Dealing With Mortgage Owners Who Won’t Foreclose — A Possible Bankruptcy Option
by Siu Yan Chan[1] and John Rao
NCLC eReports, July 2014, No. 4
Bankruptcy; Foreclosures and Servicing
Consumer advocates have struggled with finding ways to force mortgage holders to foreclose on property that their clients no longer wish to keep and in fact may have vacated. Homeowners having vacated a home may be better off expediting a foreclosure to stop the accumulation of fees and other expenses for which the homeowner continues to bear responsibility until the foreclosure. A recent bankruptcy court decision offers the possibility that the chapter 13 plan confirmation process might be used to obtain an order conveying the property to the mortgage holder.
THE ZOMBIE MORTGAGE PROBLEM
Homeowners who vacate their homes in response to a pending foreclosure often hope the foreclosure sale will put an end to certain of their financial problems. Until the property is sold at a foreclosure sale, they remain responsible as owner for the property taxes and homeowners’ association (HOA) fees. They are also responsible for maintenance of the property, and can face potential liability for local housing code violations and any personal injuries occurring on the property.
SIMPLY FILING BANKRUPTCY MAY NOT BE THE SOLUTION
Simply filing bankruptcy may not speed up a foreclosure sale or eliminate the homeowner’s continued liability for various fees and expenses. Although the debtor’s mortgage debt (but not the lien on the home) may be discharged, as well as any prepetition HOA fees, an exception to the discharge obtained in a chapter 7 case provides that the debtor remains liable for any postpetition HOA fees that come due until the property is sold.[2]
HOA fees also place a considerable burden on chapter 13 debtors. So long as a debtor retains the title to a condominium unit, some courts find that the debtor remains liable for postpetition HOA fees even though the discharge exception for postpetition HOA fees does not apply to chapter 13 cases.[3] This is sometimes the case even if a debtor vacates the property.[4] Despite having filed bankruptcy, debtors also face the possibility of open-ended liability beyond simply HOA fees. For example, debtors may be subject to real estate taxes, insurance fees, and civil and criminal penalties for failure to maintain the property.[5]
Given these possible outcomes, it comes as no surprise that debtors in the bankruptcy often seek to transfer the title to property they have vacated. Although the debtor may wish to relinquish title to the property, a debtor ordinarily cannot compel a mortgagee to accept a conveyance or to foreclose on the property.[6] Debtors have the option under § 1325 of the Bankruptcy Code to surrender property to a creditor, but surrendering property does not by itself convey title. Thus, a debtor cannot avoid HOA fees or other ownership liabilities merely by surrendering real property in the bankruptcy.
A SOLUTION: USING CHAPTER 13 BANKRUPTCY TO VEST PROPERTY IN THE MORTGAGE HOLDER
In In re Rosa,[7] the debtor owned property in which there was no equity and which was subject to HOA fees. Ms. Rosa proposed in her chapter 13 plan to surrender her real property to the holders of the first and second mortgage claims on the property. The nonstandard provision included in the debtor’s plan proposed not only to surrender the property, but to vest the property in — or transfer ownership of the property to — the holder of the first mortgage pursuant to § 1322(b)(9) of the Bankruptcy Code. The chapter 13 plan provision read:
All collateral surrendered for Class 3 claims is surrendered in full satisfaction of the underlying claim. Pursuant to §§ 1322(b)(8) and (9), title to the property located at 91-1849 Luahoana Street, Ewa Beach, Hawaii 96707, 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. All secured claims secured by the Debtor’s property in Ewa Beach will be paid by surrender of the collateral and foreclosure of the security interests.[8]
Section 1322(b)(9) states that a chapter 13 plan may “provide 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.”[9] The chapter 13 trustee objected to this plan on the basis that it did not conform to the requirements of the Bankruptcy Code.
