Posting for

     Wednesday, September 19, 2001

 

     by:  Bert Rush

     brush@firstam.com

 

     TESTAMENTARY GIFTS/WILLS/ADEMPTION/ESCROW AND CLOSING/TITLE UNDERWRITING

 

     What's the effect upon a testamentary gift of specific real property (i.e., by a will), where the testatrix contracts to sell the property during her lifetime--but then dies before closing?

 

     This was the issue in a case recently decided by the Massachusetts Supreme Court, titled Kelley v. Neilson, 433 Mass. 706, 745 N.E.2d 952 (2001).  Here's what happened.

 

     Aileen Neilson was owner of a residential duplex on Laurel Avenue in Waltham, MA.

 

     In January 1993, Aileen executed her last will, by which she devised the Laurel Avenue property to her granddaughter, Jane Kelley, subject to a "life estate" in favor of Aileen's son, Donald Neilson, and Donald's wife, as to one of the units in the duplex.  Under this life estate, Donald and his wife were entitled to occupy one unit as long as they live ("and [she] does not remarry"), or, if they should move elsewhere, Donald and his wife were entitled to net rental proceeds from one unit as long as they live, or until the property may be sold or transferred by Jane.  (The Court assumes that Jane is the daughter of Donald.)

 

     The will also gave all of Aileen's personal property to Donald, except for gifts of $5,000 each to Jane and one other granddaughter, and two other gifts of $1,000 each.

 

     Finally, the will nominated Donald as the executor of Aileen's estate. 

 

     During November 1995, Aileen entered into a purchase and sale agreement, for sale of the Laurel Avenue property to yet another granddaughter, Bonnie Neilson, for $169,000.  The agreement provided the transaction would close on January 16, 1996.  The Court characterizes this as an arms-length transaction. 

 

     On November 30, 1995, Aileen (according to the Court) "took all steps necessary on her part to effect the sale."  She signed a quitclaim deed, and also signed a power of attorney authorizing her attorney, David Mitchell, "to do all things necessary with respect (to) the sale" of the property.

 

     On the date set for closing, January 16, attorney Mitchell, acting on behalf of Aileen, agreed to extend the closing date until January 30. 

 

     On January 20, Aileen died. 

 

     It was undisputed that the buyer was ready, willing and able to close on January 30.  However, perceiving a "cloud" on the title created by Aileen's death, the buyer requested and attorney Mitchell agreed to an extension until February 29.  The closing was further extended twice, and the transaction closed on May 22.

 

     Jane filed a complaint in probate court for an order that all proceeds be paid to her.  Donald, as executor of the estate (and donee as to all the decedent's personal property), dutifully opposed Jane's lawsuit.

 

     On cross-motions for summary judgment, Jane argued that, as devisee of the Laurel Avenue property under the will, she is entitled to proceeds of the sale consummated after Aileen's death.  Alternatively, Jane argued that extensions of the closing date given by attorney Mitchell on (and after) January 30 were unauthorized--because Mitchell's authority under the power of attorney was terminated by the death on January 20, and Mitchell's other claim to authority, as attorney for the estate in probate, did not commence until his appointment by the court on April 2.

 

     In reply, Donald argued that the purchase and sale agreement adeemed (i.e., extinguished) the devise to Jane under the will, and that questions of Mitchell's authority to extend the closing date were irrelevant because the buyer could enforce the agreement by an action for specific performance.

 

     The trial court ruled in favor of Donald.  Jane appealed.  The Court of Appeals reversed, but on reconsideration remanded the case for the trial court to consider how to deal with the life estate.  Donald appealed, and the Supreme Court agreed to hear the case.

 

     The Supreme Court ruled in favor of Donald, holding that the specific devise of real property was adeemed when Aileen, during her lifetime, 'disposed' of the subject real property.  In other words, the Court explained, the real property 'didn't exist' in the decedent's estate, to pass under her will.

 

     In so holding, the Court reasoned that Aileen effectively 'disposed' of the property when she had taken sufficient steps that the buyer could enforce the sale by an action for specific performance.  The Court didn't say whether the mere signing of the purchase and sale agreement was enough, but instead seemed to hedge its opinion by saying that Aileen's execution of the quitclaim deed (which the Court assumes was entrusted to her attorney for later delivery to the buyer), and giving of the power of attorney, made this a specifically enforceable agreement.

 

     And, since it considered the agreement specifically enforceable, the Court did not consider extensions of the closing date as material to the outcome.

 

     Comment:  This very interesting case includes a good discussion of common law theories of ademption.  This Court follows the "identity" theory--looking to "existence or nonexistence of the bequeathed property at the time of the testator's death;" which the Court distinguishes from the "intent" theory--looking to the testator's probable intent. 

 

     The Court says the "identity" theory is followed by the "great weight of modern authority," although the "intent" theory is adopted by the Restatement (Third) of Property (Wills and Other Donative Transfers), section 5.2 comment b (1999).

 

     Bottom line:  When a seller dies while a transaction is pending, a title underwriter may want assurance that no one objects to a closing and performance of the contract.  Likewise, an escrow/closing officer may want assurance that no one objects to a proposed disbursement of sale proceeds.

 

     One always wants to know what the heirs are saying, and one should also have an ear attuned to rumblings from creditors.

 

     If there is a dispute, in most jurisdictions it's difficult and very risky to guess the outcome.

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  Following Wednesday's posting, Rich Angelo (Iselin, NJ) writes:

 

     A very good case which illustrates important issues to consider. Even though it is not one of our claims, it would be a good case to add to the Claims Chronicles because of what it teaches. Too many closers simply assume the legitimacy of fiduciaries actions and 'skip over' these issues when dealing with decedents and/or powers of attorney. Careful attention is the watchword of the day.