Forced Vesting Does Not Satisfy Confirmation Requirements

Posted by NCBRC - February 8, 2017

Section 1322(b)(9) does not permit a court to confirm a plan vesting surrendered property in an unwilling creditor. Wells Fargo v. Sagendorph, No. 15-40117 (D. Mass. Jan. 23, 2017).

Paul Sagendorph’s chapter 13 plan proposed to surrender property on which Wells Fargo held the sole lien, and vest title in Wells Fargo notwithstanding Wells Fargo’s objection. The bankruptcy court held that the Code permitted Mr. Sagendorph’s treatment of the secured debt and confirmed the plan. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).

On appeal the district court, like the bankruptcy court, looked to the interplay between sections 1322 and 1325.

Section 1325(a) provides that, in the absence of objection by a creditor, a plan shall be confirmed so long as it meets certain conditions with respect to secured debts. Subparagraph 1325(a)(5)(C) permits a debtor to meet the requirements for confirmation by surrendering the property that secures the lien. Section 1322(b)(9) states a 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 in any other entity.”

The district court began its analysis with the statutory text which it found to be unambiguous. “Surrender” means “make available” and says nothing with respect to the party to whom the property is surrendered. To “vest” is to confer title on another. Both the bankruptcy court and the district court agreed that surrender and vesting were separate and distinct concepts. However, where the bankruptcy court interpreted vesting as an action by the debtor—conferring title upon another, the district court interpreted it as an action by the creditor—accepting transfer of title. The district court therefore concluded that vesting required a willing recipient.

The district court found the bankruptcy court erred in treating surrender and vesting as coincident in time and, therefore, essentially synonymous. Because the plan tied surrender to transfer of title, the district court found the mandatory confirmability that would normally accompany surrender was incorrectly tied to permissive vesting by the bankruptcy court.

The court also disagreed with the bankruptcy court’s analogy between vesting in chapter 13 and chapter 11. The chapter 11 vesting provision, section 1123(a)(5)(B), differs in two significant respects from chapter 13’s. First, the chapter 11 provision is mandatory; it requires that a plan, to be confirmed, shall provide for vesting or other form of implementation. Second, the forced vesting in chapter 11 is implemented by section 1129(b)(2)(A) which requires a court to find that the property being vested in the creditor is “indubitably equivalent” to the debt. No such equivalence is required by chapter 13.

The court suggested that while the avenue pursued by Mr. Sagendorph in this case was unavailing, there was room to explore other ways a court could use its equitable power to assist a debtor to achieve his fresh start. Citing United States v. Energy Res. Co., Inc., 495 U.S. 545, 549 (1990), the court conceded that “[f]orced vesting under Chapter 13 not only addresses debtors’ evolving needs in the aftermath of the housing market crisis, but is also ‘consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor–debtor relationships.’” It went on to suggested use of section 1322(b)(2) where the property at issue is not a debtor’s principal residence, or the Code sections implicated by section 1322(c), or perhaps substitution of in-kind payments rather than cash.

Sagendorph D. Mass opinion Jan 2017


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