Osberg v. Fibison (In re Fibison)

• Decision Date: 12 December 2011
• Docket Number: Adversary No. 10–25.,Bankruptcy No. 08–15440–7.
• Citation: 474 B.R. 864
• Parties: In re James D. FIBISON and Lisa F. Fibison, Debtors. Randi L. Osberg, Trustee, Plaintiff, v. George T. Fibison, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

474 B.R. 864

In re James D. FIBISON and Lisa F. Fibison, Debtors.Randi L. Osberg, Trustee, Plaintiff,

v.George T. Fibison, Defendant.

Bankruptcy No. 08–15440–7.

Adversary No. 10–25.

United States Bankruptcy Court,

W.D. Wisconsin.

Dec. 12, 2011.

Christopher M. Seelen, Ruder Ware, Eau Claire, WI, for Plaintiff.

D. Peter Seguin, Mudge, Porter, Lundeen & Seguin, S.C., Hudson, WI, for Defendant.

MEMORANDUM DECISION DENYING TRUSTEE'S MOTION FOR SUMMARY JUDGMENT

THOMAS S. UTSCHIG, Bankruptcy Judge.

James and Lisa Fibison filed this bankruptcy case in October of 2008. The previous January, James executed a quit claim deed to certain real estate in favor of his father George, the defendant in this adversary proceeding. The chapter 7 trustee seeks to avoid this transaction as a fraudulent transfer under either § 548(a)(1)(B) of the bankruptcy code or Wis. Stat. § 242.04(1)(b).¹ This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and the Court has jurisdiction under 28 U.S.C. § 1334. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.

The parties appear to agree on the following facts. In April of 2001, James and his father entered into a land contract for the purchase of a parcel of vacant land.² The contract contemplated that George would make monthly payments totaling $21,300.00 in exchange for the property. According to George, he satisfied the purchase price in December of 2007.³ After execution of the land contract, George purchased a trailer, placed it on the property, and began living there.⁴ In 2004 he began to build a house on the property.⁵ James did not contribute anything toward the construction of the home.⁶ As George built the home himself, he did not incur labor costs, although he indicates that he spent more than $19,000.00 in materials.⁷ The trustee has proffered appraisals of the property which indicate that it might have been worth approximately $88,000.00 as of the January 2008 execution of the quit claim deed.⁸ The appraisal also indicates a potential value as of June 2010 of $117,000.00.⁹

The reason for this adversary proceeding is simple. George and James may have signed the land contract in 2001, but neither of them recorded it. As such, the trustee believes that the January 2008 quit claim deed which transferred the property from James to George constitutes a fraudulent transfer because James did not receive reasonably equivalent value for the land. In exchange for a parcel of real property worth $88,000.00, he received less than $20,000.00 (or less than one-fourth of its ostensible value at the time). The trustee cites to this Court's decision in Osberg v. Risler (In re Risler), 443 B.R. 508 (Bankr.W.D.Wis.2010), for the proposition that the trustee may rely on the face of the deed to determine ownership, regardless of any equitable interests that may exist. On the face of the deed, James owned the property in January of 2008; since he transferred it for far less than it was worth, the transfer should be avoided.¹⁰

George, of course, notes the inequitable result that will occur if the trustee is correct. He has lived on the land for approximately nine years and has slowly improved the property through the construction of his home over the past seven years. Any significant appreciation in value is largely due to his efforts. He thought he had bought the land from his son. He made the payments and received a deed. To have his home taken away from him certainly seems unfair. He argues that after execution of the land contract in 2001, James had only bare legal title to the real estate, and that the execution of the quit claim deed should relate back to the date the land contract was originally signed. For purposes of this bankruptcy proceeding, the debtor's interest in the property is determined by relevant state law. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). To resolve this dispute, the Court must therefore turn to Wisconsin law regarding land contracts, the recording of interests in real estate, and the rights of bona fide subsequent purchasers.

George cites to the case of Mueller v. Novelty Dye Works, 273 Wis. 501, 78 N.W.2d 881 (Wis.1956). In that case, a couple conveyed a parcel of real property to their son under a “support deed” which reserved a life estate interest for themselves. The son subsequently sold the property to another couple. After the contract for sale was signed but prior to closing, two companies docketed a judgment against the son. The question was whether the real estate was still the son's property at the time the judgment was docketed. The court cited the doctrine of “equitable conversion” and held that the vendees under the sales contract became the equitable owners of the land upon execution of the contract, even before payment of the purchase price. Id. at 883. According to the court, “The vendee, from the date of the contract, has full rights over the land and may sell it, incumber it, or devise it to his heirs as real estate. The vendor has no such rights.” Id. at 505–06, 78 N.W.2d 881.

