A federal bankruptcy judge ruled last month that a lender can be forced to take the title of a property it has a mortgage on as part of the mortgagee’s Chapter 13 bankruptcy.
In his 12-page decision, Judge Melvin S. Hoffman wrote, “I conclude that a correct application of the relevant provisions of the Bankruptcy Code permits a Chapter 13 debtor to propose a plan that provides for transferring title to mortgaged real estate to the mortgagee in full satisfaction of its claim subject to the mortgagee’s right to object, in which case the court must determine if the plan has been proposed in good faith.”
Paul R. Sagendorph II filed for bankruptcy in August 2014 and listed three properties among his assets. His bankruptcy plan included giving the title to each of the properties back to the lenders that held his mortgages. Two lenders agreed, but a third, Wells Fargo, objected.
The property, 51 Pleasant St. in Ware, Mass., was valued at $89,000 and Sagendorph owed Wells Fargo a little over $60,000 on it.
The bank’s attorney argued that even though the property is ostensibly worth more than the unpaid balance of the mortgage, it could not be forced to take the title because it was possible that there were negative conditions on the property that would make it worth less.
Hoffman dismissed this claim in his decision.
“In this case there has been no claim that the Pleasant Street property has been subject to environmental contamination or debtor-induced deterioration,” Hoffman wrote.
The bank’s attorney also argued that state law specifically precludes forcing any entity to take title to a property it doesn’t want, but Hoffman was unpersuaded.
“Does Massachusetts law permit a mortgagor to force a mortgagee to take title to mortgaged property? It does not,” Hoffman wrote. “But the Bankruptcy Code as federal law preempts state law with which it is in conflict.”
Attorney Alison Kinchla is an associate at Bernkopf Goodman and typically represents lenders in real estate litigation. She said she’s seen people argue that their lender should be forced to take title to a property in other cases, but it is rare.
Kinchla said the three crucial points in this case were that Sagendorph was the sole owner of the property, there were no other mortgages and the property was worth more than the loan balance.
In bankruptcy proceedings, it is far more common that the property is worth less than the loan, they are vacant, and often in disrepair to the point of being unsafe. Kinchla said that Hoffman acknowledged in his decision that in cases like these, it would not be fair to force a lender to take title to the distressed property.
“As written, the judge’s decision will have limited application,” Kinchla said. “From a servicer standpoint, we’re going to have to be much more vigilant in analyzing and assessing a debtors proposed bankruptcy plan.”
