A chapter 13 debtor confirmed a plan that provided for surrender of her condominium unit to secured creditors. After confirmation, the condominium association sought relief from the automatic stay to pursue collection action for post-petition assessments against both the condo and the debtor. The debtor did not object to the association pursuing its in rem rights but contended that she had no ongoing personal liability for assessments.
Under the condo documents, by acceptance of the deed to a unit the owner was deemed to agree to pay charges levied by the association. Any unpaid assessments were (1) a charge against the unit, and (2) the personal obligation of the owner at the time the assessment was due. Collection options included foreclosing the lien on the unit and bringing a collection action against the owner.
The condo was subject to two mortgages: a first mortgage securing ~$99,000, and a second mortgage securing ~$28,000. Apparently the first mortgagee commenced a foreclosure action prior to the bankruptcy. The parties were not clear about the status of the foreclosure post-bankruptcy. The debtor did not live in, use or lease the condo postpetition.
The debtor’s schedules listed the value of the condo as $50,000. The condo association claimed that it was owed at least ~$12,500 for postpetition assessments, although the court found that the amount due at the time the plan was confirmed was only ~$4,100 based on a ledger attached to the Association’s motion. In any event, under the condominium declaration the lien for assessments subordinate to the first mortgage (which means it is likely that the in rem rights were of limited practical significance since the condo lien was subordinate to a $99,000 first mortgage on $50,000 property).
The debtor’s plan provided:
The following secured claims [including claims of the first and second mortgagees and the condo association] will be satisfied through surrender of the collateral securing the claims (described the collateral); any allowed claims for deficiencies will be paid pro rata with general unsecured creditors; upon confirmation of the plan, the automatic stay is lifted if not modified earlier, as to the collateral of the listed creditors.
Pursuant to §§ 1322(b)(8) and (9), title to the [condo unit] shall vest in [the first mortgagee] upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the Property when recorded at the applicable Land Records office.
The confirmation order also provided that “the property of the estate shall not vest in the Debtor until the Debtor is granted a discharge or this case is dismissed or otherwise terminated.”
The court first found that given confirmation of the plan there was no need for any further order to allow the condo association to pursue its in rem rights against the condo.
With respect to the in personam rights, the debtor first argued that the condo association was barred from collecting post-petition assessments since the plan provided that its claims were satisfied by surrender of the collateral. The court rejected this argument for several reasons: Surrender just means that the debtor is making collateral available and will not oppose the creditor’s collection actions. But the debtor cannot compel the secured creditor to either accept the surrender or foreclose. In addition, it was clear that surrender was in full satisfaction of only the “secured claims” and any deficiency would be paid with the general unsecured claims. Finally, it was inappropriate to interpret the plan to convert surrender into a release of liability.
Thus, the key issue was the impact of the provision in the plan vesting title the first mortgagee, and thus the point at which the debtor ceased to be the owner.
The court noted that there is significant disagreement among courts about whether a forced vesting plan provision is valid and enforceable. It discussed a series of cases, concluding that the majority view and more recent trend favored an interpretation of section 1322 that precludes confirmation of a plan that vests title to collateral in a secured creditor over that creditor’s objection. (For discussion of a couple of these cases see Chapter 13 Plan: How to Really Get Rid of Unwanted Property … Or Maybe Not and Property Surrender Round 2: Can a Mortgagee Really Be Forced to Take Title?)
However, the court did not need to take a position on this issue. Section 1327(a) of the Bankruptcy Code provides that a confirmed plan binds the debtor and “each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.” So, the only remaining question was the impact of the binding plan vesting provision on the condo association’s request for relief from the automatic stay.
At the time of the court’s decision the first mortgagee still had not recorded a copy of the confirmation order. Since the plan provided that the confirmation order would constitute a deed of conveyance upon recordation, it was the condo association’s position that under state law the debtor continued to hold title, and thus continued to have individual liability for assessments until the order was recorded.
While acknowledging that generally property interests are created and defined by state law, the court noted that the Bankruptcy Code specifically permits title to property to be vested upon confirmation – which overrides state law. Thus, the condo association was bound by the plan provision vesting title in the first mortgagee on the confirmation date. As of that date, the first mortgagee became the owner for purposes of liability for assessments.
Accordingly, with respect to assessments related to the time period between the petition date and the confirmation date, the court granted the condo association relief from the automatic stay to the extent that the condo association was allowed to reduce its claim to a judgment. (This did not include the right to enforce a judgment against property of the estate.)
As indicated by this case and the other cases discussed in the opinion, a chapter 13 debtor may still be in a difficult position after it surrenders property. If there is no ability to force a secured creditor to either accept title or proceed with foreclosure, the debtor can be left on the hook indefinitely for continuing charges related to the property.
Vicki R Harding, Esq.