CHAPTER 7 BANKRUPTCY BULLETIN
October 2017 Vol. III
Note From the Editor
When Does a Chapter 7 Trustee Need to Disclose Property Defects?
does not apply if the property in question is being held by a court-appointed trustee or the executor of an estate. Although there are several other exceptions as well, these two are among the most commonly used. The exception is a blanket exception, meaning that a trustee or executor is under no statutory legal obligation to disclose anything to a prospective buyer. The rationale behind the exception for a trustee or executor is that they never lived in the property and, therefore, are not in a position to know about any defects the property might have. The fact that a trustee or executor gains knowledge of a defect as a result of an inspection done by a prospective buyer in a sale that falls through does not appear to change the trustee’s/ executor’s legal duty under the applicable statutes. Is There a Common Law Duty to Disclose? So far, we have only discussed the statutory duty to disclose defects. Before states began to enact statutes that imposed a duty on a seller to disclose defects, buyers were forced to rely on the common law duty to disclose. Although that duty still exists, to varying degrees, it is much more difficult to litigate a claim using the common law duty than it is to litigate using the statutory duty. Nonetheless, the seller of real property, even a trustee or executor, should be aware that a duty to disclose known defects may still exist under common law. Does the Real Estate Agent Have a Duty to Disclose? Although a trustee or executor is not required to disclose defects to a potential buyer, real estate agents are held to a much higher standard. Not only must a licensee disclose defects that are known to them, but they are also required to disclose to all parties material facts the licensee knows or should have known. A material fact is defined as “any fact that affects the value of the property or that, if known, might cause a reasonable buyer to make a different decision regarding the price or conditions of the contract.” Once again, the rules for agents in D.C. are very similar, with the exception that a licensee is only required to disclose material facts that are actually known to them. In other words, they are not responsible for facts they should have known.
Historically, the doctrine of caveat emptor (Latin for “buyer beware”) governed transactions involving the sale of real property. Over the last several decades, however, most jurisdictions have implemented laws requiring sellers to disclose defects to potential buyers. Both Maryland and Washington, D.C. are among those jurisdictions that have enacted disclosure laws. Under most circumstances, those laws make it very clear what must be disclosed, by whom, and at what point during a transaction. Of course, there are some gray areas. What happens, for example, if the property is under the control of a Chapter 7 bankruptcy trustee? Furthermore, what legal obligation does the trustee have if a prior sale fell through and the trustee is now aware of defects as a result of the inspection conducted in anticipation of that sale? The Statutory Duty to Disclose In both Maryland and D.C. there is a statutory duty to disclose. Annotated Code of Maryland, Real Property Article, section 10-702 requires a seller to complete a disclosure or disclaimer and provide it to a prospective buyer on or before entering into a contract of sale. D.C. has a similar statute requiring a seller or transferor of property to complete a disclosure statement and deliver it to a prospective buyer “before or at the time the prospective purchaser or transferee executes a purchase agreement.” Maryland is somewhat unique in that a seller may choose to complete a disclosure or a disclaimer statement. If the seller chooses to complete a disclaimer, the property is essentially sold “as-is” without any warranties from the seller regarding the condition of the property. Even if a seller uses a disclaimer, however, Maryland law requires the seller to notify the buyer of any latent defects of which the seller has actual knowledge. A “latent defect” is defined as a defect that a purchaser “would not reasonably be expected to ascertain or observe by a careful visual inspection of the real property and that would pose a direct threat to the health or safety of the purchaser or an occupant of the property.” Exceptions to the Statutory Duty to Disclose Like most laws, there are exceptions to the general duty of a seller to disclose defects found under both the Maryland and D.C. statutes. In both jurisdictions, the seller’s duty to disclose
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- Marc Cormier Editor/Realtor
Our real estate practice specializes in understanding the unique complexities of selling homes tied up in legal processes, whether bankruptcy, divorce, or probate. The challenges in these types of filings don’t only come from the buyers and sellers, but also from creditors, spouses, heirs, the IRS, local tax authorities, local code enforcement, HOAs, and POA. If you value working with an agent who can avoid these pitfalls, someone you can feel confident will close the file, then give me a call
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