HSBC Bank USA, N.A. v. Zair et al
MEMORANDUM OF DECISION AND ORDER (US Bankruptcy Court, 8-14-74456-ast) - Based on the foregoing, the Court reverses the underlying decision of the Bankruptcy Court; vacates the subject confirmation order; and remands this matter for further proceedings consistent with this Opinion. The Clerk of the Court is directed to close this case. SEE ATTACHED DECISION for details. So Ordered by Judge Arthur D. Spatt on 4/12/2016. c/ecf Judgment Clerk; c/ecf Remands-NYEB. (Coleman, Laurie)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
HSBC BANK USA, N.A.,
4/12/2016 2:58 pm
U.S. DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
LONG ISLAND OFFICE
DECISION AND ORDER
-againstRAYMOND E. ZAIR, CHRISTINE M. ZAIR,
and MARIANNE DEROSA, TRUSTEE,
McCabe Weisberg & Conway, PC
Attorneys for the Appellant
145 Huguenot Street, Suite 210
New Rochelle, NY 10801
By: Irene M. Costello, Esq.
Charles A. Higgs, Esq., Of Counsel
Ronald D. Weiss, P.C.
Co-Counsel for the Appellees Raymond E. Zair and Christine M. Zair
734 Walt Whitman Road
Melville, NY 11747
By: Nathan Z. Kaufman, Esq., Of Counsel
Eugene R. Wedoff, Esq.
Co-Counsel for the Appellees Raymond E. Zair and Christine M. Zair
144 N. Elmwood Avenue
Oak Park, IL 60302
Krista M. Preuss, Esq.
Attorney for Appellee Marianne DeRosa, Trustee
115 Eileen Way, Suite 105
Syosset, NY 11791
SPATT, District Judge:
When a debtor files for Chapter 13 bankruptcy protection, the United States
Bankruptcy Code strictly regulates the manner in which the debtor’s secured
creditors are repaid. In particular, under the provisions of 11 U.S.C. § 1325(a)(5), a
repayment plan is only confirmable if, with respect to each secured creditor, one of
the following is true: (1) the creditor consents to the plan, id. § 1325(a)(5)(A); (2) the
plan provides for the creditor to retain his security interest in his collateral and
id. § 1325(a)(5)(B); or (3) the debtor agrees to surrender the collateral so that the
creditor may pursue any legal remedies he may have, id. § 1325(a)(5)(C).
These are the exclusive methods of repaying a secured creditor, and a
proposed Chapter 13 plan which, as to each secured claim, does not satisfy one of
these three requirements, cannot be confirmed, even if the plan complies with the
Bankruptcy Code in all other respects.
Against this backdrop, the present case calls for the Court to enter an
ongoing debate over the answer to the following question: Is the surrender option
found in § 1325(a)(5)(C) satisfied by a Chapter 13 plan that purports to “vest” title
to collateral in a secured creditor pursuant to § 1322(b)(9) over that creditor’s
objection? Posed differently, can a confirmable Chapter 13 plan both “vest” title to
real property and “surrender” that property to a common secured lender? If so, can
the creditor refuse to accept the vesting in satisfaction of its claim? Can a court
nevertheless compel the transfer over the creditor’s objection?
In this case, confronted with an apparent division in the relevant caselaw,
the United States Bankruptcy Court for the Eastern District of New York (Trust, J.)
(the “Bankruptcy Court”) on August 13, 2015 confirmed the Chapter 13 plan (the
“Plan”) of the Appellees Raymond E. Zair and Christine M. Zair (together, the
“Debtors”), which provided that: (i) certain real property of the Debtors, which
secured a mortgage loan issued by the Appellant HSBC Bank USA, N.A. (“HSBC”
or the “Bank”), would be surrendered to the Bank in satisfaction of its secured claim
pursuant to § 1325(a)(5)(C); and (ii) over the Bank’s objection, title to the property
would also vest in the Bank pursuant to § 1322(b)(9), thereby divesting the Debtors
of their interest in the property, and creating a present possessory ownership
interest in HSBC.
On August 24, 2015, the Bank appealed from the Bankruptcy Court’s
decision, arguing principally that, with respect to a common secured lender, the
legal concepts of “surrender” and “vesting” are inherently incompatible. Thus, to
the extent the Debtors’ Plan in this case provided for both; and because the Plan did
not satisfy any of the other requirements for plan confirmation found in
§ 1325(a)(5); the Bankruptcy Court erred in determining that the Plan was
confirmable. For the reasons that follow, this Court agrees, and finds that the
weight of persuasive authority supports a finding that a secured creditor’s rights
under § 1325(a)(5) are impermissibly compromised by a Chapter 13 plan that
provides for non-consensual vesting under § 1322(b)(9).
Thus, the Court reverses the underlying decision of the Bankruptcy Court;
vacates the subject confirmation order; and remands this matter for further
proceedings consistent with this Opinion.
Unless otherwise noted, the following facts are drawn from the underlying
order of the Bankruptcy Court, see In re Zair, 535 B.R. 15 (Bankr. E.D.N.Y. 2015)
(“Zair I”), and are not in dispute.
In October 2013, Superstorm Sandy destroyed the principal residence of the
Debtors, located at 88 Nebraska Street in Long Beach (the “Long Beach Residence”).
Due to the storm damage, the Debtors moved to a new home in Melville, and did not
return to the Long Beach Residence.
On or about September 30, 2014, the Debtors filed for Chapter 13 bankruptcy
protection. Schedule “A” to their bankruptcy petition, which relates to real property
in the bankruptcy estate, identified the vacant Long Beach Residence as having a
value of $255,000, and as being encumbered by two mortgages. The first-priority
mortgage was held by HSBC and had an outstanding balance of $387,185.41. A
junior mortgage was held by Bank of America, N.A. (“Bank of America”) and had an
outstanding balance of $30,437.51.
