Minnesota Bankruptcy Courts Now Allow a Chapter 13 Debtor to Compel a Mortgagee Bank to either Foreclose or Take Deed to a ‘Zombie Property’

On September 1, 2015, the honorable Judge Michael Ridgway of the US Bankruptcy Court for the District of Minnesota joined several other jurisdictions nationally in recognizing a chapter 13 debtor’s ability to compel her mortgage bank to either foreclose a property or to take deed to a property for which it had previously refused to foreclose. In so creating this new caselaw in Minnesota, Judge Ridgway has now established the legal procedure for debtors to get out from under a ‘zombie property’, i.e.., a property that the bank refuses to foreclose for financial reasons unknown.

Particularly when it comes to zombie condos and townhomes, mortgagee banks often elect not to foreclose in effort to avoid incurring the homeowner’s association fees, real estate taxes and other accruing costs for a property that may not easily sell to recoup its losses. For such zombie properties, the homes can remain abandoned for years before it is finally either subject to a tax forfeiture proceeding or the toxic mortgage is eventually assigned to a bank who will foreclose. To the homeowner, however, it means years of uncertainty and increasing personal liability for homeowner’s association assessments and other costs of remaining the titled owner to an unwanted home.

For now in Minnesota, chapter 13 bankruptcy offers an avenue of relief in that the debtor can now force a lienholder—i.e., the mortgage bank, the homeowner’s association, or perhaps even the county itself—to either foreclose the property or take deed to the property.

In In re Stewart (Case No 15-40709-MER), the chapter 13 debtor had long-abandoned a condominium property in her former state of residence, Maryland, before moving to Minnesota and eventually filing for bankruptcy relief. For over three years, the condo sat vacant, abandoned and awaiting foreclosure by the bank or any other lienholder for that matter. Yet despite her many efforts to cooperate in a voluntary foreclosure or even deed-in-lieu the property to its lienholders, no one wanted to take deed and ownership to the zombie condo. Even after successful completion of a 5-year chapter 13 plan, she would have emerged from bankruptcy owing tens of thousands of dollars in HOAs and other costs if property continued to not be foreclosed. In essence, the very purpose of her bankruptcy proceeding would have been negated if she could not rid herself of the debts associated with the condo. Therefore, her chapter 13 plan—which was confirmed without objection by any party—provided that the condo unit would vest in its mortgagee bank (One West Bank at that time) in satisfaction of the claim and the deed would so transfer out of her name at long last. Yet over two years after her chapter 13 plan was confirmed, neither the mortgagee bank nor the homeowner’s association made any attempts to foreclose the zombie property. So the debtor and her attorney, Lynn Wartchow, brought a motion to compel the mortgagee bank to either foreclose or take deed to the property once and for all.

In so deciding in favor of the debtor and enforcing the terms of her chapter 13 “Baxter Plan”, Minnesota is now aligned with several other bankruptcy courts including Hawaii (In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013)), Oregon (In re Watt, 520 B.R. 834, 839 (Bankr. D. Or. 2014)), Massachusetts (In re Sagendorph, II, 2015 WL 3867955 (Bankr. D. Mass. June 22, 2015)) and the Eastern District of New York (In re Zair, 2015 WL 4776250 (Bankr. E.D.N.Y. Aug. 13, 2015)).

The full memorandum opinion and order of In re Stewart may be viewed on the bankruptcy court’s website at http://www.mnb.uscourts.gov/sites/mnb/files/opinions/Stewart%2013-40709%20Opinion.pdf.

 

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