HSBC Bank United States, N.A. v. Zair

HSBC BANK USA, N.A., Appellant, v. RAYMOND E. ZAIR, CHRISTINE M. ZAIR, and MARIANNE DEROSA, TRUSTEE, Appellees.

15-cv-4958 (ADS)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

April 12, 2016

MEMORANDUM OF DECISION AND ORDER

APPEARANCES:

McCabe Weisberg & Conway, PC

Attorneys for the Appellant

145 Huguenot Street, Suite 210

New Rochelle, NY 10801

By: Irene M. Costello, Esq.

Charles A. Higgs, Esq., Of Counsel

Ronald D. Weiss, P.C.

Co-Counsel for the Appellees Raymond E. Zair and Christine M. Zair

734 Walt Whitman Road

Melville, NY 11747

By: Nathan Z. Kaufman, Esq., Of Counsel

Eugene R. Wedoff, Esq.

Co-Counsel for the Appellees Raymond E. Zair and Christine M. Zair

144 N. Elmwood Avenue

Oak Park, IL 60302

Krista M. Preuss, Esq.

Attorney for Appellee Marianne DeRosa, Trustee

115 Eileen Way, Suite 105

Syosset, NY 11791

SPATT, District Judge:

When a debtor files for Chapter 13 bankruptcy protection, the United States Bankruptcy Code strictly regulates the manner in which the debtor's secured creditors are repaid. In particular, under the provisions of 11 U.S.C. § 1325(a)(5), a repayment plan is only confirmable if, with respect to each secured creditor, one of the following is true: (1) the creditor consents to the plan, id. § 1325(a)(5)(A); (2) the plan provides for the creditor to retain his security interest in his collateral and receive periodic payments equaling the present value of the collateral, id. § 1325(a)(5)(B); or (3) the debtor agrees to surrender the collateral so that the creditor may pursue any legal remedies he may have, id. § 1325(a)(5)(C).

These are the exclusive methods of repaying a secured creditor, and a proposed Chapter 13 plan which, as to each secured claim, does not satisfy one of these three requirements, cannot be confirmed, even if the plan complies with the Bankruptcy Code in all other respects.

Against this backdrop, the present case calls for the Court to enter an ongoing debate over the answer to the following question: Is the surrender option found in § 1325(a)(5)(C) satisfied by a Chapter 13 plan that purports to "vest" title to collateral in a secured creditor pursuant to § 1322(b)(9) over that creditor's objection? Posed differently, can a confirmable Chapter 13 plan both "vest" title to real property and "surrender" that property to a common secured lender? If so, can the creditor refuse to accept the vesting in satisfaction of its claim? Can a court nevertheless compel the transfer over the creditor's objection?

In this case, confronted with an apparent division in the relevant caselaw, the United States Bankruptcy Court for the Eastern District of New York (Trust, J.) (the "Bankruptcy Court") on August 13, 2015 confirmed the Chapter 13 plan (the "Plan") of the Appellees Raymond E. Zair and Christine M. Zair (together, the "Debtors"), which provided that: (i) certain real property of the Debtors, which secured a mortgage loan issued by the Appellant HSBC Bank USA, N.A. ("HSBC" or the "Bank"), would be surrendered to the Bank in satisfaction of its secured claim pursuant to § 1325(a)(5)(C); and (ii) over the Bank's objection, title to the property would also vest in the Bank pursuant to § 1322(b)(9), thereby divesting the Debtors of their interest in the property, and creating a present possessory ownership interest in HSBC.

On August 24, 2015, the Bank appealed from the Bankruptcy Court's decision, arguing principally that, with respect to a common secured lender, the legal concepts of "surrender" and "vesting" are inherently incompatible. Thus, to the extent the Debtors' Plan in this case provided for both; and because the Plan did not satisfy any of the other requirements for plan confirmation found in § 1325(a)(5); the Bankruptcy Court erred in determining that the Plan was confirmable. For the reasons that follow, this Court agrees, and finds that the weight of persuasive authority supports a finding that a secured creditor's rights under § 1325(a)(5) are impermissibly compromised by a Chapter 13 plan that provides for non-consensual vesting under § 1322(b)(9).

Thus, the Court reverses the underlying decision of the Bankruptcy Court; vacates the subject confirmation order; and remands this matter for further proceedings consistent with this Opinion.

I. Background

Unless otherwise noted, the following facts are drawn from the underlying order of the Bankruptcy Court, see In re Zair, 535 B.R. 15 (Bankr. E.D.N.Y. 2015) ("Zair I"), and are not in dispute.

In October 2013, Superstorm Sandy destroyed the principal residence of the Debtors, located at 88 Nebraska Street in Long Beach (the "Long Beach Residence"). Due to the storm damage, the Debtors moved to a new home in Melville, and did not return to the Long Beach Residence.

