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In re Sagendorph

United States District Court, D. Massachusetts

January 23, 2017

In re PAUL R. SAGENDORPH, II
v.
PAUL R. SAGENDORPH, II, Appellee. WELLS FARGO BANK, N.A., Appellant,

          MEMORANDUM AND ORDER REGARDING BANKRUPTCY APPEAL (Dkt. No. 1)

          MARK G. MASTROIANNI United States District Judge

         I. Introduction

         Paul Sagendorph (“Debtor”) is the debtor in a Chapter 13 bankruptcy proceeding. His amended Chapter 13 plan sought to vest title to certain property in one of his creditors, Wells Fargo Bank, N.A. (“Wells Fargo”). Wells Fargo objected to this provision of the plan, but the Bankruptcy Court overruled the objection and confirmed the plan based on the court's interpretation of the statutory provisions presently at issue. Wells Fargo has appealed the decision of the Bankruptcy Judge.

         II. Facts

         The facts in the record are undisputed. On July 30, 2014, Debtor filed a voluntary Chapter 13 petition. (See Dkt. No. 9, Bankruptcy Court Record (“Bankr. Rec.”) at 16-21.) On August 15, 2014, Debtor filed his initial reorganization plan. (Id. at 22-30.) The plan indicated Debtor owns three income-producing properties. (Id.) The plan provided that each of the mortgagees on the three properties would be paid in full through the surrender and vesting of title to each property. (Id. at 25.) Wells Fargo is the mortgagee of the income-producing property located at 51 Pleasant Street, Ware, Massachusetts. (Id.) The initial plan treated all of Wells Fargo's secured claims in the property identically. (See id.) The value of the property at issue is approximately $89, 000, (id. at 26), which is more than Wells Fargo's secured claim of $61, 498.99.[1] (Dkt. No. 14, Brief of Wells Fargo (“B. Wells Fargo”) at 2.) Wells Fargo did not consent to the vesting provision, and objected to the plan on that basis. (Bankr. Rec. at 34-35.) The Bankruptcy Court sustained the objection, but left open the possibility of confirming a plan with a vesting provision, and gave Debtor leave to file an amended plan addressing Wells Fargo's concerns. (See Id. at 72, 125.)

         On February 10, 2015, Debtor filed an amended plan still calling for title to the property to vest in Wells Fargo. (Id. at 73-83.) The amendment clarified Wells Fargo's mortgage was the only encumbrance on the property. (Id. at 76.) Over Wells Fargo's renewed objection, (id. at 87-88), the Bankruptcy Court confirmed the amended plan by order dated August 3, 2015. (Id. at 143-45.) The confirmation order treated Wells Fargo's claim as follows:

Debtor is surrendering the property located at 51 Pleasant Street, Ware, Massachusetts in full satisfaction of the secured claims. Wells [Fargo] will foreclose on the property in full satisfaction of the Mortgage, Note and any outstanding fees. Pursuant to [11 U.S.C.] §§ 1322(b)(8) and (9), title to the property located at 51 Pleasant Street, Ware, Massachusetts shall vest in Wells [Fargo], and/or any/all successors and/or assigns, upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Registry of Deeds.

(Id. at 144 (emphasis added).) Wells Fargo appealed the confirmation order to this court. (Id. at 147.)

         III. Standard of Review

         The Court reviews the Bankruptcy Court's legal determinations de novo. See In re Clifford, 255 B.R. 258, 263 (D. Mass. 2000). The Court reviews the Bankruptcy Court's factual findings for clear error. Id.

         IV. Background

         Wells Fargo brings this case under Chapter 13 of the federal Bankruptcy Code (“the Code”) to resolve a significant question of statutory interpretation. Chapter 13 regulates the reorganization of an individual debtor's arrearage. This is in contrast to Chapter 11, which generally pertains to the reorganization of business-related debt, and Chapter 7, which governs the process of liquidation. At issue is whether, in full satisfaction of a claim, a debtor may transfer title to collateral property to a secured creditor over the creditor's objection. The statutory provisions relevant to resolving this dispute are 11 U.S.C. §§ 1322(b)(8), 1322(b)(9), and 1325(a)(5)(C).

