Surrender of collateral under section 521(a)(2) is a procedural action lifting the bankruptcy stay and permitting a lienholder to exercise state remedies with respect to the collateral. Because surrender does not affect the substantive rights of the debtor or the creditor, however, the debtor could not compel the creditor to take possession or release the lien. In re Loucks, 619 B.R. 908 (Bankr. E.D. Mich. Oct. 9, 2020) (case no. 20-42265). [Read more…] about Creditor Cannot Be Compelled to Take Possession of Surrendered Collateral
Lienholder May Seek Value for Post-Discharge Release of Lien
The discharge injunction does not prohibit a lienholder from seeking value for release of its lien so long as, under the specific facts of the case, its conduct is not an improper attempt to coerce repayment of the discharged debt. Bentley v. OneMain Financial Group, No. 19-8026 (B.A.P. 6th Cir. July 8, 2020). [Read more…] about Lienholder May Seek Value for Post-Discharge Release of Lien
Forced Vesting Does Not Satisfy Confirmation Requirements
Section 1322(b)(9) does not permit a court to confirm a plan vesting surrendered property in an unwilling creditor. Wells Fargo v. Sagendorph, No. 15-40117 (D. Mass. Jan. 23, 2017).
Paul Sagendorph’s chapter 13 plan proposed to surrender property on which Wells Fargo held the sole lien, and vest title in Wells Fargo notwithstanding Wells Fargo’s objection. The bankruptcy court held that the Code permitted Mr. Sagendorph’s treatment of the secured debt and confirmed the plan. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).
On appeal the district court, like the bankruptcy court, looked to the interplay between sections 1322 and 1325.
Section 1325(a) provides that, in the absence of objection by a creditor, a plan shall be confirmed so long as it meets certain conditions with respect to secured debts. Subparagraph 1325(a)(5)(C) permits a debtor to meet the requirements for confirmation by surrendering the property that secures the lien. Section 1322(b)(9) states a plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.”
The district court began its analysis with the statutory text which it found to be unambiguous. “Surrender” means “make available” and says nothing with respect to the party to whom the property is surrendered. To “vest” is to confer title on another. Both the bankruptcy court and the district court agreed that surrender and vesting were separate and distinct concepts. However, where the bankruptcy court interpreted vesting as an action by the debtor—conferring title upon another, the district court interpreted it as an action by the creditor—accepting transfer of title. The district court therefore concluded that vesting required a willing recipient.
The district court found the bankruptcy court erred in treating surrender and vesting as coincident in time and, therefore, essentially synonymous. Because the plan tied surrender to transfer of title, the district court found the mandatory confirmability that would normally accompany surrender was incorrectly tied to permissive vesting by the bankruptcy court.
The court also disagreed with the bankruptcy court’s analogy between vesting in chapter 13 and chapter 11. The chapter 11 vesting provision, section 1123(a)(5)(B), differs in two significant respects from chapter 13’s. First, the chapter 11 provision is mandatory; it requires that a plan, to be confirmed, shall provide for vesting or other form of implementation. Second, the forced vesting in chapter 11 is implemented by section 1129(b)(2)(A) which requires a court to find that the property being vested in the creditor is “indubitably equivalent” to the debt. No such equivalence is required by chapter 13.
The court suggested that while the avenue pursued by Mr. Sagendorph in this case was unavailing, there was room to explore other ways a court could use its equitable power to assist a debtor to achieve his fresh start. Citing United States v. Energy Res. Co., Inc., 495 U.S. 545, 549 (1990), the court the conceded that “[f]orced vesting under Chapter 13 not only addresses debtors’ evolving needs in the aftermath of the housing market crisis but is also ‘consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.’” It went on to suggested use of section 1322(b)(2) where the property at issue is not a debtor’s principal residence, or the Code sections implicated by section 1322(c), or perhaps substitution of in-kind payments rather than cash.
Surrender Ends State Foreclosure Fight
“Debtors who surrender their property in Bankruptcy may not oppose a foreclosure action in state court.” Failla v. Citibank, No. 15-15626 (11th Cir. Oct. 4, 2016). Bankruptcy debtors, David and Donna Failla, opted, under section 521(a)(2)(B), to surrender their home but continued to live in the house and oppose Citibank’s state court foreclosure action. The trustee abandoned the property as having negative value. Citibank moved to compel surrender. The bankruptcy court granted the motion ordering the Faillas to cease opposition to foreclosure in the state court. The district court affirmed. [Read more…] about Surrender Ends State Foreclosure Fight
Same District, Same Day, Different Conclusions on Surrender Plus Vesting
Two bankruptcy courts in Massachusetts faced with objections to confirmation of plans that proposed the debtor’s surrender of residential property and vesting of title in that property in the mortgagee reached opposite conclusions. In re Brown, No. 14-12357 (Bankr. D. Mass. March 4, 2016). In re Tosi, No. 13-14017 (Bankr. D. Mass. March 4, 2016). [Read more…] about Same District, Same Day, Different Conclusions on Surrender Plus Vesting
Creditor’s Motion to Reopen Is Too Late
The doctrine of laches applied a fatal blow to the creditor’s motion to reopen to compel surrender. In re Kourogenis, 2015 Bankr. LEXIS 3400, No. 09-32936 (Bankr. S.D. Fla. Oct. 7, 2015). Five years after discharge, a creditor, Green Tree Servicing, sought to reopen Ms. Kourogenis’s Chapter 7 bankruptcy to compel the surrender of real property which Ms. Kourogenis had opted to surrender in her Statement of Intentions. The court denied the motion. [Read more…] about Creditor’s Motion to Reopen Is Too Late
Plan May Vest Surrendered Property in Creditor
The bankruptcy court for the Eastern District of New York confirmed the debtors’ chapter 13 plan which provided for surrendering their residential property and vesting title in the creditor over that creditor’s objection. HSBC Bank v. Zair, No. 14-74456 (Bankr. E.D. N.Y. Aug. 13, 2015).
