Improper Estate Planning Leads to Sale of Properties in Bankruptcy

By Ryan C. Wood

If you have properties you are trying protect either for estate planning purposes or for purposes of filing bankruptcy the most important lesson is to plan properly. It is always best to obtain the advice of an experienced professional like an estate planning attorney or a bankruptcy attorney to ensure you do not lose the very property you are trying to protect.

One family learned this lesson the hard way. In Oklahoma, Mr. and Mrs. Gragg transferred title to their three properties to themselves and their two daughters (Angela Harrison and Melody Lavender) via quitclaim deeds so that each of them had a 25% interest in the properties as joint tenants with the right to survivorship. They did this for estate planning purposes. Only two of the properties were at issue in this case. Both of the properties were paid in full. Neither of their daughters had made any payments towards to the house and the Graggs received all the rent and paid the corresponding taxes and used the deductions on their tax returns. Ms. Harrison filed for Chapter 7 bankruptcy protection. (In re Angela Michelle Edmound Harrison, Case No. 11-13580). Ms. Harrison listed her 25% interest in the properties in the petition schedules with footnotes indicating that her and her sister were added to the title of the properties for their parent’s estate planning purposes only. Harrison claimed she did not have any ownership or control over the properties. The total market value for both of the properties in question is approximately $170,000 to $180,000. The total creditor claims filed in the case was approximately $35,000. The Chapter 7 trustee in the case moved the court to sell the two properties for the benefit of Ms. Harrison’s creditors even though there were three other people on title to the properties that did not file bankruptcy. The trustee proposed to sell the both properties because the properties could not be properly partitioned and sold. The trustee is proposing to sell both properties, give the Graggs and Ms. Lavendar their 75% of the proceeds and pay Ms. Harrison’s creditors in the bankruptcy case with Ms. Harrison’s 25% of the proceeds. The Graggs objected to this sale and argued that Ms. Harrison did not have any recognizable interest in the property and the trustee did not have the right to sell the properties.

The judge in this case concluded that Oklahoma law controls and under Oklahoma law, a quitclaim deed is sufficient to provide notice of the claim to title in the property. If the deed itself does not convey what the original parties intended to convey, the law allows the parties to show what the original intent was. Whether that intent should be binding on an innocent third party buyer is the big question in this case. Once a bankruptcy petition is filed the trustee steps into the shoes of a bona fide purchaser of the property. Based upon the deeds themselves, nothing provides notice to the bona fide purchaser that the deed was only for estate planning purposes. The deeds only show that each party receives 25% interest in the properties as joint tenants with the right of survivorship. Nothing puts the bona fide purchaser on notice that the actual circumstances are different than what is listed on the deed. The Graggs also argued that since they paid for all expenses and taxes related to the property their daughters only hold bare legal title and that Ms. Hamilton’s interest is subject to a resulting trust in favor of the Graggs. The trustee does not dispute this. The court indicated that even if there was a resulting trust Oklahoma law mandated that express or implied trusts do not defeat the title of a bona fide purchaser of real property.

The Graggs lost their properties in bankruptcy even though they did not file bankruptcy themselves. One issue not discussed in the case is that the Graggs could have purchased the bankruptcy estate’s interest in the two properties instead of both properties being sold. As long as the bankruptcy estate receives the same value as if the properties were sold. It is unclear whether Harrison’s bankruptcy attorneys attempted this or if it was even financially possible for the Graggs to do. Even though the Graggs received the full value of their interest in the properties minus Ms. Harrison’s 25% share the Graggs no longer have the rental properties and lost a chunk of their income stream. This is all because they used the wrong estate planning tool. If they had an attorney draw up a revocable living trust naming their daughters as beneficiaries and including a spendthrift provision in their trust the scenario could have played out differently.