Deed In Lieu and Right of Setoff

Interesting bankruptcy case touching on some fairly common residential real estate issues in In re Johnson (371 BR 336).

The opinion starts with facts that seem rather unremarkable, the Johnson's got behind on mortgage loan payments and negotiated a deed in lieu of foreclosure with the bank...i.e. they conveyed the property to the bank to avoid a foreclosure suit. Fairly common event. The case got interesting when the Johnson's attempted to get some $10k from an interest reserve account back from the bank. The bank refused.

After trial the bankruptcy court found that the bank had a common law and contractual "right of setoff." Some interesting drafting issues and reminders to be careful in areas that we think of as sort of "no brainers."