The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A bankruptcy court in Ohio, applying Alabama law, has held that a trustee could not qualify as a hypothetical bona fide purchaser of a bankrupt’s real property because a recorded power of attorney did not expressly authorize the daughter to convey her mother’s real property to herself. [In re Shelton, 2018 Westlaw 5098814 (Bankr. N.D. Ohio).]
Facts: An Ohio woman executed a durable power of attorney (“POA”), appointing her daughter as her attorney-in-fact with authority to convey the mother’s real property. The POA did not, however, specifically authorize the daughter to transfer real property from the mother to herself.
About a year later, the daughter conveyed her mother’s Alabama property to herself, without authorization. She recorded both the deed and the POA.
Four years later, she filed a Chapter 7 petition, listing the Alabama property as her own. The mother claimed that the property did not belong to the daughter. The trustee filed an avoidance action under 11 U.S.C.A. §544(a)(3), claiming that as a hypothetical bona fide purchaser of the debtor’s property, he took free of the mother’s alleged interest in the property. Both parties filed motion for summary judgment.
Reasoning: Citing Alabama law, the court held that the purported conveyance under the power of attorney was not merely voidable; it was completely void because it did not specifically authorize the daughter to convey her mother’s property to herself:
Under Alabama law, a power of attorney that does not specifically authorize the attorney-in-fact to transfer the principal’s real property to herself does not grant the power to do so. Furthermore, applicable Alabama Supreme Court precedent holds that a deed purporting to make such a transfer to the attorney-in-fact is void, not merely voidable. Under these circumstances, no party could acquire good title to the real property from the attorney-in-fact and could not be a bona fide purchaser.
As a fallback, the court held that even if the conveyance had not been void ab initio, the trustee still could never have qualified as a hypothetical bona fide purchaser because of the omission in the POA:
[Ev]en a bona fide purchaser would not acquire superior title to real estate under such circumstances because she would be charged with constructive knowledge of the flawed recorded instruments—which in this case include both the deed itself as well as the POA. In fact, the deed alone, purporting to transfer real estate to the same person who is acting as the transferor’s attorney-in-fact, would be sufficient to warn a purchaser of Alabama real estate to inquire further about any specific authorization for the attorney-in-fact to transfer the principal’s real property to herself.
Author’s Comment: Note that the result in this case is not attributable to language contained in the power of attorney. Instead, the problem stems from what the POA did not say. The implication (harsh but correct) is that anyone searching the record must look not only at what is contained in the record but what is missing from the record, a higher standard of inquiry.
Disputes over powers of attorney, their drafting, and their effects are not uncommon; anyone relying on a POA (or who spots one in the chain of title) must be extra-vigilant. For discussions of cases dealing with related issues, see:
- 2017-2 Comm. Fin. News. NL 4, Even Though Mortgage Acknowledgment Executed by Borrowers’ Attorney-in-Fact Differs from Official Form, Mortgage Was Validly Recorded.
- 2016-27 Comm. Fin. News. NL 53, Mortgage Acknowledgment Executed by Borrowers’ Attorney-in-Fact is Valid Despite Minor Ambiguities.
- 2011 Comm. Fin. News. 19, Durable Power of Attorney Coupled with Purchase Option Is Extinguished When Option Is Assigned to Affiliate, Depriving Affiliate of Authority to Affect Optioned Parcel.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.