Belfance v. Shelton (In re Shelton)

Citation: 593 B.R. 755Docket: Case No. 14-51588; Adversary Proceeding No. 16-05068

Court: United States Bankruptcy Court, N.D. Ohio; October 17, 2018; Us Bankruptcy; United States Bankruptcy Court

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Kathryn A. Belfance, the chapter 7 trustee in the bankruptcy case of Angela D. Shelton, filed a Complaint on November 22, 2016, seeking authorization to sell the estate's interest in real property located at 101 Tolbert Circle, Montevallo, Alabama, and a determination of the rights to this property among the parties involved. The Trustee claims her interest in the property is superior to that of defendant Annie Bell Tolbert Shelton, based on her strong-arm powers under 11 U.S.C. § 544. The Defendant responded to the Complaint on February 9, 2017, and subsequently filed a motion for summary judgment on August 25, 2017, the same day the Trustee filed her own motion for summary judgment. After full briefing of both motions, the Court has decided to deny the Trustee's Motion and grant the Defendant's Motion.

The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334, with venue appropriately set under 28 U.S.C. § 1409(a). This matter is classified as a core proceeding per 28 U.S.C. § 157(b)(2). The summary judgment standard allows parties to move for judgment if there is no genuine dispute regarding material facts, with the burden shifting to the non-moving party to present sufficient evidence to support their claim or defense. The evidence must be viewed in the light most favorable to the non-moving party, and mere speculation is insufficient to oppose a summary judgment motion.

The parties have submitted a stipulated record to the Court, confirming that no genuine disputes exist regarding material facts pertinent to the Motions. The Debtor is the daughter of the Defendant, who, on April 27, 2009, executed a durable power of attorney (POA) in Akron, Ohio, designating the Debtor as her attorney in fact. This POA grants broad authority over the Defendant's person and property, including the ability to sell or lease real property, but does not specifically allow the Debtor to transfer property from the Defendant to herself. At the time of the POA's execution, the Defendant was not adjudicated incompetent, and the POA is not contingent upon her disability.

On August 2, 2010, the Debtor executed a warranty deed conveying the Defendant's interest in real estate to herself, which was recorded that same day in Shelby County, Alabama. Although the deed states that $10,000 was exchanged, the parties have stipulated that no payment was made. The Debtor filed for Chapter 7 bankruptcy on June 19, 2014, listing the property in her assets. A title report dated July 28, 2016, indicated that the deed executed by the Debtor as attorney in fact was based on an improperly acknowledged POA, which did not authorize the Debtor to convert the Defendant's assets for her own benefit and was deemed invalid upon the Defendant's incompetency.

On January 12, 2015, the Trustee received a "Limited Liability Title and Lien Certificate" from Shelby County Abstract Title Company, indicating that the title to the Real Estate was held by the Debtor. This 2015 Title Report did not question the Defendant's power of attorney (POA) or the validity of a deed dated August 2, 2010. In contrast, the 2016 Title Report raised concerns about the POA and the title transfer to the Debtor but was not included in the record title. Subsequently, on November 22, 2016, the Trustee filed a Complaint seeking permission to sell the Real Estate under Section 363 of the Bankruptcy Code and a declaration regarding the parties' rights in the property. The Defendant, in her Answer, denied knowledge of the Debtor's fee simple interest in the Real Estate and disputed the Trustee's right to sell it unencumbered.

Under Section 544(a)(3) of the Bankruptcy Code, a trustee assumes the rights of a hypothetical bona fide purchaser of the debtor's real property, exempting her from actual knowledge of prior claims or interests. However, the trustee has constructive knowledge of claims imputed under nonbankruptcy property law. In Alabama, a power of attorney lacking specific authority to transfer real property to the attorney-in-fact does not confer such power, rendering any resulting deed void. Consequently, no party can acquire valid title from the attorney-in-fact, and even bona fide purchasers would be charged with constructive knowledge of the defective recorded instruments, including the deed and the POA. Therefore, the existence of the deed, which attempts to transfer property to the attorney-in-fact, serves as a warning that necessitates further inquiry into the authority for such a transfer.

The Trustee cannot obtain good or superior title to the Real Estate from the Debtor due to the Debtor's purported title being void. Under 11 U.S.C. § 541(a)(1), a bankruptcy estate includes all legal or equitable interests of the debtor at the case's commencement, subject to certain exceptions. Section 544 of the Bankruptcy Code grants the Trustee the rights of a hypothetical bona fide purchaser without regard to actual knowledge of any claims against the property. However, the validity of these rights is determined by state law, which, in this case, is Alabama law.

To qualify as a bona fide purchaser under Alabama law, one must (1) purchase in good faith, (2) obtain legal title, (3) provide valuable consideration, and (4) have no notice of any third-party claims. Notice can be actual or constructive, and joint possession does not constitute constructive notice. The Trustee's powers under 11 U.S.C. § 544(a)(3) apply regardless of actual knowledge, though constructive knowledge can affect the Trustee's standing. Case law indicates that if a bona fide purchaser would be subject to a claim due to constructive notice, the Trustee cannot avoid that claim. For instance, a mortgage lacking a legal description did not provide constructive notice, allowing the Trustee to potentially avoid the claim if the mortgage had described the property adequately.

