The 1st Circuit Rejects Attempt To Expand Debtor’s Rights Regarding Surrendered Properties

After Bankruptcy can you force the bank to take back your surrendered property with a “foreclose or release” ultimatum? At least in the 1st Circuit, the answer is no.

In Canning v. Beneficial Maine, Inc., et al. (In Re Canning), the Court of Appeals for the 1st Circuit recently affirmed a decision rejecting a claim by a debtor who wanted to force his bank to either take back the property or release its lien. In Canning, the debtors were attempting to extend the holding in the case of Pratt v. General Motors Acceptance Corp. (In Re Pratt). The Pratt case held that a bank’s refusal to release the lien on a junk car could be seen as a violation of the Bankruptcy discharge order. Some commentators thought that the 1st Circuit was going to empower debtors to force banks to take back properties surrendered in bankruptcy. This would help clear up the growing problem of zombie title, where post-bankruptcy debtors are stuck on title of their surrendered property. However, On February 1, 2013, the 1st Circuit affirmed the Bankruptcy Appellate Panel decision to not extend the holding in Pratt.

The 1st Circuit stated that it could not extend the holding in Pratt, which dealt with abusive conduct by creditors involving a junk car, to cover real estate. Simply put, a salvage car is not a house. The Court explains that surrendering real estate in bankruptcy does not “discharge the ongoing burdens of owning property” until the title has been transferred back to the bank. The court had to “balance between the competing state-law rights of secured creditors and the bankruptcy rights of debtors.”

Instead of a “foreclose or release” demand ultimatum, the 1st Circuit would have debtors remain at the bargaining table. This can mean a short sale, a deed-in-lieu, or even situation where the bank pays a portion of what they would spend on the foreclosure directly to the debtor. The Court hints that if the facts were different and the debtors were trying to negotiate with a bank, and the bank refused to negotiate then perhaps there would be a violation of the Bankruptcy discharge order.

The Court ends the decision with a quote from Pratt: “the line between forceful negotiation and improper coercion is not always easy to delineate, and each case must therefore be assessed in the context of its particular facts.”

You can read the In re Canning decision at: www.ca1.uscourts.gov.

You can read the In re Pratt decision at: www.ca1.uscourts.gov.

You can read more about “zombie title” at: www.reuters.com, and www.forbes.com.