June 8, 2015
by Michael J. McCormick
McCalla Raymer, LLC – USFN Member (Georgia)
Since the financial crisis, debtors have tried several methods to transfer the title to surrendered properties back to the mortgage company in an effort to avoid having to pay property taxes or homeowners association (HOA) fees. Bankruptcy courts across the country have approached this issue in a less than uniform fashion.
In In re Arsenault, 456 B.R. 627 (Bankr. S.D. Ga. 2011), the bankruptcy court determined that a mortgage servicer cannot be compelled to take affirmative steps to accept surrendered collateral. Moreover, the servicer’s failure to do so was not a violation of the automatic stay or confirmation order. Id., at 631.
In In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013), in addition to a plan provision surrendering the property in full satisfaction of the debt, the debtor’s plan provided that “the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.” Although the trustee objected to the nonstandard plan provision, the mortgage company did not object or make an appearance. Accordingly, the bankruptcy court confirmed the debtor’s plan. Id., at 524 (citing In re Szostek, 886 F.2d 1405, 1413) (3d Cir. 1989) (“The general rule is that the acceptance of the plan by a secured creditor can be inferred by the absence of a timely objection”). See also In re Rose, 512 B.R. 790, 795 (Bankr. W.D.N.C. 2014) (Since a transfer of real property is not effective unless the deed is delivered and the grantee accepts it, Section 105(a) of the Code does not allow a bankruptcy court to permit a debtor to transfer property to his mortgage lender by fiat).
On the other hand, the U.S. Bankruptcy Court for the Middle District of Tennessee stated that equity required the court to fashion a remedy that would prevent eradication of the debtor’s fresh start in chapter 7, due to the nondischargeability of HOA fees. In re Pigg, 453 B.R. 728 (Bankr. M.D. Tenn. 2011). Here, the debtor had attempted to deliver a deed-in-lieu of foreclosure after parts of Nashville were flooded and her home was damaged. Although the bank had taken steps to physically possess the property, the bank took no steps to foreclose even though there was interest by a third-party investor. The court eventually determined that the bank and the HOA had consented to the trustee’s sale of the property by their inaction, and the debtor would be relieved of any interest in the property.
A recent ruling has come from the U.S. District Court in Oregon — in the case of Bank of New York Mellon v. Watt (In re Watt), 2015 WL 1879680 (D. Or.).
In November 2006, Nicholas and Patricia Watt (debtors) took out a loan in the amount of $296,940 to purchase a second residence in Newport, Oregon (Property). The Property was a townhouse in a planned community subject to covenants and restrictions (CCRs) enforced by Meritage Homeowners Association (Meritage HOA). Pursuant to this transaction, the debtors executed a note and deed of trust that were eventually transferred to Bank of New York Mellon, as Trustee for Certificate Holders of the CWALT, Inc., Alternative Loan Trust 2006-OA21, Mortgage Pass Through Certificates Series 2006-0A21 (BNYM). The deed of trust held by BNYM created a secured first-position lien against the Property. Watt, at *1.
In 2012 the debtors stopped making their loan payments, thus materially defaulting under the note and deed of trust, resulting in BNYM commencing foreclosure proceedings. At the same time, the debtors incurred a significant amount of assessments as a result of failing to make repairs and by failing to pay HOA fees. These assessments created a lien that was subordinate to BNYM’s deed of trust pursuant to Or. Rev. Stat. § 94.709(1)(b). In addition, Bank of America held a junior consensual lien in the amount of $34,000, and Meritage HOA held a judgment lien against the Property in the amount of $225,000.
On March 12, 2014 the debtors filed for relief under chapter 13 of the Bankruptcy Code, thus halting BNYM’s foreclosure proceedings. The debtors scheduled the Property with a value of $271,220, and more than $346,000 was owed on BNYM’s note. Accordingly, there was no equity in the Property.
The debtors filed more than one plan; both of which received objections from Meritage HOA. On June 30, 2014 the debtors filed their second amended plan. Of significance was the provision in Paragraph 10 stating that “[u]pon entry of an Order Confirming this Chapter 13 Plan, the property at 56 B NW 33rd Place in Newport, Oregon shall be vested in” BNYM but that the vesting “shall not merge or otherwise affect the extent, validity, or priority of any liens on the property.” On the same day, the debtors responded to a previously-filed motion for relief from stay by BNYM by stating that the “Property is subject to homeowners association dues which continue to accrue so long as Debtor is on title so any delay on the part of Movant to foreclose causes damage to Debtor” and that the “Amended Plan filed by Debtors seeks to vest title to the property in the name of Movant pursuant to 11 U.S.C. 1322(b)(9).” The following day, Meritage HOA filed a response to the stay relief motion in support of the Second Amended Plan, requesting the court to address confirmation prior to granting BNYM’s motion. Id., at *1-2.
BNYM objected to the Second Amended Plan, arguing that confirmation thereof would force it to take title to the Property, subject to junior liens, and with the obligation to pay HOA dues and assessments. BNYM asserted that Section 1325(a)(5) was an exclusive statutory provision regarding confirmation of a chapter 13 plan and that no other provision, including Section 1322(b)(9), could enlarge these requirements. Id., at *2.
