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
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Law Proposed to Exempt Some D.C. Homeowners FromTenant Opportunity to Purchase Act (TOPA) Legislative Update
Brown v. Ellmann, No. 16-1967 (6th Cir. 2017)
Background In 2014, Debtor filed a voluntary petition for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code. At the time, Debtor owned property in Ypsilanti, Michigan valued at $170,000; however, the home was also subject to secured mortgage claims, totaling $219,000, from two separate creditors. Therefore, the Debtor had no equity in the home at the time she filed for bankruptcy protection. In her initial petition, Debtor indicated her intention to surrender the property to the bankruptcy estate and did not seek an exemption for the value of her redemption rights in the property under Michigan law. The bankruptcy Trustee sought the court’s permission to sell the property for $160,000 and to distribute the proceeds from that sale among Debtor’s creditors and professionals involved in the sale of the property. Debtor objected to the Trustee’s request and subsequently attempted to amend her original disclosures, citing 11 U.S.C. 522(d) to include an exemption for the value of the redemption rights, worth approximately $23,000 pursuant to Mich. Comp. Laws 600.3240. The court granted the Trustee’s request to sell and denied the Debtor’s proposed exemption. Debtor appealed to the U.S. Court of Appeals for the Sixth Circuit. Arguments After rejecting two arguments made by the Trustee challenging the court’s jurisdiction, the Court analyzed the merits of the Debtor’s appeal. In doing so, the 6th Circuit reasoned that any exemption based on the value of redemption rights must attach to equity which the debtor is entitled to after satisfaction of all secured liens on the property. In the case before the court, Debtor had no equity in the property. Debtor primarily relied on Law v. Siegel, 134 S. Ct. 1188 (2014), to convince the court to depart from the “no equity — no exemption” decision reached in a previous, unreported case (In re Baldridge 553 F. App’x at 599). The 6th Circuit, however, did not find Law to be relevant. In that case, the bankruptcy court used its equitable powers to approve a Trustee’s request to surcharge a debtor’s $75,000 undisputed homestead exemption as reimbursement for over $500,000 in fees related to an investigation into debtor’s fraudulent conduct. In reversing the court’s approval of the request, the Court pointed to the statute which “expressly and unconditionally states that exempt property was not liable for payment of any administrative expense.” The 6th Circuit distinguished Law from the instant case by holding that Law was about “the extent of the bankruptcy court’s discretionary power under Section 105(a); this case addresses the bankruptcy court’s interpretation of a specific provision of the Bankruptcy Code.” Conclusion In the absence of authority contradicting the holding in Baldridge, the Court chose to follow the “no equity — no exemption” rule stated in that case and affirmed the bankruptcy court’s denial of Debtor’s requested exemption.
Council member Anita Bonds (D-at large), joined by council members Gray, McDuffie, Todd, Evans, Grosso, and Council Chair Phil Mendelson, recently introduced a bill, supported by co-sponsoring Council members Nadeau and Allen, that would relieve homeowners from adhering to the city’s TOPA law if they occupy single-family homes while renting out part of their properties.
TOPA gives renters the right of first refusal if their living space goes on the market.
The scope of B22-0315, the “TOPA Accessory Dwelling Unit Act of 2017,” would be quite narrow. It would exempt properties with two separate entrances, one unit of which includes the upstairs portion of the house, is owner-occupied, and takes up two-thirds or more of the property’s square footage. For the proposed exemption to apply, the smaller, rented portion must be built in the garage or basement, or be a carriage house or a similar unit. Council member Bonds issued a public statement explaining that some renters of such properties have “abused the spirit” of TOPA by delaying home sales by as much as six months, and insisting on being paid substantial sums in return for not exercising their TOPA rights. The practice, said the statement, has created a “cottage industry of ‘TOPA lawyers’” and added to the cost of home selling, so that homebuyers are having to pay more. The council member’s press statement goes further in challenging TOPA than this limited-scope bill would suggest, by pointing to a survey showing that TOPA almost never results in actual purchases by renters. Thus, the hearing on this bill, currently slated for Sept. 21, could get interesting — especially as the D.C. Council has, in years past, considered repealing the Tenant Opportunity to Purchase Act for single-family homes.
Michelle J. Adams, Esq. Adams, Morris, & Sessing
12850 Middlebrook Road Suite 308, Germantown, MD 20874 Phone (301) 637-0143 x 101 | Fax (888) 614-7163 Michelle@amslawgroup.com | www.amslawgroup.com
Short Sales and Real Estate Licensees – Real Estate Commission
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