By Henry E. Hildebrand, III, Chapter 13 Trustee for the Middle District of Tennessee

In re Rosa, 2013 WL 3380166 *1, *2 (Bankr. D. Haw., July 8, 2013) (Faris)

Assuming adequate notice, a Chapter 13 plan may propose to both surrender real property to a mortgage holder and vest title of the property in that mortgage holder for the purpose of cutting off any future personal liability of the debtor for homeowners association fees.

Case Summary

The debtor (along with other entities) owned real property which was subject to both a first and a second mortgage. The property was also subject to homeowners’ association fees. The mortgages were seriously in arrears and the debtor had no equity in the property. Her Chapter 13 plan, accordingly, proposed to surrender the property to the first mortgage holder, City National Bank/Ocwen Loan Servicing. The plan also contained a “non-standard provision” that the real property was being surrendered to City National Bank/Ocwen “in full satisfaction of the underlying claim. Pursuant to §§ 1322(b)(8) and (9), title to the [real] property . . . shall vest in City National Bank/Ocwen Loan Service upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.”

The trustee objected to the provision, arguing that the surrender of property to a creditor in a plan does not effect a transfer of the property. The court agreed, but noted that the plan also provided for the vesting of the property in the first mortgage holder. Section 1322(b)(9) specifically recognizes that the plan can provide for vesting of property of the estate to the debtor “or in any other entity . . .”. “It is true that ‘surrender’ does not transfer title to the property. But Congress spoke of ‘vesting,’ not ‘surrender,’ in § 1322(b)(9). Under familiar rules of statutory interpretation, courts presume that, when Congress uses different words, it means different things. The plain meaning of ‘vesting’ includes a present transfer of ownership. Thus, § 1322(b)(9) permits inclusion of this non-standard provision.” The court also found that confirmation of a plan with this non-standard provision could be achieved.

Although § 1325(b) states that a secured creditor is to either be paid or the collateral must be surrendered to the creditor, that provision also provides that the creditor may accept other terms of a plan. The plan proposed by Ms. Rosa did contain an additional provision – she proposed to vest the property in the creditor at confirmation. Thus, confirmation of the plan with the “vesting” provision depended upon whether the creditor had accepted the plan.

The Bankruptcy Code does not define “acceptance” for purposes of Chapter 13. Various circuits have stated that silence or a failure to object to a plan can constitute acceptance if there had been adequate notice of the plan. Here, the court found adequate notice had been provided.

Observing that the § 342 statutory rules dealing with addresses would not apply (they only apply when the debtor is providing the notice) and Rule 7004 did not apply (it only applies in a contested matter, not in the filing of a plan), service of the plan through the Bankruptcy Noticing Center to a proper address was adequate to provide notice to City National Bank/Ocwen Loan Services. Accordingly, it was appropriate for the debtor to include the non-standard provision and it was appropriate for the court to assume City National Bank/Ocwen had accepted it and confirm the plan.

What this Case Means to Debtors

One of the most difficult aspects of dealing with a debtor that wishes to surrender real property is the nagging problem of a homeowners’ association that continues to accrue fees and charges against the debtor after the filing of the petition.

In a Chapter 7 context, § 523(a)(16) saddles a discharged Chapter 7 debtor with ongoing fees and costs imposed by a homeowners’ association when the possession or ownership of the property transfers.

Similarly, many states’ laws recognize that personal liability remains imposed upon a homeowner for homeowners’ association fees which may accrue post-petition. Many courts have held these fees as not subject to the discharge in a Chapter 13. What is a debtor to do?

The Rosa case provides a very clear answer. When a debtor is seeking to give up property, the debtor must clearly and specifically provide for both the surrender of the property in accordance with 11 U.S.C. § 1325(a)(5) and must also include a specific provision that provides for the vesting of the property to the mortgage holder in accordance with § 1322(b)(9). If no objection is raised, that creditor will be deemed to have accepted the plan and the debtor would then record the confirmation order which would effect the transfer of the property. In this way, future personal liability for the HOA fees can terminate.

Debtors’ counsel, however, must make certain that the plan specifically provides that silence or failure to object by the creditor constitutes an acceptance of the plan under § 1325(a)(5) and must also make certain that notice is adequate to satisfy the minimum requirements of notice which the debtor may have to demonstrate at a later hearing.

What this Case Means to Creditors

For homeowners’ associations, whether the disappeared, disinterested debtor is liable for the homeowners’ association fees or whether a deep-pocketed financial institution is responsible for such fees could be important. For mortgage servicers and their investors, the question is of keen importance. Delays, imposed on the foreclosure process by modification efforts or loss mitigation, are often present. This is so even where the debtor proposes to surrender property. If the creditor fails to object to a non-material provision like that included by Ms. Rosa, the homeowners’ association fees would apparently be imposed against the mortgagee starting with the recording of the confirmation order in the public records. This can impose substantial post-petition liabilities and additional costs on the mortgagee to which it may not have assumed would exist.

Because, in most cases, a mortgagee can time the transfer of the property at its own schedule based upon the timing of its foreclosure, in a Rosa transaction, it becomes the debtor that selects the timing and imposes the shift of liability from the debtor to the mortgage servicer. In order to halt this, the creditors must either object to the confirmation of the plan, thus eliminating the argument that they have accepted the terms of the plan or accepted the vesting of the property in them, or they must speed up the foreclosure process, to the extent possible, so that the ownership of the property would no longer simply rest in them resulting in increasing liabilities.

What this Case Means to Trustees

It is interesting to note that the court, though overruling the trustee’s objection, complimented the Chapter 13 trustee for bringing the issue to the court’s attention. The court noted that in the Ninth Circuit, the trustee has an obligation to make certain that a plan conforms to all requirements of the Bankruptcy Code, even those that primarily protect secured creditors. The judge acknowledged: “I rely upon and appreciate his careful review of all provisions of Chapter 13 plans.” Hooray, Howard.

It is also becoming clear that in many cases the trustee is the notice police. If notice to City National Bank/Ocwen were adequate, as the court found it was in the Rosa case, then the trustee’s concern would be satisfied if no objection is made to the plan and the plan contained a provision that revested the property back into the mortgage servicer. The termination of the post-petition potential HOA fees can shift the burden from the estate or the debtor which might work to the benefit of the remaining unsecured creditors. As we write repeatedly, the trustee is all about helping the unsecured creditors.

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Henry E. Hildebrand, III has served as Standing Trustee for Chapter 13 matters in the Middle District of Tennessee since 1982 and as Standing Chapter 12 Trustee for that district since 1986. He also is of counsel to the Nashville law firm of Lassiter, Tidwell, Davis, Keller & Hogan, PLLC.