On or about November 26, 2014, HSBC filed a proof of claim in the amount of
$440,380.68, representing the principal unpaid balance on its mortgage, plus
interest, fees and pre-petition arrearages. Bank of America, through its servicing
agent, Green Tree Servicing LLC, also filed a proof of claim for the amount due on
On April 27, 2015, the Debtors filed and served a second amended Chapter 13
plan (previously defined as the “Plan”), which is at issue in this appeal.
described by the Bankruptcy Court, the Plan provided, in relevant part, that: (i) the
Debtors would surrender the Long Beach Property to HSBC in full satisfaction of
the secured portion of the Bank’s mortgage loan; (ii) to the extent that the
outstanding balance on the Bank’s loan exceeded the value of the Long Beach
Residence, the Bank would have thirty days to file an unsecured deficiency claim;
and (iii) upon confirmation of the Plan, title to the Long Beach Residence would vest
in the Bank. See Zair I, 535 B.R. at 17 (quoting Plan ¶¶ 2, 7).
The Debtors and the assigned Chapter 13 Trustee Marianne DeRosa (the
“Trustee”) supported confirmation of the Plan. However, HSBC objected, arguing,
as it does here, that, although the Long Beach Residence can and should be
surrendered under § 1325(a)(5)(C), so that the Bank may pursue state foreclosure
proceedings as it deems appropriate, it would be improper to transfer title to the
Long Beach Residence – and all of the concomitant carrying costs – to the Bank
without its consent. In this regard, the Bank contends that the Plan is legally
untenable because the concepts of surrender and vesting cannot coexist relative to a
common piece of secured property.
The Bankruptcy Court disagreed with the Bank’s position, and held that
“while surrender and vesting are different, they are not mutually exclusive, and the
Bankruptcy Code’s plain language permits a debtor to deploy both options in a
plan.” Id. at 21. As noted above, HSBC appealed the Bankruptcy Court’s decision
to this Court.
The Standard of Review
This Court is vested with appellate jurisdiction over “final judgments, orders,
and decrees” of the Bankruptcy Court.
See 28 U.S.C. § 158(a); see also
Fed. R. Bankr. P. 8013; KLG Gates LLP v. Brown, 506 B.R. 177, 189 (E.D.N.Y.
2014) (Spatt, J.).
The Court reviews the Bankruptcy Court’s legal conclusions,
including determinations on matters of statutory construction, de novo. See In re
Bethlehem Steel Corp., 02-cv-2854, 2003 U.S. Dist. LEXIS 12909, at *20 (S.D.N.Y.
2003) (citing In re Air Crash Off Long Island, New York, 209 F.3d 200, 202 (2d Cir.
The Relevant Statutory Framework
As noted above, two statutory provisions are at the heart of this appeal. The
first is 11 U.S.C. § 1325(a)(5), which provides that, as to each secured creditor, a
Chapter 13 plan may only be confirmed:
(1) when the secured creditor accepts the plan; (2) when the debtor
surrenders the secured property; or (3) in an option known as a
cramdown, when the debtor, over the creditor’s objection, retains the
secured property, “yet pay[s] only the present value of the collateral to
the creditor . . . over the life of the plan,” with “[t]he remaining balance
of the debt [becoming] a general unsecured claim.”
AmeriCredit Fin. Servs. v. Tompkins, 640 F.3d 753, 756 (2d Cir. 2010) (quoting
Capital One Auto Finance v. Osborn, 515 F.3d 817, 820 (8th Cir. 2008)).
Thus, where, as here, “a secured creditor does not accept a debtor’s Chapter
13 plan, the debtor has two options for handling allowed secured claims: surrender
the collateral to the creditor, see § 1325(a)(5)(C); or, under the cram down option,
keep the collateral over the creditor’s objection and provide the creditor, over the life
of the plan, with the equivalent of the present value of the collateral, see
§ 1325(a)(5)(B).” Assocs. Commer. Corp. v. Rash, 520 U.S. 953, 962, 117 S. Ct. 1879,
138 L. Ed. 2d 148 (1997). This case involves the “surrender” option.
The second relevant Code provision is 11 U.S.C. § 1322(b)(9), which provides
that “the plan may . . . provide for the vesting of property of the [bankruptcy] estate,
on confirmation of the plan or at a later time, in the debtor or in any other entity.”
Although the Bankruptcy Code does not define “surrender” or “vesting,” the
parties agree, and the law is well-settled, that these terms are not synonymous. For
example, “surrender does not require the debtor to physically transfer the collateral
to the secured creditor, [but] does require the debtor to make the collateral available
to the secured creditor.” In re Higley, 539 B.R. 445, 449 (Bankr. D. Vt. 2015); accord
(Bankr. D. Kan. 2015)
“surrender . . . has a well defined meaning,” namely, “the relinquishment of all
rights in property, including the right to possess the collateral. Surrender does not
transfer ownership. Rather, 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” (internal citations omitted)); Wiggins v. Hudson
City Sav. Bank, 2015 Bankr. LEXIS 2606, at *9 (Bankr. D.N.J. Aug, 4, 2015)
(“Although not defined in the Bankruptcy Code, ‘surrender’ refers to the ‘act of a
debtor surrendering collateral to a lienholder who then disposes of the property
pursuant to the requirements of state law’ ” (quoting In re Behanna, 381 B.R. 631,
640 (Bankr. W.D. Pa. 2008))); In re Sagendorph, 2015 Bankr. LEXIS 2055, at *6
(Bankr. D. Mass. June 22, 2015) (“ ‘Surrender’ in the present context is that a
debtor agreed to make the collateral available to the secured creditor – viz., to cede
his possessory rights in the collateral”); In re Ware, 533 B.R. 701, 712
(Bankr. N.D. Ill. 2015) (“Put simply, surrender under 1325 requires at a minimum
the surrender of all of the rights that the debtor has”).
By contrast, “vesting” is a more “consequential event” than surrender. See
Williams, 542 B.R. at 518.
Whereas “[s]urrender means making the property
available to be taken; vesting means transferring title.” Id.; see, e.g., In re Tosi,
2016 Bankr. LEXIS 690, at *12-*13 (Bankr. D. Mass. Mar. 4, 2016) (“[T]o vest
property in another, as contemplated in 11 U.S.C. § 1322(b)(9) . . . is to effect a
transfer of ownership of that property from the [bankruptcy] estate to another
person or entity. Vesting means transferring title” (internal quotation marks and
citations omitted)); Williams, 542 B.R. at 518 (“ ‘Vesting’ is also not defined in the
Code. But its plain meaning ‘includes a present transfer of ownership.’ ” (quoting In
re Rosa, 495 B.R. 522, 523 (Bankr. D. Haw. 2013))); Sagendorph, 2015 Bankr.
