Bankruptcy Court Denies Lender's Request To Proceed With Foreclosure Of Delinquent Mortgage On Real Estate Inherited From Deceased Owner

The following facts have been taken from a recent ruling from a Federal bankruptcy court in Missouri:

• Father buys real estate, financing the purchase with a loan from Bank/Creditor secured by a deed of trust.
• Father dies four weeks later.
• Daughter, as sole survivor, acquires through inheritance Father's real estate, subject to the secured debt.
• Daughter encounters financial problems and defaults on mortgage payments, causing Bank/Creditor to initiate a foreclosure action.
• Daughter files for Chapter 13 bankruptcy to stop the foreclosure.
• Daughter proposes Chapter 13 payment plan which provides that she will pay certain amounts to cure pre-petition arrears on the Bank/Creditor's claim. Daughter also proposes to make post-petition payments to the Bank/Creditor outside of the Daughter's Chapter 13 plan. (The Loan Documents were never modified to show the Daughter as a borrower or obligor. Accordingly, the parties do not dispute that Daughter has no personal liability to the Bank/Creditor for the amounts owed under the loan documents.)
• Bank/Creditor files request to lift the automatic stay for the purpose of completing the foreclosure action.

The issue before the Court is whether Daughter may defeat Bank/Creditor's request for relief from the automatic stay by including in her Chapter 13 bankruptcy plan the Creditor's claim against property that the Daughter acquired through a pre-petition inheritance, even though the Daughter was never in privity with Bank/Creditor on a promissory note or deed of trust in which the property was pledged as security, and modify the rights (ie. "cram down") of Bank/Creditor.

Relying in large part on the U.S. Supreme Court ruling in Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed. 2d 66 (1991), the bankruptcy court held that Daughter was permitted to handle the payments on the Bank/Creditor's secured loan as proposed, despite the lack of privity, and the Bank/Creditor's request to lift the automatic stay was denied.(1)(2)

For the court's ruling, see In re: Rhonda M. Holmes, Case No. 10-41140-399, Motion No. 8., 10 (USBC E.D. Missouri, East. Div., March 3, 2010).

(1) Apparently sensing the possibility that some clever real estate operators and others might attempt to use this ruling as a basis for acquiring real estate subject to existing mortgages or deeds of trust without formally assuming the loan with the lender, and then look to invoke the "cramdown" provisions of 11 U.S.C. §1322(b)(2) to legally screw it by modifying its rights through a subsequent Chapter 13 filing, the Missouri Eastern District's Chief Bankruptcy Judge Barry S. Schermer concluded his ruling with the following admonition to those opportunists:

• This holding is limited to the facts presented here, specifically, a ruling on a motion for relief from the automatic stay where a debtor obtained real property by inheritance or operation of death, rather than by a conveyance of realty from one party to another unrelated party.

• This Court expresses grave concern that litigants will try to extend this holding to a situation where a stranger to a loan acquires real property serving as collateral for the loan, and then tries to defeat a lender's request for stay relief by modifying the lender's rights through his subsequent Chapter 13 case. Those parties should remember, among other things, that Bankruptcy Code section 362(d)(4)(A) requires a court to grant relief from the automatic stay:

• (4) with respect to a stay of an act against real property . . ., if the court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved ... (A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval. 11 U.S.C. §362(d)(4)(A).

(2) An issue not addressed in this case is the (incorrect) belief of many that a lender could invoke the "due-on-sale" clause in a mortgage when title to real estate containing less than five dwelling units is transferred to a surviving relative upon the death of the owner in order to proceed with foreclosure, even if the mortgage loan is not in default. According to Federal law, a lender "may not exercise its option pursuant to a due-on-sale clause upon ... a transfer to a relative resulting from the death of a borrower." See 12 USC 1701j–3(d)(5) - Preemption of due-on-sale prohibitions (Exemption of specified transfers or dispositions). See also, Federal law protects those who inherit homes.