Massachusetts Agencies

Title Standard Spotlight

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices Fall 2003, Volume 2, Number 4

Title Standard Spotlight
by Ward P. Graham, New England Region Counsel

In this issue, we'll take a look at some collateral issues to be considered when dealing with real estate passing through a bankruptcy. Our focus will start with Title Standard No. 32, Unadministered Bankruptcy Interests and then discuss some issues that are not addressed by the Title Standard.

Title Standard No. 32, adopted on November 6, 1978, provides: 

In a bankruptcy proceeding filed prior to June 9, 1941, any interest in real estate not conveyed by the trustee, receiver, or debtor in possession may be treated as abandoned. Any such interest in a bankruptcy proceeding filed after June 9, 1941, may be treated as abandoned after the expiration of 20 years from the filing without action as to such interest by the trustee, receiver, or debtor in possession. Following abandonment such interest may be conveyed by the bankrupt or debtor.[1]

The first thing we notice about this title standard is that the first sentence provides a definitive cutoff point for any interest in real estate going through a bankruptcy filed before June 9, 1941, where the interest was not conveyed by the trustee, receiver or debtor in possession. The use of the term "conveyed" implies that the absence of a deed of record would suffice to make that determination.[2] Notice, however, that the second sentence, dealing with bankruptcies filed after that date, says that such interests may be treated as abandoned after 20 years "without action as to such interest by the trustee, receiver, or debtor in possession." This implies that there may be actions taken with respect to real estate interests that do not involve the conveyance of those interests. It also implies that there may be such other actions that may not appear of record at the Registry of Deeds or at the Land Court District. 

One would expect that any sale transaction would appear of record. But some other kinds of actions that may be taken by a trustee may not appear of record, such as use or lease of the property under the provisions of §363 of the Bankruptcy Code (hereafter, "the Code").[3] Because the words "without action" in Title Standard No. 32 are not limited by words such as "appearing of record," it appears that the title standard would require reviewing bankruptcy cases filed even more than 20 years ago, but after June 9, 1941, to see if there was any "off record" action taken relative to the property. 

However, while the title standard talks about a presumption of abandonment after 20 years from the filing of the bankruptcy, usually, the key to disregarding adverse actions involving bankruptcy estate property is the closing of the case.[4] It is going to be the very rare case, if you run into it at all, that a bankruptcy is going to continue for so long that you'll only be dealing with the filing of the case and not its closure, especially for purposes of applying Title Standard No. 32. In most instances, too, the closure of the case is going to follow within a relatively short period from filing, perhaps as little as six months for an individual Chapter 7 (§§701-766 of the Code) to five years for a Chapter 13 (§§1301-1330) or Chapter 11 (§§1101-1174) plan, unless you're dealing with some complicated business Chapter 11. In the latter case, it is likely that the case will be so notorious as to be a matter of public knowledge and/or there will be some evidence on record of how the real estate interest is or was affected by the bankruptcy, or both.

Sale or transfer of bankruptcy estate property will, of course, involve the recording of a deed. Use of bankruptcy estate property by the trustee, even if authorized under §363, will end with the discharge of the trustee and the closure of the case. Any lease that was entered into that would last more than 7 years would have to be recorded under G.L.c. 183, §4, to be valid as against bona fide purchasers. Thus, for some action to be taken relative to real estate involved in a bankruptcy, the great likelihood is that there will be some evidence of record. Lacking any such evidence of record, one ought to be able to rely on Title Standard No. 32 without the necessity of having to search the bankruptcy records to see if something was done with the property "off record." Of course, if there is a sale or transfer of bankruptcy estate property, even in a case more than 20 years old, then you look to Title Standard No. 30, Bankruptcy Transfers, for the guidelines on how to evaluate such a title. If the documentation called for in that Title Standard is not "on record," then resort to the bankruptcy file will be necessary. 

What about bankruptcies that are less than 20 years old and there is no sale or transfer on record nor is there any record evidence of the closure of the case? Well, as we've discussed, the good news is that the vast majority of bankruptcies are going to be over in less than five years from filing. If you're dealing with an active bankruptcy situation in which a sale is going to occur, again, refer to Title Standard No. 30.[5

But what if you're dealing with a title in which there is a suggestion of bankruptcy and title is coming out of the debtor now or the title came out of the debtor some time after the bankruptcy was filed and you see nothing on record to indicate that the bankruptcy case was closed? In that case, it will also be necessary to review the bankruptcy file to determine if title has revested in the debtor because (1) the case was dismissed and closed, (2) the debtor was discharged and the case was closed or (3) the property was otherwise abandoned.[6] If none of these occurred, you've got a problem because title is still in the estate. If one or the other did occur, documentation from the bankruptcy file ? usually a Clerk's Certificate (verifying whichever is the case) together with a certified copy of the relevant court order ? should be obtained and recorded.[7]

Why is it important to establish closure of the case and not just rely on an order of dismissal or discharge? As discussed briefly in Gary Casaly's article on Bankruptcy Law and the Conveyancer in the last issue of The Massachusetts Focus, there are some potential pitfalls if you're not careful.

