Real Property Notes Blog

Chapter 13 Plan May Not Manufacture Homestead Mortgage Default In Order to Pay Debtor’s Attorney Fees

The recent case of In re Maike, a decision from the Eastern District of Michigan District Court on appeal from the bankruptcy court, throws light on the tensions between 11 USC 1322, which prohibits modification of the rights of a creditor secured only by a lien on the debtor’s principal residence, and the administrative priority of debtor’s counsel’s attorney fees.  In Maike, the debtor defaulted on his mortgage and filed a Chapter 13 case to cure the default.  At the time of confirmation, the trustee did not have on hand sufficient funds to pay the debtor’s attorney fees.  The mortgage company objected to confirmation on the basis that there were not sufficient funds to pay post-petition mortgage monthly payments.  The bankruptcy court adjourned the confirmation hearing for three months, at which time there were sufficient funds to pay the attorney fees, but not enough to make a mortgage payment.  The court confirmed the plan over the objections of the creditor.

On appeal, the district court reversed and remanded.  Although 11 USC 1325 allows a debtor to cure debtor-created defaults under a mortgage, this section does not allow a debtor’s plan to create a default for the sole purpose of paying the attorney fees first.  The court reversed and remanded the matter to the bankruptcy court.

Presumably, on remand, the debtor will have to modify his plan to provide for payment of attorney fees in installments so that there will be sufficient funds to make monthly mortgage payments post-petition.

UPDATE:  On second appeal, the District Court upheld a decision of the bankruptcy court to require debtor’s attorney to refund a portion of the attorney fee paid as a result of the initial confirmation (prior to the first appeal) so that the mortgagee could receive full payment of the two post-petition, pre-confirmation payments it was due.

Mortgagors Contacted Wrong Party to Calculate Redemption

In Johnston v Sterling Mortgage and Investment, an unpublished Court of Appeals opinion, the mortgagors defaulted on their mortgage and the mortgagee foreclosed.  A third party purchased at the foreclosure sale.  The third party filed an affidavit identifying the person to contact to redeem the property.  The mortgagors initially contacted the correct third party and obtained a redemption statement, but did not pay by the date therein.  They then contacted another person, not designated in the affidavit, who initially told them he would provide a redemption statement, but never did.  Although they had the funds, the mortgagors did not redeem from the property either with the proper party or with the register of deeds.

The purchaser at the foreclosure sale started an eviction.  The mortgagors claimed they had tendered redemption but it as not accepted.  The trial court ruled that tender was not sufficient; payment had to be made either to the purchaser’s designee or to the register of deeds.  Since the mortgagors did neither, they did not timely redeem and the district court entered a judgment of possession.  The mortgagors appealed to the Circuit Court, which affirmed.  They then appealed to the Court of Appeals, which also affirmed.

This case is a cautionary tale for mortgagors who have the wherewithal to redeem:  contact the designee stated in the affidavit of purchaser for redemption amounts and, if a statement of the amount is not produce timely, contact the register of deeds.  Regardless of who you contact, PAY THE MONEY to the purchaser or the register of deeds.  Being ready, willing, and able to tender the funds is no defense; the money must be actually paid over to redeem from a foreclosure sale.

Rental Income is Not Property of Bankruptcy Estate if Assignment of Rents is Perfected Prepetition

In In Re Town Center Flats, LLC, the District Court for the Eastern District of Michigan overturned the bankruptcy court’s ruling that rental income in a single-asset-real-estate Chapter 11 case was property of the estate and constituted cash collateral.  Prior to the bankruptcy filing, the mortgagee had filed its notice of default and served it on the tenants, which are the steps required to enforce the assignment of rents under Michigan Law.

The District Court overturned a 20-year old decision by the bankruptcy court which had held that rental income was cash collateral, and part of the bankruptcy estate, notwithstanding a creditor’s perfection of the assignment of rents.  The issue is a “make or break” issue in a single asset case, because the real property usually has no equity and the debtor has no other source of income.  If the debtor cannot use rents to finance a plan, the case will likely be converted to a Chapter 7 case quickly.

NOTE: this decision has since been upheld by the 6th Circuit Court of Appeals.

© Steve Sowell 2017