This new potentially very important court decision explained, along with its impact, including how that’s affected by the bank’s appeal.
The Story So Far
In our blog post a couple of days ago we explained the problem that homeowners have when they owe ongoing homeowner association dues and/or assessments, they want to surrender the property, but their mortgage lender just sits and does nothing. It refuses to take back the property by deed in lieu of foreclosure AND delays foreclosing. It does so in part because it doesn’t want to have to pay those monthly accruing HOA liabilities, which it has to as soon as it becomes the title owner at the end of a foreclosure. But the homeowner filing bankruptcy now couldn’t discharge (legally write off) FUTURE HOA dues and assessment, until after the property was legally in the mortgage lender’s hands. So the homeowner needs relief from his or her creditors, and wants to move on in life, but can’t because of the mortgage lender’s inaction.
Well, on October 14, 2014, an Oregon bankruptcy judge gave a big poke to all these mortgage lenders. She issued a ruling saying that if you as a homeowner in this situation want to surrender your home to your mortgage lender, under a Chapter 13 “adjustment of debts” plan you can require that lender to accept title to the home right away. As a result you may have a great way to get the title out of your name and no long be legally obligated on future homeowner association dues and assessments.
But then after being poked by this ruling, the mortgage lender in this case, Bank of New York Mellon, poked back. On October 31, 2014 it filed an appeal of this ruling with a higher court.
In this blog post we explain the judge’s ruling, and its potential consequences, including how the appeal fits into the picture.
The Rationale of the Judge’s Ruling
In her ruling the judge first creatively acknowledged the practical problems caused by the mortgage holder having the right to foreclose but with no commitment or timetable to do so:
It reminds me of the old adage of the dog in the manger. The dog cannot eat the hay but refuses to let the horse or the cow eat it either. [The mortgage lender] would rather sit on the hay. This creates a stalemate.
So the judge held that under Chapter 13 statutes the bankruptcy court has the authority to make the first mortgage lender accept title to the property as part of the court approved payment plan.
Specifically, the statute which details what a Chapter 13 plan may do states that a plan may “provide for the vesting of property . . . in the debtor or in any other entity.” The judge focused on this last phrase—“in any other entity”—to allow a plan to vest title of a home in the mortgage holder. Because nothing in the provision requires the consent of the mortgage holder, the judge concluded that “a plan which provides for vesting of property in a secured lender at the time of confirmation [court approval] may be confirmed [approved] over the lender’s objection.”
A separate Chapter 13 statute about other requirements to be met for the court approval of a plan says that one way to satisfy a secured creditor is if “the debtor surrenders the property securing such a claim to such holder.” The judge determined that “surrender [is] a proper treatment of a secured claim.”
The judge’s bottom line was that a Chapter 13 plan can vest title to the home in the mortgage lender as of the time of the court’s approval of the plan, regardless of that lender’s objections.
The Judge’s Practical Win-Win
The judge’s explanation of her ruling refreshingly went from legalities to discussing some realistic practicalities.
First, the stalemate caused by the mortgage lender delay in taking title to the property “hurts more than the Debtors who have ongoing HOA obligations they cannot afford and [the HOA itself]. It affects all the homeowners in [the homeowners association].” They have to make up for what neither the Debtors nor the lender will be paying.
Second, under the Chapter 13 plan which the court approved the mortgage lender “starts with a clean slate. If [it] acts promptly “it can sell the Property and incur little in the way of HOA assessments. Alternatively, it could work with [the HOA] on a rental agreement for the Property which would provide for payment of the obligations owed to both, a win-win situation.”
One Little Problem
This court ruling presents a great opportunity for homeowners who want to surrender their homes or condominiums but have been sensibly holding off because their lenders are not yet foreclosing. This ruling shows a potentially great way through Chapter 13 to quickly pass title to your lender, discharge (legally write off) all past HOA debts, and avoid liability on future accruing HOA debts.
But there’s the one little problem we mentioned at the beginning—the mortgage holder, the Bank of New York Mellon, just filed an appeal of the judge’s ruling.
Effect of the Appeal
It is impossible to know how the appeal will be turn out. This is a legal issue that has apparently not reached the appeals courts before anywhere in the country—the judge’s ruling indirectly acknowledged as much. Even though the judge’s rationale both as to the bankruptcy statutes and as to the practical realities appears very sensible, it is breaks new ground, locally and from what we can tell so far nationally as well. We will not know how strong her arguments are until the bank tries to poke holes in it, and even then we’ll have to see how the appeals court will rule. We won’t know that until a year or so from now. And even that appellate ruling could be appealed again, adding another year or so until what would then likely be a final decision.
But what to do in the meantime if you’re in this Catch-22?
We have to state very strongly that how this ruling, and the appeal, affects any particular person truly depends on that person’s own unique circumstances. We are in the process of finding out whether the five local bankruptcy judges will or will not be following their fellow judge’s ruling in light of the appeal. But regardless, each person needs advice about their own situation. That’s because timing decisions in particular turn so much on your individual circumstances. Deciding whether to move ahead with a bankruptcy case or not given this recent ruling and the bank’s appeal involves a judgment call weighing all the relevant things going on in both your financial and personal lives.
This new ruling, notwithstanding the pending appeal, may also give us some leverage in “encouraging” a mortgage lender to either accept a deed in lieu of foreclosure or start a foreclosure to get the property out of your name and to cut off HOA liabilities. Again, whether this effort is worthwhile depends on your own unique circumstances, including who your mortgage lender happens to be.
Finally, note that we are personally very familiar with the attorney for the debtors in the case, and in fact have worked closely with him in the past on an unrelated complicated bankruptcy litigation matter. He is a very capable attorney. We expect to keep in touch with him and will be constantly monitoring the appeal as it progresses.