LEXIS 2055, at *6-*7 (“ ‘[v]esting’ . . . plainly means to place one in legal possession
or ownership of property”); Bank of N.Y. Mellon v. Watt, 14-cv-2051, 2015 U.S. Dist.
LEXIS 54041, at *11-*12 (D. Or. Apr. 22, 2015) (“[V]esting is the mechanism that,
in the context of real property, transfers title and, by extension” extinguishes the
debtor’s continuing obligations and liabilities).
Summary of the Arguments
As noted above, HSBC argues principally that the legal concepts of
“surrender” and “vesting” are mutually exclusive, and therefore, with respect to a
secured claim, a Chapter 13 plan that provides for one must not provide for the
other. Applied here, HSBC argues that, to the extent the Plan invokes § 1322(b)(9)
to non-consensually vest title to the Long Beach Residence in the Bank, it cannot
also provide for
Beach Residence to
Under this scenario, because compliance with § 1325(a)(5) is
mandatory; and because the Plan does not satisfy any of the other requirements for
plan confirmation found in that provision; the Plan is not confirmable, as a matter
of law, and the Bankruptcy Court erred in concluding otherwise.
As a practical matter, the Bank seeks to avoid the “vesting” option because,
as one bankruptcy court in this Circuit noted, being “stuck with the collateral”
means being “responsible for the maintenance, taxes, and other obligations that
come with owning property.”
In re Sherwood, 2016 Bankr. LEXIS 263, at *9
(Bankr. S.D.N.Y. Jan. 28, 2016) (quoting In re McCann, 537 B.R. 172, 179
(Bankr. S.D.N.Y. 2015)). Ordinarily, “until the property is actually sold pursuant to
a foreclosure sale, title to the property [and all of the attendant carrying costs]
remain[ ] vested in the debtor.” In re Sneijder, 407 B.R. 46, 52-53 (Bankr. S.D.N.Y.
2009). However, “vesting” the Long Beach Residence in the Bank would force it to
assume immediate ownership of the property, which was destroyed in a storm in
2013, and has since remained vacant and in disrepair.
As a mortgage holder, HSBC would understandably prefer to leave the
Debtors in possession of the Long Beach Residence, while it takes whatever steps it
deems are appropriate to enforce its lien through foreclosure proceedings. Or, if the
Bank sees fit, it could take no steps at all. See In re Rose, 512 B.R. 790, 793-94
(Bankr. W.D.N.C. 2014) (“Although ‘surrender’ envisions a debtor relinquishing his
or her rights in the collateral, there is no corresponding requirement that the lender
[ ] do anything with the property”). In this regard, the Bank’s position is that it has
the right to “control its remedies,” id. at 794, and the Court may not, over its
objection, require HSBC to either “accept a surrender of property or take possession
of or title to it through repossession or foreclosure.” Id. (quoting In re Arsenault,
456 B.R. 627, 630 (Bankr. S.D. Ga. 2001), aff’d, 2012 U.S. Dist. LEXIS 128412 (S.D.
Ga. Aug. 20, 2012))).
In this regard, HSBC’s argument is rooted in principles of state law.
particular, relying on the Supreme Court’s opinion in Butner v. United States, 440
U.S. 48, 55, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979), which recognized that “[p]roperty
interests are created and defined by state law,” the Bank contends that New York is
a so-called “lien theory state,” meaning that, as the mortgagee, the Bank has only a
lien on the Debtors’ property, not legal or equitable title. According to the Bank, the
Debtors’ Plan interferes with this legal status by imposing an ownership interest in
the Long Beach Residence for which the Bank did not bargain.
Also, the Bank asserts that the Plan violates New York’s Statute of Frauds
because, by vesting in the Bank a present possessory ownership interest in the Long
Beach Residence, it materially alters the parties’ contract rights under the
applicable mortgage documents, and there is no signed writing to that effect.
The Debtors and the Trustee respond by arguing that the Bank’s
interpretation of the relevant Code provisions runs counter to the overarching goal
of Chapter 13, which is to provide a “fresh start” to debtors. Counsel for the Debtors
in this case explained their position lucidly:
Congress enacted Chapter 13 of the Bankruptcy Code to “provide
expanded relief to a debtor” and an adequate opportunity for a “fresh
start . . . essential to modern bankruptcy law.’ ” In re Sher, 12 B.R.
258, 265 (Bankr. S.D.N.Y. 1981 (citing House Report No. 95-595, 95th
Cong., 1st Sess. 117 (1977)). For a debtor burdened by the ownership
costs of property that the debtor cannot live in – costs that may include
real estate taxes, maintenance, and insurance – §§ 1322(b)(8) and (9)
are critical to the debtor’s fresh start. They allow the debtor to pay a
claim secured by the property through transferring the property to the
creditor holding the security interest. This not only removes ongoing
ownership costs for the debtor, it allows the creditor to obtain the
property more quickly and at less cost than a foreclosure would
See Br. for Debtors at 9; see also Br. for Trustee at 8 (“Without being able to vest
the property, as is specifically permitted under Section 1322(b)(9), the Debtors are
at the whim of the [Bank] and will be incurring expenses associated with the
Property, such as real estate taxes, until if and when the [Bank] completes a state
court foreclosure. . . . Allowing debtors to be saddled with this debt and other
related debt or to continue to be burdened with ownership of property they cannot
manage goes against the ‘fresh start’ policy of the Bankruptcy Code”).
Thus, it is the Appellees’ position that § 1322(b)(9) provides a mechanism by
which debtors can offload property that they can no longer afford, and secured
creditors may not frustrate that process by refusing the transfer of the collateral.
See Br. for Debtors at 6 (arguing that the Bank’s interpretation “makes it
impossible for a Chapter 13 plan to pay a debt by transferring surrendered property
unless the creditor consents”).
As for the Bank’s arguments concerning the application of state law, the
Debtors and the Trustee contend, as a matter of Constitutional law, that the
Bankruptcy Code preempts these principles.
