Business Law

In re Higgins, 20232 WL 8823920 (Bankr. E.D. Wisc. 12/20/23)

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The United States Bankruptcy Court for the Eastern District of Wisconsin (the Court) declined to allow a chapter 13 debtor to cure a prepetition arrearage on a house which had been owned by the debtor’s parents.  The Court concluded that the house was not property of the bankruptcy estate and the secured creditor did not hold a claim against the estate, so no cure was allowed.  In re Higgins, 20232 WL 8823920 (Bankr. E.D. Wisc. 12/20/23).  

To view the opinion, click here.

FACTS

Debtor Sean Higgin’s parents, Janice and Donald Higgins, owned a home in Milwaukee, Wisconsin (the “Property”).  In 2018 they executed a note and mortgage for about $100,000 which was later assigned to Matrix Financial Services Corp (“Matrix”).  Janice died in November 2020 and her interest in the Property passed to Donald as her joint tenant.  Donald died intestate without a will in 2021, per the debtor, whose affidavit on that issue was not countered with any admissible evidence, so the bankruptcy court deemed it as true for the purposes of the motions.  The debtor has four or five siblings; no probate proceeding had been opened to administer Donald’s estate.  Matrix commenced a foreclosure action on the Property in Wisconsin, a judgment was entered, and a sheriff’s sale was scheduled in May 2023.

The debtor filed a chapter 13 bankruptcy petition on May 5, 2023.  The debtor’s plan proposed to cure the arrearage on the Property, with him maintaining direct payments to Matrix.  Matrix objected to the plan and filed a motion for relief from stay, asserting that it was not a creditor of the debtor.  The debtor responded that his interest in the Property was sufficient for Matrix to have a claim.  He argued that the Property was part of his father’s probate estate and that since he had a right to a distribution from that estate, he had an interest in the Property.  It followed that Matix had a claim against the Property and therefore a right to payment, citing definitions in Bankruptcy Code §§ 101(5) and 102(2).

By order dated October 27, 2023 the Court had ruled that a chapter 13 plan may provide for the cure of a default and maintenance of payments under § 1322(b)(5) even when a debtor is not personally liable on the debt and not in privity with the creditor so long as the creditor has an interest in property owned by the debtor.  It based that ruling on its interpretation of Johnson v. Home State Bank, 501 U.S. 78 (1991) and a litany of cases which had allowed debtors to cure arrearages on property owned by them but where they had no personal liability on the debt. However, the Court determined that the debtor here did not have an ownership interest in the Property.  Since 1971, under Wisconsin law a personal representative of a decedent’s estate “succeeds to the interest of the decedent in all property of the decedent.”  Unlike the majority of states, title to the decedent’s real property did not immediately vest in the heirs.  Wisconsin law required that a probate be opened and a personal representative be appointed.  Only after that personal representative transferred property of the probate estate to the heirs would the heirs have standing to take any action with respect to that property.

The debtor asserted that he had an equitable interest in the Property as an heir.  The Court ruled that he had an equitable interest, but it was in the probate estate, not the Property itself.  Moreover, the Court found that even if the debtor had an equitable interest in the Property, it did not necessarily follow that Matrix had a claim that could be paid through the plan. Matrix did not have a right to payment from the equitable interest, only from the Property, which is controlled by the personal representative.  The Court concluded that the better view was that mortgagees like Matrix have a claim under § 102(2) only when the debtor holds legal title to the underlying property.

A last minute argument by the debtor’s attorney that a probate action had been commenced in November 2023 and the debtor had petitioned to be appointed the personal representative held no sway with the Court because the debtor presented no admissible evidence on that point.  Therefore, the Court denied confirmation of the plan and granted stay relief to Matrix.

AUTHOR’S COMMENTS

Debtors who have inherited property often seek to cure a mortgage arreage on that property through a chapter 13 plan.  As the Court here noted, a majority of courts have interpreted Johnson v. Home State Bank to allow that result.  To do so, however, the creditor must have a claim or a right to payment which is based upon the debtor’s interest in the relevant property.  Here, under Wisconsin law, that interest was lacking.  A footnote to the decision pointed out that in the majority of states, an heir’s legal interest in property arises automatically upon death of the decedent, with no requirement that a probate be opened or a transfer be made.  Wisconsin was not in that majority.  That ultimately defeated the debtor’s efforts here.

The opinion noted and I am aware of one way to avoid this dilemma.  Many states (Wisconsin and California among them) have a Transfer Upon Death deed, which will allow title to transfer upon the death of the transferor to the named beneficiary of the Deed, if not revoked before such death.  To be effective to transfer legal title, both the Transfer Upon Death deed and an Affidavit of Death must be recorded, but no probate is needed.  Debtors’ counsel should be aware of this important estate planning tool in states where it is available.  By using this type of deed, potential debtors avoid the inevitable fraudulent transfer lawsuits brought by trustees when the debtors are either children or parents who have put each other as joint tenants on title for the purpose of estate planning.  

[The Commercial Financial Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section.  This article was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group.  The opinions contained herein are strictly those of the author.]


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