When a Member Surrenders Her Home Does It Belong To the Credit Union?

May 10, 2016 at 9:53 am Leave a comment

A couple’s home on Long Beach Long Island is destroyed by Hurricane Sandy. They fall on hard times and become delinquent on their mortgage loan.  They file for Chapter 13 bankruptcy, which allows them to reorganize their debts,  still owing hundreds of thousands of dollars on their  mortgage loan.

The bank makes a reasonable business decision not to seek to exercise its lien but instead to allow the homeowners to keep their home which is worthless.  The homeowners make the reasonable decision that they don’t want the home.  Even though it is worthless, there are still property taxes to pay and the responsibility to maintain it.  Over the bank’s objection the bankruptcy court agrees to a Chapter 13 reorganization plan in which the property is vested in the bank but   Can the property vest in the bank over its objection?

The first court to look at this case answered that question with a Yes. ( In re Zair, 535 B.R. 15, 16 (Bankr. E.D.N.Y. 2015). It concluded that by surrendering the property to the bank,  HSBC  as the first lien holder, became the owner of the property.

Round 2 recently went to the bank when  federal district court overruled the bankruptcy court. ( HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *1 (E.D.N.Y. Apr. 12, 2016). The case is   important and  instructive since  it involves an exploration of what your credit union is actually getting with its mortgage.

As explained by the district court, a Chapter 13 repayment plan is only confirmable if, with respect to each secured creditor, one of the following is true: (1) the creditor consents to the plan; (2) the plan provides for the creditor to retain his security interest in his collateral and receive periodic payments equaling the present value of the collateral, or (3) the debtor agrees to surrender the collateral so that the creditor may pursue any legal remedies he may have.

What everyone agrees on is that a debtor can surrender his property to a creditor.  What is in dispute is whether the  surrender vests  legal right and responsibilities for the property  to the creditor\lienholder. (11 U.S.C.A. § 1322(b)(9) (West).   HSBC argued that it could not be forced to assume responsibility for the property.  Our homeowners argued that “Without being able to vest the property, as is specifically permitted under Section 1322(b)(9), the Debtors are at the whim of the [Bank] and will be incurring expenses associated with the Property, such as real estate taxes, until if and when the [Bank] completes a state court foreclosure.” HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *5 (E.D.N.Y. Apr. 12, 2016).

In the end the District court sided with the bank. It explained that  “the Bank is entitled to the full array of property rights that accompany its position as first-priority lienholder, including and especially the right to foreclose its security interest, or to refrain from doing so.” The  concept of surrender necessarily contemplates permit[ting] the creditor to exercise its  property rights “to do nothing to recover its collateral”); HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *12 (E.D.N.Y. Apr. 12, 2016).

Why is this important? Because the stigma of walking away from a house is fading away and policy makers are looking for ways to make creditors take responsibility for vacant property without taking away foreclosure protections for debtors. You don’t want a world in which it becomes even easier for homeowners to reorganize their debts by making their underwater mortgage someone else’s problem.

 

 

 

Entry filed under: Legal Watch, Mortgage Lending. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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