With these contentions in mind, the next step in the Court’s analysis is to
determine whether and to what extent § 1325(a)(5)(C) and § 1322(b)(9) have been
understood to coexist in a valid Chapter 13 plan.
The Interplay of § 1325(a)(5)(C) and § 1322(b)(9)
The State of the Law at the Time of the Underlying Decision
At the time of the Bankruptcy Court’s decision below, two divergent lines of
cases had emerged. One line of cases, exemplified by In re Rosa, 495 B.R. 522
(Bankr. D. Haw. 2013), supports the Debtors’ position. It holds that a Chapter 13
plan may vest title to real property in a secured creditor under § 1322(b)(9) and still
be confirmable under the surrender option found in § 1325(a)(5)(C).
For example, in In re Rosen, 2015 Bankr. LEXIS 4448 (Bankr. D. Kan. Feb.
24, 2015), the bankruptcy court permitted the debtors to amend their Chapter 13
plan to provide for real property to vest in a secured creditor, in addition to being
surrendered to that creditor.
The court noted that the debtors had “patiently
waited for [the mortgagee] to take legal steps to foreclose the[ ] security interests in
good faith,” while at the same time remaining liable for property taxes,
maintenance, upkeep, and municipal fees and penalties. See id. at *3, *6. Thus,
the court reasoned that allowing the debtors to divest themselves of the burdens of
owning this property was consistent with the plain language of § 1322(b)(9) and
“the broader principal purpose of the Bankruptcy Code, which is to grant a fresh
start to the honest but unfortunate debtor.” Id. at *5 (internal quotation marks and
Similarly, in In re Sagendorph, 2015 Bankr. LEXIS 2055, the bankruptcy
§ 1322(b)(9), and held that “[a] plan which contains a provision for transferring or
vesting in the secured creditor the property that is its collateral would be
confirmable under § 1325(a)(5)(C) because a transfer of property presupposes its
surrender by the transferor.”
Stated otherwise, consistent with an
argument advanced by the Trustee in this case, the court reasoned that
“[s]urrendering, or ceding possessory rights is a preliminary step in the process of
transferring title.” Id. (internal quotation marks and citation omitted); see Br. for
Trustee at 7 (arguing that “surrender is a condition precedent to vesting property”
because “Debtors cannot vest the property without surrendering it first”).
Consistent with Rosen, the Sagendorph court also emphasized debtors’ need
for a “fresh start,” referring to that policy rationale as the “paramount federal
interest” behind its decision.
However, the Court notes that Rosa, the fountainhead of this line of cases, is
materially distinguishable from this case. Unlike here, in Rosa, the mortgagee did
not object to the proposed vesting. See Rosa, 495 B.R. at 522-23, 525. The court
specifically noted that the “surrender” option in § 1325(a)(5)(C) would not have
“fully validate[d]” the plan in that case precisely “because the debtor propose[d]
vesting in addition to surrender.” Id. at 524 (emphasis supplied). Indeed, the Rosa
court hypothesized situations where a “mortgagee may have legitimate reasons to
object” to such a plan, for example, where the subject property “is contaminated by
hazardous waste or subject to exorbitant [homeowners’] association fees”; or where
“the property is subject to other liens or co-ownership interests,” in which case
“vesting plus the doctrine of merger might extinguish the mortgage.” Id. at 525.
However, unlike in this case, in Rosa, “the fact remain[ed] that the first mortgagee
received adequate notice . . . and did not object” to the proposed plan. Id.
Thus, critically, the Rosa case was not decided under § 1325(a)(5)(C). Rather,
the court there determined that the secured creditor had consented to its treatment,
and the plan was confirmed under § 1325(a)(5)(A).
circumstances, the Court is of the view that the Rosa decision is not analogous to
the present case, and indeed, forms a questionable foundation for the line of
subsequent cases, relied upon by the Appellees, which purport to extend the holding
of Rosa to situations, like the present case, involving § 1325(a)(5)(C).
By contrast, the second line of cases, exemplified by In re Malave, 2014
Bankr. LEXIS 5383 (Bankr. S.D.N.Y. 2014), supports the Bank’s position. It holds
that “[w]hen a secured creditor timely objects to the confirmation of a plan that
proposes to vest title in that creditor, the court cannot confirm the plan” under
§ 1325(a)(5)(C). See id. at *3-*4.
For example, in In re Rose, 512 B.R. 790 (Bankr. W.D.N.C. 2014), the
bankruptcy court confirmed a plan under which the debtors surrendered
encumbered property to the mortgagee.
However, for more than a year the
mortgagee took no action to foreclose on the property, and the debtors remained
liable for continuing post-petition obligations, including taxes and maintenance
costs. The “[f]rustrated” debtors sought permission from the bankruptcy court to
transfer the property by quitclaim deed to the mortgagee over its objection. The
Rose court recognized that, although “the creditor’s failure to foreclose might leave
the debtors with continued liabilities, these are by-products of property ownership,”
and the debtors’ preference to “walk away from the property . . . does not justify
shifting these burdens to the lender.” Id. The court noted that “[m]ost courts that
have considered the matter agree [that] . . . the ‘secured creditor . . . has the
prerogative to decide whether to accept or reject the surrendered collateral.’ ” Id.
In oft-cited language, the court found that forcing a lender to take title to
property “opens up a Pandora’s box of possible injuries to lenders”:
First, and obviously, forcing a lender to take title causes it to assume
burdens of ownership for which it did not contract. The costs of
foreclosure or repossession, coupled with ongoing obligations to insure
the property and to pay ad valorem taxes, may well exceed any present
net realizable value.
Second, if the property is subject to multiple encumbrances, requiring
a senior lender to accept title to its collateral would destroy that
lender’s priority lien position vis a vis junior mortgages, liens, and
accrued [homeowners’ association] obligations. . . . [T]he quitclaim
scenario makes the lender owner of the property and, under the
doctrine of merger, it takes title subject to these interests.
A worse fate awaits the lender if the quitclaimed property is subject to
environmental contamination. Making the lender the record owner [of]
its collateral potentially subjects it to personal liability for existing
environmental contamination . . .
