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).
The plan provided that the debtors, Raymond and Christine Zair, surrender their property “in full satisfaction of the secured portion of the first mortgage owed,” that title to the property be vested in HSBC, and that “the confirmation order shall constitute a deed of conveyance of the property when recorded with the county clerk’s land records.” The plan went on to state that HSBC (and junior mortgagee, Bank of America) had thirty days to file proofs of claim for the unsecured deficiency judgment. HSBC objected to plan confirmation.
The case turned on the court’s interpretation of sections 1322(b)(9) and 1325(a)(5). Section 1325(a)(5) provides that a debtor may satisfy his obligation to present a confirmable plan over the objection of a creditor by surrendering secured property. Section 1322(b)(9) provides that the plan may vest estate property in any entity. The court noted that the Code does not define “surrender” or “vesting” and that courts have disagreed as to whether together they permit transfer of title to an unwilling creditor. Specifically, the court pointed to In re Watt, Case No. 3:14-cv-02051-AA, 2015 WL 1879680, 2015 U.S. Dist. LEXIS 54041, at *13-17 (D. Or. Apr. 22, 2015), In re Rose, 512 B.R. 790, 793-796 (Bankr. W.D.N.C. 2014), and In re Malave, Case No. 13-13348 (Bankr. S.D. N.Y. April 11, 2014), all of which denied the debtor’s attempt to vest title in the unwilling secured creditor. In contrast, the court in In re Sagendorph, II, Case No. 14-41675 (MSH), 2015 Bankr. LEXIS 2055, at *17-18 (Bankr. D. Mass. June 22, 2015), appeal filed, No. 15-40117 (D. Mass.), held that the Code contemplates vesting of title in a secured creditor upon surrender by the debtor. (NACBA filed an amicus brief in that case).
The court found that the Code permits both surrender by the debtor and vesting in the creditor, explaining: “Congress did not provide that a debtor may only vest title to real property under a plan that the lien holder accepts under § 1325(a)(5)(A), nor did Congress limit vesting to personal property. Reading § 1325 narrowly, as the Watt court does, essentially eliminates the usefulness of § 1322(b)(9) — a debtor would not use cram down under 1325(a)(5)(B) for property it is vesting in another entity — and Watt thus limits a debtor’s vesting right to a plan to which the lender consents; however, Congress did not limit vesting to where the creditor consents under § 1325(a)(5)(A).” The court stated that its decision harmonizes with section 1327(b) which vests estate property in the debtor upon confirmation of a plan by clarifying in whom surrendered property vests.
The decision also harmonizes with Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), which concerned valuation of personal property the debtor intended to retain. In Rash, the Court found that personal property being retained by the debtor was valued differently from surrendered property because surrendered property becomes immediately available to the creditor for sale and reinvestment thereby providing an immediate, quantifiable benefit to the creditor. The Zair court found that if title does not vest in the creditor upon surrender, valuation of the property becomes uncertain due to potential delays in foreclosure or complications based on assertion of rights by co-owners, in contradiction of the premise upon which Rash was based.
The court agreed with the debtor and the chapter 13 trustee, that not permitting transfer of title leaves the debtor in an untenable state of limbo in which he remains responsible for taxes and insurance and other costs related to the property while the creditor decides what action to take. This, the court found, is inconsistent with the bankruptcy goal of permitting debtors to get out from under crushing debt and gain a fresh start. Also, the debtor’s continued obligation to cover expenses related to the surrendered property would adversely affect the funds available to pay other unsecured creditors in the bankruptcy.
The court rejected HSBC’s state law argument that vesting title in it is contrary to the New York law under which mortgages transfer a “lien estate” rather than a “fee simple estate.” HSBC argued that the plan vesting title improperly merges the two estates in such a way that HSBC might be impeded from foreclosing due to tainted record title. The court answered the concern by noting that its decision was based on statutory interpretation rather than policy considerations, that the plan provided that the priority of liens would not be affected by its terms, and finally, that to the extent state and federal law conflict, federal law preempts state law.
The court recognized that surrender does not necessarily satisfy the debt in its entirety. Here, where the property was worth less than the liens, the court found that the secured creditors were entitled to seek a deficiency judgment as unsecured creditors.
Finally, the court rejected HSBC’s remaining arguments. Under sections 101(15) and (41), HSBC is an “entity” within the meaning of section 1322(b)(9). Also, there was no support for an order requiring the Zairs to sell the property under section 363, and forcing them to do so would unnecessarily tax the estate.
The court lifted the automatic stay and confirmed the Zair’s plan.
HSBC has appealed this decision to the District Court for the Eastern District of New York. Case No. 15-CV-04958.Tags: surrender of collateral