New England Case Summary-re Sagendorph, 562 B.R. 545 (D. Mass 2017)

Bankruptcy Court Holds That Chapter 13 Debtor’s Surrender of Collateral Property Does Not Impose On Secured Creditors A Requirement To Accept That Property In Satisfaction Of Its Claims.  In re Sagendorph, 562 B.R. 545 (D. Mass 2017).

Paul Sagendorph, debtor in a Chapter 13 bankruptcy proceeding (the “Debtor”), sought to amend his Chapter 13 plan to vest title to certain real property (the “Property”) in one of his secured creditors, Wells Fargo Bank, N.A. (the “Secured Party”), in full satisfaction of the Secured Party’s claim.  The Secured Party, however, had previously filed a proof of claim secured by a mortgage in an amount less than the total value of the Property.  Although the Secured Party rejected the vesting provision of the Debtor’s Chapter 13 plan (which provision would require the Secured Party to accept the Property in satisfaction of its claim) on the grounds that Chapter 13 does not authorize forced vesting, the bankruptcy court ultimately confirmed the amended plan and allowed for title to the Property to vest in the Secured Party. 

The Secured Party appealed the bankruptcy court’s decision to determine “whether a surrender of collateral property, as permitted by Section 1325(a)(5)(C) of the federal Bankruptcy Code, imposes on secured creditors a requirement to accept vesting on that property.”  The district court, after determining the definitions of “vest” and “surrender”, reversed the bankruptcy court’s decision by ruling that “the plain language of Section 1322(b)(9), considered alone or in combination with Sections 1322(b)(8) and/or 1325(a)(5)(C), does not allow forced vesting of collateral property in an objecting creditor.” 

The district court further distinguished the language of the Chapter 13 statutes detailed above from that of their supposed “chapter 11 analog”.  The district court noted that Chapter 13, in Section 1322(b), states that a plan “may provide for” vesting whereas Chapter 11, in Section 1123(a)(5), states that “a plan shall” provide for vesting.  Accordingly, Chapter 11’s use of “shall”, unlike Chapter 13’s use of “may”, makes the former mandatory.  Although Chapter 13 allows for vesting as a means of discharging debt under Section 1322(b), it does not mandate forced vesting akin to Chapter 11.

The district court ultimately held that the plain language of Sections 1322(b)(8), (b)(9) and 1325(a)(5)(C) of the federal Bankruptcy Code precludes forced vesting, thereby reversing this appeal and remanding for further proceedings.