Bankruptcy judges in Massachusetts have been split on whether a chapter 13 plan can force a mortgage lender to take title to property. In an appeal from a confirmation order upholding forced vesting, District Judge Mark G. Mastroianni of Springfield, Mass., reversed the bankruptcy court and held that the plain language of Sections 1322(b)(9) and 1325(a)(5)(C) does not empower a debtor to convey title to a secured lender over the lender’s objection.
Remanding the case to bankruptcy court, Judge Mastroianni left the door open for the bankruptcy judge to search for equitable powers that might permit forced vesting.
Forced vesting arose as a remedy for situations where the secured lender either delays foreclosing or will not foreclose, thus leaving the debtor stuck with title and with nondischarged post-petition costs for maintaining and insuring the property until the lender forecloses. The problem can be acute for debtors who own condominiums and thus remain liable for post-petition common area fees.
The appeal involved a man who owned several parcels of real property. One was property worth about $90,000 that was encumbered with one mortgage for about $60,000. The plan, confirmed by Bankruptcy Judge Melvin S. Hoffman, required the mortgage lender to take title in full satisfaction of the debt. The lender appealed and won in Judge Mastroianni’s Jan. 23 opinion.
The opinion revolved around Section 1322(b)(9), which provides that a plan may “provide for the vesting of property,” and Section 1325(a)(5)(C), which requires confirmation if, among other things, the debtor “surrenders” collateral to the lender.
Judge Mastroianni held that the terms “vest” and “surrender” have well established meanings. In the First Circuit, “surrender” means to make collateral “available” to the lender. “In contrast,” he said, “vest” is generally defined to mean conferring ownership. In other words, “Vesting refers instead to the acceptance of surrender by the grantee, which consummates the legal act of transfer.”
The bankruptcy court was wrong, because the two words are not interchangeable. Consequently, a debtor cannot use Section 1325(a)(5)(C) to convey title forcibly on a lender.
Judge Mastroianni held that “the plain language of Section 1322(b)(9), considered alone or in combination with Sections 1322(b)(8) and/or Section 1325(a)(5)(C), does not allow forced vesting of collateral property in an objecting creditor.”
The opinion by Judge Mastroianni includes a comprehensive summary of arguments on both sides of the issue.
Judge Mastroianni ended his opinion by saying that he “ultimately doubts” whether the bankruptcy court is “wholly lacking in authority and ability to balance the equities in a situation that includes forced vesting in chapter 13.” Citing the Supreme Court, he said that forced vesting would be consistent with the concept of the bankruptcy court being a court of equity with broad authority to modify the debtor/creditor relationship.
For property that is not a principal residence, he said that a debtor might use Section 1322(b)(2), which allows modification of the rights of a secured creditor. In the case of a principal residence, the debtor might try using Section 1322(c), he said.