George suggests that under Mueller an unrecorded land contract in Wisconsin can be retroactively perfected by the subsequent delivery of a deed because the owner has no rights to the property itself after execution of the contract. It is true that George became the equitable owner of the property upon execution of the land contract. See In re Fitzpatrick, 29 B.R. 701, 703 (Bankr.W.D.Wis.1983) (vendees under unrecorded land contract became equitable owners of property at time of conveyance). The doctrine of equitable conversion is based upon the premise that “equity treats that as being done which should be done.” Milwaukee v. Greenberg, 163 Wis.2d 28, 471 N.W.2d 33, 36 (Wis.1991) (citing 8A Thompson on Real Property § 4447, pp. 273–74 (1963)). The land contract vendor holds legal title, but the vendee is the only one with full rights over the land as of the date of the contract and must be regarded as the “real” owner. 471 N.W.2d at 36.¹¹

However, it is also true that such an equitable interest can be defeated if it is left unrecorded. Wis. Stat. § 706.08(1)(a) provides that:

[E]very conveyance that is not recorded as provided by law shall be void as against any subsequent purchaser, in good faith and for a valuable consideration, of the same real estate or any portion of the same real estate whose conveyance is recorded first (emphasis added).

These recording requirements “shall govern every transaction by which any interest in land is created, aliened, mortgaged, assigned or may be otherwise affected in law or in equity.” SeeWis. Stat. § 706.001(1).¹² As such, these provisions indicate that the rights of a vendee under an unrecorded land contract may be trumped by a subsequent purchaser.¹³ The key is whether that purchaser is deemed to have acted in “good faith” within the meaning of the statute.

Under Wisconsin law, a purchaser in good faith is one without notice of any existing rights in the land. Bump v. Dahl, 26 Wis.2d 607, 133 N.W.2d 295, 299 (Wis.1965). This includes both actual and constructive notice. Actual notice is a relatively straightforward concept: a purchaser with personal knowledge of a prior claim to the property cannot be a purchaser in good faith and may not utilize the recording statute to defeat the prior claim.¹⁴ Constructive notice, on the other hand, is a bit more involved. In Bump, the court stated:

Constructive notice arises when a purchaser without knowledge is subjected on grounds of public policy to the liabilities he would be subject to had he in fact had knowledge, because he was in such a position that if he had exercised a reasonable degree of care in availing himself of the avenues of information open to him he could have acquired the knowledge.

Id. A good faith purchaser is one who properly consults three sources of information in order to learn of any competing claims to the property in question. These sources are the records in the office of the appropriate register of deeds, other public records, and the land itself, by which it is possible to “discover by observation the rights which arise outside of the recording system by virtue of possession or use.” Id. at 300.

In the case of First Nat'l Bank v. Chafee, 98 Wis. 42, 73 N.W. 318 (Wis.1897), the Wisconsin Supreme Court was confronted with determining the relative priorities of various parties when the assignee of a land contract commenced a foreclosure action against the vendee in possession, the vendor, and a subsequent mortgagee of the vendor. Neither the land contract nor the assignment had been recorded, and the mortgagee had no knowledge of either of them. The court concluded that the unrecorded assignment of the vendor's interest was subordinate to that of the subsequent mortgagee because the mortgage had been recorded first. However, the mortgagee's interest was itself subordinate to that of the vendee (even though the land contract was not recorded) because actual possession of the land constituted constructive notice to the mortgagee and the world of the vendee's interest in the land. Id. at 319.

Likewise, in Bump the primary dispute was between two purchasers: one who acquired his interest pursuant to an oral agreement but was in actual possession of the property, and another purchaser who had subsequently bought the same parcel. The court noted that a party's possession of the land is constructive notice to a subsequent purchaser if the possession is “visible, open, clear, full, notorious, unequivocal, unambiguous, inconsistent with, or adverse to the title or interest of the vendor.” 133 N.W.2d at 298 (quoting Ubbink v. Herbert A. Nieman & Co., 265 Wis. 442, 62 N.W.2d 8 (Wis.1953)). In fact, subsequent purchasers are charged with notice of all the rights of the possessor and “of all the facts connected therewith which a reasonable inquiry of the...