On or about September 30, 2014, the Debtors filed for Chapter 13 bankruptcy protection. Schedule "A" to their bankruptcy petition, which relates to real property in the bankruptcy estate, identified the vacant Long Beach Residence as having a value of $255,000, and as being encumbered by two mortgages. The first-priority mortgage was held by HSBC and had an outstanding balance of $387,185.41. A junior mortgage was held by Bank of America, N.A. ("Bank of America") and had an outstanding balance of $30,437.51.

On or about November 26, 2014, HSBC filed a proof of claim in the amount of $440,380.68, representing the principal unpaid balance on its mortgage, plus interest, fees and pre-petition arrearages. Bank of America, through its servicingagent, Green Tree Servicing LLC, also filed a proof of claim for the amount due on its mortgage.

On April 27, 2015, the Debtors filed and served a second amended Chapter 13 plan (previously defined as the "Plan"), which is at issue in this appeal. As described by the Bankruptcy Court, the Plan provided, in relevant part, that: (i) the Debtors would surrender the Long Beach Property to HSBC in full satisfaction of the secured portion of the Bank's mortgage loan; (ii) to the extent that the outstanding balance on the Bank's loan exceeded the value of the Long Beach Residence, the Bank would have thirty days to file an unsecured deficiency claim; and (iii) upon confirmation of the Plan, title to the Long Beach Residence would vest in the Bank. See Zair I, 535 B.R. at 17 (quoting Plan ¶¶ 2, 7).

The Debtors and the assigned Chapter 13 Trustee Marianne DeRosa (the "Trustee") supported confirmation of the Plan. However, HSBC objected, arguing, as it does here, that, although the Long Beach Residence can and should be surrendered under § 1325(a)(5)(C), so that the Bank may pursue state foreclosure proceedings as it deems appropriate, it would be improper to transfer title to the Long Beach Residence - and all of the concomitant carrying costs - to the Bank without its consent. In this regard, the Bank contends that the Plan is legally untenable because the concepts of surrender and vesting cannot coexist relative to a common piece of secured property.

The Bankruptcy Court disagreed with the Bank's position, and held that "while surrender and vesting are different, they are not mutually exclusive, and theBankruptcy Code's plain language permits a debtor to deploy both options in a plan." Id. at 21. As noted above, HSBC appealed the Bankruptcy Court's decision to this Court.

II. Discussion

A. The Standard of Review

This Court is vested with appellate jurisdiction over "final judgments, orders, and decrees" of the Bankruptcy Court. See 28 U.S.C. § 158(a); see also Fed. R. Bankr. P. 8013; KLG Gates LLP v. Brown, 506 B.R. 177, 189 (E.D.N.Y. 2014) (Spatt, J.). The Court reviews the Bankruptcy Court's legal conclusions, including determinations on matters of statutory construction, de novo. See In re Bethlehem Steel Corp., 02-cv-2854, 2003 U.S. Dist. LEXIS 12909, at *20 (S.D.N.Y. 2003) (citing In re Air Crash Off Long Island, New York, 209 F.3d 200, 202 (2d Cir. 2000)).

B. The Relevant Statutory Framework

As noted above, two statutory provisions are at the heart of this appeal. The first is 11 U.S.C. § 1325(a)(5), which provides that, as to each secured creditor, a Chapter 13 plan may only be confirmed:

(1) when the secured creditor accepts the plan; (2) when the debtor surrenders the secured property; or (3) in an option known as a cramdown, when the debtor, over the creditor's objection, retains the secured property, "yet pay[s] only the present value of the collateral to the creditor . . . over the life of the plan," with "[t]he remaining balance of the debt [becoming] a general unsecured claim."

AmeriCredit Fin. Servs. v. Tompkins, 640 F.3d 753, 756 (2d Cir. 2010) (quoting Capital One Auto Finance v. Osborn, 515 F.3d 817, 820 (8th Cir. 2008)).

Thus, where, as here, "a secured creditor does not accept a debtor's Chapter 13 plan, the debtor has two options for handling allowed secured claims: surrender the collateral to the creditor, see § 1325(a)(5)(C); or, under the cram down option, keep the collateral over the creditor's objection and provide the creditor, over the life of the plan, with the equivalent of the present value of the collateral, see § 1325(a)(5)(B)." Assocs. Commer. Corp. v. Rash, 520 U.S. 953, 962, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997). This case involves the "surrender" option.

The second relevant Code provision is 11 U.S.C. § 1322(b)(9), which provides that "the plan may . . . provide for the vesting of property of the [bankruptcy] estate, on confirmation of the plan or at a later time, in the debtor or in any other entity."

Although the Bankruptcy Code does not define "surrender" or "vesting," the parties agree, and the law is well-settled, that these terms are not synonymous. For example, "surrender does not require the debtor to physically transfer the collateral to the secured creditor, [but] does require the debtor to make the collateral available to the secured creditor." In re Higley, 539 B.R. 445, 449 (Bankr. D. Vt. 2015); accord In re Williams, 542 B.R. 514, 518 (Bankr. D. Kan. 2015) (noting that "surrender...