Bankr.  W.D.N.C.: In re Rose- Coerced Foreclosure on Real Property

Summary:

Debtors sought authority to quitclaim their previous residence in Florida to the SBA, which held a mortgage against the property but had declined to foreclose.

The bankruptcy court first held that 11 U.S.C. § 1325(a), while property may be “surrendered”, the Bankruptcy Code does not define that term but it has “has been described as the relinquishment of all rights in property, including the right to possess the collateral.” IRS v. White (In re White), 487 F.3d 199, 205 (4th Cir. 2007); 8 Collier on Bankruptcy ¶ 1325.06[4] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 2005).  This relinquishment of rights by the debtor does not, however have a “corresponding requirement that the lender to do anything with the property” and that a creditor has the right to control its remedies.

The bankruptcy court further rejected the “Baker Plan”, named after David Baker of Massachusetts,  whereby 11 U.S.C. § 1322(b)(9) is used to vest the property in the lienholder.  The court, similar to its rejection of  § 1325(a), stated that while a plan may revest property in a third part, it does not state that such relief can be imposed.  The court also rejected use of 11 U.S.C. § 105 to accomplish this goal, finding no other cases allowing such transfer by fiat.

The bankruptcy court did, however, hold that while it might not be possible to compel a lienholder  to accept title to property, absent an affirmative objection to the quitclaim, “[w]hen a grantor causes a deed conferring substantial benefits on the grantee to be recorded, it creates prima facie and strong presumptive evidence of a delivery to and acceptance by the grantee.” Harris v. Steele, 43 N.C. App. 44, 46 (1979).  The assent and ratification of the quitclaim deed can also be inferred from the lienholder’s conduct, including:

(1) Failure to renounce the deed;

(2) Retention of possession of the property;

(3) Conveyance or mortgage the property, or

(4) Otherwise exercising the rights of an owner of the property.

See Messer v. Laurel Hill Assocs., 93 N.C. App. 439, 445 (1989).  The bankruptcy court then held that  in failing to exercise its foreclosure rights and in ignoring the  motion, hearing and briefing schedule  in this case, the lienholder would have 60 days from delivery of a quitclaim deed to reject it or be bound by the transfer.

Commentary: 

While this case interprets Florida, and not North Carolina,  law, the bankruptcy court nonetheless stated that was “of no matter, as the law in both states is the same.”

The bankruptcy court does not read the grammar of §1322(b)(9) accurately  in its rejection of the vesting.   § 1322(b)(9) allows that a plan may “(9) provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.”   (Emphasis added.)  The bankruptcy court writes that “[a]lthough §1322(b)(9) contemplates that a plan may revest property in third parties, it does not state whether such relief can be imposed on a third party at the debtor’s election.”  (Emphasis added.)   § 1322(b)(9) does not, however, use the word “revest” but instead only “vesting“.    Black’s Law Dictionary defines “revest” to mean “To vest again. A seisin is said to revest, where it is acquired a second time by the party out of whom it has been divested.”  “Vest“, on the other hand, is defined as “To give an immediate, fixed right of present or future enjoyment.”  Revesting indicates that property is being forced back on a party that previous held title and the mortgage lienholder, at least under North Carolina law,  never holds actual title to the property.    (This may not be true in all states as, for example,  in Connecticut,  the mortgagor actual does hold actual title to the property while the mortgagee only holds a right of redemption,  requiring a debtor to only surrender a right of redemption.)   Vesting is, while shorter by two letters,  a broader word that should allow transfer to “any other entity.”

Further,  while the bankruptcy court found that  § 1322(b)(9)   “does not state whether such relief can be imposed on a third party at the debtor’s election”  the same verb  “provide” is used in 1322(b)(3)  (“provide for the curing or waiving of any default”), 1322(b)(4) (“provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim”), 1322(b)(5) (“… provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due”), etc.  None of these plan provisions require the assent of the affected creditors and,  when conjoined with 1321 (“the debtor shall file a plan”),   the plan may provide for vesting of the property in mortgage holder against its wishes, just as it provides for other results against the wishes of creditors.  Or perhaps now Debtors in the Western District  of North Carolina cannot provide for plans that cure a mortgage arrearage over the objection of the lienholder.

Lastly, the concerns by the bankruptcy court about the  “Pandora’s Box of Unintended, Injurious Consequences”  that coerced surrender could cause is not without merit.  These concerns, however, are more than adequately addressed by the fact that any plan that forces the surrender of property is still subject to the good faith requirements of 1325(a)(3) and most  judges can fashion equitable requirements to satisfy any problems that arise.  Both the concerns for senior lien holders losing their priority and for environmental contamination can be handled by allowing lien-holders both a reasonable period of time to foreclose, rather than being given title, and also to investigate for environmental problems and seek redress from the court.  And even though the a problem, namely personal liability, is recognized “if the collateral property is dilapidated, damaged, or otherwise a public nuisance” the equally harmful problem that arises from such property conditions, namely to the community in having a property that is neither maintained nor able to be resold,  appears to have been ignored. Perhaps if an amicus brief had been solicited from North Carolina City and County Attorneys, this issue would have been more present.

Lastly, the North Carolina Court of Appeals recently held in Townsend v. Watts (See:  http://ncbankruptcyexpert.com/?p=4810) that at least for properties where there are co-owners,  the co-owners could seek a partition sale of the property, name the lienholder as parties to the partition sale and then sell the property free and clear of all liens, subject, of course to the lienholder purchasing the property at the partition sale.  This would not be dissimilar fro the Debtors, acting with the consent and delegated authority of the Chapter 13 Trustee, conducting a 11 U.S.C. § 363 sale.

For a copy of the opinion, please see:

Rose- Coerced Foreclosure on Real Property

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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