Re: MY SELLER HAS DECLARED BANKRUPTCY !!! - Posted by JPiper
Posted by JPiper on March 11, 2001 at 15:07:33:
This is a complicated question?and has a large number of possibilities and outcomes depending on exactly all the facts in the specific circumstance. There is going to be no way answer your question. You need to spend some time in thought, and with an attorney.
But first point?..when you enter into a contract you then obligate yourself to perform according to the contract. So?if you granted a tenant an option on a property, you have the obligation to deliver the deed to the property when and if they exercise their option. Your failure to deliver a deed upon the tenant?s exercise would mean that 1) you had breached the contract and 2) that the tenant could sue you for performance and/or damages.
On a ?subject to? transaction YOU own the property. So the property itself is not an asset in a bankruptcy (unless the property is deemed to have been fraudulently conveyed, another set of complications). However, the loan is probably going to be included, and in fact must be included. If not, the bankruptcy runs the risk of being thrown out if the other creditors discover that they are being treated unfairly. The idea here is that the borrower will extinguish his obligation under the loan. In doing this, it will become clear to the lender that the property has been transferred. And at this point, they will have an option as to continue with a loan that is being paid by a ?non-borrower?, to have you formally assume the loan, or to accelerate the loan under the due on sale provisions. Their possible acceleration is a possible risk to these transactions ALWAYS, not just in a bankruptcy.
This same transaction ?bought? by you as a lease/option and then sandwich lease/optioned to a tenant/buyer is a different scenario completely. In this tranaction, the seller is still the owner, the loan is still in their name. If they file bankruptcy, then the goal is to extinguish their obligation under the loan, but the asset (house) is now a part of the bankruptcy as well. Your right to the property via your option and lease, now become claims under the bankruptcy. This is what we call ?a mess?. A judge is now going to make some decisions, and clearly this is not where you want to be considering the fact that you are obligated to deliver a deed. I would say that in this scenario you would want a performance mortgage recorded to secure your option?giving you a secured interest in the property.
I had an interesting one here last year. I don?t normally sandwich lease properties?but I did one in a low equity situation with a very low rate on the mortgage. In the process of due diligence, I called the lender Bank of America. I hear the phone go through so various transfers after I called the automated system and keyed in the account number. Next thing that happens is that the phone is answered ?Bankruptcy department?. For once in my life I was absolutely speechless! I sputtered around for a minute?and then finally hung up?lol. My next call was to check on whether a bankruptcy had been filed?yep, it had.
I ended up doing this deal anyway, against the advice of my attorney by the way. When I sandwiched it to the next guy, I disclosed the bankruptcy filing. I agreed to refund their option money if I were unable to deliver title because of the bankruptcy, and they agreed to release me from any obligation if it came down to it.
I had a performance mortgage executed, but I decided not to record it until the bankruptcy was discharged. It?s now recorded.