In Alabama, purchasers are deemed to have constructive notice of all information contained in the deeds or instruments that establish the title they are acquiring, which if known, would equate to actual notice (Shorter v. Frazer, 64 Ala. 74, 81 (1879)). Constructive notice also applies when circumstances would lead a reasonable person to inquire about potential competing interests (In re Stanphill, 312 B.R. at 694; Touchstone v. Peterson, 443 So.2d 1219, 1225 (Ala. 1983)). The burden of proving that a trustee had constructive notice lies with the defendant (Lightsey, 255 Ala. at 547, 52 So.2d at 381). The principles governing constructive knowledge in Alabama are similar to those in Ohio (Field v. Ocwen Loan Servicing, 490 B.R. 555, 561 (Bankr. S.D. Ohio 2012)). 

The relevance of the 2016 and 2015 Title Reports to the Trustee's constructive knowledge is challenged. Under Alabama law and relevant interpretations, only official property records provide constructive knowledge to bona fide purchasers or bankruptcy trustees, not third-party analyses (Shorter, 64 Ala. at 81; In re Schlabach, 490 B.R. at 561). Constructive notice pertains solely to the recorded deeds or instruments that establish title, and since the Title Reports were not recorded, they do not contribute to the official record of the Real Estate. Therefore, the Court deems the Title Reports irrelevant and will focus on the recorded documents in Shelby County, Alabama, specifically the Power of Attorney (POA) and the Warranty Deed.

Under Alabama Real Property Law, a Power of Attorney (POA) must explicitly authorize an agent to transfer the principal's real property to herself; otherwise, such a transfer is deemed ineffective. In Lamb v. Scott, 643 So.2d 972 (Ala. 1994), the Alabama Supreme Court ruled that powers of attorney are interpreted strictly, limiting agents to the powers expressly granted. The court found that because the POA did not expressly allow the attorney-in-fact to convey property to herself, the deed executed for such transfer was invalid. In the case at hand, a mother had granted her daughter a durable POA, allowing her to manage certain transactions, but the POA lacked specific authorization for self-dealing. The question at issue is whether Alabama law permits such a transfer under the given POA. The court concluded that Alabama law prohibits an agent from transferring real estate to herself without explicit permission, regardless of the POA's execution under Ohio law. Therefore, Alabama law governs real estate transactions within its jurisdiction.

Alabama law does not recognize the Power of Attorney (POA) as valid authority for the Debtor to execute the Warranty Deed, rendering the deed void and without legal effect. If the deed were merely voidable, the Debtor's bankruptcy estate could claim an interest in the Real Property, as no action had been taken to void the deed by the petition date. The distinction between "void" and "voidable" is significant, as void deeds are legal nullities, and the Alabama Supreme Court has classified deeds executed by an attorney-in-fact without explicit authority as void. Consequently, the Warranty Deed did not transfer any interest in the Real Estate from the Defendant to the Debtor, meaning the Debtor lacked any interest in the property when she filed for bankruptcy, which affected the Trustee's rights under 11 U.S.C. 541 and 544(a)(3).

Even if the deed were voidable rather than void, the Trustee could not claim superior rights due to constructive notice of the Defendant's rights. The Trustee was aware of the defects in the Debtor's title and the Defendant's right to challenge the Warranty Deed. The Debtor appeared to hold title at the time of her bankruptcy petition; however, the recorded POA indicated that the Debtor did not have the necessary authority to transfer the title to herself. Any potential purchaser, including the Trustee, would have been on inquiry notice regarding the validity of the transfer, reinforcing the conclusion that the Real Estate was never part of the Debtor's bankruptcy estate according to Alabama property law.

A bankruptcy trustee cannot sell real estate free and clear of liens or encumbrances under 11 U.S.C. 363(f) based on an asserted bona fide dispute when the property was not part of the bankruptcy estate. The court finds that the transfer of the defendant's interest in the real estate to the debtor was void under Alabama law, which prohibits an attorney-in-fact from transferring a principal's property without express written authority. Consequently, the debtor did not hold an interest in the real estate at the time of the bankruptcy petition, and thus, it was never part of her bankruptcy estate as per 11 U.S.C. 541(a). As a result, the trustee lacks the rights of a hypothetical bona fide purchaser under 11 U.S.C. 544(a)(3) and cannot sell the property under 11 U.S.C. 363(b) and (f). The court denies the trustee's motion for summary judgment and grants the defendant's motions for summary judgment. The judgment will be entered separately by the Clerk. Additionally, while the parties agree on the authenticity of the power of attorney (POA), they did not stipulate its recordation. However, evidence shows the POA was recorded in Shelby County, which the trustee does not dispute.