against him."(fn11) An analysis of this definition reveals that the trustee acquires more rights in the property than the bankrupt himself had. In essence, the trustee may wear the hat of the bankrupt or the hat of a lien creditor, whichever suits his purpose. For example, if property has been conveyed by the bankrupt by deed which is not recorded, the trustee will acquire title by virtue of his status as a lien creditor.(fn12) The major limitation upon the trustee's ownership is the homestead exemption of the bankrupt, which now has been automatically extended to each person residing in his or her home in Colorado.(fn13)

Property Acquired after Filing PetitionOnce the...