U.S. District Court in Oregon rejects Chapter 13 plan providing that a secured lender can be forced to take title to property without its consent

Bank of New York Mellon v. Watt, 14-cv-02051 (April 22, 2015 D.Or.), is an appeal from a Bankruptcy Court order confirming a Chapter 13 plan that included a non-standard provision proposing to both surrender the property _and_ to vest title to the Debtor’s vacation home in the name of mortgagee pursuant to 11 U.S.C. § 1322(b)(9). The mortgagee objected arguing that a plan proposing to surrender property was confirmable under 11 U.S.C § 1325(a)(5) only if it the secured lender consents to the treatment of its claim. The mortgagee argued that vesting title by force would mean that a lender takes title subject to existing junior liens and other post-petition HOA dues and assessments. Confirmation of Chapter 13 plans is governed exclusively by 11 U.S.C. § 1325(a)(5). By contrast 11 U.S.C. § 1322 regulates the contents of a Chapter 13 plan. Subsection (b) of § 1322 includes a list of permissive terms that may be included in the plan, including a term that the plan may provide for the vesting of property of the estate in the debtor or any other entity. The mortgagee argued that the Bankruptcy court erred in confirming the plan because it did not meet any of the criteria of 11 U.S.C. § 1325 (a)(5). Debtors argued that §1322(b) is to be balanced with and not replaced by the obligation of §1325(a)(5) such that property may be vested in a non-consenting secured creditor. The District Court agreed with the mortgagee. The case, it held, turned on whether a plan is confirmable when it proposes the surrender of property under §1325(a)(5) and concurrently proposes a nonstandard provision (vesting) that the secured creditor opposes. Essentially the bankruptcy court interpreted §1322(b) as creating another option under §1325(a)(5). But this is odds with the plain language of §1325(a)(5) in that reads into the section language that does not exist and frustrates the purpose which is to provide protection to creditors holding secured claims. [t]he bankruptcy court’s interpretation impermissibly transforms the secured creditor’s right into an obligation, thereby rewriting both the Bankruptcy Code and the underlying loan documents, while at the same time belying the secured creditor’s state-created property rights. Thus, Debtor’s plan was not confirmable under §1325(a)(5).

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