Court Orders Quitclaim of Surrendered Property

The Bankruptcy Court for the Eastern District of North Carolina found a unique way to deal with the problem of surrendered property that the mortgagee refused to foreclose upon. It authorized the debtor to convey the property via quitclaim deed to the mortgagee upon continued failure to accept title. In re Perry, No. 12-1633, 2012 Bankr. LEXIS 4731 (Bankr. E.D. N.C. Oct. 9, 2012). The court reasoned that:

“Solely surrender of possession to Beneficial will not accomplish a change in the state of the title. Only a foreclosure or voluntary conveyance of the property will change the title and the responsibilities of ownership. Additionally, until the title is conveyed, the Debtor is responsible for insurance and up keep of the property.”

Courts have dealt with the issue of a lender refusing to take title to surrendered property in a variety of ways. In In re Pratt, 462 F.3d 14 (1st Cir. 2006), the court addressed the realities of the situation in which the debtor had surrendered a worthless vehicle but GMAC refused to repossess and the debtor could not dispose of the vehicle so long as GMAC’s lien existed. The court found that “[a]lthough GMAC did not create all these circumstances, and we find no record evidence that it acted in bad faith, in these circumstances its actions were objectively coercive.” The court required the lender to release its lien on the debtor’s surrendered worthless vehicle in order to allow the debtor to dispose of it.

On the other hand, in Arsenault v. JP Morgan Chase, No. 11-106 (S.D. Ga. Aug. 27, 2012), the court took a hard line when the mortgagee refused to transfer title despite the fact that the failure to do so left the debtor with the ongoing financial burdens associated with owning real property. It found that section 1325(a)(5)(C) did not place an affirmative duty on the lender to take title to surrendered property. In addition, where the financial pressure upon the debtor came from taxing entities and insurance companies, the failure to transfer title was not found to be an improper attempt to coerce payment on the debt. See also In re Brown, 477 B.R. 915 (Bankr. S.D. Ga. 2012).

The impact of the court’s decision in Perry is unclear. Though it has the earmarks of a victory for debtors in this untenable situation, a word of caution is necessary. A quitclaim deed conveys title “as is” but may not, in and of itself, convey the responsibility for payment of mortgage, taxes or assessments against the property. Separation of ownership of title and responsibility for taxes and other expenses was discussed in In re Cormier, 434 B.R. 222 (Bankr. Mass. 2010), where the debtor surrendered his residence and moved the court for an order requiring the mortgage company to take possession of the property and take responsibility for taxes and other expenses associated with it. The court acknowledged that Massachusetts is a “title” state in which the mortgagee continues to hold title to the property until the mortgage is paid off (as opposed to a “lien” state in which the mortgagor holds title and the mortgagee is a lienholder), but it found that under state law, the mortgagee as titleholder was not responsible for the types of expenses at issue. The Cormier court, however, did not rule on the separate issue of whether state law conflicted with section 1325(a)(5)(C) by undermining the relief to the debtor provided by that surrender provision.

As a practical matter, a requirement that the lender take title and responsibility for the property would benefit both the debtor, in conformance with the apparent purpose of the surrender provision, as well as unsecured creditors who could benefit from the debtor’s increased ability to pay.

 Perry Opinion