HSBC Bank USA N.A. v. Zair: Debtors Cannot Vest Collateral in Secured Creditors Against Their Will

Hurricane Sandy was the deadliest hurricane in the 2012 hurricane season and the second-costliest hurricane in U.S. history. It was Sandy that came ashore on Oct. 29, 2012, with a vengeance and destroyed the Zairs’ home, which was located within the jurisdiction of the U.S. Bankruptcy Court for the Eastern District of New York. The Zairs moved to a new home and abandoned their “Sandy home.” Two years later, they filed a chapter 13 bankruptcy and sought to force their primary lender, HSCB Bank USA, N.A., to assume title to their zombie Sandy home.

The debtors’ chapter 13 plan provided that (1) the debtors would surrender the Sandy home to HSBC in full satisfaction of HSBC’s secured claim, (2) the debtors would allow HSBC to file a deficiency claim for any additional outstanding balance, and (3) upon confirmation of the Zairs’ plan, title to the Sandy home would vest in HSBC. HSBC objected to the plan insofar as it was forced to take title to the home, arguing that although the home can and should be surrendered, it is improper to force it to take title without its consent.

The bankruptcy court sided with the Zairs and confirmed their plan over HSBC’s objection.[1] HSBC appealed.[2]

Courts are divided on the issue of whether a debtor can force vesting of collateral in a creditor. As the district court in Zair II explained, understanding the chasm requires deeper knowledge of the applicable provisions of the Code. Section 11 U.S.C. § 1325(a)(5), for example, provides that a chapter 13 plan may only be confirmed (1) when the secured creditor accepts the plan, (2) in cramdown when the debtor, over the creditor’s objection, retains the secured property and pays only the present value of the collateral to the creditor, or (3) when the debtor surrenders the secured property. Thus, if a creditor does not accept the plan, the only options a debtor has left are cramdown or surrender.

Seemingly in contrast with § 1325(a)(5), 11 U.S.C. § 1322(b)(9) provides that a plan also “may” provide for the vesting of the property of the estate in the debtor or any other entity upon confirmation. The question then becomes: Can a debtor force a creditor to take title to its collateral under this provision outside of § 1325? The district court in Zair II says “no”; if a creditor objects to a plan that provides for vesting, the debtor may only resort to the cramdown provisions or surrender nothwithstanding § 1322(b)(9), which is optional.

Zair II quickly clarified the distinction between surrendering and vesting. “Surrendering” means relinquishing all property rights in the collateral and making the property “available” to the secured creditor, but it does not transfer ownership. By contrast, vesting is a more “consequential event” and effectuates the transferring of title to the creditor. HSBC argued the majority position that the legal concepts of “surrendering” and “vesting” are mutually exclusive in that, with respect to a secured claim, the Zairs’ plan could not provide for both. Because the Zairs’ plan provided for surrender, HSBC argued that the Zairs could not force it to take title to the property. Such a provision would interfere with HSBC’s contract rights as a lienholder, not a property owner, and would rewrite HSBC’s contract, a statute-of-frauds offense. HSBC also argued that even if the Zairs’ plan attempted to “vest” the property under § 1325(a)(5)(A), it could only do so if HSBC consented.[3]

Speaking more practically, HSBC’s objections are two-fold. First, taking title to the property sticks HSBC with all of the consequential costs of its ownership, including maintenance, taxes and, in this case, the risks of owning a vacant and dilapidated home. It also impairs HSBC’s rights to foreclose, thereby forcing HSBC to take title “subject to” the junior interest held by Bank of America.

The Zairs argued that HSBC’s objection and interpretation of the §§ 1325(a)(5) and 1322(b)(9) run contrary to the goal of bankruptcy to provide debtors with a “fresh start.” Without being able to force a secured creditor to take back its collateral, a debtor would be saddled with expenses until the bank completes foreclosure, if ever. Therefore, as the Zairs argued, § 1322(b)(9) gives debtors an “out” to offload property they can no longer afford, and surrender of property and vesting must not be mutually exclusive.

