TITLE STANDARDS SUMMARY OF BANKRUPTCY TITLE STANDARDS Materials By: Heather Wagner The Wagner Law Firm, LLC Roswell, Georgia Presented By: Heather D. Brown Brown Law, LLC Roswell, Georgia 169306
1 of 6 Summary of Bankruptcy Title Standards Presented by Heather Brown, Brown Law, LLC Written by Heather Wagner, The Wagner Law Firm, LLC I. Introduction. Chapter 21 of the State Bar of Georgia Title Standards (the Title Standards ) is the bankruptcy chapter of the Title Standards. This paper will summarize the Title Standards as they relate to bankruptcy. First, this paper will describe the requirements relating to bankruptcy records searches. Second, this paper will describe the process of obtaining title from a bankruptcy debtor or bankruptcy estate in Chapter 7, Chapter 11, Chapter 12, and Chapter 13 bankruptcies, as well as what happens in regards to bankruptcy discharges and when a bankruptcy case is dismissed. Next, this paper will describe the process of obtaining title through a bankruptcy stay. There are no currently published cases interpreting Chapter 21, and thus, the language of the Title Standards is the only guidance practitioners have in regards to these standards. II. Requirements Regarding Bankruptcy Records Search. Section 21.1 of the Title Standards provides guidance regarding the required scope of the bankruptcy records search. It provides that [t]he examining attorney is not required to examine the records of the Clerk of the United States Bankruptcy Court for the District in which the real property is located. If the examining attorney, however, has any notice of any bankruptcy proceeding, the examining attorney must inform the client about the effect of the bankruptcy on the marketability of title. 1
2 of 6 It is good practice for the examining attorney to require proof at closing that no bankruptcies are pending that could affect conveyance of the title to the property. The examining attorney should also include an exception regarding this in the certificate. III. Obtaining Title Through Bankruptcy Debtor or Bankruptcy Estate. Section 21.2 describes how to obtain title through a bankruptcy debtor or a bankruptcy estate. This section discusses how to convey title in relation to (a) a Chapter 7 Bankruptcy, (b) a Chapter 11 bankruptcy, (c) Chapters 12 and 13 bankruptcies, (d) bankruptcy discharges, and (e) dismissals of bankruptcy cases. For each category, this paper will provide a summary of that type of bankruptcy, identify the proper conveyancing party, and then describe how to transfer title. a. Chapter 7 Bankruptcy. A Chapter 7 bankruptcy is a bankruptcy proceeding that provides for liquidation the debtor s nonexempt property is sold and the proceeds are distributed to the debtor s creditors in accordance with the Bankruptcy Code. A Chapter 7 bankruptcy debtor may be an individual, partnership, corporation, or other business entity. As a preliminary determination before the examining attorney even gets to title, he/she needs to determine whether the proper party has executed the conveyancing document in question. In Chapter 7 cases, if a trustee has been appointed, the trustee is the proper party. If, however, the trustee has abandoned the property, the debtor would be the proper conveyancing party. If a Chapter 7 trustee has been appointed, marketable title can generally be conveyed if there is (1) a court order authorizing the sale of the property filed in the bankruptcy case showing that notice was given to all creditors and the opportunity for a hearing to object to the sale was 2
3 of 6 offered, (2) an order appointing an interim trustee by the U.S. Trustee or order showing the creditors election of the trustee, (3) proof that the property at issue was property of the estate and not otherwise exempted from the bankruptcy estate. If a Chapter 7 trustee has abandoned the debtor s real property to the debtor (i.e., the property was burdensome to the estate or of inconsequential value or benefit to the estate), the debtor can convey the property to a third party. In this scenario, marketable title may be conveyed upon proof that the trustee has abandoned the property after notice and hearing and has entered a notice of abandonment in compliance with local rules and the Bankruptcy Code. 1 Any liens on the abandoned property prior to the Chapter 7 proceeding remain on the property and must be paid, released, or satisfied. b. Chapter 11 Bankruptcy. A Chapter 11 bankruptcy, which usually involves a business organization, and is often referred to as a reorganization bankruptcy, generally involves the debtor proposing a plan of reorganization to keep its business running while paying creditors over time. Here, the Chapter 11 bankruptcy trustee (where one has been appointed) is the proper conveyancing party. If no trustee has been appointed, the debtor would be the correct conveyancing party. Determining marketability of title in a Chapter 11 case is more difficult, as these cases tend to be more complex than cases filed under other chapters of the Bankruptcy Code, and thus, it is difficult for the Title Standards to provide an examining attorney with clear rules that can be applied when real estate conveyances involve a Chapter 11 bankruptcy. The standards regarding Chapter 11 bankruptcies do, however, provide that marketability is not otherwise affected by the 1 Although many trustees make this abandonment part of the record during the Section 341 meeting of creditors, it is good title practice to formalize an abandonment by written notice to creditors and other third parties. 3
