In re Rose

512 B.R. 790

In re Jeffery Francis ROSE, Katherine A. Rose, Debtors.

No. 12–40743.

United States Bankruptcy Court,

W.D. North Carolina,

Shelby Division.

Signed July 8, 2014.

Wayne Sigmon, Sigmon & Henderson, PLLC, Gastonia, NC, for Debtors.

ORDER

J. CRAIG WHITLEY, Bankruptcy Judge.

THIS MATTER came before the Court on the Debtors' Motion for Authority to Transfer Real Property to Secured Creditor by Quitclaim Deed and Request for a Presumptive Non-base Fee, filed March 10, 2014. A hearing was held on March 28, 2014. Wayne Sigmon appeared on behalf of the Debtors, (the “Roses”), and Steven Tate appeared on behalf of the Chapter 13 Trustee. The secured creditor in question, the U.S. Small Business Administration (hereinafter, “SBA”), did not respond to the motion, nor did it appear at hearing.

The Roses' Motion asks permission to quitclaim their Residence to the SBA, without its consent. The Motion does not cite any authority to support this relief. Consequently, the parties were given the opportunity to file post-hearing briefs. Because such requests by consumer debtors are becoming more and more common in this district, the Court also invited amicus briefs. ¹

Having considered the arguments presented, the Roses' Motion is GRANTED IN PART, and DENIED IN PART.

FACTS

The Roses filed this Chapter 13 bankruptcy case on December 5, 2012. While the Roses currently reside in North Carolina, their Schedules disclosed joint ownership of an Arcadia, Florida residence (hereinafter, the “Residence”). The Residencehas a scheduled value of $30,000.00, and is subject to a mortgage debt in favor of the SBA of some $78,653.47.

The Roses' confirmed Chapter 13 plan provided for the surrender of the Residence to the SBA and granted relief from stay so that the lender might foreclose its mortgage. As of the hearing date on this current motion, now more than a year past confirmation of the Roses' plan,² the SBA has neither initiated foreclosure nor asserted control over the Residence. Meanwhile, the Roses find themselves subject to post-petition liabilities relating to the Residence, including ad valorum taxes and maintenance costs. Frustrated, the Roses have asked this Court for permission to quitclaim the Residence to the SBA.

As described below, nothing in the Code or Florida state law ³ compels a creditor to foreclose on a debtor's property or accept a quitclaim deed to the same. Nevertheless, under state law, and absent objection by SBA, the Roses may still be able to accomplish their goal. To that end, they will be authorized to tender a quitclaim deed to the SBA, and, potentially, record it.

DISCUSSION

I. Neither the Bankruptcy Code nor State Law Give this Court the Authority to Force a Creditor to Foreclose or Accept a Quitclaim Deed.

Several potential Code authorities have been suggested in the amicus briefs to justify a debtor transferring property by quitclaim deed to a secured creditor without the creditor's consent. For the reasons stated, none are availing.

A. Surrender of the Collateral Pursuant to 11 U.S.C. § 1325(a)(5)(C) does not Require a Creditor to Accept the Surrendered Property.

11 U.S.C. § 1325(a)(5)(C) provides that a Chapter 13 plan may be confirmed if, among other alternatives, “the debtor surrenders the property securing such claim to the holder.” The Roses' confirmed plan provides for surrender of the Residence to the SBA for foreclosure. Consistent therewith, the Roses have vacated the Residence and made it available to the SBA.

The suggestion has been made that this Plan provision supports a transfer of title to the lender without its consent; however, the weight of the case law is to the contrary. Section 1325(a)(5)(C) does not serve to pass ownership of the Residence to a lender; nor does it require the lender to foreclose its mortgage.

While “surrender” is not a defined term in the Code, it has a well defined meaning. “Surrender” has been described as the relinquishment of all rights in property, including the right to possess the collateral. IRS v. White (In re White), 487 F.3d 199, 205 (4th Cir.2007); 8 Collier on Bankruptcy ¶ 1325.06[4] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 2005).

Although “surrender” envisions a debtor relinquishing his or her rights in the collateral, there is no corresponding requirement that the lender to do anything with the property. See Pratt v. Gen. Motors Acceptance Corp. (In re Pratt), 462 F.3d 14, 18–19 (1st Cir.2006); Canning v. Beneficial Maine, Inc. et al. (In re Canning), 442 B.R. 165 (D.Me.2011); In re Arsenault, 456 B.R. 627 (Bankr.D.Ga.2011).

