By Louis Robin
Law Office of Louis Robin
In In re Sagendorph, II, No. 14-4675, 2015 Bankr. LEXIS 2055 (Bankr. D. Mass. 6/22/15), Bankruptcy Judge Hoffman, in a well reasoned and workmanlike opinion, has mechanically and, in my opinion and that of most debtor practitioners, properly applied the provisions of Chapter 13 to allow "vesting" of property to a secured creditor; the opinion may even provide secured creditors an opportunity to save significant foreclosure costs. In this decision, Judge Hoffman permitted a debtor to surrender a property, and take the additional step of vesting the property to the secured creditor. Section 1325(a)(5)(C) permits “surrendering” of assets as one of the alternatives for treatment of a secured claim as a precondition to confirmation. “Vesting” is permitted as an element of plan under Section 1322(b)(9). Despite Wells Fargo's objection that “vesting” was “subservient”, Judge Hoffman found no such direction in the Code – Section 1325 only set forth the confirmation requirements, while Section 1322 set forth terms that are permissible.
The Massachusetts state law prohibition of involuntary transfers of real estate did not restrict the Bankruptcy Code provisions because bankruptcy law, as a federal law, preempts state law.
This resolves a practical problem for Chapter 13 debtors, when mortgage holders refuse or delay extensively to foreclose upon property that a debtor does not want to own further. Debtors, who want to rid themselves of property that is underwater, cannot do so without Judge Hoffman's well placed reasoning. And this continues the burden of maintaining insurance, often on abandoned or distressed properties. True, without debtor insurance, a mortgage holder can insure property, but this only insures the mortgage holder's insurance, not a debtor or the debtor's estate from any liability from injuries an individual may incur, such a slip and fall, or, worse, as a fire. And a debtor may not escape such liability by “abandoning” a property under Section 554, as that section only permits the abandonment of property from the debtor's “estate.” Accordingly, if a property is abandoned in Chapter 13, it is only “abandoned” by the Chapter 13 estate, presumably to the debtor – and this means a personal injury liability incurred as a result of an incident on such abandoned property still creates a liability against the post-petition Chapter 13 debtor, a liability for which the Chapter 13 estate is still responsible. Accordingly, the Bankruptcy Court's routinely dismiss Chapter 13 cases that do not have complete insurance on property.
Judge Hoffman also addresses two legitimate concerns of secured creditors and possible resolutions. First, if the property is “underwater”, a creditor will complain that it should not be forced to accept the property in full satisfaction of its secured and unsecured “deficiency” claim. To be candid, a secured creditor should not be prevented from asserting its unsecured “deficiency” claim – if a secured creditor is forced to accept its collateral, it should only satisfy its claim to the extent that it realizes value, with the balance reserved as an unsecured claim. Judge Hoffman suggests that such restrictive treatment of satisfaction in full might be considered bad faith – but this was not an issue in the case at bar because the property, according to the schedules, was worth more than the debt and Wells Fargo did not assert an objection based upon bad faith. A debtor need not attempt to eliminate an unsecured claim – this will not, routinely, increase the monthly payments under the plan as most plans are “pot plans”, meaning that the only effect will be to give the deficiency claim a dividend from funds that other unsecured creditors would routinely receive.
The second issue is that, by having property “vest” in a secured creditor, when mortgaged property is received by the secured creditor, the lien “merges” with the property, and the mortgage lien is eliminated. This results in the ownership of the property still subject to all liens, and depriving the mortgage holder with the ability to void junior liens by foreclosing on the mortgage. In a footnote (no. 7), Judge Hoffman suggests that secured creditors utilize affiliates to hold such properties, which would not result in a “merger”. But how this would be accomplished is unclear as the debtor's plan would designate the mortgage holder, not an affiliate, to be the transferee. Perhaps a creditor can, upon the filing of a plan, request the designation of an affiliate, and, if the debtor refuses to so designate, file an objection based upon bad faith (as it really doesn't matter who is designated to receive the property from the perspective of the debtor) – the debtor can then amend the plan to designate the affiliate as the transferee. This could even result in an opportunity for secured creditors – the secured creditor could request that the plan provide that the property vest in the designated (affiliate) party free and clear of all liens (save taxes), saving the secured creditor significant foreclosure expenses. In the case at bar there were no junior liens, so that this was not an issue.
In sum, Judge Hoffman has resolved a debtor problem of liquidating underwater property by the application of the terms of the Bankruptcy Code. It eliminates a debtor predicament of being burdening with property that it could not otherwise retain, when the mortgage holder delays foreclosures. And, to be candid, but holding mortgage holders to the benefit of the bargain for which negotiated – a designated property – does not sound unfair.