In re Tosi, 546 B.R. 487 (Bankr. D. Mass 2016) –

A mortgagee objected to a proposed chapter 13 plan which provided that the debtor’s title to the mortgaged property would automatically vest in the mortgagee if the debtor and his wife were not able to sell the property within 90 days after the plan became effective. The bankruptcy court concluded that the plan did not satisfy the requirements for treatment of a secured claim and could not be confirmed over the objection of the mortgagee.

The debtor owned a home jointly with his wife. They were in the process of a divorce, and she was not a debtor in the case and did not join in the debtor’s plan. The property was subject to a mortgage. The debtor’s chapter 13 plan provided that the mortgage loan “will” be paid out of the proceeds of a sale of the property. However if the property was not sold within 3 months of confirmation:

[T]he debtor’s interest in the property shall be surrendered pursuant to section 1325(a)(5)(C) and shall immediately vest in [the mortgagee] pursuant to sections 1322(b)(8) and (9) without further order of the court. The confirmation order, when recorded at the Registry of Deeds, shall constitute a deed of conveyance of the property.

The debtor did not have a buyer lined up, so payment of the mortgagee was contingent on finding a buyer willing to buy the property on terms acceptable to the debtor and his wife. Since the wife did not join in the plan, only the debtor’s interest would be surrendered and vested in the mortgagee. (This was a rather messy detail that the court did not need to address given its decision.)

The mortgagee objected to both the 90 day delay in surrender and the involuntary vesting of title. It argued that the delay was not justified since the debtor had already been unsuccessful in selling the property. Further the simultaneous surrender and vesting of the property effectively denied the mortgagee the right to foreclose under state law. So the surrender was illusory. The debtor responded that the vesting was just a form of surrender and noted that section 1322(b)(9) specifically authorized a plan to provide for vesting of property of the estate in an entity other than the debtor.

The court focused on section 1325(a) of the Bankruptcy Code which sets forth requirements for a plan. Under subsection (5) the alternatives for treatment of secured claims are:

(A) the holder of the secured claim consents,

(B) a “cramdown” option where the secured creditor retains its lien and the value of distributions on account of the claim are not less than the value of the collateral as of the effective date of the plan, or

(C) “the debtor surrenders the property securing such claim to such holder.”

The court noted that regardless of the substance of the mortgagee’s complaint the mere fact that it objected meant that it did not consent. It was also undisputed that the plan did not satisfy the cramdown option. So, to qualify for confirmation the plan was required to provide for surrender of the property.

The court found that surrender “means only that the debtor will make the collateral available so the secured creditor can, if it chooses to do so, exercise its state law rights in the collateral.” According to the court if a plan modifies the secured creditor’s rights to its collateral collateral the plan does not provide for surrender as required by the Bankruptcy Code.

In this case, the 90 day delay with surrender contingent on no sale of the property modified the secured creditor’s rights and thus did not qualify as a surrender. Further, although the plan “uses the nomenclature of surrender, in fact it merely vests the property in [the mortgagee], an act that substantially modifies [the mortgagee’s] rights as to its collateral, is thus inconsistent with surrender, and therefore effects no true surrender at all, merely a vesting.”

The court acknowledged that not all courts share its view on vesting. There is general agreement that surrender and vesting are not synonymous. Surrender means making collateral available to a secured creditor so that it can exercise its pre-existing state law rights. Vesting means a transfer of title to the property.

While recognizing this difference, some courts do not view these terms as mutually exclusive. Thus, they would approve a plan that provides for both surrender and vesting title in the mortgagee. The Tosi court rejected this approach on the basis that the vesting would impair the mortgagee’s rights under state law.

For example, under the state law doctrine of merger, the mortgagee interest would be merged into and superseded by the transferred title. This would mean that the secured creditor could no longer foreclose the mortgage to extinguish any junior liens. The secured creditor would also be saddled with various responsibilities arising from ownership of the property, including liability for taxes, maintenance, and environmental remediation.

The court rejected arguments that the Bankruptcy Code specifically authorizes a plan provision vesting title in a nondebtor entity, noting that it would be acceptable to provide for vesting if the mortgagee consented but otherwise the mortgagee’s rights were not adequately protected.

Consequently the court joined what it characterized as the majority view in finding that a plan that relies on surrender to meet the requirements of the Bankruptcy Code cannot also provide for forced vesting of title over the secured creditor’s objections. On this basis the court upheld the mortgagee’s objections to confirmation of the debtor’s plan.

It is easy to be sympathetic to the mortgagee’s position that it did not bargain for being forced to take title to its collateral even though it has not elected to exercise its remedies. However, this leaves the debtor with a problem because if the mortgagee does not exercise its right to foreclose the debtor can have indefinite ongoing liability for the surrendered property.

Vicki R Harding, Esq.