In re Austin

• Decision Date: 29 December 2021
• Docket Number: Case No. 15-10401
• Citation: 638 B.R. 671
• Parties: IN RE: Kathy L. AUSTIN, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of New York

638 B.R. 671

IN RE: Kathy L. AUSTIN, Debtor.

Case No. 15-10401

United States Bankruptcy Court, N.D. New York.

Signed December 29, 2021

Michael J. Toomey, Esq., The Toomey Law Firm, PLLC, Attorney for Debtor, One South Western Plaza, PO Box 2144, Glens Falls, New York 12801.

Andrea E. Celli, Esq., Chapter 13 Standing Trustee, 7 Southwoods Boulevard, Albany, New York 12211.

MEMORANDUM-DECISION AND ORDER

Robert E. Littlefield, Jr., United States Bankruptcy Judge

The current matter before the Court is the Chapter 13 Standing Trustee's ("Trustee") objection to the proposed distribution of proceeds from the sale of Kathy L. Austin's ("Austin" or "Debtor") property located at 145 Heath Road, Corinth, New York ("the Property").The Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a), (b)(1), (b)(2)(A)and1334(b).¹

FACTS

Based on the Court's docket and the "Joint Statement of Stipulated Facts and Issues of Law"("Joint Statement")(ECF No. 191), the following constitutes the Court's finding of facts:

1.On August 7, 2010, a "Residential Real Estate Contract"("the Purchase Contract") and accompanying disclosures for the sale of the Property were executed by Walter F. Wood("Walter") as Buyer and on August 12, 2010, the Purchase Contract was accepted by Brenda L. Beratis("Beratis") as Seller.(Joint Statementat ¶ 22, Exhibit "A").

2.On August 7, 2010, a deposit was paid by Walter and his wife, Shirley J. Wood("Shirley"), (collectively "the Woods") in the amount of $1,000.00 to Realty USA Saratoga towards the purchase of the Property.²(Joint Statementat ¶ 23, Exhibit "B").

3.The Woods utilized proceeds from the sale of their previous home to pay the remaining amount due of the Property's $40,000.00 purchase price.(ECF No. 196, Trustee's Memorandum of Law, p. 10).

4.On August 30, 2010, an "Addendum to Contract for Purchase and Sale"("the Addendum") between Walter and Beratis was executed.The Addendum provides in relevant part, "It is hereby agreed by the parties that: The Buyer shall assign his interest and rights in the contract to Kathy L. Austin, ... and giving simultaneously a life estate to Walter F. Wood and Shirley J. Wood, his wife."(Joint Statementat ¶ 24, Exhibit "C").

5.On August 30, 2010, a "Real Property Transfer Report"³ and a "Combined Real Estate Transfer Tax Report, Credit Line Mortgage Certificate, and Certification of Exemption from the Payment of Estimated Personal Income Tax"⁴(collectively the "Purchase Documents") were executed between Beratis as Grantor and Walter, Shirley and Austin as Grantees.⁵(Joint Statementat ¶¶ 25 & 26, Exhibits "D" & "E").

6.After its purchase, the Woods moved into the Property "on or about August 30, 2010."(ECF No. 196, Trustee's Memorandum of Law, p. 9).

7.A Warranty Deed dated August 30, 2010, (the "2010 Deed") between Beratis as Grantor and Austin as Grantee was recorded on September 30, 2010.⁶(Joint Statementat ¶ 28, Exhibit "G").

8.The 2010 Deed contains the following language, "THIS CONVEYANCE is subject to a life estate given simultaneously herewith to Walter F. Wood and Shirley J. Wood, his wife."Below Austin's signature, the deed contains the phrase, "Kathy L. Austin, confirming Life Estate To Walter F. Wood and Shirley J. Wood."(Joint Statementat ¶¶ 29 & 31, Exhibit "G").

9.On June 6, 2014, a subsequent deed (the "2014 Deed") was executed by Austin as Grantor to Sharon L. Winchell and Austin as joint tenants with right of survivorship and recorded on June 20, 2014.The 2010 and 2014 Deeds contain identical life estate clauses.(Joint Statementat ¶¶ 37 & 38, Exhibit "H").

10.The Woods were not parties to, did not sign and are not listed as "Grantees" on either the 2010 or 2014 Deed.(Joint Statementat ¶¶ 32-34 & 39).

11.On March 2, 2015, the Debtor filed a Chapter 7 voluntary petition for relief.(ECF No. 1).

12.In her schedules, the Debtor lists the Property subject to a life estate in favor of the Woods.Id.

13.On July 10, 2015, this Court sustained the Chapter 7Trustee's objection to the Debtor's claimed homestead exemption in the Property.(ECF No. 46).

14.On May 18, 2016, while administering assets of the estate, the Chapter 7Trustee filed a "Motion to Compel" seeking access to the Property for an inspection by a realtor.(ECF No. 82).

15.On June 22, 2016, the Debtor filed a "Motion to Convert Case to Chapter 13" so "her parents are not displaced from their home."(ECF No. 88, p. 1 at ¶ 7).

16.On September 12, 2016, the Court approved a "Consent Order Granting Motion to Convert Case to Chapter 13."(ECF No. 98).