On October 15, 2014 the bankruptcy court issued its memorandum opinion granting BNYM’s motion for relief from stay and confirming the debtors’ second amended plan. In re Watt, 520 B.R. 834 (Bankr. D. Or. 2014). In making its decision, the bankruptcy court noted that debtors may find themselves in a situation where mortgage lenders are reluctant to foreclose, and because to “surrender” through bankruptcy does not divest the debtor of title, the debtor remains liable for post-petition HOA assessments. Even after acknowledging the Rosa and Rose cases (see supra, which held that a secured party could not be required against its will to take title to property surrendered in a bankruptcy proceeding), the court held that “[s]ection 1322(b)(9) permits confirmation of a plan that provides for vesting of property in a third party, such as a lien holder, without that party’s consent.” Moreover, “the Debtors carefully drafted paragraph 10 to make sure that Debtors were not altering the extent, priority, or validity of existing liens. This non merger language is important to preserve [BNYM]’s ability to complete a foreclosure post confirmation.” Watt, 2015 WL 1879680, at *2-3.
On October 31, 2014 BNYM filed its notice of appeal. BNYM asserted that the bankruptcy court erred as a matter of law in confirming the debtors’ chapter 13 plan because it did not meet any of the three requisite criteria listed in Section 1325(a)(5) of the Bankruptcy Code. On the other hand, the debtors contended that the substantive rights given to them by Congress under Section 1322(b) “are balanced with and not supplanted by the substantive obligations imposed on them by Section 1325(a),” such that they should be read together to allow vesting of property in a secured creditor, even without its consent. Id., at *3.
As expected, the district court explained that the debtors had the burden of establishing that their plan satisfied the requirements of the Bankruptcy Code for confirmation and, further, that Section 1322 of the Bankruptcy Code regulates the contents of a plan. Specifically, Section 1322(a) dictates what a plan “shall provide” while Section 1322(b) includes a list of terms that “may” be included. The relevant provision for this case was Section 1322(b)(9), which specifies that “the 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 any other entity.” It was undisputed by the parties that this provision does not require consent. Id., at *3.
Confirmation of a chapter 13 plan is governed by Section 1325. Id., at *4 [citing In re Andrews, 49 F.3d 1404, 1407 (9th Cir. 1995)]. Bankruptcy Code Section 1325. Confirmation of plan expressly states: “(a) Except as provided in subsection (b) the court shall confirm a plan if – … (5) with respect to each allowed secured claim provided for by the plan – (A) the holder of such claim has accepted the plan; (B)(i) the plan provides that – (I) the holder of such claim retain the lien securing such claim until the earlier of – (aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328; and (II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and (iii) if – (I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and (II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or (C) the debtor surrenders the property securing such claim to such holder[.]”
The Bankruptcy Code does not define the terms “surrender” or “vesting” for purposes of chapter 13. However, “surrender” has been interpreted as the debtor’s relinquishment of his or her right to the property at issue, and then the creditor is free to accept or reject the collateral. Id., at *4 [citing Arsenault, 456 B.R. at 629-30 (“surrender of encumbered property leaves the secured creditor in control of the exercise of its remedies”)]. Conversely, “vesting” includes a present transfer of ownership. Id., at *4 (citing Rosa, 495 B.R. at 524). Thus in the context of real property, vesting is the mechanism that transfers title and terminates the debtor’s liability for post-petition HOA assessments.
The question presented for the district court was whether a chapter 13 plan is confirmable when the debtor proposes to surrender and inserts a nonstandard plan provision such as vesting, and the secured creditor opposes the inclusion of the nonstandard term. Id., at *5.
The district court ruled that confirmation under these circumstances was erroneous and that, essentially, the bankruptcy court had interpreted Section 1322(b)(9) as creating a fourth option under Section 1325(a)(5). Section 1325(a)(5) “unambiguously” states that a plan is confirmable “solely” where surrender is proposed. However, the debtors’ second amended plan not only proposed to surrender the Property, it forcibly transferred that interest and the liabilities to BNYM. This would necessarily open the door for “unintended and injurious” consequences: the lender assumes the burdens of ownership for which it did not contract, including personal liability. Id., at *5 (citing Rose, 512 B.R. at 795-96).
By confirming a plan that included non-consensual vesting in conjunction with surrender, the bankruptcy court read language into the Bankruptcy Code that is not there, and “frustrated the purpose” of the statute, which is to provide protection to creditors holding allowed secured claims. See McDaniel v. Wells Fargo Invs., LLC, 717 F.3d 668, 677 (9th Cir. 2013). The bankruptcy court’s interpretation transforms the secured creditor’s right into an obligation, thereby rewriting both the Bankruptcy Code and the underlying loan documents. Id., at *6.
On April 22, 2015 the district court vacated the bankruptcy court’s order of confirmation and remanded the case for further proceedings. Id., at *7. The debtors have filed a motion for reconsideration before the district court.
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