The limitations of a Section 1325 “surrender” were explored in the case of In re Arsenault, 456 B.R. 627. There, as here, the debtors' confirmed Chapter 13 plan surrendered Florida real property to the secured creditor. When the lender failed to foreclose or otherwise take responsibility for the property, the debtors sued, accusing the lender of a § 362 stay violation. In resolving that dispute, that bankruptcy court considered whether a “creditor can be compelled to take affirmative steps to accept surrendered collateral pursuant to 11 U.S.C. § 1325(a)(5)(C), and whether its failure to do so violates the automatic stay or confirmation order.” Id. at 629. It concluded that the creditor could not be so compelled.

Arsenault holds that a secured creditor is entitled to control its remedies; thus “a plan cannot require a secured creditor to accept a surrender of property or take possession of or title to it through repossession or foreclosure.” Id. at 630 ( quoting W. Homer Drake, Jr., Paul W. Bonapfel & Adam M. Goodman, Chapter 13 Practice and Procedure § 9C:9 at 682 (2010–11 ed.)) (additional citations omitted) (internal quotation marks omitted). While the creditor's failure to foreclose might leave the debtors with continued liabilities, these are by-products of property ownership. Id. at 631. Although the debtors prefer to walk away from the property, their desire does not justify shifting these burdens to the lender. As Arsenault explains, the Code does not authorize bankruptcy courts “to create substantive rights” not otherwise available under applicable statutes; nor does it “constitute a roving commission to do equity.” Id; accord, In re Landbank Equity Corp., 973 F.2d 265, 271 (4th Cir.1992).

Most courts that have considered the matter agree with Arsenault. As long as the secured creditor's actions do not “constitute a subterfuge intended to coerce payment of a discharged debt,” the “secured creditor ... has the prerogative to decide whether to accept or reject the surrendered collateral.” Canning, 706 F.3d at 69–70;see also In re Khan, 504 B.R. 409, 410 (Bankr.D.Md.2014) (noting that a debtor cannot force a secured creditor to accept proffered property); In re Brown, 477 B.R. 915, 917 (Bankr.S.D.Ga.2012) (finding no authority for court to require secured creditor to assume ownership obligations in property).⁴

Admittedly, two unpublished cases from our sister court in the Eastern District of North Carolina have permitted Chapter 13 debtors to surrender property by quitclaim deed to a mortgage lender absent consent. See In re Perry, No. 12–01633–8–RDD, 2012 WL 4795675, at *2 (Bankr.E.D.N.C. Oct. 9, 2012); In re Williams, No. 10–06243–8–SWH (Bankr.E.D.N.C. Jan. 30, 2014). However, it must be noted that these are unpublished decisions that do not identify a legal basis for their holdings. Notably, the lenders in these cases did not respond or defend against the motions. Thus, while pragmatic, Perry and Williams are of limited precedential value.

B. Vesting Under 11 U.S.C. § 1322(b)(9) does not Require a Creditor to Accept Title to Property.

Alternatively, it has been suggested that an encumbered property may be forced upon the lender under 11 U.S.C. § 1322(b)(9), which provides in relevant part:

(b) Subject to subsections (a) and (c) of this section, the plan may—

(9) 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.

Although § 1322(b)(9) contemplates that a plan may revest property in third parties, it does not state whether such relief can be imposed on a third party at the debtor's election. To date, only one published decision has ever read this Code section to require a lender to accept title to a property. See In re Rosa, 495 B.R. 522 (Bankr.D.Haw.2013). As discussed below in Section I.E., taking title by deed could impair a lender's rights in the collateral, subject it to ownership liabilities that it never would have voluntarily assumed, and contravene state property law. Consequently, this Court declines to adopt the Rosa interpretation of this statute.

C. 11 U.S.C. § 105 does not Allow Courts to Alter the Substantive Rights of Parties.

It has also been suggested that the power to require a lender to accept title to its collateral exists under the Bankruptcy Court's catch-all powers, as codified in 11 U.S.C. § 105(a). That provision declares that a bankruptcy court has the power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].”

While bankruptcy courts have fashioned relief under Section 105(a) in a wide variety of situations, this provision does not allow courts to alter the substantive rights of the parties. In re Landbank Equity Corp. 973 F.2d 265, 271 (4th Cir.1992). Rather, the powers granted by this section must be exercised in a manner consistent with the provisions of the Code and other applicable law. Id.;Petro v. Mishler, 276 F.3d 375, 377–378 (7th Cir.2002).

There is no published case law construing Section 105 to permit a debtor to transfer property to its mortgage lender by fiat. This decision will not be the first.

D. Florida Law Does not Require a Creditor to Initiate Foreclosure or Accept Title to Property.

As the Arsenault decision points out, under state law, a mortgage lender cannot be compelled to...