Oregon Bankruptcy Court Says Debtors’ Chapter 13 Plan Can Force Lender to Take Title to Property

US Bankruptcy Court For The District of Oregon decision (October 15, 2014):

The Debtors in this Chapter 13 bankruptcy proceeding owned a property located in a planned community where the property was subject to homeowners association assessments. The homeowners association had a judgment lien in the amount of $179,733 against the property.

In a Second Amended Chapter 13 Plan, the Debtors proposed that on confirmation of their Chapter 13 Plan, the property “shall be vested in the lender, its successors, transferees or assigns pursuant to USC 1322(b)(9), and that the vesting of title in the lender “shall not merge or otherwise affect the extent, validity, or priority of any liens on the property.” Toward that end, the Debtors surrendered the property by vacating it and making it available to the lender. The lender objected to the confirmation of the proposed Chapter 13 Plan arguing that the court lacked the authority to compel the lender to accept title to the property and that absent some further action like foreclosure, accepting a deed in lieu o foreclosure, or a short sale, the surrender of the property does not divest the Debtors of ownership of the property and the obligations associated with it (payment of assessments owed to the homeowners association). The Debtors sought to force the divestment of their ownership interest in the lender through the confirmation of their Chapter 13 Plan.

The court agreed with the Debtors’ argument that section 1322(b)(9) of the Bankruptcy Code authorizes the vesting of title to the property in the lender. Said section states that a plan may “provide for the vesting of property of the state, on confirmation of the plan or at a later time, in the debtor or in any other entity.” (Emphasis added).” The court stated that the rules pertaining to the construction of statutes require that every word and clause be given effect and that courts will not read limitations that are not clearly specified into a statute. Accordingly, under § 1322(b)(9) a plan that provides for vesting of property in a third party, such as a lien holder, can be confirmed without the third party’s consent unless it the plan was not proposed in good faith such as where a debtor seeks to avoid responsibility for a nuisance or environmental problems associated with the property. As there was no evidence of a lack of good faith in the proposed plan, the court confirmed the Chapter 13 Plan over the objection of the lender.

See case decision: In_re_Watt_520_B.R._834_(Bankr.Or._2014)1