The potential for personal liability also exists if the collateral property
is dilapidated, damaged, or otherwise a public nuisance.
Id. at 795-96 (internal citations omitted).
A similar result was reached in the case of Bank of N.Y. Mellon v. Watt, 14cv-2051, 2015 U.S. Dist. LEXIS 54041 (D. Or. Apr. 22, 2015).
In that case, the
district court reversed a bankruptcy court decision confirming a Chapter 13 plan
that proposed surrendering an encumbered townhouse to the mortgagee under
§ 1325(a)(5)(C), and vesting title to the townhouse in the same creditor under
§ 1322(b)(9). The court noted that, despite the authority in § 1322(b)(9) to vest
property of the bankruptcy estate in other persons, in order to be confirmable, the
plan must nevertheless comply with the requirements found in § 1325(a)(5),
specifically, the surrender option found in § 1325(a)(5)(C).
Consistent with Rose, the court noted that “surrender” implies a degree of
freedom on the part of secured creditors to accept or reject collateral. Thus, if the
debtors had “surrendered” the townhouse in satisfaction of the mortgage, it would
not extinguish their continuing liability for homeowners’ association fees.
contrast, “vesting” the townhouse in the mortgagee would operate as a complete
transfer of ownership, thereby cutting off the debtors’ liability for post-petition
assessments, and transferring that obligation to the lender. See id. at *14 (noting
that the debtors’ plan “did not merely propose the cessation of their interest in the
Property, it also forcibly transferred that interest, and the attendant liabilities, to
The court in Watt, emphasized the rights afforded to secured creditors under
the Bankruptcy Code, finding that by “confirming a Chapter 13 plan that advanced
non-consensual vesting in conjunction with surrender, the bankruptcy court [had]
read language into the bankruptcy Code that does not exist, as well as frustrated
the purpose of the statute, which is to provide protection to creditors holding
allowed secured claims.”
Id. at *15-*16.
Further, the court found that “the
creditor’s right into an obligation, thereby rewriting both the Bankruptcy Code and
the underlying loan documents . . .” Id. at *16-*17.
Of particular note, the court in Watt specifically addressed, and rejected, the
overreliance the Rosen line of cases had placed on the “fresh start” argument, which
is advanced by the Debtors and the Trustee in this case:
Debtors assert repeatedly on appeal that a balance must be struck
between the rights of creditors on the one hand, and the policy of
affording the debtor a fresh start on the other. Their second amended
plan, however, effectuated no such balance; it wholly eliminated their
financial responsibility in relation to the Property, at the sole expense
of a secured creditor.
Id. at *19 n.6 (internal quotation marks and citation omitted).
On August 13, 2015, confronted with this apparent split in the relevant
authority, the Bankruptcy Court issued the underlying decision in this case, which
explicitly departed from the Malave-Rose-Watt line of cases, and followed the RosaRosen-Sagendorph line in concluding that the Debtors’ Plan should be confirmed.
See Zair I, 535 B.R. at 21 (noting that the Bankruptcy Court “disagree[d] with Watt
and to some extent, with Malave” and “agree[d] for the most part with
However, while this appeal was on submission, several other courts weighed
in on this question, deepening the divide between the two emerging philosophies.
Recent Developments in the Law
Less than one month after Zair I issued, a bankruptcy court sitting in the
District of Minnesota decided In re Stewart, 536 B.R. 273 (Bankr. D. Minn. 2015).
There, the court expressly adopted the reasoning of both Sagendorph and Zair I in
concluding that “[w]hile the ‘surrender’ concept found in § 1325(a)(5)(C), and the
‘vesting’ concept embodied in § 1322(b)(9) are different, they may nonetheless be
used in tandem when providing for the treatment of a secured claim in a chapter 13
Id. at 277.
However, the court in Stewart did not answer the central
question presented here, namely, whether these provisions may be used in tandem
where, as here, the creditor objects to the plan. As in Rosa, discussed supra, the
secured creditor in Stewart did not object to the debtors’ proposed Chapter 13 plan
before it was confirmed. Therefore, the court relied upon an unrelated provision of
the Bankruptcy Code, namely, 11 U.S.C. § 1327(a), to hold that the creditor was
bound by the terms of the already-confirmed plan. In the Court’s view, like Rosa,
the Stewart case is of limited usefulness to the instant appeal.
Nonetheless, two months after Stewart, another bankruptcy court sitting in
the District of Kansas decided In re Williams, 542 B.R.514 (Bankr. D. Kan. Dec. 2,
2015). In that case, the court confirmed an initial plan by the debtor whereby his
former residence would be surrendered to Wells Fargo, the mortgagee, under
§ 1325(a)(5)(C). To that end, the debtor abandoned the property, allowing Wells
Fargo to enter the premises, change the locks, and generally maintain the property.
However, several months passed without the mortgagee taking any steps to
foreclose its security interest, and so the debtor made a motion to amend the plan to
provide for the property to “vest” in Wells Fargo under § 1322(b)(9).
Upon reviewing the relevant caselaw, including Zair I, the bankruptcy court
found in favor of the mortgagee, holding that § 1325(a)(5) “does not permit
confirmation of a plan vesting title to collateral in the secured creditor over that
creditor’s objection.” Id. at 521.
In reaching this conclusion, the court acknowledged the familiar argument
that allowing a debtor to vest encumbered property in a secured lender may
alleviate certain burdens of ownership and promote the idea of a “fresh start.” See
id. (noting that “[i]t is tempting to hold that a plan providing for vesting may be
confirmed over the secured creditor’s objection” because, among other things,
“[s]uch a holding would remove the burdens of property ownership” and “promote
the debtor’s fresh start”).
However, explicitly agreeing with the Watt decision,
discussed supra, the court found these considerations to be outweighed by the
reality that “[v]esting the title over Well Fargo’s objection would force it to accept
the title and impose unbargained for obligations on it to pay taxes and other costs
associated with the Property.” Id.
Shortly after Williams, in January of this year, another decision addressing
this issue was rendered in In re Weller, 2016 U.S. Bankr. LEXIS 108 (Bankr.
