Matter of Elin

Decision Date11 June 1982
Docket NumberCiv. A. No. 82-749,Bankruptcy No. 81-02755,Adv. No. 81-1298.
Citation20 BR 1012
PartiesIn the Matter of Charles ELIN, Debtor. Margaret ELIN, Plaintiff, v. Michael G. BUSCHE, as Trustee in Bankruptcy of Charles Elin, Debtor, et al., Defendants.
CourtU.S. District Court — District of New Jersey

Jerome C. Eisenberg, Frank Orbach, Clapp & Eisenberg, P.C., Newark, N.J., for plaintiff.

Michael G. Busche, Trustee, pro se.

OPINION

DEBEVOISE, District Judge.

This is an appeal from a judgment of the Bankruptcy Court. The Court authorized the sale of certain residential real estate and determined that plaintiff, Margaret Elin, owned only an undivided one-half interest in the property as a tenant in common. Plaintiff urges that the Bankruptcy Court erred in holding that the provisions of 11 U.S.C. § 544(a) rendered ineffective the debtor's (plaintiff's husband's) attempt, in 1973, to transfer all of his interests in the property to her.

The Facts

The facts are undisputed. In 1972 plaintiff and her husband, Charles Elin, now the debtor, separated after twenty-six years of marriage. After six weeks of separation the debtor, in consideration for plaintiff's return to him, agreed to convey to her all of his interest in their residence in South Orange, New Jersey. At the time they held the property as tenants by the entirety. The debtor directed his attorney to prepare a deed to effectuate his promise.

The attorney prepared a deed which was executed in March, 1973 and recorded on June 11, 1973. In the deed the debtor purported to transfer the premises (which were described by metes and bounds) to plaintiff. After the description there appeared the language: "The purpose of this deed is to relinquish the curtesy rights of the grantor pursuant to statute." At the time of delivery of the deed both plaintiff and her husband, as tenants by the entirety, stood to take the entire property in the event of the earlier death of the other. In such a form of tenancy the wife had no dower interest and the husband had no curtesy interest. Instead, each had a survivorship interest. Consequently the recital in the deed that its purpose was to relinquish the husband's curtesy rights made no sense. Both husband and wife intended that all of the husband's interests be conveyed to the wife, and the form of the deed was attributable to an attorney's error of which both parties to the deed were unaware. After delivery of the deed plaintiff began to receive the real estate tax bills addressed to her alone, and she commenced paying the taxes.

The reconciliation was short-lived and plaintiff instituted an action for divorce. On December 20, 1976, prior to the trial of the divorce action, plaintiff and the debtor entered into a property settlement agreement. The agreement provided, among other things:

4. In addition, the parties covenant and agree that the Wife shall retain the property presently owned or held by her, including, without limitation: the residence at 325 Highland Road, South Orange. . . .
5. In consideration of the division of real and personal property as more fully set forth in paragraphs 1 through 4, inclusive, above, the parties hereby waive, release, and abandon any claims that either may have for a division of property (other than as expressly set forth herein), held jointly or by the other, pursuant to the present or future laws of the State of New Jersey or any other state of the United States.

(Emphasis added.)

The January 6, 1977 divorce decree terminating plaintiff's and the debtor's marriage referred to the agreement and, in effect, adopted its provisions in lieu of determining the issues of equitable distribution and alimony.

In May, 1981 the debtor filed a voluntary petition in bankruptcy. He did not list the South Orange residence as one of his assets, believing that he had conveyed it to his wife in 1973 and had no further interest in it.

At about the same time plaintiff decided to sell the property. When the purchaser conducted a title examination the record disclosed title in plaintiff and debtor as tenants by the entirety, with the 1973 deed purporting to convey the debtor's non-existent curtesy rights. The purchaser, confronted with this cloud on title, refused to complete the transaction.

To cure the title defect plaintiff filed a complaint in the pending bankruptcy proceeding. The complaint recited the above facts, identified certain creditors who had obtained and docketed judgments against the debtor after the recording of the deed, and sought a judgment reforming the deed and directing the trustee to execute and deliver to plaintiff a corrective deed. The Bankruptcy Court conducted a hearing at which the United States Trustee opposed the relief plaintiff sought and urged the sale of the property free and clear of the debtor's and his creditors' interests.

The Bankruptcy Court held that the Trustee can defeat plaintiff's attempted reformation of the deed under 11 U.S.C. § 544(a)(3), which provides that "the trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation of the debtor that is voidable by— . . . (3) a bona fide purchaser of real property from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists." The Bankruptcy Court found that the original transfer of the property was made to plaintiff and the debtor as tenants by the entirety, that the 1973 deed from the debtor to plaintiff transferred only the debtor's curtesy interests, and that neither the deed, the unexpressed intent of the parties, nor the divorce decree established notice to a bona fide purchaser that there was a transfer of the debtor's interest to plaintiff's sole ownership. The Court stated, "The only way title could have been changed to defeat the interests of a bona fide purchaser is to record the deed with the County Records Office." (Transcript of Dec. 9, 1981, p. 29) (citing N.J.S.A. 46:22-1).

The Bankruptcy Court concluded that the Trustee succeeded to the debtor's one-half interest in the property he held as a tenant by the entirety with his wife, which, upon their divorce, was converted to a tenancy in common. A judgment was entered authorizing a sale of the real estate free and clear of liens and determining that plaintiff was entitled to only a one-half interest in the proceeds. After the filing and withdrawal of a motion for reconsideration, plaintiff filed a notice of appeal to this Court.

The appeal raises two issues. First: 11 U.S.C. § 541(d) provides that "property in which the debtor holds . . . only legal title and not an equitable interest . . . becomes property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold". In the light of § 541(d), did the Bankruptcy Court err in holding that plaintiff's equitable interest in the South Orange real estate, which existed by reason of the 1973 transaction, became part of the estate? Second: If § 541(d) does not prevent plaintiff's interest in the South Orange real estate from becoming a part of the estate, did the Bankruptcy Court correctly apply 11 U.S.C. § 544(a) when he avoided the 1973 transfer to plaintiff of the debtor's interest in the South Orange real estate?

These are questions of law and are reviewable by this Court. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir. 1981).

Plaintiff contends that under 11 U.S.C. § 541, which defines the bankruptcy estate, the estate does not include the onehalf interest in the South Orange real estate which the Bankruptcy Court awarded to the Trustee. This is so, plaintiff urges, because the debtor held the property under a constructive trust in favor of plaintiff.

The provisions of § 541 upon which plaintiff relies read:

(a) The commencement of a case . . . creates an estate. Such estate is comprised of all the following property, wherever located:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
. . . . .
(d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a) of this section only to the extent of the debtor\'s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.

It is apparent, as plaintiff urges, that in the present case under New Jersey law were the debtor not in bankruptcy he would be deemed to hold his interest in the property subject to a constructive trust in favor of plaintiff. Plaintiff would be entitled, in the circumstances of this case, to a decree reforming the 1973 deed so that it would accomplish the intent of the parties to it.

New Jersey courts have recognized the availability of the constructive trust as a means of redressing inequitable results of mistakes in attempts to convey property. See D'Ippolito v. Castoro, 51 N.J. 584, 588-89, 242 A.2d 617 (1968); In re Hoffman, 63 N.J. 69, 81, 304 A.2d 721 (1973). Although courts ordinarily employ a constructive trust where there has been a transfer based on fraud or mistake, this device is also available where a purported conveyance based on consideration turns out to be ineffective to transfer the property. See Annotation, 12 A.L.R.2d 961 (1950). At least one New Jersey...

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