A relatively common misunderstanding of the effect of discharge under Sec. 524 of the Bankruptcy Code (11 U.S.C. 524) can lead to a serious omission on a title opinion. The purpose of this article is to attempt to help point out the issues that should concern a title examiner when a closed bankruptcy case is discovered in the chain of title.

The basic principle underlying the effect of bankruptcy on judgments is that, once docketed, a judgment forms the basis of two liabilities. The first is the personal liability of the judgment debtor to satisfy the debt by payment. The second is the in rem liability of the lien which attaches to all real property owned or subsequently acquired by the judgment debtor while the judgment remains unsatisfied and in full effect. It is this second liability that survives the discharge since Sec. 524 only provides relief from the first, the personal obligation of the debtor to pay the judgment debt.

Bankruptcy essentially treats a pre-filing judgment as a secured debt in the nature of a deed of trust. Even though the debtor may not have any further obligation to make payment the property remains available to satisfy the secured debt to the extent that the debtor has equity in it in excess of any available exemption. Therefore, unless the property is disposed of free of the lien in the bankruptcy proceeding, the lien remains attached and enforceable against the property even though the underlying debt is no longer enforceable against the debtor.

It should be noted that Sec. 523 provides certain exceptions to discharge which in most, but not all, cases relevant to title examination must be raised prior to discharge. See particularly Sec. 523(c). Since a discharged debt is no longer enforceable personally against the debtor any prefiling judgment lien will not attach to property acquired after the bankruptcy. The significance of sec. 523 to a title examiner lies primarily in cases where a pre-filing judgment debt is not discharged and therefore the lien would attach to after-acquired property.

The vast majority of bankruptcy cases involving real estate usually dispose of the property through: a sale free of liens, relief from stay and foreclosure, or are filed prior to any judgments being docketed and therefore pre-bankruptcy judgment concerns are cut off. The foregoing discussion becomes very pertinent in those rare cases where a debtor owns property with judgment liens attached prior to filing bankruptcy. Typically it is encumbered by a secured indebtedness senior to the judgments, with little or no equity, and the lender and debtor work out an arrangement to pay the debt and retain the property. The property continues to be vulnerable to execution (an in rem proceeding) for the life of the judgment.

The ambiguities in Chapter 28A and Chapter 32 of the General Statutes have caused differing opinions regarding when a "personal representative" (for example, an executor) can sell real property pursuant to a power of sale set forth in the testator’s probated will. A review of relevant North Carolina statutes is helpful.

G.S. 28A-13-3(a) states that, except as qualified by express limitations in the will or a court order, a personal representative ("P.R.") has the power to reasonably and prudently perform every act incident to collection, preservation, liquidation, or distribution of a decedent’s estate so as to accomplish the result of estate settlement and distribution, including, but not limited to, G.S. 28A-13-3(a)(1)’s power to take custody or control of real property, subject to G.S. 28A-13-3(c)’s petition and order requirements. G.S. 28A-13-3(a)(27) also references G.S. 28A-17-1, et seq’s court procedures.

G.S. 28A-13-3(a)(31) states that the P.R. can exercise such additional lawful powers as contained in the will.

G.S. 28A-17-8 states that a sale of real property made pursuant to authority given by will may be either public or private and may be on such terms as in the opinion of the P.R. are most advantageous to the estate. The statute contains no requirement for a court order.

G.S. 28A-15-1 pertains to assets of the estate "generally." G.S. 28A-15-1(a) provides that real property of the decedent is available for discharge of debts and other claims against the estate, if it is in the best interest of estate administration. G.S. 28A-15-1(b) is phrased with a similar predicate regarding sale to make assets to pay debts of the estate. G.S. 28A-15-1(c) states that if the P.R. determines that it is in the best interest of estate administration to sell real property to pay estate debts and claims, the P.R. shall institute a special proceeding under G.S. 28A-17-1, et seq. to do so, except that no such proceeding is required for a sale made pursuant to authority granted by the will. Is the "except" clause in G.S. 28A-15-1(c) limited to a sale to make assets to pay estate debts and claims? No one knows for sure, but it is arguable that the answer is "[maybe] yes."

In 1985, the last sentence was added to G.S. 28A-15-1(c) purportedly to overcome the holding of Montgomery v. Hinton, 45 N.C. App. 271, 262 S.E. 2d 697 (1980). The case dealt with a will that left the property to the beneficiary and granted the P.R. all G.S. 32-27 powers. The court held that G.S. 32-27(2) was not applicable since the P.R. was not devised title and, therefore, did not "hold" title under G.S. 32-27(2). Therefore, the P.R. could not use the power to sell and should have pursued a special proceeding to sell. G.S. 28A-15-2(b) should be noted. It vests title in the beneficiaries upon probate of the will. The 1985 amendment to G.S. 28A-15-1(c) literally says that if a will contains a general provision granting a power to sell to the P.R. or if a will incorporates G.S. 32-27(2), G.S. 28A-15-1(c)’s requirement for a special proceeding does not apply. But that does not overcome the point that under G.S. 32-27(2) the P.R. must still be devised title by the will. So, literally, the amendment to G.S. 28A-15-1(c) does not "fix" the Hinton problem. Further, whether the amendment "fixes" the problem or not, is the amendment’s application limited to selling to make cash assets to pay debts and claims of the estate? No one knows for sure, as noted above.

We believe that if land is devised to B and in another clause the P.R. is granted "the power to sell real property of the decedent in the discretion of the P.R." the P.R. can sell the property devised to B during administration. A devise to B is subject to the P.R.’s power to sell. It is a matter of will construction. Also, while it is helpful for the will to say "without court order," that is not necessary.

Obviously, the will must be read carefully.

The case of James v. James, 58 N.C. App. 371, 293 S.E. 2d 655 (1982), should be noted. The will gave the executors: "the full power and authority to sell in such manner as they in their sole and absolute discretion may determine to be proper any and all property described in the second item of my will and to convey good title to the purchaser or purchasers." 58 N.C. App. 371, 374. If the will draftsman had stopped here, the executors could have sold the property without a court order. However, the will also stated: "This authority shall not be obligatory upon my executors but can be exercised by them if in their judgment such a procedure will facilitate the settling of my estate." 58 N.C. App. 371, 374.

The Court held that since the executor’s discretion to sell was limited to matters which would facilitate the settlement of the estate, the sale, to avoid a partitioning proceeding, was not a valid exercise of the power of sale and did not divest the petitioners of their interest in the real estate. Id. at 375.

Pursuant to G.S. 28A-17-9, if a decedent has contracted to sell real property his P.R. may execute and deliver a deed pursuant to the contract. No court order is required.

G.S. 28A-17-10 states that when real property is conveyed to a P.R. for the benefit of the estate he (or a successor representative) may sell and convey it upon terms that the P.R. deems just for the estate pursuant to Article 29A of Chapter 1 entitled "Judicial Sales." But, it would seem that a power of sale set forth in a devise in a will is not governed by this statute.

See G.S. 28A-13-6 (exercise of powers of joint personal representatives).

Other powers in G.S. 32-27 (which can be incorporated by reference into a will or trust) are G.S. 32-27(8) (management of real property) and G.S. 32-27(12) (borrowing money and mortgaging). Other provisions of G.S. 28A-13-3 which should be noted are G.S. 28A-13-3(a)(7) (relinquishing rights in property when it is valueless or of no benefit to the estate); and G.S. 28A-13-3(a)(12) (borrowing money and mortgaging, which is subject to G.S. 28A-17-11).