D. Mass. Jan. 13, 2016). Of note, the Weller decision originated in the bankruptcy
court for the District of Massachusetts, namely, the same district from which the
Sagendorph decision issued. However, although decided less than a year apart, the
Weller court broke with the reasoning and conclusion in Sagendorph, and fell in line
with the Malave-Rose-Watt-Williams line of cases.
In Weller, the debtors owned real property that was encumbered by a
mortgage held by Wells Fargo. The outstanding balance on the mortgage loan was
approximately twice the value of the property.
Thus, when the debtors sought
protection under Chapter 13, they proposed a plan whereby the property would be
surrendered to Wells Fargo in satisfaction of the secured claim. This plan was
confirmed, but the bank refrained from foreclosing on the property for three years
after confirmation, during which time the debtors continued to pay the applicable
Eventually, the debtors became unable to continue meeting these expenses,
and, “[w]ishing to relieve themselves of the burden of maintaining and insuring the
Property, the Debtors decided to take another approach,” namely, “propos[ing] that
title to the Property vest in Wells Fargo upon confirmation of the Proposed
Amended Plan.” Id. at *3-*4. The bank objected.
In passing on the bank’s objection, the Court held plainly that “[a] plan which
‘vests’ property in a secured creditor does not fulfill the requirements of
§ 1325(a)(5)(C) and may not be confirmed over that secured creditor’s objection.” Id.
In reaching this conclusion, the Court conceded that § 1325(a)(5) and
§ 1322(b)(9) “are not in conflict,” and hypothesized situations where a plan invoking
both provisions might be confirmed:
[F]or example, a debtor could propose a plan which would vest
property in a grantee that has consented (or from whom the debtor
plans to seek consent). Or could propose a plan which would vest
property in a grantee in the hopes that such party will not object, and
that its silence might be deemed consent.
Id. at *9.
However, the court clarified that, ultimately, § 1325(a)(5) outlines the
exclusive methods of satisfying a secured claim, and “vesting” property in an
unwilling lender is not one of them. Therefore, “[w]hat a Chapter 13 debtor may not
do . . . is substitute the options which may be proposed by a plan under § 1322 for
requirements mandated by § 1325 for confirmation of a plan.”
Id. (emphasis in
Although sensitive to the fact that the debtors had “been left in limbo by
Wells Fargo’s failure to act,” the court in Weller nevertheless held that the debtors’
proposed plan to vest the property in Wells Fargo could not be confirmed over the
Two weeks later, a bankruptcy court in this Circuit took up the issue in a
case called In re Sherwood, 2016 Bankr. LEXIS 263 (Bankr. S.D.N.Y. Jan. 28,
In that case, the mortgagee bank objected to a plan that would both
surrender real property of the debtor in satisfaction of its secured claim, and vest
title to the property in the bank.
Similar to HSBC in this case, the mortgagee in Sherwood argued that,
although “the Debtor [wa]s entitled to surrender property through her plan
pursuant to section 1325(a)(5)(C),” “she [could] not compel [the bank] to accept title
to the property under section 1322(b)(9) so long as [the bank] objects to such
The bankruptcy court agreed, rejecting “[c]ases such as Watt I,
Sagendorph, Zair [I], and Stewart [which] take the position that surrender and
vesting are not mutually exclusive and that a provision vesting title in a secured
creditor may be used in tandem with surrender in accordance with section
1325(a)(5)(C),” and instead finding “persua[sive] the emerging line of cases,
exemplified by Rose, Malave, Watt[ ], Williams, and Weller, which hold that a
chapter 13 plan may not be confirmed over the objection of a secured creditor where
the plan proposes to vest title to surrendered property in that creditor.” Id. at *18*19 (internal quotation marks and citations omitted).
The court in Sherwood recognized that “[w]here property is surrendered in a
chapter 13 plan, there is often an ‘expectation’ that the creditor will promptly
enforce its rights to recover and sell the property in order to satisfy its claim.” Id. at
*9 (quoting McCann, 537 B.R. at 179). The court further recognized that “at times,
creditors may fail to exercise these rights, leaving debtors ‘ ‘stuck with’ the
collateral’ and ‘responsible for the maintenance, taxes and other obligations that
come with owning property.’ ” Id. However, this reality, though unfortunate, could
not, in the view of the court, justify interpreting § 1322(b)(9) to “override the rights
of a secured creditor under § 1325(a)(5),” which, as noted above, “includ[es] the
option to do nothing to recover its collateral.” Id. at *19-*21.
Of particular note, the Sherwood court was “not persuaded” by the conclusion
in Zair I that “preventing a creditor from vesting surrendered property in a secured
creditor over that creditor’s objection ‘essentially eliminates the usefulness of
[section] 1322(b)(9).’ ” Id. at *20 (quoting Zair I, 535 B.R. at 21). On the contrary,
the court noted that this conclusion incorrectly “assumes that section 1322(b)(9) can
only be used to vest property in secured creditors, and that Congress must have
intended for debtors to be able to vest surrendered property in secured creditors
with or without their consent.”
In this regard, the court noted several
“permissible uses of section 1322(b)(9)” that either do not conflict with the
surrender option, or do not implicate § 1325(a)(5) at all. For example:
[A] debtor might retain property under section 1325(a)(5)(B) while
providing for title to vest in a nondebtor spouse, child, or wholly-owned
entity for tax or estate planning purposes . . . Or, as the court
suggested in Weller, a debtor might provide for the vesting of property
in some other third party ‘that has consented (or from whom the debtor
plans to seek consent) . . . or in the hopes that such party will not
object, and that its silence might be deemed consent.’ . . . Or a debtor
might provide for the vesting of completely unencumbered property,
which would not implicate section 1325(a)(5) because there would be
no allowed secured claim subject to that section.
Id. at *20-*21.
Most recently, on March 4, 2016, a bankruptcy court in the District of
Massachusetts decided the case of In re Tosi, 2016 Bankr. LEXIS 690 (Bankr.
