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A bankruptcy trustee can't recover real property that was transferred, allegedly to avoid being lost, the Tenth Circuit ruled on Monday. That's because the transferor possessed only bare legal title, which is not an interest that may be avoided as a fraudulent conveyance under the Bankruptcy Code.
The case confirms that a joint tenancy and a trust may coexist under Kansas law. When a parent transferred her interest in a joint tenancy to her child without consideration, but also without fraudulent intent, and to be managed for her benefit -- she created a resulting trust, transferring only "bare legal title" to her soon-to-be-bankrupt child.
Blackacre is the Place to Be
The case involves the repeated transfer of interests in land over a relatively short period of time, so feel free to sketch things out as we go along. Hoa Thi Pham and Noel Esplund purchased a piece of real property -- let's call it Blackacre, in order to properly invoke the mental traumas of law school -- in Reno County, Kansas, in 2007. Pham owned two thirds, and Esplund one third. Two days after purchase, they conveyed the property to their children, Tung Nguyen and Lisa Dang as joint tenants with rights of survivorship.
Nguyen's possession of the property didn't last long. In 2008, he transferred his interest in the land to Dang via quitclaim deed with no compensation. A year later, he declared bankruptcy. Spot any issues yet?
Can the Trustee Recover?
After Nguyen filed for bankruptcy, his trustee attempted to get the interest back under Bankruptcy Code provisions regarding fraudulent transfers. These allow trustees to avoid any transfer done less than two years before filing, when the individual was already insolvent and received disposed of the property for less than its value.
The court said no, however. Why? Because Nguyen never possessed an actual ownership interest in the land in the first place. His mother's initial transfer of the land to him was without consideration. Though Pham purported to transfer the land to Nguyen, the two also agreed (without fraudulent intent) that Nguyen would manage the property for the benefit of his mother. That created a resulting trust under Kansas law, meaning that Nguyen had no real interest to transfer to Dang before his bankruptcy and that his trustee had no real property interest to recover.
Joint Tenancy and Trust Not Legally Impossible
The bankruptcy trustee objected, arguing that a trust and a joint tenancy cannot coexist. This, the argument goes, would destroy the "four unities" needed to establish a joint tenancy -- namely, the unity of interest. That's not the case in Kansas, the Tenth Circuit held, though the Circuit noted, courts have not stated exactly why that is.