Bank of N.Y. Mellon v. Watt
| Decision Date | 22 April 2015 |
| Docket Number | Case No. 3:14-CV-02051-AA |
| Court | U.S. District Court — District of Oregon |
| Parties | BANK OF NEW YORK MELLON, Appellant, v. NICOLAS LEE WATT & PATRICIA MOUDY WATT, Appellees. |
Crystal S. Chase
Oren B. Haker
Stoel Rives LLP
900 S.W. 5th Avenue, Suite 2600
Portland, Oregon 97204
Attorneys for appellant
Bank of New York Mellon
Michael D. O'Brien
Michael D. O'Brien & Associates PC
12909 S.W. 68th Parkway, Suite 160
Portland, Oregon 97223
Attorney for appellees
Nicolas and Patricia Watt
Britta E. Warren
Black Helterline, LLP
805 S.W. Broadway, Suite 1900
Portland, Oregon 97205
Attorney for appellees
Meritage Homeowners' Association
C. Anthony Crnic , III
Klatt, Augustine, Sayer, Treinen & Rastede, PC
6th Avenue, Suite 1015
Des Moines, Iowa 50309
Attorney for amicus curiae
American Legal and Financial Network
Bank of New York Mellon, as trustee for certificate holders of the CWALT, Inc., alternative loan trust 2006-OA21, mortgage pass-through certificates series 2006-OA21 ("BNYM"), appeals the bankruptcy court's confirmation of Nicolas and Patricia Watt's ("debtors") Chapter 13 plan. For the reasons set forth below, the bankruptcy court's decision is vacated and this case is remanded for further proceedings.
In November 2006, debtors took out a loan, in the amount of $296,940, to purchase a second residence in Newport, Oregon ("Property"), which is one of eighteen townhouse units within a planned community that is subject to a series of covenants and restrictions enforced by Meritage Homeowners' Association ("Meritage"). Excerpt of Record ("ER") 19-48, 70. Pursuant to this transaction, debtors executed a promissory note ("Note") in favor of Mortgage Trust, Inc. ("MTI"). ER 19-23, 39-48. The Note was secured by a deed of trust ("DOT"), which lists MTI as the lender, Western Title and Escrow as the trustee, and Mortgage Electronic Registration Systems, Inc. ("MERS"), as the beneficiary. ER 25-38. The DOT was duly recorded in Lincoln County, Oregon. ER 25.
In April 2012, MERS assigned MTI's interest in the DOT to BNYM. ER 50. This assignment was recorded in the official records of Lincoln County. Id. At some unspecified time in 2012, debtors stopped making the requisite loan repayments, thereby materially defaulting under the Note and DOT, such that BNYM commencedpreliminary foreclosure proceedings. ER 88-89, 122. Coterminous with or subsequent to that default, debtors incurred a significant amount of assessments leveraged by Meritage as a result of their failure to repair defective windows and pay homeowners' association ("HOA") fees. ER 70-72.
On March 12, 2014, debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code.1 ER 122. By operation of law, debtors' Chapter 13 petition stayed BNYM's foreclosure efforts. ER 122; 11 U.S.C. § 362. At that time, the Property was subject to several liens. Specifically, the DOT, held by BNYM,2 created a secured first-position lien on the Property; the total amount owing under the Note was greater than $346, 000. ER 71-72. Meritage's unpaid assessments and fines formed an automatic lien under Oregon law, subordinate to the DOT. ER 72; Or. Rev. Stat. § 94.709(1)(b).Further, Bank of America, N.A., possessed a $34,000 consensual lien. ER 72. Finally, Meritage held a judgment lien against the Property in the amount of $225,000. Id. As such, the value of the Property did not exceed the value of the secured claims. ER 71, 124.
On April 1, 2014, debtors proposed their initial plan, which advanced "selling the Property pursuant to 11 U.S.C. § 363(b)," as well as surrendering the Property to creditors with secured claims. ER 1-4. Meritage objected to this plan on the ground that it sought to discharge debtors' obligation to pay post-petition HOA assessments and fines.3 BNYM's Opening Br. 4-5 (citation omitted). On April 23, 2014, debtors amended their initial plan, but without addressing Meritage's objection. ER 5-9. As such, Meritage filed a substantively identical opposition to debtors' amended plan. BNYM's Opening Br. 5 (citation omitted).
On June 17, 2014, BNYM moved for relief from the automatic stay to enable it to pursue its remedies under the Note and DOT. ER 10-52. On June 30, 2014, debtors filed a second amended plan. ER 53-58. This plan no longer proposed the sale and surrender of the Property; instead, debtors added a nonstandard provision pursuant to which they planned to vest the Property in BNYM under 11 U.S.C. § 1322(b)(9) upon confirmation. ER 58. That same day, debtors filed a response to BNYM's motion for relief from stay, in which theyargued that the stay should remain in place in light of their second amended plan. ER 60.
