In last month’s e-Update we detailed some of our dealings with real properties in bankruptcy estates. The central message was that trustees retained a vested interest in real property and can deal with that interest late in the bankruptcy period and up to six years after the bankrupt has been discharged.
Many times, however, we find that properties that were owned by the soon-to-be-bankrupt in the period leading up to commencement of the bankruptcy are no longer in their names when we are appointed. It is these transfers of property, particularly the property transfers in three separate estates we are handling and which led to three different outcomes, which are examined in this article.
There is usually nothing wrong with a bankrupt selling a property in the months before bankruptcy, as long as it is for true value and the consideration is accounted for properly. The acid test of whether this happens is whether the creditors are disadvantaged because of the sale and the ultimate use of the funds. For example, a trustee could not complain about the sale of a property before bankruptcy for true value where all of the money went to the mortgagee holding security over that property. The creditors have not been disadvantaged.
However sometimes properties are sold undervalue; sometimes for “love and affection” (yes, people still try this one); and sometimes the consideration, although properly calculated, is not paid. The three cases mentioned in this article highlight the extremes of these positions.
In the first case, a quarter share in a property was transferred a few weeks before the bankruptcy commenced. In obtaining a copy of the transfer form , it indicated that the quarter share was transferred for $130,000 – and stamp duty was duly paid on that amount. We obtained a valuation of the property which showed that $130,000 was more than a fair value for that share. So far so good, but was the consideration actually paid? There was no indication of this happening.
We then obtained details of the mortgaged debt. The debt secured against the property was for more than the value of the property. The consideration ‘paid’ was the assumption of the mortgage. When we considered the acid test, that the share had no equity (the value being less than the secured debt), we could not show that anything of value left the grasp of the creditors when title was transferred. We could not see any commercial recovery for the estate as the secured creditor was always going to get the proceeds of any sale.
The second case was only slightly different. The half share in the property had been transferred under the same circumstances and the assumption of debt was used as the consideration. The transfer form had both a valuation and the formal agreement to assume the secured debt attached. The valuation obtained by the parties checked out, but the level of the debt secured on the property was $80,000 less than the valuation. That is, $40,000 of equity (the equity in the half-share) was transferred but no consideration was paid for that equity. Remarkably the documents attached to the transfer clearly showed this discrepancy. We issued a demand for the $40,000 that should have been an asset in the estate.
The third case is a combination of the last two with a twist. The share in the property was transferred for a sum based on a valuation. That valuation checked out. The assumption of the mortgaged debt was again the major consideration paid, and the secured debt was again less than the value of the property. Equity had been transferred but not obviously paid for at the time the bankruptcy commenced. The twist was that the new owner of that share (a relative of the bankrupt) had a bank cheque in the name of the old owner for the amount of the equity transferred and was ready to hand that across to us when we were appointed. They had agreed that he would hold it until the trustee was appointed.
We quickly determined that the amount of the cheque would have been the amount that the estate would have received if the property had remained in the estate (probably more if selling costs were taken into account). The new owner owed the old owner the money – really he was a debtor in the estate – and he happily paid it to us. This is a very rare occurrence.
If the message in our previous article was that a trustee’s rights survive the duration of the bankruptcy and discharge, the message of this article is that trustee’s still have some rights of recovery if the property is transferred away before the bankruptcy commences.