The court analyzed the divide of case law on the topic and agreed with HSBC, finding that surrendering and vesting remain an option in those situations when a creditor does not object to a plan. “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.”[4] Section 1322(b)(9) is optional and does not guarantee the confirmability of a plan that violates the mandatory provisions in § 1325(a)(5). The court in Zair II found no support in the language of § 1322(b)(9) to conclude that simply by virtue of its position as a mortgagee, HSBC was somehow susceptible to the nonconsensual reformation of its mortgage, or that its lien operated as a waiver of property rights under state law.

Those cases supporting the debtor’s position holding that a chapter 13 plan may vest title to real property under § 1322(b)(9) against a creditor’s objection include:

• In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013) (a chapter 13 plan can vest title to property in a secured creditor under § 1322(b)(9) and still be confirmable under the surrender option in § 1325(a)(5)(C) (notably, the creditor in Rosa did not object to the plan)).
• In re Sagendorph, 2015 Bankr. LEXIS 2055 (Bankr. D. Mass. June 22, 2015) (noting there is nothing inherently inconsistent between §§ 1325(a)(5)(C) and 1322(b)(9); a plan that provides for transferring or vesting property in the secured creditor would be confirmable under § 1325(a)(5)(C) because a transfer of property presupposes its surrender by the transferor).
• In re Rosen, 2015 Bankr. LEXIS 4448 (Bankr. D. Kan. Feb. 24, 2015) (noting that the debtors had patiently waited for the mortgagee to take legal steps to foreclose the security interests in good faith and continued to pay for property taxes, maintenance, upkeep, and municipal fees and penalties).
• In re Stewart, 536 B.R. 273 (Bankr. D. Minn. 2015) (finding that while the “surrender” concept found in § 1325(a)(5)(C) and the “vesting” concept in § 1322(b)(9) are different, they may be used in tandem to treat a secured claim in a chapter 13 plan (the creditor did not object)).

The case law adopted by Zair II and supporting HSBC’s position includes:

• In re Malave, 2014 Bankr. LEXIS 5383 (Bankr. S.D.N.Y. 2014) (when a secured creditor timely objects to the confirmation of a plan that attempts to vest title in that creditor, the court cannot confirm the plan under § 1325(a)(5)(C)).
• In re Rose, 512 B.R. 790, 793-94 (Bankr. W.D.N.C. 2014) (although the creditor’s failure to foreclose might leave the debtors with continued liabilities, these are byproducts of property ownership, and the debtors’ preference to walk away from the property does not justify shifting these burdens to the lender).
• Bank of N.Y. Mellon v. Watt, 2015 U.S. Dist. LEXIS 54041 (D. Or. Apr. 22, 2015) (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 concept of surrendering found in § 1325(a)(5)(C)). By confirming a chapter 13 plan that advanced nonconsensual vesting in conjunction with surrendering, the bankruptcy court read language into the Bankruptcy Code that does not exist. Watt at *15-16.
• In re Williams, 542 B.R.514 (Bankr. D. Kan. Dec. 2, 2015) (holding that § 1325(a)(5) does not permit confirming a plan vesting title to collateral in the secured creditor over that creditor’s objection. Vesting title over Well Fargo’s objection would impose unbargained-for obligations on Wells Fargo to pay taxes and other costs associated with the property).
• In re Weller, 2016 U.S. Bankr. LEXIS 108 (Bankr. D. Mass. Jan. 13, 2016) (a plan that 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, even if the creditor has not foreclosed after three years of the debtors’ surrender).
• In re Sherwood, 2016 Bankr. LEXIS 263 (Bankr. S.D.N.Y. Jan. 28, 2016) (when a debtor surrenders property, there is often an expectation of an immediate foreclosure, but if that does not happen, a court cannot override the rights of a secured creditor that has the option of doing nothing to recover its collateral).
• In re Tosi, 2016 Bankr. LEXIS 690 (Bankr. D. Mass. Mar. 4, 2016) (finding that the proposed plan to vest property in the secured creditor was not confirmable because it substantially modified the lender’s rights as to its collateral).