17.On April 3, 2017, the Debtor's Chapter 13 Plan was confirmed.(ECF No. 111).

18.On June 25, 2020, the Debtor filed an "Attorney's Affirmation in Support of a Motion for an Order Permitting the Sale of Real Property" pursuant to § 363(b).(ECF No. 178).

19.On August 7, 2020, this Court issued an Interim Order approving the sale of the Property for $50,000.00 to be distributed as follows: $22,591.00 to be held in escrow by Mark Delsignore, Esq., Borgos & Delsignore, pending this Court's determination of the current matter; $13,000.00 to Austin;⁷ and $10,759.00 to the Trustee for distribution to creditors.⁸(ECF No. 186).

20.On December 18, 2020, this Court issued a Briefing Order on the limited question of whether the Woods held a valid life estate in the Property.The Briefing Order directed the Trustee to file papers by March 19, 2021.The Debtor was to file a reply by April 23, 2021.(ECF No. 193).

21.On March 26, 2021,⁹the Trustee filed the "Chapter 13Trustee's Memorandum of Law."(ECF No. 196).

22.On May 13, 2021,¹⁰ the Debtor filed the "Plaintiff's Reply Brief" and this matter was fully submitted to this Court.(ECF No. 200).

ARGUMENTS

The Trustee asserts that the Wood's life estate is void.The Trustee relies upon Estate of Thomson v. Wade , 69 N.Y.2d 570, 573-74, 516 N.Y.S.2d 614, 509 N.E.2d 309(1987), which states, "The long-accepted rule in this State holds that a deed with a reservation or exception by the grantor in favor of a third party, a so-called ‘stranger to the deed’, does not create a valid interest in favor of that third party."The Trustee contends the Woods should not receive any sale proceeds "prior to payment of all unsecured claims in full in this case."(ECF No. 182, p. 2 at ¶ 7).

Austin argues a reservation in a deed in favor of a third party is not void when the third party is the true grantee.(ECF No. 200).Austin relies upon Nield v. Jupiter , 175 A.D. 732, 162 N.Y.S. 465, 466(App. Div. 3d1916), aff'd , 226 N.Y. 594, 123 N.E. 880(1919), where, based upon a factual inquiry, the Court found a third party to a deed to be the "real grantee"¹¹ thereby nullifying the "stranger to the deed" rule.In the alternative, Austin asks this Court to apply its inherent authority pursuant to 11 U.S.C. § 105 as "technical consideration should not prevent substantial justice from being done."(ECF No. 200).Austin requests the Woods receive "approximately half of the funds" from the Property's sale to compensate them.Id.

DISCUSSION

In a bankruptcy proceeding, courts look to state law for "the determination of property rights in the assets of a bankrupt's estate ...."Butner v. United States , 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136(1979)."Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving ‘a windfall merely by reason of the happenstance of bankruptcy.’ "Id. at 55, 99 S.Ct. 914(quotingLewis v. Mfrs. Nat'l Bank , 364 U.S. 603, 609, 81 S.Ct. 347, 5 L.Ed.2d 323(1961) ).

Notwithstanding New York's adherence to the "stranger to the deed" rule, "it is not universally applied."Peters v. Smolian , 49 Misc.3d 408, 12 N.Y.S.3d 824, 833(Sup. Ct.2015)(declining to extend the "stranger to the deed" rule to the right of first refusal).Further, an exception to this general rule exists "when the third party is found to be the real grantee under the deed."Clearmont Prop. , 872 N.Y.S.2d at 728(finding a third party to a quitclaim deed to be a "true grantee")(citingNield , 162 N.Y.S. 465 ).

I. THE FACTS ARE SUFFICIENT TO CONCLUDE THE WOODS ARE THE TRUE GRANTEES UNDER THE2010 DEED, RENDERING THE"STRANGER TO THE DEED" RULE INAPPLICABLE.

The finding that the Woods are in fact the true grantees is supported by the Nield case.Real property was conveyed to Jesse J. Nield("Jesse") after its purchase was initiated, negotiated and executed by Jesse's father, Elisha L. Nield("Elisha").162 N.Y.S. at 465-66.The deed contains the following relevant language, "Elisha L. Nield shall be the trustee of the premises hereby conveyed to Jesse J. Nield, and that the same shall be at his disposal and under his control during his lifetime, unless sooner sold under the direction of the said Elisha L. Nield."Id.Importantly, the Court added, "Jesse knew nothing about the transaction at the time, took no part in it, and paid no part of the consideration."Id. at 466.At the time the deed was delivered to Elisha, he recorded it and "took immediate possession of the premises and assumed complete control over the same."Id.Despite Elisha never being on the chain of title, the New York Supreme Court, Appellate Division, Third Department, determined the evidence "discloses that Elisha L. Nield was not a stranger to the conveyance, but was, in fact, the real grantee.Therefore[,] the rule that a reservation or exception in a deed in favor of a stranger is void does not apply here."Id.

The facts in Nield are nearly identical to the present case.Austin did not initiate, negotiate or execute the Purchase Contract.¹²On the 2010 Deed, Austin is the only named grantee but specific, additional language sought to create an ownership interest for the Woods.¹³Although Austin did participate in the execution of the deed, she provided no consideration towards the purchase.¹⁴Further, once the purchase was...