[Read more…] about Plan May Vest Surrendered Property in Creditor
Court Denies Bank’s Motion to Reopen and Compel Surrender
Bank of America’s failure to provide the debtor with a written reaffirmation agreement during the pendency of her bankruptcy led the court to deny its motion to reopen and compel surrender. In re Rodriguez, No. 12-12043 (Bankr. S.D. Fla. Aug. 12, 2015). [Read more…] about Court Denies Bank’s Motion to Reopen and Compel Surrender
Plan May Include Vesting in Unwilling Creditor
A Debtor may confirm a plan that provides for the transfer of title to the secured creditor even over the creditor’s objection. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).
Paul Sagendorph’s chapter 13 plan provided for certain secured property as follows:
The debtor is Surrendering his property . . . to Wells Fargo . . . in Full Satisfaction of any Claims filed. Wells Fargo . . . will Foreclose on the property in Satisfaction of the Mortgage, Note, and any outstanding Fees. Under §§ 1322(b)(8) and (9), title to the property . . . shall vest in Wells Fargo . . . upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Registry of Deeds. All secured claims will be paid by surrender of the collateral and foreclosure of the security interest. [capitalization in original]
Wells Fargo objected to the plan, arguing that it could not be compelled to take title to the property, that forcing it to take the property would subject it to liens held by other parties, and that the treatment of Wells Fargo’s interest did not comply with the requirements of section 1325(a)(5). The bankruptcy court sustained Wells Fargo’s objections but permitted the debtor to amend the plan to address the issues raised. The debtor amended the plan using the same title transfer language but reflecting that the only encumbrance on the subject property was the mortgage held by Wells Fargo. Wells Fargo renewed its objections.
The court’s analysis turned on the interplay between section 1322(b)(9), which provides that a chapter 13 plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity,” and section 1325(a)(5)(C), which provides that a plan may be confirmed over objection if the debtor surrenders the property to the holder of the secured claim. Wells Fargo argued that section 1325(a)(5)(C) establishes a limitation on the court’s power to vest title in an unwilling creditor.
Beginning with statutory language, the court found that “surrender,” though not defined in the Code, has been found by the First Circuit to mean to “make the collateral available to the secured creditor, – viz., to cede his possessory rights in the collateral.” “Vesting,” likewise undefined, “means to place one in legal possession or ownership of the property.” The court found that while surrender merely makes property available, “vesting means transferring title.” The court turned to the issue of whether there is inherent tension between sections 1325(a) and 1322(b) and, if so, whether section 1325(a)(5)(C) limits the court’s discretion to “vest” title under section 1322(b)(9).
The court found no conflict. Section 1325(a)(5) permits a debtor to surrender property, and section 1322(b) permits the court to vest it in the creditor so long as the plan is proposed in good faith and conforms to the Bankruptcy Code. The court disagreed that section 1322(b)(9) is circumscribed by section 1325(a)(5)(C), finding instead that section 1325(a)(5), establishes a “baseline” requirement that must be met before the menu of options set forth in section 1322 apply. That Congress used “surrender” in one provision and “vest” in the other, indicates different meaning and different treatment. Surrender is a preliminary step to transferring title.
The court rejected Wells Fargo’s argument that because Massachusetts law does not permit a debtor to force a creditor to take title to surrendered property the same cannot be accomplished through bankruptcy. Where a fundamental purpose of bankruptcy is to give debtors a fresh start free of certain financial obligations, it is often the case that bankruptcy permits treatment of debts in ways that are contrary to state law. In those cases, bankruptcy law preempts conflicting state law.
The court was swayed in part by the fact that such title transfers are commonplace in chapter 11 in what it referred to as “dirt for debt plans” under section 1123(a)(5)(B). As an analog of chapter 11, chapter 13 plans should receive similar treatment unless Congress has explicitly established differences.
The court noted that its ruling does not leave creditors without recourse when a debtor acts in bad faith or proposes a plan that is contrary to law. Section 1325(a)(3) prevents confirmation of such plan. But, in this case, the value of the property exceeded the amount of the mortgage and Wells Fargo did not raise any issues with respect to bad faith.
David Baker authored an amicus brief on behalf of the NACBA membership in support of the debtor.
Lender May Be Compelled to Take Title to Surrendered Property
Under section 1322(b)(9), the chapter 13 plan may provide for vesting of title to property that the debtor has surrendered in an entity (the mortgagee) without that entity’s consent. In re Watt, No. 14-31295 (Bankr. D. Or. Oct. 15, 2014). [Read more…] about Lender May Be Compelled to Take Title to Surrendered Property