The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), analyzing a recent decision of interest:
The United States District Court for the Western District of Michigan (the “Court”) recently affirmed a bankruptcy court’s decision that because a deed conveying an interest in commercial property was never “delivered” and therefore never “accepted” by the debtor, the property never became property of the debtor’s chapter 7 estate. Therefore, the trustee could not recover the property for creditors of that estate. Moyer v VanPopering, 2021 U.S. Dist. LEXIS 183976 (W.D. Mich. Sept. 27, 2021).
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Lee VanPopering owned a one-half tenant-in-common interest in a commercial property in Plainfield Township, Michigan (the “Property”). In 2002, purportedly for estate planning purposes, he drafted a quit-claim deed conveying his interest in the Property to one of his employees, James Suschil. Although he recorded the deed, he did not deliver the deed to Mr. Suschil nor did he tell him about it. As such, Mr. Suschil did not accept the deed. It is undisputed that Mr. Suschil also had no other indicia of ownership, such as receipt of rents, payment of taxes, or responsibility for other expenses.
In 2005, James Suschil and his wife filed for chapter 7 bankruptcy. Since they did not know about the deed, they did not list the Property in their schedules. They received a discharge in 2007 but the case remained open for another ten years while state court litigation between the trustee and VanPopering was ongoing. Sometime in 2014, in anticipation of perhaps selling the Property, VanPopering needed to clear up title and presented two deeds to the Suschils which reconveyed the interest quit-claimed in 2002 back to VanPopering. The Suschils signed the deeds without ever knowing why they were doing so. VanPopering did not record these deeds until the Property was sold in 2017, a month after the Suschils’ bankruptcy case had closed.
In 2018 the trustee in the Suschil’s chapter 7 learned about the 2002 and 2014 deeds and reopened the case to initiate an adversary proceeding against VanPopering. He asserted that the Property had belonged to James Suschil while his bankruptcy was pending and must be turned over as property of the estate. VanPopering opposed these efforts to recover the property, asserting that since the deed was never delivered, it did not convey title to James Suschil under Michigan law. The bankruptcy court, making an “Erie guess” on how the Michigan Supreme Court would rule agreed with VanPopering, dismissing the complaint. After a motion for reconsideration, the trustee appealed to the District Court, which affirmed.
The Court noted that the recording of a deed created a rebuttable presumption that title had passed to the grantee. However, long-standing Michigan law required delivery of a deed for it to be effective. In fact, delivery is required to show that the grantor “intended to convey the property described in the deed.” Subsequent conduct of the parties is also relevant to the inquiry as to whether title passed. Here, both the failure to deliver and the subsequent conduct—no rent receipts, no payment of expenses and taxes—rebutted the presumption. The Court concluded that since there was no delivery, there could not be acceptance, and it affirmed the bankruptcy court.
In the motion for reconsideration, the trustee asserted that the fact the Suschil’s executed the quit-claim deeds back to VanPopering was in effect equivalent to the required delivery and acceptance. The Court rejected that theory, distinguishing the cases cited by the trustee because they dealt with property that both parties recognized had been conveyed, a fact not present here. Also, notwithstanding the broad definition of property of the estate, which includes future, nonpossessory, contingent and speculative interests, the Court’s conclusions rested on the undisputed fact that there was no delivery and therefore no interest was conveyed. The Property never changed hands and was never property of the estate.
This principle of Michigan law is applicable in most states. Yet, many practitioners just assume that if a deed was recorded, it transferred title to real property. And in most instances, that assumption is accurate. However, we all learned for our bar exams that recording is merely perfection as against the world; it is not the required transfer. Without delivery and acceptance, no title ever passed and perfection is meaningless. The decision here was the correct one and the simple lesson is a good reminder.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.