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Being a beneficiary of a decedent’s estate didn’t entitle the chapter 13 debtor to cure defaults on the mortgage on his deceased parents’ home. Nor did the debtor’s equitable interest in the property make the mortgage holder a creditor of the debtor whose mortgage could be affected by the plan, according to Bankruptcy Judge Rachel M. Blise of Milwaukee, Wis.

The debtor’s parents owned a home subject to a mortgage. Both parents died intestate. The debtor had five siblings.

The mortgage holder obtained a judgment of foreclose on the parents’ home. The day before the sale, the debtor filed a chapter 13 petition along with a plan to cure the arrears on the mortgage and make current payments over the five-year life of the plan.

The mortgage holder objected to confirmation and filed a motion to modify the automatic stay. In her December 20 opinion, Judge Blise sustained the objection and modified the stay.

The Status of an Heir

As an heir from his deceased parents’ intestate estate, the debtor claimed to have a sufficient interest in the home to cure mortgage arrears under Section 1322(b)(5).

Like a majority of courts, Judge Blise herself had held that

a chapter 13 plan may provide for the cure of default and maintenance of payments under § 1322(b)(5) even where the debtor is not personally liable on the debt and is not in contractual privity with the creditor so long as the creditor has an interest in property owned by the debtor.

As an example of the majority’s holdings, Judge Blise cited In re Stevenson, 23-32811, 2023 BL 402991, 2023 WL 7401456, at *2 (Bankr. E.D. Va. Nov. 8, 2023). To read ABI’s report on Stevenson, click here.

Judge Blise admitted that a “minority of courts” hold “that a debtor may not use the cure and maintain provision of § 1322(b)(5) when the debtor is not personally liable for the underlying debt.”

Judge Blise summarized the majority as holding that

a chapter 13 plan may provide for the cure of default and maintenance of payments under § 1322(b)(5) even where the debtor is not personally liable on the debt and is not in contractual privity with the creditor so long as the debtor has an ownership interest in the property that secures the creditor’s claim. [Emphasis added.]

In turn, Judge Blise held that the debtor’s ability to deal with the mortgage turned on whether the mortgage holder had a claim under Sections 101(5) and 102(2).

What’s a ‘Claim Against the Debtor’

Of course, a “claim” is a “right to payment” under Section 101(5), but the mortgage holder admitted that it had no right to payment from the debtor because the debtor was not obligated on the mortgage.

The debtor reasoned that the mortgage holder held a “claim” because Section 102(2) provides that a “‘claim against the debtor’ includes [a] claim against property of the debtor.”

The term “property of the debtor” is not defined, but Judge Blise cited the Supreme Court for holding that estate property includes “all of the debtor’s legal or equitable interests in property as of the commencement of the case. Begier v. Internal Revenue Service, 496 U.S. 53, 58-59 (1990) (citing 11 U.S.C. § 541(a)).” She therefore deduced that the mortgage holder had “a claim if it has an interest in property that is part of the debtor’s bankruptcy estate.”

The mortgage holder admitted that the debtor had a claim against his parents’ probate estate but said there’s a difference between an interest in a probate estate and an interest in property held in the probate estate.

When Title Passes from a Probate Estate

Judge Blise consulted Wisconsin law and found the answer in the state’s probate code, which was modified in 1971. The amendments provided that the “personal representative” of an estate succeeds to the decedent’s interest in all property, meaning that title to real property does not pass automatically to heirs. State law goes on to say that title remains “suspended” until there is a personal representative.

Furthermore, state law says that real property can be transferred to an heir only by a personal representative, and none had been appointed in the case at hand.

“For now,” Judge Blise said, “all the debtor has is an interest in the probate estate, and the Property is only part of the probate estate.”

The debtor, however, argued that he had an equitable interest in the home because estate property under Section 541(a)(1) includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”

Judge Blise said that an equitable interest in the decedent’s estate is not the same as an interest in a home that the deceased owned. Even if the debtor had an interest in the home, she said that “it does not necessarily follow that [the mortgage holder] has a claim that can be paid through a chapter 13 plan.”

For the holder of the mortgage to have a claim, Judge Blise held that “it must have a right to payment from the specific property that is part of the bankruptcy estate. 11 U.S.C. § 102(2).”

Even if the debtor had a possessory interest in property of the decedent’s estate, Judge Blise said that “a debtor with a mere possessory interest in property cannot cure and maintain a mortgage in default because the creditor does not have a security interest in the debtor’s possessory interest.” She said that the “better view is that mortgagees . . . have a claim under § 102(2) only when the debtor holds legal title to the underlying property.”

At the hearing a few days before Judge Blise handed down her opinion, the debtor’s counsel informed the court that the debtor had been appointed as the personal representative. However, counsel submitted no papers to authenticate the representation.

Judge Blise sustained the objection to confirmation and granted the motion to modify the stay. However, she stayed the lift-stay motion for 14 days under Bankruptcy Rule 4001(c).