Lower courts are split on the question of whether a chapter 13 plan can force a lender to take title to real property.
Reversing the bankruptcy court, District Judge Arthur D. Spatt of Central Islip, N.Y., followed what he saw as the “clear weight of authority” and held that a chapter 13 plan cannot convey title to a lender absent the lender’s consent.
The issue brings two chapter 13 provisions into play. As one of the alternatives for dealing with a secured claim, Section 1325(a)(5)(C) allows the debtor to surrender property to the lender. Section 1322(b)(9) provides that a plan “may” vest title to property of the estate. Judge Spatt rested his decision in part on the notion that the vesting of title under Section 1322(b)(9) is permissive, not mandatory, while employing one of the three alternatives in Section 1325(a)(5) is mandatory.
Judge Spatt’s April 12 opinion contains a valuable survey of all decisions throughout the country coming down on both sides of the question. He noted that two bankruptcy judges in Manhattan held that a plan may not force a lender into taking title.
A lender’s rights include the right not to take title, or refrain from foreclosing, Judge Spatt said. He saw “no principled basis for exalting” the debtor’s right to a fresh start over the “well-settled property rights of secured lenders.”
He also said that the right of a lender to “control its own remedies” cannot be “subordinated to the debtors’ interest in achieving a fresh start in bankruptcy.”
There would be “irreconcilable legal implications,” the judge said, if a plan both surrendered and vested title over a lender’s objection.
The opinion is HSBC Bank USA NA v. Zair, 15-4958 (E.D.N.Y. April 12, 2016).