Cancel That Mortgage: Why Bankruptcy?
By L. Jed Berliner, Massachusetts Bankruptcy Attorney on Aug 1, 2008 in Chapter 13 Bankruptcy, Massachusetts
This third article follows Cancel That Mortgage! and Cancel That Mortgage: The Grounds. We’ve seen that a mortgage can be cancelled but the unpaid principal of the loan, the total amount borrowed less all payments including closing costs, must be returned (tendered) to the lender.
Bankruptcy courts split on whether this obligation to return the money is a condition before a mortgage can be cancelled, or whether it is a regular, unsecured debt like a credit card which gets discharged. In Chapter 13, a regular unsecured debt get paid a dividend, which can be quite small.
Massachusetts has a strong line of cases allowing cancellation of a mortgage without requiring a full return of all the unpaid borrowed money. This was recently affirmed by U.S. Bankruptcy Judge William C. Hillman in Kaaskelainen, et ux v. Wells Fargo Bank, N.A. et al (In re Jaaskelainen). His ruling added that a perfect “chain of custody” for the closing documents is not necessary, since a “closing booklet is not a murder weapon or controlled substance whith requires a perfect chain of custody to prove guilt.” A reasonable account for the closing papers is all that is required.
In declaring that the closing papers were defective because the married borrowers did not each receive two copies of the required notice of right to cancel, Judge Hillman went on to rule that the bona fide (good faith) error defense was not available where the lender’s compliance procedures unreasonably relied on the same closing agent to present the proper papers, and then to verify that the proper papers were presented. Verification must be peformed by an independent party, or the error is not bona fide.
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