A deed in lieu of foreclosure given by a mortgagor to the then current holder of that mortgage is effective to transfer all the mortgagor’s title to such holder and shall create a merger of title discharging the mortgage unless, from all the circumstances, it is apparent that the best interests of the mortgagee require the legal and equitable estates be kept separate.
Comment 1. See, Howard v. Clark, 71 Vt. 424, 427, 45 Atl. 1042, 76 A. S. R. 782 as cited in Island Pond National Bank v. Alfred Lacroix et al. 158 A. 684, 104 Vt. 282 (Vt. 1932)
Comment 2. A Deed in Lieu of Foreclosure is a deed of the mortgaged property by the mortgagor/borrower to the then current holder of the mortgage. It may be conveyed with or without warranty covenants and may be given by a fiduciary.
Comment 3. An effective conveyance of the fee title occurs when all the interests have merged or, if the deed in lieu includes non-merger language: (i) when the conveyance by the grantee of the deed in lieu includes the interest acquired in the deed in lieu and the original mortgage interest; or, (ii) the holder of the mortgage discharges the mortgage.
Comment 4. If the mortgagor/borrower’s right of redemption is granted to any person other than to the then current holder of the mortgage, fee title is not conveyed until both the mortgage interest and the equitable interest are vested in the same person or entity.
Comment 5. A deed in lieu of foreclosure given contemporaneously with the mortgage or an amendment of the mortgage is not effective to terminate the rights of the mortgagor, under the doctrine of clogging the equity of redemption. See generally, Powell on Real Property (4:Section 37.44).
Comment 6. In order to avoid the possibility of a claim of fraudulent transfer of title under the applicable federal bankruptcy or state law, a grantee in a deed in lieu should be satisfied that there is no substantial value in the property in excess of the mortgage debt due to the mortgagee plus assessed but unpaid property taxes. In re: Lauren Jo Chase, Chapter 13 Case #02-10582, Adversary Proceeding #03-1058 United States Bankruptcy Court, District of Vermont. See also 12 V.S.A.4941(c) for court finding required in a strict foreclosure action.
Comment 7. A deed in lieu given during the pendency of a foreclosure does not operate to extinguish the rights of any person with a valid lien of record in the land records.
September 20, 2012: This standard was added.