In an interesting case involving an attorney’s mistake (and fortunately, it was not mine), a chapter 7 debtor will obtain a “clean” discharge. The case involved a debtor who in 1995 purchased her home under a state program which helped low and moderate income families to own their homes purchased at a market discount. Under this program, the local town or city would provide the housing subsidy. The local town or city would then retain certain rights, such as a right to a portion of net sale proceeds, first refusal and assent to refinancing. These rights were spelled out in a deed rider which was attached to the deed and recorded at the local registry.
In 2005, the debtor sold her home to a buyer. The buyer used the bank’s attorney, and did not retain one for herself. The debtor also did not hire an attorney. The closing attorney handled all aspects of the closing, including issuing a report that noted that the title to the condo was “clean.” The term “clean” however, meant free from any lien or encumbrance other than the first mortgage. The closing attorney missed the deed rider and the rights of the municipality.
After the closing, the buyer got her condo subject to a deed rider, and the municipality got nothing. Debtor received over $115,000 at the closing was more than $70,000 more than she was entitled to receive. As a result, the buyer sued the debtor for breach of contract and received a judgment in connection with what the Bankruptcy Court this “unfortunately flawed transaction.”
Fortunately, the buyer obtained title insurance and in 2006, the title insurer paid the more than $70,000 to the municipality and the title to the condo was finally “clean” when the municipality discharged the deed rider.
Debtor filed bankruptcy, and the title insurer asked the bankruptcy court to exempt from discharge the “windfall” that the debtor received. They argued that the debt was precluded from discharge because it was incurred by fraud (see Section 523 (a)(2)(A)), and alternatively argued the funds were embezzled (see Section 523(a)(4)). The title insurer claimed that because the debtor received over $70,000 more than she should have and was silent about it, the requisite intent to commit fraud can be implied.
The Court noted that there were no allegations, and no evidence to support any allegation, that the debtor acted in such a way prior to the closing in an effort to obtain more money than she was entitled to. She did not prepare the settlement statement or the title examination. She made no representations about her condo, the state of her title or the rights of the municipality, and there was no evidence she was asked to. In fact, the closing attorney testified he placed no reliance on the debtor in his title examination or the settlement statement. The evidence also did show that she had refinanced the property twice in ten years, and on both occasions, the municipality was not involved. Therefore, she had no basis to expect they would be involved again.
The debt was discharged. The buyer got "clean" title to the property. And the court ruling made no mention of whether the closing attorney had malpractice insurance.
