by 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).
These cases represent the “hot potato” situation in which neither the debtor nor the secured lender want to be responsible for the burdens, such as taxes, homeowner association fees, insurance, etc., of property ownership.
In Brown, the debtor’s condominium was encumbered by a lien held by Selene Finance LP, as successor to Bank of America. The debtor surrendered the property pursuant to section 1325(a)(5)(C). The plan provided: “[u]pon confirmation, the property shall vest in Bank of America, its successors or assigns, pursuant to § 1322(b)(8) and (9), subject to all other unavoidable liens.”
The court began its analysis with the legislative structure. Section 1322(b)(8) provides for payments of debts with estate property, and section 1322(b)(9) provides for “vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.” Section 1325(a)(5)(C) provides that a plan may be confirmed over objection by a secured creditor if the plan provides for the debtor to surrender the secured property. With these provisions in mind the court turned to the question of whether surrender and vesting in the creditor are permissible treatments of secured debts in a chapter 13 plan.
Noting that the issue has divided the bankruptcy courts the Brown court discussed the recent decision in In re Sagendorph, No. 14-41675-MSH, 2015 WL 3867955 (Bankr. D. Mass. June 22, 2015) (currently on appeal to the District Court of Massachusetts, No. 15-40117), in which the court approved the surrender plus vesting plan. In that case, Chief Judge Hoffman reasoned that “surrender” generally means “to make available,” while “vesting” contemplates actual transfer of title. The court found that surrender plus vesting was a two-step process that is supported by the plain language of both section 1325(a)(5)(C) and section 1322(b)(9). It also conforms to section 1322(b)(8)’s requirement that claims be paid through property of the estate. To the extent that state law requires consent to a transfer of property, Judge Hoffman found that requirement preempted by the Bankruptcy Code. Reaching the same conclusion, the court in In re Zair, 535 B.R. 15, 18 (Bankr. E.D. N.Y. 2015), found that surrender plus vesting served the dual purpose of freeing the debtor from the burden of ownership and immediately giving the creditor access to the collateral.
The Brown court found the reasoning of courts rejecting the surrender plus vesting option to be flawed because they fail to give adequate weight to the plain language of the statutory text, and they impose state law requirements upon bankruptcy laws that have no such requirements. The court found that when the creditor refuses to foreclose or take title, the debtor is deprived of the benefit granted by section 1325(a)(5)(C)’s surrender provision. Thus, requiring consent for the transfer of title is tantamount to placing a creditor consent requirement on the debtor’s right to surrender; a requirement not included by Congress in the legislation.
The court was unmoved by the difficulties placed on secured creditors by having burdensome properties foisted on them, saying “lenders granted mortgages while cognizant of the risks of default and bankruptcy, as well as the potential existence of senior statutory liens for unpaid taxes and homeowner or condominium association charges, and the possibility of junior liens in favor of judgment creditors and junior mortgagees.” They also have the ability to avoid some of these risks by foreclosing when the bankruptcy court lifts the stay and seeking to recover the deficiency through the chapter 13 plan. The court noted that creditors may still challenge a “dirt for debt” plan as proposed in bad faith.
Brown Bankr Mass opinion 030416
In Tosi, the plan proposed to give Mr. Tosi ninety days within which to sell the property, which he owned with his non-debtor spouse. After the ninety days, if the property did not sell, the plan provided that “the debtor’s interest in the property shall be surrendered pursuant to section 1325(a)(5)(C) and shall immediately vest in Flagstar Bank (or its principal) pursuant to sections 1322(b)(8) and (9) without further order of the court. The confirmation order, when recorded at the Registry of Deeds, shall constitute a deed of conveyance of the property.”
The court found that the plan could not be confirmed without the creditor’s consent to the transfer of title. Where the Brown court found that inability to vest property in the secured creditor deprived the debtor of the benefit of surrender, the Tosi court found that the simultaneous surrender/vesting would deprive Green Tree (as successor to Flagstar) of certain advantages of being a mortgagee rather than owner, including its opportunity to foreclose. This was particularly so where the plan proposed to give Mr. Tosi ninety days before surrender to try to sell his interest himself.
Where the Brown court found that a lender assumes certain risks when offering home loans, including the risk of bankruptcy and the existence of junior lienholders, the Tosi court found these concerns compelling. The Tosi court reasoned that in the event of a foreclosure Green Tree would not be subject to junior liens, while, as owner, those liens would remain in place. Vesting would also transform Green Tree’s interest as mortgagee to one of tenant in common with Mr. Tosi’s wife. The court found that the surrender plus vesting method was not a surrender at all because it did not make the collateral available to allow the secured creditor to exercise its state law rights in the collateral, if it so chose. The court found that surrender and vesting were mutually exclusive.
The court disagreed with Judge Hoffman in Sagendorph stating: “This reasoning understates the meaning of surrender, which is not merely to cede possessory rights, but to permit the creditor to exercise its preexisting property rights as to the collateral. The vesting of title in the mortgagee goes well beyond surrender of the collateral by altering the mortgagee’s rights as the holder of a mortgage.”
The court also disagreed that section 1322(b)(9) permits the vesting contemplated by the debtor’s plan. Having found that the two treatments of property are mutually exclusive, the court reasoned that vesting under section 1322(b)(9), has a viable function when the creditor consents to transfer of title, either explicitly or by failure to object, or where the plan itself provides for sale of property. The court said that by vesting title in the creditor the debtor does not meet the requirement that the claim be paid in full. While the court’s language was definitive as to the surrender plus vesting issue, this may be a case of bad facts making (or at least contributing to) bad law. Both the ninety day pre-surrender selling provision, and the fact that the property was co-owned with a non-debtor, worked against Mr. Tosi.