Some time ago, Vincent Howard and our Perris foreclosure defense lawyers wrote about a Bankruptcy Appellate Panel case in which a Maine couple surrendered their home in bankruptcy--but the lender refused to foreclose. Now, that case has reached the First U.S. Circuit Court of Appeals. In Canning v. Beneficial Maine, Ralph and Megan Canning reopened their Chapter 7 bankruptcy to seek sanctions against Beneficial Maine for refusing to take title to the home, leaving them with the costs of taxes and maintenance even though they had been released from obligations on the loan by their discharge. The bankruptcy court found that Beneficial's letters violated the discharge, but its failure to take title to the home did not. The BAP for the First Circuit agreed, and the First Circuit affirmed.
The Cannings filed for Chapter 7 bankruptcy in 2009, after an unsuccessful attempt to refinance their home, which was valued at about $100,000 less than they owed. They intended to abandon the home. Beneficial voluntarily dismissed its foreclosure case and the Cannings received a discharge in June of 2009, releasing them from obligations on the loan. Beneficial sent a letter in August of that year informing them that it refused to foreclose, giving them legal ownership and the obligation to pay taxes, insurance and maintenance. They responded with a request that Beneficial either foreclose or discharge the mortgage, and Beneficial suggested that they settle or short-sell the property.
After further failure to agree, the Cannings reopened their Chapter 7 case and started an adversary proceeding, asking for damages and a declaratory judgment forcing Beneficial to act. The Cannings relied heavily on In re Pratt, in which the First Circuit held that General Motors was effectively coercing a debtor to pay by refusing to foreclose or release a worthless car. Despite this precedent, the bankruptcy court distinguished it enough to rule that Beneficial's refusal to foreclose is not coercive and thus does not violate the injunction. The BAP for the First Circuit upheld that ruling, using the same logic.
The Cannings took their case to the First Circuit itself, but were rebuffed. To get rid of a pre-petition lien, debtors may surrender the collateral--but First Circuit precedent says creditors are not obligated to take it, unless the refusal to accept it is intended to coerce payment of a discharged debt. In Pratt, the First Circuit found this kind of coercion because the car was too worthless to be sold, and too encumbered to be junked, thus incurring maintenance costs for the debtor. The First found several important differences in this case. Beneficial was not demanding that the Cannings pay in full or retain the house forever; it suggested a short sale or a settlement, indicating a willingness to negotiate and collect no more than the value secured by the underlying lien. Furthermore, the court said, the record does not show that the house is burdensome to the Cannings. Finally, the court noted that the value of the house may improve, meaning Beneficial may actually have an interest to protect. Thus, it declined to reverse the lower courts.
Vincent Howard and our Yorba Linda foreclosure defense attorneys are disappointed that the court declined to consider the "fresh start" arguments made by the Cannings. The purpose of a bankruptcy is to help debtors escape an unmanageable financial situation and make a fresh start. Beneficial's refusal to foreclose--which, the BAP noted, appears to be purely because it's not financially worthwhile--denies them that. The First suggests that the Cannings' choice to abandon the property was irresponsible because it places burdens on the neighbors and their town. But returning foreclosed property to the lender is the normal thing to do, and intended as compensation for the lender. That it's not good compensation in this case could be construed as evidence that Beneficial made a lending mistake. And if Beneficial declines to take up the abandoned property, doesn't it bear some blame for the resulting disrepair? The Redlands foreclosure defense lawyers at Howard Law, P.C., do not believe that all of the blame for the real estate bubble can be placed at the feet of borrowers.
If you're looking into bankruptcy as a way to avoid foreclosure or mitigate its effects, you should call Vincent Howard and the team at Howard Law. You can reach us at 1-800-872-5925 or send us a message through our website.