Robert and Lee Hanks (the “Hanks”) purchases a property from their son, Charles Dennie. One day prior to the closing of the sale, Mr. Dennie filed for Chapter 7 bankruptcy protection and included the property as an asset in his bankruptcy schedules.
In buying the property, the Hanks purchased a standard title policy from First American. The policy expressly covered “defects, liens, encumbrances, adverse claims, or other matters” involving title to the property. Exclusion number 4 in the policy, however, excluded coverage for “[a]ny claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws,” that the transaction is “a fraudulent conveyance or fraudulent transfer[.]”
When the Bankruptcy Trustee discovered that the property was sold to the Hanks after the Chapter 7 filing, he filed a complaint against the Hanks in the United States Bankruptcy Court for the Middle District of Tennessee seeking to void the transfer of the property, claiming it was both a fraudulent transfer under state law and an invalid post-petition transfer under federal law. The complaint stated that the Trustee, on behalf of the bankruptcy estate and unsecured creditors, was entitled to claw back the “post-petition” property from the Hanks.
The Hanks notified First American of the Trustee’s claim. First American, however, denied the claim, relying, in part, on Exclusion no. 4 in the policy. The Hanks resolved the litigation with the Trustee by paying $65,000 to clear all existing liens.
The Hanks then filed suit against First American for breach of the title policy. First American moved for summary judgment, claiming that the Hanks could not prove breach of contract since the claim was excluded from coverage under the title policy by virtue of Exclusion no. 4.
The Trial Court agreed, granting summary judgment, and holding, inter alia, that the clear language of the Title Policy excludes any claim brought under the federal bankruptcy code or Tennessee state law alleging fraudulent conveyance.
The Hanks appealed, claiming that the title policy contained no language specifically excluding the Trustee’s “post-petition transfer” claim. The appeals court agreed, reversing the trial court’s summary judgment. Specifically, the appeals court held that the Bankruptcy Trustee’s claim regarding the post-petition transfer of the property is “not a claim of a fraudulent conveyance or fraudulent transfer under the federal bankruptcy code and does not fall within the ambit of exclusion 4 of the Title Policy.”
The court of appeals ruling is noteworthy for lenders and other insureds across the country. By actually looking at the wording of the policy, the appeals court dispelled the myth propagated by most title insurers that any title claim arising out of a bankruptcy is automatically excluded by similar standard clauses in CLTA and ALTA policies. Myth busted.