Creditor Can Be Forced to Take Ch. 13 Debtor's Condo

By Stephanie Cumings

Sept. 4 — Whether or not a creditor can be forced by a debtor to accept real property in satisfaction of a debt remains a muddled issue for bankruptcy courts.

Judge Michael E. Ridgway sided with debtors and found that Ocwen Loan Servicing LLC must accept the deed to a debtor's condo in full satisfaction of the debt or, in the alternative, it must reject the deed and initiate foreclosure.

‘Little Uniformity' Among Courts

This issue hinges on how courts define the terms “surrender” and “vesting” in certain sections of the Bankruptcy Code, and as the Minnesota court noted, there has been “little uniformity” in the courts' various interpretations.

Notably in this case, Ocwen did not object to the debtor's Chapter 13 plan, which was confirmed by the bankruptcy court. Chapter 13 allows consumer debtors to retain certain property while repaying debts in a series of payments over a period of years.

The plan provided that upon confirmation, the debtor's condominium would vest in Ocwen and that all secured claims would be “paid by the surrender of the collateral real property and foreclosure of the security interest.” After the plan was confirmed, the debtor moved for the court to allow her to transfer the property. Ocwen didn't object.

Mutually Exclusive?

The court granted the debtor's motion, but noted that courts disagree on whether or not surrendering and vesting are mutually exclusive. Section 1322(b)(9) says that the plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.” Section 1325(a)(5) says that with regard to secured creditors, a bankruptcy court can only confirm a plan if one of three requirements are satisfied: (1) the creditor accepts the plan, (2) the creditor can keep its lien, or (3) the debtor surrenders the property to the creditor.

The court noted that in this case, unlike some prior cases to address this issue, the plan had already been confirmed. The court said that the Bankruptcy Code is clear that a confirmed plan is binding on debtors and creditors alike.

Surrender and Vesting in Tandem

But the court went further and held that while “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 [C]hapter 13 plan.” This approach is consistent with the Massachusetts bankruptcy court's recent decision in In re Sagendorph, 2015 BL 198148 (Bankr. D. Mass. June 22, 2015), which held that a debtor can utilize both surrender and vesting in a plan, and can confirm the debtor's Chapter 13 plan over the secured creditor's objection.

The court in In re Zair, 2015 BL 260817 (Bankr. E.D.N.Y. Aug. 13, 2015) also adopted Sagendorph 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.”

Potential Liabilities

Other cases have taken a different tact. In In re Rose, 512 B.R. 790 (Bankr. W.D.N.C. 2014), the court would not force a creditor to accept the conveyance of a property via vesting or surrender. The court noted that forcing unwanted property on a creditor could subject them to unwanted liabilities, like environmental or public nuisance claims.

A district court held in BNY Mellon v. Watt, 2015 BL 116981 (D. Or. 2015) that the Bankruptcy Code presents three options to treat a secured claim (one of which is surrender) and that there is no fourth vesting option. An appeal of Watt remains pending before the Ninth Circuit and if it were to issue an opinion on this issue, it would be the first circuit court to do so, according to research conducted by Bloomberg BNA.

Lynn J.D. Wartchow of Wartchow Law Office, LLC, Edina, Minn., represented the debtor in this case.

To contact the reporter on this story: Stephanie Cumings in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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