Aside from dismissal, the other way to revest title in the debtor is by abandonment of the property under §554 of the Code. Under that section, there are only three ways to do it: first, by motion of the trustee (§554(a)), second, by motion of an interested party (§554(b)) and, third, unless the court orders otherwise, by closing the case, so long as the property was properly scheduled and not otherwise administered during the bankruptcy proceeding (§554(c)).

The first two are pretty straightforward. You'll find motions, notices and court orders, which will have to be reviewed and certified copies of which will likely have to be recorded along with a Clerk's Certificate. The third one looks simple enough: you probably only need to check to see that the docket does not reflect any other action taken relative to the property and get a Clerk's Certificate, right? Wrong! You'll also need to check the schedules to make sure the property was properly listed. Why? Because under §554(d) of the Code, "[u]nless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate." [Emphasis added.]

Thus, as Gary's article pointed out, don't be misled by those who think that merely recording a discharge order is enough to revest title in the debtor. By the same token, keep in mind that merely recording the discharge and a Clerk's Certificate of the closure of the case is also not enough to fully establish abandonment under §554(c) of the Code. It will also be necessary to record something to verify the scheduling of the property, such as a certified copy of the schedule (or the relevant portion thereof) showing the property listed. Alternatively, see if you can get an appropriate statement added to the Clerk's Certificate establishing that the property was scheduled. Another possibility may be an attorney's c.183, §5B affidavit reciting that the attorney has reviewed the appropriate schedule(s) and found the property listed.

The other major pitfall to keep in mind is that, like the debtor's title to real estate that will pass right through bankruptcy if not otherwise administered by the court or specifically abandoned, mortgages and liens on that property will pass right through as well, unless otherwise avoided by the court. See, §502(a). Again, don't be misled by those who think that the mere listing of liens and mortgages in the bankruptcy schedules somehow automatically avoids them. Quite to the contrary. Id. Indeed, even a lien that secures a claim against the debtor that is "not an allowed secured claim" [emphasis added] is not void if the only reason it is not an allowed claim is because of failure by the lienholder to file a proof of claim under §501 of the Code. §506(d)(2).

In further support of this concept of survival of liens and mortgages through bankruptcy, we are fortunate in Massachusetts to have a readily accessible state court case that not only confirms this concept but explains it pretty well. See, First Colonial Bank v. Bergeron, 38 Mass. App. Ct. 136, (1995), affirming an Appellate Division decision of the same caption (1993 Mass. App. Div. 228; 1993 Mass App. Div. LEXIS 89, Dec. 24, 1993,[8] Coven, J.), which actually did a better job explaining the rule. In ruling on a case brought by a debtor discharged in bankruptcy who was trying to snatch excess proceeds of a mortgage foreclosure sale away from a junior mortgagee, the Appellate Division aptly explained the rule this way:

Contrary to the Bergerons' argument, a valid secured lien passes through bankruptcy unaffected and remains enforceable in rem after the debtor's discharge. Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 778, 116 L. Ed. 2d 903 (1992); In Re Stern, 44 B.R. 15, 17 (Bkrtcy. D. Mass. 1984); 3 COLLIER ON BANKRUPTCY, Par. 524.01 at 524-14-16 (15th Ed. Supp. 1983). Exceptions to this general rule of bankruptcy are where the lien is disallowed as a secured claim, 11 U.S.C. §§502(e), 506(d), or where the lien is subject to challenge under one of the numerous avoiding provisions, 11 U.S.C. §§522(j), 544, 545, 547, 548 and 549. None of these exceptions applied in the Bergerons' bankruptcy case.

The discharge in bankruptcy extinguished only one mode of enforcing the claim of Ford as the second mortgage; i.e., an action against the debtors, the Bergerons, in personam, while allowing an action against them in rem. 11 U.S.C. §701 et. seq.; Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 2154, 115 L. Ed. 2d 66 (1991). . . .

