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To Surrender or To Vest: That is the Question

Can a homeowner who owes more on their mortgage than their property is worth force the mortgagee to take title to the property as part of a bankruptcy plan?  Put more simply: can an underwater homeowner, by filing bankruptcy, force a bank to take their property off their hands in full satisfaction of their debt?  The United States Bankruptcy Court for the District of Massachusetts has answered that question in the negative in In re Weller, No. 12-40418-HJB (U.S. Bankr. D. Mass. Jan. 13, 2016).

The facts of the case follow an all-too-familiar pattern: Jeffrey and Karen Weller own a single-family home in Lunenburg, Massachusetts.  They filed a Chapter 13 bankruptcy petition on February 7, 2012, in which they valued the property at $139,000 and listed a secured claim held by Wells Fargo in the amount of $258,083.97.  Shortly after they filed their bankruptcy petition, the Wellers moved out of the house.  On June 1, 2012 the Court confirmed the Wellers’ original Chapter 13 plan, which provided that:

The secured claim of Wells Fargo Financial (“First Mortgagee”) is being modified as follows: Debtors are surrendering the property located at 37 Graham Street, Lunenburg, Massachusetts in full satisfaction of the secured claims. The First Mortgagee shall be allowed an unsecured claim for the deficiency balance owed. The Debtors are surrendering the primary residence located at 37 Graham Street, Lunenburg, Massachusetts to Wells Fargo and/or any successors and assigns and will foreclose on the property in full satisfaction of the mortgage, note and any outstanding fees.

Despite the Wellers’ attempt to get Wells Fargo to take the property, Wells Fargo opted not to, and made no attempts to foreclose.  The Wellers, still owners of the property, continued to make the payments required by their confirmed Chapter 13 plan, but, in 2015, apparently found themselves unable to afford maintenance and insurance costs for the property.  So, on August 5, 2015, the Wellers filed a Post-Confirmation Amended Chapter 13 Plan, which attempted to force Wells Fargo to take title to the property upon confirmation of the Proposed Amended Plan.  Specifically, the Proposed Amended Plan provided:

Pursuant to §§1322(b)(8) and (9), title to the property located at 37 Graham Street, Lunenburg, MA 01462 shall vest in Wells Fargo Financial Massachusetts, Inc. and/or any successors and assigns upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the registry of Deeds. (emphasis added).

Wells Fargo, unsurprisingly, objected, and argued that the Wellers could not force it to take title to the property as part of the plan confirmation.

The Bankruptcy Court agreed, relying on In re Cormier, 434 B.R. 222, 233 (Bankr. D. Mass. 2010), which held that a secured creditor could not be forced to take title to a property that the debtors proposed to surrender pursuant to their Chapter 13 plan.  In In re Cormier, the debtors argued, unsuccessfully, that § 1325(a)(5)(C) of the Bankruptcy Code permitted them to surrender collateral, their property, in satisfaction of a secured claim without the secured creditor’s consent.  Section 1325(a)(5)(C) of the Bankruptcy Code “requires a Chapter 13 plan to treat secured claims in specified ways: (i) the secured creditor may accept the plan; (ii) the debtor may make payments to the secured creditor sufficient to “cram down” the plan; or (iii) the plan may provide for surrender of the property to the secured creditor.”  In re Weller, at *9. The Wellers argued that In re Cormier did not control the outcome in their case because the Cormier decision did not consider the implications of § 1322(b)(9) of the Bankruptcy Code, which contains an optional provision allowing a debtor to propose a plan which provides for “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 Wellers claimed that § 1322(b)(9) allows them to force Wells Fargo to take title to their property as part of their Chapter 13 plan.

Courts have split when considering whether a debtor’s plan may provide for forced vesting of property in a secured creditor, as proposed by the Wellers.  Courts in Massachusetts, In re Sagendorph, No. 14-41675-MSH (U.S. Bankr. D. Mass. June 22, 2015), Minnesota, In re Stewart, 536 B.R. 273 (Bankr. D. Minn. 2015), and New York, In re Zair, 535 B.R. 15 (Bankr. E.D.N.Y. 2015), have concluded that a Chapter 13 plan may vest title in a secured creditor over the creditor’s objections.  On the other hand, courts in Oregon, Bank of N.Y. Mellon v. Watt, No. 3:14-cv-02051-AA (D. Or. Apr. 22, 2015), Kansas, In re Williams, No. 14-20159 (U.S. Bankr. D. Kan. Dec. 2, 2015), and North Carolina, In re Rose, 512 B.R. 790 (Bankr. W.D.N.C. 2014), have all concluded that a secured creditor cannot be forced to take title to property as part of a Chapter 13 plan.

The Weller Court concluded that a Chapter 13 plan may not force vesting of title in a secured creditor; the Wellers cannot force Wells Fargo to take title to their property.  The Court focused on the term “surrender” in § 1325(a)(5)(C) of the Bankruptcy Code, distinguishing it from the term “vests,” which the Wellers hoped to read into the statute.  As the Court stated: “A plan which ‘surrenders’ property to a secured creditor fulfills the requirements of § 1325(a)(5)(C) and may be confirmed. 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.”

Although sympathetic to the difficult situation that the Wellers (and many other underwater homeowners) find themselves in, the Court reiterated that it is not the judiciary’s role to make policy decisions – rather, “judges are interpreters and not architects of the law.”  This decision only serves to further the split amongst courts in interpreting these sections of the Bankruptcy Code as it creates a split even within Massachusetts.  However, In re Sagendorph has been appealed to the United States District Court for the District of Massachusetts, and is currently being briefed. Therefore, there should be resolution, at least within this District, once a decision is issued, pending further appeal.