4 of 6 mere fact that a debtor s reorganization plan includes provisions for the sale of real property so long as such plan is confirmed and the plan authorizes the transaction at issue. Additionally, marketability is not impaired if a Chapter 11 debtor sells property prior to the confirmation of its reorganization plan if the procedures specified in the Bankruptcy and local rules have been followed, including, but not limited to, obtaining an order of sale with the required notice to creditors and the opportunity for a hearing. c. Chapters 12 and 13 Bankruptcies. A Chapter 12 bankruptcy is a type of bankruptcy proceeding that provides for the adjustment of debts of a family farmer or family fisherman with regular annual income, as those terms are defined in the bankruptcy code. This bankruptcy proceeding allows financially distressed family farmers or family fishermen to propose and carry out a plan to repay all or a portion of their debts. A Chapter 13 bankruptcy, which is often referred to as a wage earner s plan, provides for the adjustment of debts of an individual with regular income. Under both Chapter 12 and Chapter 13 bankruptcies, the debtor is the proper conveyancing party. Under both chapters, marketability is not otherwise impaired when a debtor has conveyed title to property if the debtor obtained a final order authorizing the sale after notice to creditors and the opportunity for a hearing. If there are any objections to the sale, marketability is also not impaired if the bankruptcy court conducts a hearing, issues an order approving the sale over any objections, and the ten-day appeal period has expired. It should also be noted that in Chapter 12 bankruptcies, a trustee will be appointed or there is a standing Chapter 12 trustee. In Georgia, there is a standing Chapter 13 trustee in each district. Thus, it is good practice to include the written consent of the applicable trustee for real estate conveyances coming out of a pending Chapter 12 or 13 bankruptcy estate. 4
5 of 6 d. Bankruptcy Discharges. Bankruptcy proceedings ordinarily discharge debtors from certain debts which in turn render those debts unenforceable against the debtor individually. Discharges, however, do not eliminate liens on property that are not otherwise avoided during a bankruptcy proceeding. Thus, a bankruptcy discharge has no impact on an unavoided lien or a cosigner's liability on a debt. Examining attorneys should further be aware that if the final order authorizing a sale of the property does not include the language "free and clear of all liens," then that lien could remain and impair marketability. e. Dismissals of Bankruptcy Cases. If a bankruptcy case is dismissed prior to a discharge of the debtor, then the property generally reverts back to its pre-filing status and subject to general state rights and remedies, marketability is generally not impaired when the debtor conveys the property. It is good practice, however, for the examining attorney to require proof at closing that no bankruptcies are pending which could impact title. IV. Title Obtained via Bankruptcy Stay Relief Provisions. Title may be obtained through bankruptcy stay relief provisions by express order of the Court or by a Chapter 11 plan of reorganization. In regards to an express order, marketability of title is not impaired by the fact that title is obtained through the foreclosure of a security instrument if it can be shown that (a) the court ordered stay relief and authorized foreclosure, (b) the creditor complied with the terms of such order in conducting the foreclosure, and (c) the stay relief order expressly included language that the automatic bankruptcy stay is vacated, terminated, annulled, modified, or lifted. 5
6 of 6 Additionally, marketability of title is not impaired when title is obtained through the foreclosure of a security instrument if a confirmed Chapter 11 bankruptcy plan provides that the real property could be foreclosed upon under certain terms and conditions and the examining attorney can verify that those terms and conditions were satisfied. V. Conclusion. While the above paper summarizes the Title Standards relating to bankruptcies, bankruptcy law is constantly evolving, and an examining attorney should be aware of these changes and how they may affect marketability of title. 6