Mortgage Can Be Modified By Ch. 11 Plan, Even If Debtor Is Not Indebted, But Cram-Down Limited

As the old saying goes — interesting facts make interesting law. In this post-great recession era where mortgage lenders are carefully scrutinizing borrowers for credit worthiness and have tightened underwriting criteria, the assumption is that they know the identity of their borrowers, and if the mortgaged property is transferred, the lender can demand payment of its loan.
Today we review a situation where a 50% interest in mortgaged commercial real estate was transferred without the consent of the lender, and the new tenant-in-common owner subsequently filed a Chapter 11 case and attempted to modify the payment terms of the mortgage loan to which he is not a party. Can this be done in bankruptcy? And what happens to the nondebtor 50% tenant-in-common borrower under the loan?
In a recent decision in In re Taing, Case No. 22-40896-CJP, the U.S. Bankruptcy Court for the District of Massachusetts held that a mortgagee holds a claim that could be modified by a Chapter 11 plan even if the debtor was not indebted under the mortgage, but limited the ability to “cram down” the plan terms against the lender to the extent it modified the lender’s rights against the nondebtor obligor.

The Debtor Was a Partial Owner of Properties Secured by Mortgages Given by Third Parties

According to the opinion, the debtor owned a partial interest in properties located in Lowell, Massachusetts. Each of the properties was encumbered by mortgages given by third parties. The debtor was not a signatory to the mortgages or obligated under the notes secured by the mortgages. The mortgages contained due-on-sale clauses that restricted the transfer of the original owners’ interests in the properties. Nevertheless, the debtor had acquired 50% interest in the properties and subsequently filed for bankruptcy under Subchapter V of Chapter 11 of the Bankruptcy Code.
The debtor proposed a plan that sought to restructure the mortgage loan obligations on the properties. The mortgagees objected to the plan, arguing that because the debtor was not an obligor under the mortgage or note, they did not hold claims in the bankruptcy case that could be restructured under the plan. The mortgagees also objected to the plan on the basis that it had not been filed in good faith. One of the mortgagees also argued that the proposed cram-down treatment of its interest in the property could not be approved because it modified its interest in a non-debtor’s interest in the property.