Surprise! Without Consent, Banks own Property Surrendered in Bankruptcy

Financial Services clients are in for a surprise if they read In Re Watt from the US Bankruptcy Court for the District of Oregon stating that, without consent, banks own property surrendered in bankruptcy. The court wrote that USC 1322(b)(9) does not restrict a court from vesting real property in a bank’s name even if the bank does not consent after the debtor surrenders the property in bankruptcy. Essentially the court found that there is no difference between surrender and surrender with vesting.  The court did, thankfully, recognize an exception to this rule.  A debtor may not surrender and seek to vest property in the name of a bank, if the debtor does so in bad faith.  Bad faith is present, for example, in cases of nuisance or environmental problems.

As a result of this ruling, financial institutions must more carefully evaluate petitions of debtors under the bankruptcy code.  If a borrower/debtor seeks to surrender real property, a bank could find itself with a surprise gift of title to the surrendered real property, together with all the legal and regulatory ramifications that may follow.  If you need help, our Creditors’ Rights and Bankruptcy team frequently reviews bankruptcy petitions and would be happy to advise you.