The court confirmed the plan over the trustee’s objection. With regard to a secured claim, a chapter 13 plan needs to satisfy one of three requirements under § 1325(a)(5). The plan is confirmable if (1) the secured creditor accepts the plan (§ 1325(a)(5)(A)); (2) the debtor’s payments comply with the requirements for a “cramdown” (§ 1325(a)(5)(B)); or (3) the debtor surrenders the property (§ 1325(a)(5)(C)). Here, the cramdown scenario did not apply. Because the debtor sought to vest the property in the first mortgagee in addition to surrendering the property, the Rosa court held that the surrender option did not apply either. The plan needed to satisfy the acceptance requirement under the first option, § 1325(a)(5)(A), to be confirmed by the court.
While the Bankruptcy Code does not define acceptance, the bankruptcy court found that “the overwhelming majority of courts hold that a secured creditor’s failure to object to a chapter 13 plan constitutes acceptance.”[10] Where a creditor receives adequate notice of the plan, acceptance may be inferred from a failure to object.[11] In this case, the court noted that the vesting provision “[would] not obviate a foreclosure” and that the first mortgagee would become liable for the HOA fees. However, these considerations were insufficient to overcome the mortgagee’s lack of objection. The court proceeded to confirm the plan with the vesting provision proposed by the debtor.
PRACTICE IMPLICATIONS
The Rosa court correctly concluded that a chapter 13 plan which provides for the vesting of property in the mortgage holder under § 1322(b)(9) must nevertheless provide for proper treatment of the holder’s secured claim under one of the three options found in § 1325(a)(5). In Rosa the court found the secured creditor’s lack of objection satisfied the first option, but in other cases the secured creditor may object.
In that case, the debtor is best served by arguing that the third option applies, that the debtor has surrendered the property. The Rosa court rejected application of this option because the debtor also proposed to vest the property in the holder. This part of the court’s decision though is not supported by the plain language of § 1325(a)(5), which deals only with the treatment of the secured creditor’s claim. The vesting provision under § 1322(b)(9) dealt with the property and should not have had any effect on whether the plan was confirmable with respect to the holder’s secured claim by providing for surrender under § 1325(a)(5)(C). In other words, the debtor’s plan in Rosashould have been confirmed even without a finding that the creditor had accepted the plan.
A chapter 13 plan provision under § 1322(b)(9) providing for the vesting of the property in the mortgage holder can be a workable solution to the zombie mortgage problem. Under Rosa, it can be done if the secured creditor consents or if there is implied acceptance of the provisions based on the creditor’s failure to object. Good arguments also can be made that such a plan can be confirmed over the creditor’s objection. As in Rosa, the plan should propose that the property will vest in the mortgage holder upon confirmation of the plan and that the confirmation order (or a separate order) will provide for conveyance of the property to the holder. This will provide the debtor with an order that can be recorded in the local land records office.
Copyright © 2014 National Consumer Law Center, Inc. All rights reserved.
[1] Siu Yan Chan is an Emory Law School Fellow at NCLC.
[2] 11 U.S.C. § 523(a)(16). See NCLC’s Consumer Bankruptcy Law and Practice, § 15.4.3.15.
[3] See Foster v. Double R. Ranch Ass’n (In re Foster), 435 B.R. 650, 661 (B.A.P. 9th Cir. 2010) (holding the debtor personally liable for post-petition HOA dues even after discharge “as long as he maintains his legal, equitable or possessory interest in the property”). In Foster, the debtor opted to remain in his home.
[4] E.g., In re Khan, 504 B.R. 409, 414 (Bankr. D. Md. 2014) (holding that debtor’s condominium assessments would continue post-discharge as an in rem obligation).But see In re Colon, 465 B.R. 657 (Bankr. D. Utah 2011) (holding post-petition HOA assessments dischargeable where debtors vacated the property and surrendered the property to the secured creditor).
