Michael and Mary Colarusso filed Chapter 7 bankruptcy. Among their assets was a realty parcel worth more than $700,000.

During the proceedings, the bankruptcy trustee listed the property for public sale. There was considerable interest from at least four bidders.

Purchase Bob Bruss reports online.

The bankruptcy trustee suggested the bankruptcy court hold a sealed-bid auction. The motion said the property would be offered for sale “free and clear of all liens, claims and encumbrances.”

Among the bidders was neighbor Mary Ragosa. But a higher bid was received by the bankruptcy court from Joan and Robert Canzano, also neighbors. The judge accepted the highest bid and directed the bankruptcy trustee to transfer the property to the Canzanos.

Because Ragosa was the second-highest bidder, the sale order said if the Canzanos failed to complete the purchase, the trustee is authorized to sell to Ragosa.

However, shortly after the sale, Ragosa filed a state court adverse possession claim to the property, which had been sold by the bankruptcy court to the Canzanos.

Ragosa alleged she had been using part of the property to park cars and store boats for more than 20 years. She recorded a “lis pendens” on the parcel, thus clouding the title of the Canzanos.

The U.S. Bankruptcy Court held a hearing to determine if Ragosa held any interest in the property, which had already been sold to the Canzanos. At the hearing, evidence showed Ragosa was represented by her attorney at the bidding and she had not raised any objections to the auction sale of the land.

If you were the judge would you rule Mary Ragosa holds title to the land by adverse possession?

The judge said no!

Evidence shows Mary Ragosa might have a right to adverse possession if she could prove non-permissive use that is actual, open, notorious, exclusive and adverse for the 20 years she claims, the judge began. If she met the requirements, he continued, she could have perfected her adverse possession title before the bankruptcy court offered the property for sale to bidders.

However, instead of asserting her possible adverse possession claim, the judge explained, Ragosa participated in the bankruptcy court’s bidding for the property. She was represented by her attorney and did not raise any objection to the property sale, he noted.

Although an adverse possessor’s claim is ordinarily not extinguished by the legal owner’s conveyance of title, in this case Ragosa had notice of the court-ordered sale but failed to assert her alleged adverse possession claim, the judge emphasized. Neither did she appeal the sale order nor did she obtain a stay of the bankruptcy court’s property sale, he added.

Because the property was offered for sale by the bankruptcy court free and clear of all liens and encumbrances and since Ragosa participated in the sale bidding without raising her possible adverse possession right, she waived her claim to the land, and title passes to the Canzanos free and clear of Ragosa’s claim, the judge ruled.

Based on the 2004 decision of the U.S. Court of Appeals in In re Colarusso, 382 Fed.3d 51.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

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