Surrender

A Debtor may confirm a plan that provides for the transfer of title to the secured creditor even over the creditor’s objection. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).

Paul Sagendorph’s chapter 13 plan provided for certain secured property as follows:

The debtor is Surrendering his property . . . to Wells Fargo . . . in Full Satisfaction of any Claims filed. Wells Fargo . . . will Foreclose on the property in Satisfaction of the Mortgage, Note, and any outstanding Fees. Under §§ 1322(b)(8) and (9), title to the property . . . shall vest in Wells Fargo . . . upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Registry of Deeds. All secured claims will be paid by surrender of the collateral and foreclosure of the security interest. [capitalization in original]

Wells Fargo objected to the plan, arguing that it could not be compelled to take title to the property, that forcing it to take the property would subject it to liens held by other parties, and that the treatment of Wells Fargo’s interest did not comply with the requirements of section 1325(a)(5). The bankruptcy court sustained Wells Fargo’s objections but permitted the debtor to amend the plan to address the issues raised. The debtor amended the plan using the same title transfer language but reflecting that the only encumbrance on the subject property was the mortgage held by Wells Fargo. Wells Fargo renewed its objections.

The court’s analysis turned on the interplay between section 1322(b)(9), which provides that a chapter 13 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,” and section 1325(a)(5)(C), which provides that a plan may be confirmed over objection if the debtor surrenders the property to the holder of the secured claim. Wells Fargo argued that section 1325(a)(5)(C) establishes a limitation on the court’s power to vest title in an unwilling creditor.

Beginning with statutory language, the court found that “surrender,” though not defined in the Code, has been found by the First Circuit to mean to “make the collateral available to the secured creditor, – viz., to cede his possessory rights in the collateral.” “Vesting,” likewise undefined, “means to place one in legal possession or ownership of the property.” The court found that while surrender merely makes property available, “vesting means transferring title.” The court turned to the issue of whether there is inherent tension between sections 1325(a) and 1322(b) and, if so, whether section 1325(a)(5)(C) limits the court’s discretion to “vest” title under section 1322(b)(9).

The court found no conflict. Section 1325(a)(5) permits a debtor to surrender property, and section 1322(b) permits the court to vest it in the creditor so long as the plan is proposed in good faith and conforms to the Bankruptcy Code. The court disagreed that section 1322(b)(9) is circumscribed by section 1325(a)(5)(C), finding instead that section 1325(a)(5), establishes a “baseline” requirement that must be met before the menu of options set forth in section 1322 apply. That Congress used “surrender” in one provision and “vest” in the other, indicates different meaning and different treatment. Surrender is a preliminary step to transferring title.

The court rejected Wells Fargo’s argument that because Massachusetts law does not permit a debtor to force a creditor to take title to surrendered property the same cannot be accomplished through bankruptcy. Where a fundamental purpose of bankruptcy is to give debtors a fresh start free of certain financial obligations, it is often the case that bankruptcy permits treatment of debts in ways that are contrary to state law. In those cases, bankruptcy law preempts conflicting state law.

The court was swayed in part by the fact that such title transfers are commonplace in chapter 11 in what it referred to as “dirt for debt plans” under section 1123(a)(5)(B). As an analog of chapter 11, chapter 13 plans should receive similar treatment unless Congress has explicitly established differences.

The court noted that its ruling does not leave creditors without recourse when a debtor acts in bad faith or proposes a plan that is contrary to law. Section 1325(a)(3) prevents confirmation of such plan. But, in this case, the value of the property exceeded the amount of the mortgage and Wells Fargo did not raise any issues with respect to bad faith.

David Baker authored an amicus brief on behalf of the NACBA membership in support of the debtor.

Sagendorph Bankr Mass opinion

A debtor may not require a secured creditor to take title to surrendered property. However, the creditor’s failure to object to the transfer of title may be construed as acceptance of the deed. In re Rose, No. 12-40743 (Bankr. W. D. N.C. July 8, 2014). The issue came before the court on the debtors’ motion to quitclaim the deed to their residence to the mortgagee, Small Business Association (SBA). [Read more…] about No Compelled Title Transfer for Surrendered Property. But . . .

The Bankruptcy Court for the Eastern District of North Carolina found a unique way to deal with the problem of surrendered property that the mortgagee refused to foreclose upon. It authorized the debtor to convey the property via a quitclaim deed to the mortgagee upon continued failure to accept title. In re Perry, No. 12-1633, 2012 Bankr. LEXIS 4731 (Bankr. E.D. N.C. Oct. 9, 2012). [Read more…] about Court Orders Quitclaim of Surrendered Property

The District Court for the Southern District of Georgia found that a bank has no affirmative duty under section 1325(a)(5)(C) to transfer title to surrendered property out of the debtor’s name. Arsenault v. JP Morgan Chase, No. 11-106 (S.D. Ga. Aug. 27, 2012). [Read more…] about Creditor Found to Have No Obligation to Foreclose on Surrendered Property