D. Mass. Mar. 4, 2016).
In that case, the debtor’s plan proposed a two-tiered
approach to dispose of encumbered property:
“In the first instance, the Debtor
would retain the Property, [the mortgagee’s] collateral, for a period of up to ninety
days in which he would attempt to broker a sale of the Property and, from the
proceeds, pay [the mortgagee’s] claim . . . [But] if a sale [wa]s not consummated
within ninety days of confirmation . . . the debtor’s interest in the property [would]
be surrendered pursuant to section 1325(a)(5)(C) and [would] immediately vest in
[the mortgagee] pursuant to sections 1322(b)(8) and (9) without further order of the
court.” Id. at 3 (internal quotation marks omitted). As in this case, the plan in Tosi
was “predicated on the assumption . . . that vesting is a form of surrender and that
surrendering and vesting are not mutually exclusive.” Id. at *5.
The court rejected this notion, and held, in relevant part, that the proposed
plan was not confirmable because:
“[T]hough it use[d] the nomenclature of
surrender, in fact it merely vest[ed] the property in [the mortgagee], an act that
substantially modifies [the mortgagee]’s rights as to its collateral, [wa]s thus
inconsistent with surrender, and therefore effect[ed] no true surrender at all,
merely a vesting.” Id. at *12.
The court departed from the conclusion reached in Sagendorph, a prior
decision of the same court, that “surrender, as a ceding of possessory rights, is
merely ‘a preliminary step in the transferring of title.’ ” Id. at *13. Rather, the Tosi
court acknowledged that the legal distinction between surrendering and vesting
affects the rights of the secured creditor, not just the debtor:
[The Sagendorph court’s] reasoning understates the meaning of
surrender, which is not merely to cede [the debtor’s] possessory rights,
but to permit the creditor to exercise its preexisting property rights as to
the collateral. The vesting of title in the mortgagee goes well beyond
surrender of the collateral by altering the mortgagee’s rights as the
holder of a mortgage. . . . Upon the debtor’s vesting of his interest in the
secured creditor . . . [n]o longer would the secured creditor have the
substantial prerogatives of a mortgagee. Among other things, it could
not sell the property at foreclosure. In a foreclosure sale, unsatisfied
junior liens are automatically discharged, but the vesting of title in the
mortgagee would leave junior liens in place, meaning that the value of
the mortgagee’s interest would be diminished by the value of any such
liens. In addition, the secured creditor would now be saddled with new
responsibilities that arise from its new form of ownership, including real
estate taxes, maintenance, the avoidance of nuisances, and
environmental remediation responsibilities.
Id. at *13-*14 (emphasis supplied).
In perhaps the most forceful rejection of the debtors’ position in recent
decisional law, the court stated that:
[V]esting precludes surrender: a debtor cannot permit a mortgagee to
exercise its preexisting rights where, by vesting the mortgaged
property in the mortgagee, it has altered those rights out of existence.
Surrender of collateral to a mortgagee and vesting of the same
collateral in the mortgagee are thus mutually exclusive. A plan cannot
do both while giving full and proper meaning to each term; and a plan
that purports to do both at once must be denied confirmation as
Some debtors, as part of the fresh start they seek in bankruptcy, want
to rid themselves of the burdens of property ownership. Where the
mortgagee is not willing to simply take title or cannot or will not
foreclose fast enough to provide the relief the debtors seek, debtors
invoke the nomenclature of surrender to satisfy § 1325(a)(5). But
where vesting occurs, there is no true surrender. The surrender is
illusory, and therefore the plan does not satisfy § 1325(a)(5)(C).
Id. at *15-*16.
With these authorities in mind, the Court now turns to the merits of the
present dispute, and in doing so, adds its voice to the growing majority of courts to
interpret the Bankruptcy Code as prohibiting debtors from forcing secured lenders
to accept title to encumbered property against the lenders’ will.
As to Whether the Bankruptcy Court Erred in Confirming the
This Court is persuaded that the clear weight of authority – including the
position unanimously adopted by other bankruptcy courts within this Circuit –
supports the conclusion that the right of HSBC to control its own remedies
respecting the Long Beach Residence cannot be subordinated to the Debtors’
interest in achieving a fresh start in bankruptcy.
Initially, as a matter of statutory interpretation, the Court finds the position
advanced by the Debtors and the Trustee in this case to be legally untenable. The
plain language of § 1322(b)(9) provides that a Chapter 13 plan may, but is not
required to, include one or more of a menu of optional features. However, nothing
in the language of the statute indicates that including one of these optional features
guarantees the confirmability of the overall plan. See Watt, 2015 U.S. Dist. LEXIS
54041, at *13 (the fact that “section 1322(b)(9) permits inclusion of a nonstandard
provision that vests property in a secured creditor does not resolve whether the plan
can be confirmed with a nonstandard provision” (internal brackets omitted)); see
also Williams, 542 B.R. at 521 (“Section 1322(b)(9) includes vesting as a
discretionary term of a plan, but it does not assure confirmation of a plan providing
for vesting”). Thus, the flaw in the Appellees’ argument is the misapprehension
that simply because the Code authorizes the use of vesting under some
circumstances, that vesting must be appropriate in all circumstances.
construction is patently at odds with the permissive nature of § 1322(b)(9), which
allows a plan to be confirmed with or without its inclusion. By contrast § 1325(a)(5)
is not permissive. It is mandatory. A plan which does not strictly conform to one of
its enumerated requirements is not confirmable.
Thus, it is true, as the Bankruptcy Court suggested, that § 1325(a)(5)(C) and
§ 1322(b)(9) are not, in all instances, mutually exclusive.
However, in some
situations, like this one, where its inclusion disrupts the mandatory treatment of a
secured creditor under § 1325(a)(5), they are mutually exclusive, and the Plan’s
inclusion of both defeats confirmability.
In the Court’s view, such a disruption is obvious in this case. Contrary to the
position set forth by the Appellees, the Court finds that the Bank is entitled to the
full array of property rights that accompany its position as first-priority lienholder,
including and especially the right to foreclose its security interest, or to refrain from
doing so, as the case may be.
See Tosi, 2016 Bankr. LEXIS 690, at *13-*14
(observing that the concept of surrender necessarily contemplates “permit[ting] the
creditor to exercise its preexisting property rights as to the collateral”); Sherwood,
2016 Bankr. LEXIS 263, at *19-*21 (noting the right of a secured creditor “to do
nothing to recover its collateral”); Rose, 512 B.R. at 793-94 (noting that there is no
“requirement that the lender [ ] do anything with the property”).
