Lender May Be Compelled to Take Title to Surrendered Property

Posted by NCBRC - November 10, 2014

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).

The debtor surrendered his planned-community property and the mortgagee obtained relief from stay but did not initiate foreclosure proceedings. As a result, under Oregon law, the debtor continued to be responsible for continuing HOA fees and assessments. In his second amended chapter 13 plan the debtor proposed the following language: “Upon entry of an Order Confirming this Chapter 13 Plan, the property at 56 B NW 33rd Place in Newport, Oregon shall be vested in The Bank of New York Mellon . . .. This vesting shall include all of Debtors [sic] legal and equitable rights.” BONY Mellon refused to take title to the property.

Addressing BONY Mellon’s objection to confirmation of the plan, the court looked at a couple of cases finding that an entity cannot be compelled to take title to surrendered property. The court in In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013), held that the debtor may vest the property in another entity under section 1322(b)(9), but, while section 1325(a)(5) permits the debtor to surrender the property, it does not authorize a court to compel a lender to take title. In that case, however, the lender failed to object to the plan provision vesting title in it and so was deemed to have accepted the transfer of title. In In re Rose, 512 B.R. 790 (Bankr. W.D. N.C. 2014), the court found that, under section 1322(b)(9) the debtor could not quitclaim the deed to the lender without the lender’s consent.

The Watt court disagreed with both Rose and Rosa, finding that section 1322(b)(9) may be used to compel a lender to accept title to collateral without its consent, so long as the requirements of section 1325(a)(5) are met. Where section 1325(a)(5) lists surrender as an acceptable treatment of a secured interest and is silent as to vesting, section 1322(b)(9) controls the issue of transfer of title. That section permits vesting in another entity.

The court noted that the practical effect of BONY Mellon obtaining relief from stay but refusing to take title essentially puts responsibility for unpaid HOA assessments on the other homeowners who are wholly unconnected with the lending agreement between the debtor and  BONY Mellon.

The court cautioned that “Section § 1322(b)(9) permits confirmation of a plan which provides for vesting of property in a third party, such as a lien holder, without that party’s consent. However, under § 1325(a)(3), the court may not confirm a plan unless it is proposed in good faith. Accordingly, confirmation could be denied if a debtor attempts to use § 1322(b)(9) to transfer property to a third party in order to relieve him or herself of responsibility for nuisance or environmental problems associated with it. In this case, there are no such concerns.”

On October 31, the Bank filed a notice of appeal to the Bankruptcy Appellate Panel for the Ninth Circuit. Bank of New York Mellon v. Watt (In re Watt), No. 14-1521 (B.A.P. 9th Cir.).



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