[5] See, e.g., In re Ricketts, 2013 WL 6858941 (Bankr. D.N.H. Dec. 23, 2013) (debtor faced major expenses to remedy an easement violation); In re Ogunfiditimi, 2011 WL 2652371 (Bankr. D. Md. July 6, 2011) (debtor faced criminal prosecution for failure to maintain the property); In re Pigg, 453 B.R. 728 (Bankr. M.D. Tenn. 2011) (HOA fees and real estate taxes continued to accrue even after debtor was forced to move out of her home due to natural disaster).
[6] See, e.g., In re Canning, 706 F.3d 64 (1st Cir. 2013); In re Khan, 504 B.R. 409, 410 (Bankr. D. Md. 2014) (“[N]one of the secured creditors has gone forward with foreclosure, and Debtor cannot compel them to accept his surrender pursuant to 11 U.S.C. §1325(a)(5)(C).”); In re Arsenault, 456 B.R. 627, 629 (holding that the act of surrender does not require “the affirmative action of transferring title”); In re White, 282 B.R. 418 (Bankr. N.D. Ohio 2002) (finding that neither the court nor the debtor may “direct the means by which the secured creditor deals with the surrendered property”); In re Service, 155 B.R. 512, 514 (Bankr. E.D. Mo. 1993) (holding that absent the secured creditor’s consent, the debtors could not force the creditor to accept surrender to take title).
[7] 495 B.R. 522 (Bankr. D. Haw. 2013).
[8] In re Rosa, 495 B.R. 522, 523 (Bankr. D. Haw. 2013)
[9] 11 U.S.C. § 1322(b)(9) (emphasis added).
[10] In re Rosa, 495 B.R. at 524; see also United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 276 (2010) (a party that is notified of a plan’s contents and that fails to object is bound by the plan); In re Jones, 530 F.3d 1284, 1291 (10th Cir. 2008); Andrews v. Loheit (In re Andrews), 49 F.3d 1404, 1409 (9th Cir. 1995); In re Szostek, 886 F.2d 1405, 1413 (3d Cir. 1989); In re James, 260 B.R. 498, 503 (Bankr. D. Idaho 2001); In re Duggins, 263 B.R. 233, 236 (Bankr. C.D. Ill. 2001) (“[T]he debtor’s plan is an offer that is deemed accepted unless objected to prior confirmation.”); In re Walker, 128 B.R. 465, 468 (Bankr. D. Idaho 1991) (“The rule is, simply, that the acceptance of the provisions of a plan by a creditor is inferred from the absence of a timely objection.”).
[11] In re Rosa, 495 B.R. at 524; see also In re Harvey, 213 F.3d 318, 321 (7th Cir. 2000) (“It is a well-established principle of bankruptcy law that a party with adequate notice of a bankruptcy proceeding cannot ordinarily attack a confirmed plan.”); Great Lakes Higher Educ. Corp. v. Pardee (In re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999) (confirmation order final where secured creditor with notice of the plan failed to file an objection); In re Flynn, 402 B.R. 437, 444 (B.A.P 1st Cir. 2009) (“A secured creditor’s failure to object . . . will create a presumption of acceptance under § 1325(a)(5)(A) upon a showing of adequate notice . . . .”); In re Wegscheid, 361 B.R. 144, 148 (Bankr. D. Ariz. 2007) (“[A] failure to object after receipt of adequate notice must be regarded as acceptance of a Chapter 13 plan for purposes of § 1325(a)(5)(A).”); In re McLemore, 426 B.R. 728, 735 (Bankr. S.D. Ohio 2010) (“[A]bsent a timely objection and appeal, a confirmation order is res judicata and not subject to a collateral attack by a creditor who has received adequate notice of a plan.”); In re Deavila, 431 B.R. 178, 179 (Bankr. W.D. Mich. 2010) (citing Espinosa, supra note 5); In re Bryan, 357 B.R. 12, 21 (Bankr. N.D.N.Y. 2006); In re Montoya, 341 B.R. 41, 45 (Bankr. D. Utah 2006) (“[I]f a plan is properly noticed and otherwise meets the requirements of § 1325(a), the Court may deem a secured creditor’s silence to constitute acceptance of a plan and the plan may be confirmed.”).