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First Circuit BAP Finds Lender Did Not Violate Discharge by Failing to Foreclose - Canning v. Beneficial Maine

January 23, 2012

At Howard Law, P.C., Vincent Howard and our team of Highland foreclosure defense attorneys were interested to see a case in which a mortgage lender was penalized for failing to foreclose after the borrowers gave up the property. In Canning v. Beneficial Maine, Ralph and Megan Canning of Sanford, Maine, filed for Chapter 7 bankruptcy after falling behind on their mortgage payments, and ultimately agreed to surrender the property. However, after the surrender and after their discharge, Beneficial Maine wrote the Cannings to demand that they repay the considerable balance on their underwater loan. They reopened their bankruptcy case and filed an adversary proceeding to require Beneficial to either repossess or give up lien to the home. The bankruptcy court found that the collection letters violated the Cannings' discharge, but that failure to foreclose did not.

The Cannings bought their home in 2007 and found themselves unable to refinance a year later because of a price drop. This led to a default and their Chapter 7 bankruptcy petition in 2009. With their petition and a separate letter to Beneficial, the couple indicated that they would surrender the home. Their trustee filed a notice of abandonment and Beneficial dismissed its foreclosure voluntarily two months after the bankruptcy filing. The Cannings received their discharge in June of 2009, and in August of that year, they received a letter from Beneficial demanding payment of the outstanding loan balance. Their bankruptcy attorney responded by reminding Beneficial of the bankruptcy discharge and demanding that Beneficial either foreclose or release the home's title, or he would seek sanctions in court. Two more rounds of letters in this vein followed, and the bankruptcy lawyer finally filed an adversary proceeding over the failure to foreclose as well as the demand letters violating the discharge order.

In a hearing, a Beneficial employee testified that it hadn't foreclosed because that would cost more than the property was worth. The bankruptcy court found that Beneficial's letters and stance were plain violations of the bankruptcy discharge. However, it found that the failure to foreclose did not violate the discharge, because it did not coerce the Cannings to pay or violate their surrender rights. The Cannings appealed.

In its analysis, the Bankruptcy Appellate Panel for the First U.S. Circuit Court of Appeal affirmed the trial court's decision. The law of the First Circuit does not require creditors to take possession of surrendered property, it said. Debtors like the Cannings are no longer personally liable for a debt discharged in bankruptcy, but the lien survives. However, under In re Pratt, Beneficial may be liable for impermissibly failing to discharge the mortgage. In Pratt, an auto dealer declined to repossess a car that was so old as to be worthless, leaving the debtors who had surrendered it the financial liability of maintaining it but no way to sell it to a junkyard. The Pratt court found that this violated their discharge by coercing them to reaffirm the debt. The Cannings relied heavily on Pratt, but the BAP found differences; the value of the home could go up, and there does not appear to be significant cost associated with maintaining it. Thus, the BAP upheld the bankruptcy court.

Vincent Howard and our team of Garden Grove foreclosure defense lawyers have seen this situation before. When a home is deep underwater -- the Cannings apparently owed about $110,000 more than the most recent appraisal said the home was worth -- the lender may decide it's not financially worthwhile to pursue a foreclosure. This is its legal right, but it sticks the borrowers with the costs and headaches of maintaining a home they no longer actually own. In some cases, this includes the cost of homeowners association fees, which banks are legally responsible for paying after a foreclosure, thanks to the 2005 changes in bankruptcy law. Though the Cannings do not appear to have that obligation, it's not hard to think of other potential liabilities raised by homeownership -- taxes, maintenance, insurance and more. Part of the job of our San Diego County foreclosure defense attorneys is to help borrowers eliminate or minimize this kind of liability.

If you're facing a foreclosure that you believe could be prevented and you'd like to speak with an experienced attorney about your options, call Vincent Howard and Howard Law, P.C., today. For a consultation, send us an email or call toll-free at 1-800-872-5925.

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