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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