There can be no dispute that wielding the option of vesting under § 1322(b)(9)
as a method of forcing the lender’s hand to take some action with respect to the
collateral that it would not otherwise take is a material curtailment of these rights.
Thus, although the statutory language at issue does not expressly foreclose the
possibility that real property may, under appropriate circumstances, be surrendered
to and vested in the same secured creditor, in the Court’s view, the incompatibility
of these concepts in situations where the creditor withholds its consent is selfevident. See Tosi, 2016 Bankr. LEXIS 690, at *15-*16 (“[W]here vesting occurs,
there is no true surrender. The surrender is illusory”).
In this regard, the Court finds no support in the language of § 1322(b)(9) for
concluding that, simply by virtue of its position as a mortgagee, the Bank is
somehow susceptible to non-consensual reformation of its mortgage contract, or that
its lien operates as a waiver of property rights under state law. Certainly that
provision cannot be read as the Bank’s assumption of liability for unbargained-for
carrying costs and exposure to the rights and obligations of junior lienholders with
whom HSBC was not otherwise in privity.
In reaching this conclusion, the Court respectfully disagrees with the
Bankruptcy Court’s determination that § 1322(b)(9) would serve no conceivable
purpose if not to facilitate debtors’ repayment of secured claims with estate
See Zair I, 535 B.R. at 21 (finding that “[r]eading § 1325
narrowly . . . essentially eliminates the usefulness of § 1322(b)(9)”).
issuance of that decision, other courts have written persuasively that this optional
provision may, where appropriate, serve numerous functional purposes that do not
conflict with the requirements of § 1325(a)(5)(C).
See Weller, 2016 U.S. Bankr.
LEXIS 108, at *9; Sherwood, 2016 Bankr. LEXIS 263, at *20-*21.
The Court also rejects the Appellees’ argument that surrender is simply a
natural first step in the broader act of transferring property out of the bankruptcy
estate, namely, vesting.
See Br. for Trustee at 7 (arguing that “surrender is a
condition precedent to vesting property” because “Debtors cannot vest the property
without surrendering it first”). As other courts have recognized, such an approach
ignores the irreconcilable legal implications that arise when both surrender and
vesting are included in a plan without the secured creditor’s consent. See, e.g., Tosi,
2016 Bankr. LEXIS 690, at *12-*13 (determining that “[a] plan cannot do both
while giving full and proper meaning to each term”); Williams, 542 B.R. at 522
(finding that “to construe surrender to include vesting would impair the state law
rights of the secured creditor without providing any corresponding protective
limitation in the confirmation standards”); Rose, 512 B.R. at 795 (finding that nonconsensual vesting “could impair a lender’s rights in the collateral, subject it to
ownership liabilities that never would have voluntarily assumed, and contravene
state property law”).
In this regard, contrary to the Appellees’ contention, surrender is generally
not followed in the ordinary course by the mortgagee taking title to the collateral.
Nor does the mortgagee’s right to receive surrendered collateral contemplate its
responsibility for ongoing carrying costs pending disposal of the property. Nor does
it potentially diminish the value of the mortgagee’s first-priority lien by the amount
of any junior liens which otherwise would have been extinguished by a foreclosure.
On the contrary, these are unique consequences of vesting. By contrast, the concept
of 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
Id. at 518 (emphasis supplied). Therefore, in the Court’s view, the
imposition of the far more “consequential event” of vesting upon a non-consenting
lender, who is entitled to the specific benefits and limitations of surrender, is
inherently inconsistent with, and impermissibly impedes upon the creditor’s rights
sought to be preserved in § 1325(a)(5).
In the Court’s view, this result is particularly warranted in this case because
the property at issue, namely, the Long Beach Residence, was abandoned almost
three years ago after being destroyed and rendered uninhabitable by a hurricane.
Other courts – including some which have ultimately ruled in favor of the debtors –
have suggested that such circumstances may provide valid reasons for a mortgagee
to resist accepting a conveyance of encumbered real property. See, e.g., Rose, 512
B.R. at 795-96 (noting that forcibly vesting property “could significantly injure the
lender” if, for example, “the collateral property is dilapidated, damaged, or
otherwise a public nuisance”); Rosa, 495 B.R. at 525 (observing that a mortgagee
may justifiably object to vesting where the subject property “is contaminated by
Finally, the Court rejects the theory that the Debtors’ pursuit of a fresh start
in bankruptcy should be elevated above the other interests of the parties in this
case. Given the very clear delineation of secured creditors’ rights in § 1325(a)(5);
and the fact that Congress saw fit to fortify those rights by conditioning the
confirmability of all Chapter 13 plans upon comformance with them; the Court can
discern no principled basis for exalting the policy rationale in favor of “fresh starts”
for debtors over the Code’s obvious goal of preserving the well-settled property
rights of secured lenders.
Other courts are in accord. E.g., Watt, 2015 U.S. Dist.
LEXIS 54041, at *19 n.6 (finding that a plan which purports to surrender and vest
the same property in a secured lender failed to effect any meaningful balance of
interests insofar as it “wholly eliminated [the debtors’] financial responsibility in
relation to the Property, at the sole expense of a secured creditor”); see also
Williams, 542 B.R.at 521 (finding the “tempt[ation] to . . . promote the debtor’s fresh
start,” to be outweighed by the fact that “[v]esting the title over [the lender’s]
objection would force it to accept the title and impose unbargained for obligations on
it to pay taxes and other costs associated with the Property”).
Accordingly, the Court finds that the underlying decision supplanted one of
the requirements for confirmation found in § 1325(a)(5) with an optional
nonstandard provision found in § 1322(b)(9).
As in Watt, the result was the
creation of a “fourth option” under § 1325(a)(5), which, in the Court’s view,
materially impaired the well-settled property rights of the Bank, requiring reversal.
Based on the foregoing, the Court reverses the underlying decision of the
Bankruptcy Court; vacates the subject confirmation order; and remands this matter
for further proceedings consistent with this Opinion.
The Clerk of the Court is directed to close this case.
Central Islip, New York
April 12, 2016
/s/ Arthur D. Spatt__________________
ARTHUR D. SPATT
United States District Judge
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