A brewing hot topic in bankruptcy law is how a Debtor deals with property that is collateral for a secured creditor which is surrendered but has not yet been legally foreclosed or repossessed by the creditor. The Debtor’s interest is obvious: to avoid accruing post petition obligations, such as taxes, insurance, and homeowner’s association dues.
In North Carolina, this issue seems to have originated with an Eastern District case, In re Perry, 2012 WL 4795675 (12-01633-8-RDD). In Perry, the Debtor filed a motion to modify her confirmed Chapter 13 plan to provide for the release of real property to the secured creditor, Beneficial Financial, Inc. The motion to modify plan also requested that, “Beneficial be responsible for city and county taxes as well as cutting the grass and removing weeds, from the date of entry of the order allowing the surrender of the real property.” The Court acknowledged that Section 1325(a)(5)(C) of the Bankruptcy Code provides a debtor may surrender property securing an allowed claim while remaining personally liable for ad valorem taxes unless title to the property changes from the Debtor. The Court further stated that in “all states, the duty to pay taxes falls upon the mortgagor.” The Court held that it would grant Beneficial a “reasonable amount of time” to commence a special proceeding to foreclose, but if Beneficial does not act timely, the Debtor will be authorized to convey title by quitclaim deed. The order in Perry appears to have been based upon equitable issues present in that case. The Order does not analyze bankruptcy court jurisdiction that would allow a court to order an entity to take legal title to property. The order was not published and does not discuss any precedent of a court approving a transfer of title to a secured creditor.
In discussing the concept of the surrender of collateral property to a secured lender, most courts have followed the “well-established law that a creditor’s decision whether to foreclose on and/or repossess collateral is purely voluntary and discretionary.” Pratt v. Gen. Motors Acceptance Corp. (In re Pratt), 462 F.3d 13, 19 (1st Cir.2006). See also Canning v. Beneficial Me., Inc. (In re Canning), 706 F.3d 64 (1st Cir.2013).
In the plan confirmation context, courts have held that confirmation of a plan providing for abandonment or surrender of property does not itself vest title in a secured creditor. See In re Arsenault, 456 B.R. 627, (Bankr. S.D. Ga. 2011) (“A plan cannot require a secured creditor to accept a surrender of property or take possession of or title to it through repossession or foreclosure,” citing Chapter 13 Practice and Procedure § 9C:9 at 682 (2010–11 ed.); In re Service, 155 B.R. 512 (Bankr.E.D.Mo.1993) (“the Court cannot compel acceptance of the surrendered property”); In re White, 282 B.R. 418 (Bankr.N.D.Ohio 2002) (“the Code does not provide for the court or the debtor to direct the means by which the secured creditor deals with the surrendered property”).
The rare exception to the general rule appears to involve suits for violation of the discharge injunction when a post petition action by a creditor has the practical effect of eliminating the benefit of a discharge by eliminating the right to surrender under 11 U.S.C. § 521(a)(2). See Pratt462 F.3d at 20. In Pratt, a secured vehicle creditor refused to repossess a vehicle that the Debtor surrendered in this statement of intent. The creditor also refused to turn over the vehicle title. Without the vehicle title, the Debtor could not junk or otherwise legally dispose of the vehicle. The Pratt Court held that the Creditor’s actions prevented the debtor from receiving the benefit of a discharge and were deemed a violation of the discharge injunction.
Based upon precedent, it would seem that an effort by a debtor to use bankruptcy court to involuntarily force a secured creditor to take title to property is dead on arrival. Nonetheless, there are still instances in which a debtor simply executes, delivers, and records a quitclaim deed to a secured creditor without any court review. In an upcoming post, we will review a creditor’s options for dealing with such a scenario.