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Kansas: To Vest or Not to Vest Mortgaged Property in Secured Creditor — Another Bankruptcy Court Weighs In

Posted By USFN, Tuesday, January 05, 2016
Updated: Tuesday, January 19, 2016

January 5, 2016

 

by Carrie D. Mermis
Martin Leigh PC – USFN Member (Kansas)

In a recent decision, the bankruptcy court held that a chapter 13 plan that provides for the vesting of mortgaged property in the secured creditor may not be confirmed over the creditor’s objection. [In re Williams, 2015 WL 7776552 (Bankr. Kan. Dec. 2, 2015)].

After the debtor’s original plan (which retained homestead property) was confirmed, the debtor filed a motion to amend the plan to surrender the property. Upon no foreclosure, the debtor filed a subsequent motion to amend the plan that not only provided for surrender of the property but also to vest title to the property in the secured creditor pursuant to 11 U.S.C. §§ 1322(b)(8) and (9). The plan further provided that an order on the modification would constitute a deed of conveyance to the property when recorded with the county Register of Deeds, and that all claims secured by the property would be paid by surrender of the collateral and foreclosure of the security interests.

The split of authority around the country on this issue was recognized in Williams. Some courts have held that vesting is allowed when the secured creditor does not object. Other courts have approved vesting provisions over the objection of the secured creditor, including one case in Kansas. The bankruptcy court in Williams, however, agreed with the courts that have held that a secured creditor cannot be compelled to accept ownership of collateral.

The court relied on the plain meaning of the statute and determined that although § 1322(b)(9) allows vesting the title to property in a secured creditor, § 1325(b)(5) does not permit confirmation of a plan vesting title to collateral in the secured creditor over that creditor’s objection. It was noted that vesting property in the secured creditor would impair the creditor’s rights under state law where the Bankruptcy Code does not provide it a basis to do so. Allowing the property to be vested to the secured creditor over its objection “would force it to accept the title and impose unbargained-for obligations on it to pay taxes and other costs associated with the [p]roperty.” The property at issue in this case also was subject to a junior mortgage lien.

Admittedly, the court found it “tempting” to allow such a provision because it would remove the burdens of property ownership from the debtor and promote the debtor’s fresh start. However, the court went on to say that to confirm the vesting provision, “… [the] results would, in effect, be judicial legislating that usurps the role of Congress.”

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