Bankrupt Debtor Can’t Force Bank to Foreclose

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Daniel Gill

A Chapter 13 plan can’t compel a bank to accept title of surrendered real estate, a Massachusetts district court held Jan. 23 ( Wells Fargo Bank, N.A. v. Sagendorph (In re Sagendorph) , 2017 BL 18903, D. Mass., No. 15-40117-MGM, 1/23/17 ).

The opinion struck another blow against debtors trying to get out from under “zombie mortgages” using Chapter 13 bankruptcy as a tool to force mortgagee banks to take title to surrendered property.

A similar issue is currently being considered by the U.S. Court of Appeals for the Ninth Circuit in Bank of New York Mellon v. Watt.

Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief by proposing a plan that uses future income to repay all or a portion of their debts over a three to five year period.

Paul Sagendorph filed Chapter 13 and proposed a plan in which he surrenders his interests in certain real property to his mortgagee, Wells Fargo Bank, N.A., Judge Mark G. Mastroianni‘s opinion for the U.S. District Court for the District of Massachusetts said.

The plan also provides that title in the property—which was worth nearly $30,000 more than Wells Fargo’s secured claim, the court said—would vest in the bank. The bankruptcy court approved the plan over Wells Fargo’s objection.

Secured lenders sometimes prefer not to complete foreclosures of real property, often because of the financial burdens which accompany the property ownership, like taxes, insurance and maintenance. These usually underwater properties, for which foreclosure proceedings have been commenced but not completed, are called “zombie mortgages” in the industry.

The court acknowledged that being unable to unload zombie mortgages can be a burden to a debtor’s fresh start, which is a “fundamental premise” of the Bankruptcy Code. But a strict reading of the operable statutes—Sections 1322(b)(8) and (9) and 1325(a)(5)(C)—does not permit the court to force vesting of title on the mortgagee, the opinion said.

The court distinguished the language of those statutes from a provision in Chapter 11, under which a debtor can compel a secured lender to take title to its collateral in payment of its claim.

Paul A. LaRoche, Gardner, Mass, represented the debtor. Wells Fargo was represented by K&L Gates LLP.

The National Assoc. of Consumer Bankruptcy Attorneys also filed a brief in favor of the debtor’s position.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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