The allowance of a bankruptcy discharge does not prevent creditors from pursuing post-discharge enforcement of a valid lien on property of the debtor which existed at the time the petition was filed. 11 U.S.C. §§524(a), 727. As the lien of Ford survived the discharge order, the secured creditor could take any appropriate action to execute the lien, other than an in personam action against the debtor, including an in rem action against the debtors' property. Dewsnup v. Timm, 112 S. Ct. at 778; In Re Richards, 151 B.R. 8 (Bkrtcy. D. Mass. 1993); In Re Paul, 67 B.R. 342 (Bkrtcy. D. Mass. 1986).

The discharge of the Bergerons in bankruptcy, being personal to them as debtors, did not act to release the liens for security interests in the property owned by them. The discharge of the mortgagors' personal debt only extinguished the creditor's right to proceed in personam against the debtors and did not extinguish the right to proceed in rem as to the mortgage for which the creditor had a secured lien. 11 U.S.C. §§522(c)(2), 524(a)(1); Dewsnup v. Timm, 112 S. Ct. at 778; Johnson v. Home State Bank, 111 S. Ct. at 2154. See also, Nobelman v. American Savings Bank, 968 F.2d 483 (5th Cir. 1992) (similar analysis with regard to the allowance of discharge petitions in Chapter 13 bankruptcy proceedings). 

First Colonial Bank v. Bergeron, 1993 Mass. App. Div. 228; ___ , 1993 Mass App. Div. LEXIS 89, ___ .[9] Thus, don't be fooled by those who would have you believe that the mere filing of the bankruptcy and a discharge of the debtor automatically avoid and extinguish any liens on the debtor's property. Unless the liens are otherwise avoided in the bankruptcy, they are going to survive and you're going to have to deal with them -as part of the bankruptcy of it's still open or, if the case is closed, just as though the bankruptcy had never occurred.[10]

Answer to Date Teaser: June 9, 1941, was on a Monday. The day/date charts to figure this out are on the inside back cover of your Lawyer's Diary ("the Red Book"). 

1 The issues that arise because of the reference in Sec. 54 to acknowledgments of payment or satisfaction by a "mortgage servicer or note holder" will be reserved for another day. [Back to Text

2 In addition, for the most part, proceedings prior to June 9, 1941, are going to be beyond the normal 50-year search period anyway, so you probably won't be aware of them unless the title comes from a conveyance of a trustee, receiver or, perhaps, debtor in possession if the grantor identifies him/her/itself as such. [Back to Text]

3 References to the Bankruptcy Code and sections thereof refer to the Code established under the Bankruptcy Reform Act of 1978 as amended through the Bankruptcy Reform Act of 1994. The Code is found at 11 U.S.C. §101-§1330. If you don't have the Code readily available in your office, you can access it easily on the internet at, scroll down to "Browse the US Code by Title Name," click on "Title Name", scroll down to "Bankruptcy," click on it and you're there. [Back to Text]

4 See, for example, §350 of the Code, providing for closure of the case after full administration and discharge of the trustee, and §554(c), providing a statutory presumption of abandonment at the closure of the case, as we'll discuss shortly. [Back to Text]

5 See, also, a discussion of taking title out of bankruptcies by my colleague, Gary Casaly, in his two-part article, Bankruptcy Law and the Conveyancer, in the last two issues of The Massachusetts Focus. For a more detailed discussion of Bankruptcy Law issues related to real estate, visit Stewart Title's Virtual Underwriter website at or access the website through the Stewart Title homepage, and click the "Resources" tab and then on "Virtual Underwriter." [Back to Text]

6 As to the effect of dismissal on title of the debtor, see §349 of the Code and, as to abandonment, see §554. [Back to Text]

7 If you're not familiar with how to find and research bankruptcy files, as it happens, our very own Donald Brown has provided information in the Paralegal Page of this issue to help guide you as to the resources available to locate and review a bankruptcy file. [Back to Text]

8 A nice Christmas Eve present for the creditor involved in the case. [Back to Text]

9 If you ever have need of a copy of the full Appellate Division decision and do not have access to it, please feel free to contact me to get a copy. [Back to Text]

10 Keep in mind, however, that limitations periods on various liens may be tolled during the bankruptcy, In Re Paul, 67 B.R. 342 (Bkrtcy. D.Mass. 1986), or extended under §108(c) of the Code. See Gary Casaly's article, "Bankruptcy Law and the Conveyancer-Traps to Watch Out For," The Massachusetts Focus, Vol. 2, No. 3. [Back to Text]