Daily Development for Monday, September 13, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu
BANKRUPTCY; FREE AND CLEAR SALE; ADVERSE POSSESSION; WAIVER: Party holding an
adverse possession claim against debtor’s property waives that claim by
participation in bidding on a free and clear sale without disclosing existence
of the claim.
Colarusso v. Ragosa (In re Colarusso), 2004 U.S. App. LEXIS 18612 (9/2/2004)
Stripped to its simplest terms, the case is simple and easy to understand.
Ragosa owned property adjacent to land owned by the Debtors, and she and the
Debtors were in dispute concerning an area of Debtors’ described parcel that was
divided from the rest of Debtors’ property by a row of stones and a hedge and
that Ragosa had used for longer than the adverse possession period for storage
of equipment and vehicles. Ragosa claimed adverse possession title to this
parcel, and prior to Debtors’ bankruptcy her husband had negotiated to obtain
Debtors’ consent to recognition of Ragosa’s claim in exchange for satisfaction
of a claimed debt owed by Debtors.
When Debtors filed for bankruptcy, and the court order a free and clear of the
entire property (including the disputed parcel), Ragosa, participated in the
bidding as a trustee the court does not disclose who the beneficiaries were, but
presumably they included Ragosa and her husband).
Other nearby neighbors submitted the highest bid, and the court ordered that the
title be delivered to them. Thereafter, Ragosa raised her adverse possession
claim against the purchasers’ title, and the bankruptcy court held that Ragosa
was estopped from claiming adverse possession by virtue of her remaining silent
at the sale. The trial court held that the estoppel arose not from the fact that
the purchasers were unaware of Ragosa’s claim, but rather from the fact that the
purchasers were entitled to assume that Ragosa was waiving any claim when she
failed to object as title was transferred to them.
The appeals court here affirmed. The court cited Massachusetts authority that
suggested the same result outside of the bankruptcy context when parties, with
knowledge of a pending sale and the ability to raise an objection to it based
upon their claims of title, stand idly by and permit the sale to occur. The
court commented that if Ragosa had raised her claim at the sale, it would have
definitely delayed and possibly prevented the purchasers from moving ahead.
So far so good. But for the court to reach this result, there were a number of
analytic hurdles. First Ragosa argued that the estoppel was entirely a state law
issue, and that the bankruptcy court should have abstained. All depends on how
one looks at it, the editor supposes. The appeals court saw the issue as a
question of the effect of the sale order of the bankruptcy court, rather than
the state law issue of estoppel, even though the bulk of its reasoning was
predicated on that estoppel.
Then Ragosa argued that the bankruptcy court had no jurisdiction to sell the
parcel in dispute because it was not “property of the estate” in light of the
fact that her title by adverse possession was already complete. Ragosa noted
that adverse possession title vests without litigation simply by the running of
time on a valid possession. The court concurred with this characterization of
adverse possession title, but stated that this rule did not mean that the Debtor
had no interest in the property at all. Citing, again, Massachusetts authority,
the court held that the right of a property owner to dispute a claimed adverse
possession claim had the character of an interest in the property.
Finally the court commented, in what appears to be dicta, that Ragosa has no
power to challenge the sale collaterally because she had not timely objected to
the sale itself. Ragosa had made no attempt to stay the sale to litigate the
propriety of the sale free of her interest.
Comment 1: Ragosa claimed that the “free and clear” sale could not sell free of
her interest because it was not the kind of interest that the statute, Section
363 of the Bankruptcy Code, was designed to avoid. Ragosa argued further that
she had not consented to any sale of her interest. The court stated that, in
light of the estoppel, it was not necessary to decide these issues. The editor
says “whew” to this, because when the editor first heard about the case he was
concerned that the court had found these issues in favor of the estate, which
result, in the editor’s view, would have been completely wrong.
Simply to apply principles of state law estoppel here reached a comfortable
result without distorting the balance between bankruptcy law and state created
property interests.
Comment 2: Similarly, the editor hopes that the discussion of whether Ragosa
lost the power to object by not appealing from the sale order will be regarded
as mere dicta, becuase it is unclear whether, in reaching this conclusion, the
court limited its comments to the special circumstances at hand. Ragosa was a
participant in the sale process, bidding at the sale, with full opportunity to
appreciate and challenge the order coming out of the process. But other parties
who might have collateral claims to the title of transferred in a free and clear
sale might not be in a position to understand and appreciate the nature of the
process. For instance, it is not clear that Ragosa was herself a party with a
claim in the bankruptcy (although her husband did). If she were a non-party, and
the court held her barred from raising a collateral title claim because she did
not appeal from the sale, what is the status of other third parties with such
claims who were not parties to the bankrup tcy at all? Is it the obligation of
every American to become conversant with the minute details of every free and
clear sale process? If not, just who has that burden?
Keep in mind that in this case Ragosa knew that there was an existing adverse
possession claim. In the typical case, the adverse claimant has no knowledge
that he or she is possession property claimed by another until a dispute arises.
Thus, most adverse possession claimants would not have any actual knowledge that
the title passing in a bankruptcy sale includes property that they occupy
without good paper title.
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