Creditor Found to Have No Obligation to Foreclose on Surrendered Property

Posted by NCBRC - September 13, 2012

The District Court for the Southern District of Georgia found that a bank has no affirmative duty under section 1325(a)(5)(C) to transfer title to surrendered property out of the debtor’s name. Arsenault v. JP Morgan Chase, No. 11-106 (S.D. Ga. Aug. 27, 2012). The issue arose when, one year after confirmation of the chapter 13 plan, the debtor filed an adversary complaint based on the Bank’s failure to cause title of the property to be transferred out of the debtor’s name. The bankruptcy court found that neither the confirmation order nor the court’s equitable powers permit the court to impose an affirmative obligation on the creditor to take possession of property surrendered under section 1325(a)(5)(C), stating: “although the Code provides a discharge of personal liability for debt, it does not discharge the ongoing burdens of owning property.” Further, because the post-confirmation collection against the debtor with respect to the real property are conducted by third parties for taxes, insurance, etc. the failure to foreclose on the property was found not to be a veiled attempt to collect on the debt in violation of the automatic stay. The District Court agreed.

In reaching its holding, the court did not address the case of In re Pratt, 462 F.3d 14 (1st Cir. 2006). In that case, the First Circuit, assessing the case “on its particular facts” acknowledged the coercive effect of a creditor’s failure to take control of property surrendered in bankruptcy.  The debtor could not get rid of his worthless vehicle because no junkyard would take it with the lien attached to it. Therefore, the debtor was in the position, similar to the debtor in Arsenault, of having made a meaningless gesture by taking the surrender option offered by section 521(a)(2) yet remaining burdened by the lien and its concomitant costs and obligations. In Pratt, 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 Pratt court required GMAC to release its lien even if it chose not to take possession of the collateral because to do otherwise would have the practical effect of eliminating the surrender option offered by the Bankruptcy Code.

Though there are some obvious differences between Pratt and Arsenault, including that Pratt is a chapter 7 case involving a vehicle and Arsenault is a chapter 13 case involving real property, in both cases the practical effect of surrender of collateral was at stake. Where the Arsenault court appeared to be swayed in large part by the fact that the pressure on the debtor was exerted by entities other than the creditor, the Pratt court did not find that fact to be dispositive looking instead at the effect of the pressure as objectively coercive with respect to the lien.

Arsenault opinion


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