On July 31, 2014, BNYM objected to the second amended plan on the grounds that confirmation thereof would force it to take title to the Property "subject to the junior liens [and] be obligated on the [post-petition HOA] dues and assessments." ER 65. In other words, BNYM asserted that 11 U.S.C. § 1325(a)(5) was the exclusive statutory provision concerning confirmation of Chapter 13 plans and that the requirements listed therein could not be enlarged by other provisions of the Bankruptcy Code, including 11 U.S.C. § 1322(b)(9). ER 64-68. On August 28, 2014, a hearing was held before the bankruptcy court, wherein BNYM reiterated its objection to debtors' second amended plan. ER 73-120.
On October 15, 2014, the bankruptcy court issued a memorandum opinion and order confirming the second amended plan and granting BNYM's motion for relief from stay. ER 121-33; see generally In re Watt, 520 B.R. 834 (Bankr.D.Or. 2014). The bankruptcy court first recognized that, "in this post-2007 world, debtors may find themselves in a position where lenders are reluctant to foreclose on their collateral [and, because] surrender alone does not divest them of ownership [,] [they] remain liable for post-petition HOA assessments." ER 125. Further, the bankruptcy court noted that 11 U.S.C. § 1322(b)(9) allowed a debtor to include a provision in a bankruptcy plan vesting the property of the estate in a secured creditor. ER 12 6. The bankruptcy court then acknowledged that two recent cases involving analogous circumstances - In re Rosa, 495B.R. 522 (Bankr.D.Haw. 2013), and In re Rose, 512 B.R. 790 (Bankr.W.D.N.C. 2014) - held that a secured party could not be required, against its will, to take title to property surrendered in a bankruptcy proceeding. ER 126-27.
Nevertheless, the bankruptcy court "s[aw] no prohibitions to allowing [d]ebtors to both surrender the Property and vest it" in BNYM:
I respectfully disagree with both the Rose and the Rosa courts [because they] took the position that § 1322(b) (9) could not be used to compel a lender to accept title to its collateral without its consent [but] nothing in the language of § 1322(b)(9) requires such consent. In the absence of such language, I find that a plan which provides for vesting of property in a secured lender at time of confirmation may be confirmed over the lender's objection. However, such a plan must still comply with the provisions of section 1325(a) (5) with respect to payment of secured claims . . .
In Rosa, the court held that the third standard - surrender - did not fully validate the debtor's plan, because the debtor proposed vesting in addition to surrender [but the Rosa court] failed to explain why the act of vesting eliminated surrender as a proper treatment of a secured claim. Nor do I see any reason why it would do so . . .
[BNYM] resists taking title and surrender but yet seeks relief from the automatic stay to foreclose at an undeterminative date with no commitment to moving forward. [BNYM] did not offer to waive its security and be treated as an unsecured creditor [thereby] creat[ing] a stalemate. This hurts more than [d]ebtors [and] Meritage. It affects all the homeowners in Meritage [pursuant to Or. Rev. Stat. §] 94.723.4
ER 127-30 (internal citations, brackets, and quotations omitted). Accordingly, the bankruptcy court approved the second amended plan, but ordered debtors to "amend [it] by interlineation to make clear that [they] are surrendering the Property and that entry of the Order has no effect on the relative priority or extent of the liens against the Property." ER 130. BNYM now appeals the bankruptcy court's decision. ER 134-41.
On appeal from the bankruptcy court, the district court independently reviews findings of fact for clear error, while conclusions of law are reviewed de novo. Barrientos v. Wells Fargo Bank, N.A., 633 F.3d 1186, 1188 (9th Cir. 2011) (citation omitted).
BNYM argues on appeal that the bankruptcy court erred as a matter of law in confirming debtors' Chapter 13 plan because it did not meet any of the three requisite criteria listed in 11 U.S.C. § 1325(a)(5). Conversely, debtors contend that "the substantive rights given to them by Congress under § 1322(b) are balanced with and not supplanted by the substantive obligations imposed on them by § 1325(a)," such that these provisions should be read together to allow the vesting of property in a non-consenting secured creditor. Debtors' Opening Br. 10.
The filing of a bankruptcy petition under Chapter 13 creates a bankruptcy estate comprised of all of the legal and equitable interests owned by the debtor as of the commencement date, pluscertain assets accrued post-commencement, until the case is closed, dismissed, or converted. 11 U.S.C. §§ 541, 1306. Following confirmation of a plan, the property of the estate "vests" to the debtor, typically free and clear of any claim or interest previously held by creditors. 11 U.S.C. § 1327. Nevertheless, where a Chapter 13 debtor owns real property that is encumbered during the post-petition period by HOA dues and fees, the debtor's liability for such dues and fees continues as long as he or she retains an interest in that property. In re Foster, 435 B.R. 650, 661-62 (B.A.P. 9th Cir. ...
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