## Facts

- Ann K. Sobotta owned and lived in residential real estate in McHenry, Illinois, and executed a mortgage in favor of BMO Harris Bank, N.A. (and its predecessor), securing the loan with the residence.
- The mortgage included a due-on-sale clause allowing the lender to accelerate the debt if any interest in the property was sold or transferred without the lender’s consent, but the clause also stated the option could not be exercised if prohibited by “Applicable Law.”
- Sobotta fell behind on mortgage payments, and the bank filed a foreclosure action in Illinois state court.
- While the foreclosure was pending, Sobotta died and title to the property passed to her nephew, Thomas R. French, who also served as executor of Sobotta’s estate.
- Acting for the estate, French filed a Chapter 13 bankruptcy petition in the Northern District of Illinois, which imposed an automatic stay of the pending foreclosure under 11 U.S.C. § 362(a).
- French proposed a Chapter 13 plan that would restructure and address the mortgage debt.
- The bank objected, arguing that 11 U.S.C. § 1322(b)(2) prevents modification of a claim secured only by a debtor’s principal residence and also contending, in substance, that it was not properly a creditor of French because French did not sign the original note and mortgage.
- The bankruptcy court granted the bank’s motion for relief from the automatic stay and allowed the bank to proceed in state court.
- French appealed to the federal district court and, for the first time on appeal, argued that the Garn–St. Germain Depository Institutions Act of 1982 and its regulations barred the bank from enforcing the due-on-sale clause based on the post-death transfer of the home to a relative.

## Issues

1. Whether the bankruptcy court erred by granting relief from the automatic stay without addressing whether the Garn–St. Germain Act and implementing regulations prohibited the bank from enforcing the mortgage’s due-on-sale clause after the borrower’s death transferred the property to a relative.
2. Whether, given potential limits on due-on-sale enforcement, the bank’s status and rights as a secured creditor had to be evaluated before lifting the stay under 11 U.S.C. § 362(d).

## Decision

- The district court vacated the bankruptcy court’s order lifting the automatic stay.
- The district court remanded for further proceedings so the bankruptcy court could consider the possible effect of the Garn–St. Germain Act and its regulations on the bank’s ability to accelerate the loan or rely on the transfer as a basis for relief from stay.
- The district court concluded that the bankruptcy court’s stay-relief ruling rested on an incomplete legal analysis because it did not evaluate whether “Applicable Law” limited enforcement of the due-on-sale clause under these facts.

## Legal Principles

- The automatic stay under 11 U.S.C. § 362(a) broadly halts actions against the debtor and property of the estate; relief from stay may be granted under § 362(d) only after applying the proper legal standard to the creditor’s asserted rights.
- A bankruptcy court abuses its discretion when it grants stay relief based on an erroneous legal premise or without considering controlling federal law that may limit the creditor’s enforcement options.
- A due-on-sale clause that is expressly conditioned on “Applicable Law” requires analysis of federal statutes and regulations that may restrict acceleration or other remedies following a transfer.
- The Garn–St. Germain Act and implementing regulations create specific exceptions under which a lender may not exercise due-on-sale rights, including certain transfers to a relative resulting from the borrower’s death; when such an exception may apply, it must be addressed before treating acceleration as available.
- Questions about whether a mortgage lender can treat a transferee as outside the loan relationship, and whether the lender holds a secured claim that must be handled in Chapter 13, depend on the enforceable rights that remain after applying federal limits on due-on-sale enforcement.

## Conclusion

The district court vacated the order lifting the automatic stay because the bankruptcy court did not consider whether the Garn–St. Germain Act barred enforcement of the due-on-sale clause after the mortgagor’s death transferred the home to her nephew, and it remanded for the bankruptcy court to evaluate the bank’s enforceable rights and whether cause existed to lift the stay under § 362(d).


French v. BMO Harris Bank, N.A., 2012 WL 1533310 (2012)