By Michael L. Moskowitz and Melissa A. Guseynov

Lender Alert: Chapter 13 Debtor Can't Compel Secured Lender to Accept Title to Surrendered Collateral by Michael L. MoskowitzIn a recent opinion, Bankruptcy Judge James L. Garrity, Jr., sitting in the Southern District of New York, held that a debtor cannot confirm a chapter 13 plan over a lender’s objection where the plan would compel the transfer of title to the secured creditor, explaining that forcing title onto the creditor would transform the creditor’s right to recover its collateral into an obligation, thereby rewriting the Bankruptcy Code and the underlying loan documents. In re Sherwood, 2016 WL 355520, at * 7 (Bankr. S.D.N.Y. Jan. 28, 2016).

In this case, Debtor’s second amended chapter 13 plan (“Plan”) did not provide for Debtor to make any payments to the mortgage lender (“Lender”) with respect to the residential property at issue. Instead, the Plan stated that the property would be surrendered, and title thereto would vest in Lender upon confirmation of the Plan. Id. at * 1.  Lender objected to this treatment, arguing that it impermissibly exposed Lender to liability that comes with the burdens of ownership, which it did not bargain for when entering into the mortgage. Id. at * 2 (internal citations omitted).

Pursuant to section 1322(b) of the Bankruptcy Code, a plan may, among other things, provide “for the payment of all or a part of a claim against the debtor from property of the estate or property of the debtor,” and “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.” 11 U.S.C. §1322(b)(8) and (9). Furthermore, Section 1325 of the Bankruptcy Code describes the requirements for confirmation of a chapter 13 plan, including that a plan may be confirmed only if one of the following conditions is satisfied with respect to each allowed secured claim: (i) the creditor accepted the plan; (ii) the plan provides for the collateral to be surrendered; or (iii) the plan provides for “cram down” of the claim. See 11 U.S.C. §1325(a)(5).

The Court clarified that when a debtor surrenders property in a chapter 13 plan, there is frequently an “expectation” that the secured creditor will quickly recover and sell the collateral to satisfy its claim. However, sometimes a secured creditor may not exercise such rights, leaving the debtor “stuck with the collateral” and responsible for the obligations that accompany property ownership. Id. at * 3 (internal citations omitted). Thus, the issue was whether a plan can require a secured creditor to accept a surrender and transfer of title of the property from the debtor to the creditor.

In examining this issue, Judge Garrity reviewed and analyzed applicable case law from across the country, wherein various courts arrived at divergent conclusions. However, the Court ultimately agreed with In re Malave, and similar cases. In Malave, former Bankruptcy Judge Allan Gropper, now retired, held that a debtor cannot compel a secured creditor to accept title to surrendered property. Judge Gropper explained simply that “[w]hen a secured creditor timely objects to the confirmation of a plan that proposes to vest title in that creditor, the court cannot confirm the plan.” In re Malave, Case No. 13-13348 (ALG), at *3 (Bankr. S.D.N.Y. Apr. 11, 2014).

Based on the relevant sections of the Bankruptcy Code, applicable case law and the arguments advanced by the parties, Judge Garrity held that Debtor’s Plan could not be confirmed over the objection of a secured creditor where the plan proposes to vest title to the surrendered property in that creditor. In re Sherwood at * 5. The Court further explained that reading sections 1322(b)(9) and 1325(a)(5) to permit a debtor to non-consensually vest title to surrendered property in a secured creditor would, among other things, deny the creditor’s state-created property rights. Id. at * 8.

Although the Court decided in favor of the mortgage lender in this case, it illustrates the importance of making a timely objection to a plan that proposes to surrender property and transfer title to a lender that does not want title to such property. Thus, it is incumbent upon lenders to scrutinize chapter 13 plans to determine the effect it may have upon the lender and its collateral. Weltman & Moskowitz can help lenders determine how best to address the chapter 13 challenges it may face.

Richard Weltman & Michael Moskowitz |

About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201)794-7500 or Melissa Guseynov is an associate of the firm.