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socrateaser, Lawyer
Category: Legal
Satisfied Customers: 38910
Experience:  Retired (mostly)
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7 years ago we purchased a house on a bond for title contract.

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7 years ago we purchased a house on a bond for title contract. The payments were made (by request of the seller) towards a loan that he had with a bank who held the mortgage on the house as well as other loans. Some how we failed to record the bond for title contract. Several months ago the seller filed chapter 11 bankruptcy and one of his creditors was the bank who held the mortgage on the house as well as other loans.

The seller actually called us and told us that he had filed bankruptcy and that we should expect to hear from the court or from the bank. We continued to make the payments as usual and awaited notification from either the court or the bank. We heard nothing until we received a notice that the house had been foreclosed on and that we needed to vacate within the next 90 days.

Can you tell me what our rights are in this case?

Bankr. Code 544(a) gives the bankruptcy trustee the powers of a "hypothetical bona fide purchaser" at the time of filing of the bankruptcy petition. Because your "bond for title" was never recorded, there was neither constructive nor actual notice for the trustee, which means that, based upon existing case law, the bank would have priority over your claims, and you would be reduced to an unsecured creditor of the debtor. See, e.g., IN RE STANPHILL, 312 B.R. 691 , 694 (2004). ("The focus is not on the Trustee, but whether a hypothetical purchaser would have constructive notice of Plaintiffs claimed interest as of the commencement of the case.")

That said, I see an interesting argument here, because in a Chapter 11, the debtor is the trustee (i.e., "debtor-in-possession"). And, your debtor had "actual notice" of your bond for title contract. It seems to me that it would elevate form over substance to suggest that the debtor should be able to avoid your bond for title as unsecured, given that the contract was between you and the debtor. However, the case law at the moment, suggests that the absurd reverse outcome should prevail.

Your facts don't suggest that you were ever contacted by the bankruptcy court concerning the Chapter 11. This could give you the opportunity to move to modify the debtor's Chapter 11 plan and ask the court to void the foreclosure sale. That could be a dicey proposition, but, it seems very odd that you had no notice of the bankruptcy from the court. It suggests that the debtor may have filed a fraudulent petition, which could be used as grounds to completely undo the bankruptcy. Whether or not this would undo the foreclosure, however, is a difficult question, because under state law, the bank would have priority to foreclose you out of the property, due to the bank's mortgage having a superior position to your bond for title (whether or not it was recorded).

What I'm getting at here is that I can see the possibility of your getting the bankruptcy set aside, and suing the debtor for fraud. But, that won't allow you to keep the property. it would only give you the possibility of collecting something from the debtor/former owner.

Assuming that you don't want to go through all of this hassle, then you would have 90 days to vacate, per federal law (12 U.S.C. 5220 note). As for purchasing the property from the bank, you can contact the bank's Real Estate Owned (REO) officer and see if there is any interest. My experience is that the property will be turned over to a local real estate broker to sell, and the only thing that the broker will care about is whether or not you are willing to pay fair market value for the property -- and whether or not you can qualify for institutional lending, if you cannot pay cash. There is little likelihood that you would be able to continue your bond for title contract.

It's a very messy deal, you've outlined. I really had to think about this one for a while, but after giving it about a half hour -- I'm pretty confident in my answer here.

Please let me know if I can clarify anything or further assist.
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