         Sections 1322 and 1325 establish, respectively, the content and methods of confirming a proposed reorganization plan. Section 1322(a) enumerates mandatory plan provisions, while section 1322(b) specifies the provisions permitted in a debtor's reorganization plan, any one or multiple of which a debtor may choose to include. See 11 U.S.C. §§ 1322(a)-(b). Subsection 1322(b)(9) in particular states a 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.” Section 1325 describes the standards for confirming a proposed reorganization plan. Subsection 1325(a)(5) enumerates three bases for approval. See Id. §§ 1325(a)(5)(A)-(C). If, with regard to a debtor's secured claim(s), any one of these bases applies, the proposed plan must be confirmed. See Id. § 1325(a) (stating plan “shall” be confirmed). A plan may not be confirmed unless it satisfies one of 1325(a)(5)'s conditions. See Bank of N.Y. Mellon v. Watt, No. 3:14-cv-02051-AA, 2015 WL 1879680, at *4 (D. Or. April 22, 2015). The first of these conditions, not relevant in this case, is acceptance. See Id. § 1325(a)(5)(A). Also grounds for confirmation is Chapter 13's “cramdown” provision, pursuant to which a debtor may retain collateral property by paying its replacement value. See Id. § 1325(a)(5)(B). Finally, and at issue here, is section 1325(a)(5)(C), which mandates confirmation if, with respect to the holder of a secured claim, “the debtor surrenders the property securing such claim to [its] holder.”

         The question presented is 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 of that property. In analyzing this question, the Court recounts in detail the Bankruptcy Court's holding, the reasoning behind its holding, and the parties' arguments. The result is a detailed accounting and analysis of the issues leading to this appeal. Given the importance of the issue at hand, the Court finds such an extended discussion appropriate.

         Bankruptcy Court Decision

         The Bankruptcy Court for the District of Massachusetts confirmed Debtor's proposed reorganization plan, whose terms vested collateral property in mortgagee Wells Fargo over the bank's objection. (See Bankr. Rec. at 123-34, 143-45.) As formulated by the court, the key inquiry was whether “[section] 1325(a)(5) occupies the field with respect to in-kind payment” of secured claims such that vesting under 1322(b)(9) “must yield to the provisions of that section.” (Id. at 127- 28.) The Bankruptcy Court ruled forced vesting in full satisfaction of a claim permissible so long as a plan is proposed in good faith and is “otherwise in compliance with the Code.” (Id. at 129.) See also 11 U.S.C. § 1325(a)(3) (“[T]he [bankruptcy] court shall confirm a plan if the plan has been proposed in good faith and not by any means forbidden by law.”). The court provided several rationales. It rejected the reasoning articulated in cases such as In re Tosi, which deemed “surrender” pursuant to 1325(a)(5)(C) and “vesting” pursuant to 1322(b)(9) mutually exclusive. 546 B.R. 487, 494 (Bankr. D. Mass. 2016); see also Id. (“A [reorganization] plan cannot . . . both [surrender and vest] while giving full and proper meaning to each term; and a plan that purports to do both at once must be denied confirmation as internally inconsistent.”). The Tosi court reasoned that because vesting is not surrender, vesting cannot, by definition, satisfy 1325(a)(5)(C)'s surrender requirement. As in Tosi, the Bankruptcy Court in this case recognized ‘surrender' and ‘vest' as distinct legal acts. (See Bankr. Rec. at 126-27, 130.) However, rather than treating these terms as mutually exclusive, the court emphasized the relationship between the two. (See Id. at 130 (finding forced vesting provisions confirmable because vesting under 1322(b)(9) “presupposes its surrender by the transferor”); see also id. (“Surrendering or ‘ceding possessory rights' . . . is a preliminary step in the process of transferring title.” (citation omitted)).) It concluded a debtor vesting property has necessarily surrendered it, thereby satisfying the stricture of 1325(a)(5)(C), and giving rise to a right to plan confirmation.

         In support of this interpretation, the Bankruptcy Court compared section 1322(b)(9) to what it considered an analogous provision in Chapter 11. (Id. at 131-32.) Under this provision, known familiarly as Chapter 11's “dirt-for-debt” provision, a forced vesting plan providing for the “transfer of all or any part of the property of the estate to one or more entities, ” and complying with all other applicable Code provisions may be confirmed. See 11 U.S.C. § 1123(a)(5)(B) (mandating “adequate means, ” such as transfer, for a plan's implementation); see also 11 U.S.C. § 1129(b)(2)(A)(iii) (allowing confirmation of a plan rejected by a creditor so long as the creditor receives the “indubitable equivalent” of its claim). This protects “what is really at stake in secured credit: repayment of principal and the time value of money.” In re Pac. Lumber Co., 584 F.3d 229, 246 (5th Cir. 2009). This in turn safeguards creditors' rightful contractual expectations. Because applying the indubitable equivalence principle in the Chapter 13 context serves both debtors' and creditors' interests in the same way, the Bankruptcy Court rationally applied this standard to the Chapter 13 plan at issue. The court further noted such a reading harmonizes the remedies available ...


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