21.1 Scope of Record Search
The 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. However, if the examining attorney has notice of any proceeding in bankruptcy, he is required to report to his client the effect the bankruptcy has upon marketability of title.
Comment: The examining attorney should routinely require proof at closing that no bankruptcies are pending which may affect title to the property conveyed, and should also include an exception in his certificate.
21.2 Title Through Bankruptcy Debtor or Bankruptcy Estate
(a) Proper Conveyancing Party The Bankruptcy Code (11 U.S.C. Section 101, et seq.) is divided into various chapters. Chapters 7, 11, 12 and 13 relate to liquidation or reorganization cases filed by individuals or other entities. The examining attorney should first determine that the proper party has executed the conveyancing document in question. Under Chapter 7 and Chapter 11 (in cases where a Chapter 11 trustee has been appointed), the trustee is the proper conveyancing party unless the Chapter 7 trustee has abandoned his interest in the subject property. In Chapter 7 cases where the trustee has abandoned the property, Chapter 11 cases (where no trustee has been appointed) and Chapters 12 and 13 cases, the debtor would be the proper conveyancing party.
NOTE: It is also considered good title practice to have the U.S. Trustee, in the case of a Chapter 11, or the Chapter 12 or 13 trustee consent in writing to the sale.
(b) Chapter 7 - Trustee’s Sale
Where a Chapter 7 trustee has conveyed title to subject property, a marketable title subject to general state rights and remedies may be conveyed if there is: (1) an order authorizing the sale of the property properly filed in the bankruptcy case showing that notice was given to all creditors and an opportunity for a hearing to object to the sale was offered; (2) an order appointing an interim trustee by U.S. Trustee or order showing creditors’ election of trustee; (3) proof showing that subject property was “property of the estate” and not otherwise exempted from the “bankruptcy estate.” Comment: In some Chapter 7 cases it may be possible for the debtor to receive a discharge, but for the bankruptcy estate to remain open as the trustee continues to liquidate assets to which he/she still holds legal title. Although it is considered good title practice to record all relevant bankruptcy court orders, the marketability of the title in the subject property is not affected if such orders or copies thereof are otherwise available to the examining attorney for a period of seven (7) years from the date of the conveyancing document in question.
(c) Chapter 7 - Property Abandoned by Trustee
Where a trustee has abandoned the debtor’s real property to the debtor because the property was burdensome to the estate or of inconsequential value and benefit to the estate, the debtor may convey it to a third party. A marketable title, subject to general state rights and remedies, may be conveyed by the debtor upon: proof showing that the trustee has abandoned the property after notice and hearing and has entered a notice of an abandonment in compliance with Bankruptcy Code rules and local rules, where applicable. Liens which attached to the abandoned property prior to the filing of the Bankruptcy proceeding remain a lien upon the property and must be paid or satisfied or released.
Comment: Many trustees simply make this abandonment part of the taped record of Section 341, First Meeting of Creditors, so it is considered good title practice to formalize the abandonment by written notice which provides creditors and other parties in interest an opportunity to object within a specified time period after the filing of the notice, usually fifteen (15) days.
(d) Chapter 11 - Plan of Reorganization
Marketability is not otherwise impaired by the fact that a debtor’s plan of reorganization contains provisions in it for the sale of real property provided that such plan is confirmed and it authorizes the transaction being reviewed by the examining attorney. Marketability is also not otherwise impaired where a Chapter 11 debtor sells property prior to the confirmation of a plan of reorganization when procedures specified in the Bankruptcy Code and local rules have been followed, including obtaining an order of sale with the requisite prior notice to creditors and an opportunity for hearing. Comment: Cases filed under Chapter 11 of the Bankruptcy Code, tend to be more complex than cases filed under other Chapters. Consequently, it is difficult and almost impossible to provide an examining attorney with specific rules that can be used when conveyances involve a Chapter 11 case.
(e) Chapters 12 and 13
Marketability is not otherwise impaired where a Chapter 12 or 13 debtor has conveyed title to property if: the debtor has obtained a final order authorizing the sale after notice to creditors and the opportunity for hearing. In the event of any objections to the sale, the marketability is also not impaired if the bankruptcy court actually conducted a hearing and issued an order approving the sale over any objections and the ten (10) day time period for filing an appeal has expired. Comment: In Chapter 12, a trustee will be appointed or in some districts there is a standing Chapter 12 trustee. In Chapter 13 cases in Georgia, there is a standing Chapter 13 trustee in each district. It is considered good title practice for conveyances out of either a pending Chapter 12 or 13 estate to include the written consent of the trustee to the sale.
The bankruptcy proceeding typically “discharge” individual debtors from certain types of debts, the actual effect of which is to render certain debt unenforceable against the debtor personally. A discharge does not eliminate the lien on any property not otherwise avoided during the pendency of the estate and thus the marketability may be affected. A discharge has no effect on an unavoided lien or co-signer’s liability on the debt. Comment: The examining attorney should be mindful that the debtor may be discharged from the obligation but if the final order authorizing a sale does not contain the language “free and clear of all liens,” the lien could remain against the property and affect the marketability of title.
It is possible that a bankruptcy case could be dismissed prior to a discharge of a debtor. When this occurs, the property generally reverts to its pre-filing status and marketability is generally not impaired where a conveyance is taken from the debtor subject to general state rights and remedies.
Comment: The examining attorney should routinely require proof at closing that no bankruptcies are pending which may affect title to the property conveyed.
21.3 Title Through Stay Relief Provisions
(a) Express Order
Marketability is not impaired by the fact that title is derived through the foreclosure of a security instrument if it can be determined that: (1) the court ordered stay relief and authorized foreclosure; (2) the creditor, in conducting the foreclosure, complied with the terms of such order; (3) the stay relief order expressly contained the language that the automatic stay is “vacated,” “terminated,” “annulled,” “modified,” or “lifted.” Comment: Court ordered stay relief can generally take one of two forms: either there was an express order authorizing the sale or provisions were set forth in a confirmed plan of reorganization which may trigger the lifting of the stay automatically upon the happening or nonhappening of an event such as the failure to make scheduled payment.
(b) Plan of Reorganization Marketability is not impaired by the fact that title is derived through the foreclosure of the security instrument if a confirmed Chapter 11 bankruptcy plan provided that the real property could be foreclosed under certain terms and conditions and the examining attorney can verify that these terms and conditions were satisfied. Comment: The examining attorney should be aware of the constant evolution of bankruptcy law.