In re Thompson

• Decision Date: 14 February 2018
• Docket Number: Case No. 17–11318–MSH
• Citation: 581 B.R. 1
• Parties: IN RE: Claudia V. THOMPSON, Debtor
• Court: U.S. Bankruptcy Court — District of Massachusetts

581 B.R. 1

IN RE: Claudia V. THOMPSON, Debtor

Case No. 17–11318–MSH

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

Signed February 14, 2018

John F. Sommerstein, Esq., The Law Offices of John F. Sommerstein, Boston, Massachusetts, for the debtor, Claudia V. Thompson

Joseph M. Dolben, Esq., Marinosci Law Group, P.C., Warwick, Rhode Island, for creditor CIT Bank, N.A.

MEMORANDUM OF DECISION ON PLAN CONFIRMATION

Melvin S. Hoffman, U.S. Bankruptcy Judge

Claudia V. Thompson, the debtor in this case, filed a proposed chapter 13 plan on April 12, 2017, containing the following treatment of the secured claim of CIT Bank, N.A., holder of the first mortgage on her home in Malden, Massachusetts:

Debtor is surrendering the property located at 36 Nichols Road, Malden, MA to Creditor effective July 1, 2019. Creditor's interest will be adequately protected in the form of post petition payments commencing May 2017 in the amount of $1,460.00 per month which includes escrow for taxes and insurance. Additionally, the Debtor and her father, Rogelio Duff, the contractual obligor on the mortgage with CIT Bank have a pending modification application which they expect to be allowed [multi-sic].

CIT objected to the plan's treatment of its claim on the basis that a chapter 13 plan calling for a deferred surrender of collateral violates the provisions of the Bankruptcy Code.¹ Before me is CIT's request that I deny confirmation of Ms. Thompson's plan.

Ms. Thompson's position is that Bankruptcy Code § 1325(a)(5)(C) recognizes surrender as an appropriate method for treating a secured party's claim in a chapter 13 plan, that this Code provision contains no express directive as to when surrender must occur, and that deferred surrender is consistent with the letter and spirit of chapter 13 in which most plans, including hers, contemplate creditors' receiving their plan entitlements over an extended period of time. She explains that her ability to propose a feasible chapter 13 plan depends on her ability to remain in her home post-confirmation because her costs in mortgage payments and upkeep will be less than what she would have to pay to move and rent an apartment in the school district where her son attends high school. Ms. Thompson has tied the surrender date in her plan to her son's graduation, at which point she would presumably relocate to rental housing in a more affordable neighborhood.

In order to resolve the parties' dispute and determine whether Ms. Thompson's deferred surrender plan is confirmable under § 1325(a)(5)(C), it is necessary first to understand what surrender means in the context of bankruptcy. The Bankruptcy Code contains a number of relevant provisions.

Code § 521 lists the duties of an debtor when a bankruptcy case is filed. Under subsection (a)(2), an individual chapter 7 debtor is given three choices, and only three choices, for dealing with secured property—redeem the property from the secured creditor by way of a cash payment, reaffirm the debt to the secured party and pay it according to agreed-upon terms, or surrender the property.² See In re Burr , 160 F.3d 843, 844 (1st Cir. 1998). The chapter 7 debtor has 30 days from case commencement to formally declare her choice by filing a statement of intention under § 521(a)(2)(A) and 30 days from the first meeting of creditors to perform her choice under § 521(a)(2)(B).

Subsection (a)(6) of § 521 takes matters one step further when personal property secured by a purchase money security interest is involved.³ It provides for self-activating stay relief when an individual chapter 7 debtor fails to reaffirm or redeem within 45 days of the first meeting of creditors.

Finally, Code § 362(h) provides, with respect to personal property collateral, that a debtor's failure to reaffirm, redeem, or surrender within the time required by § 521(a)(2)(A) and (B) automatically terminates the stay and takes the property out of the bankruptcy estate.⁴

In chapter 13, a debtor owning encumbered property need not file a statement of intention, but instead must file a chapter 13 plan which accomplishes much the same thing. Bankruptcy Code § 1325(a)(5) is the practical equivalent of § 521(a)(2). It provides for plan confirmation if:

(5) with respect to each allowed secured claim provided for by the plan—(A) the holder of such claim has accepted the plan;

(B)

(i) the plan provides that—

(I) the holder of such claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

(iii) if—

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or

(C) the debtor surrenders the property securing such claim to such holder (emphasis added).

So while a chapter 7 debtor must promptly decide whether to redeem, reaffirm or surrender, a debtor in chapter 13 must propose a plan that either receives the secured creditor's acceptance or pays the creditor over the life of the plan the allowed amount of its secured claim, and if neither of those possibilities can be achieved, the debtor must surrender the property to the secured creditor.

Interestingly, while the Code is replete with requirements for surrendering property and the penalties for failing to do so, it nowhere defines the term surrender. The United States Court of Appeals for the First Circuit has defined surrender for purposes of § 521(a)(2) as the debtor's "agree[ing] to make the collateral available to the secured creditor—viz ., to cede his possessory rights in the collateral ..." In re Canning , 706 F.3d 64, 69 (1st Cir. 2013) (quoting In re Pratt , 462 F.3d 14, 19 (1st Cir. 2006) ). The Canning Court continued: "The secured creditor, however, has the prerogative to decide whether to accept or reject the surrendered collateral ..." Id. at 69–70. As a practical matter, therefore, until the secured creditor decides whether to accept or reject surrendered real estate collateral, something secured creditors often seem to have difficulty doing, debtors tend to stay put.

In response to the statutory and decisional authority, it has become the rule rather than the exception in chapter 7 consumer bankruptcy cases in this district for a debtor to state his intention to surrender a home and then do nothing further to effectuate surrender. Often he occupies the property (sometimes making current mortgage payments, sometimes not) until the mortgage lender takes steps to exercise its rights—typically by filing a motion for stay relief in order to foreclose and evict. Ms. Thompson's plan exemplifies how this reality has found its way into chapter 13.

Having assembled the necessary statutory and interpretive tools, all that remains is to deploy them to untangle the dialectical knot presented by Ms. Thompson's proposed chapter 13 plan. As indicated previously, the plan provides that the collateral securing CIT's claim will be surrendered effective July 1, 2019, and until that time Ms. Thompson will make regular monthly mortgage payments, including real estate taxes and insurance, to the bank. CIT objects.

Since CIT rejects Ms. Thompson's plan treatment, she cannot satisfy the first of her three options for achieving plan confirmation—the secured party's acceptance under Code § 1325(a)(5)(A). Further, her plan does not qualify for confirmation over CIT's objection under the second option, § 1325(a)(5)(B), requiring that CIT be provided over the life of the plan with property having a value, as of the effective date of the plan, not less than the allowed amount of its claim. That would require Ms. Thompson to pay CIT in full, including its substantial pre-petition arrearage, over the life of the plan, because as the holder of the first mortgage on Ms. Thompson's home, CIT's claim cannot be modified. See 11 U.S.C. § 1322(b)(2). If anything, under § 1325(a)(5)(B), the treatment of CIT's claim in Ms. Thompson's plan would appear to amount to a modification of its claim in violation of § 1322(b)(2).

That leaves the third option—surrender under § 1325(a)(5)(C) —the point of contention between Ms. Thompson and CIT. The structure of § 1325(a)(5) plays a critical role in understanding how to correctly apply the surrender option. Section 1325(a)(5) does not, as many might reflexively assume, contain a list of plan provisions for the permissible treatment of a secured party's claim. It contains a list of what a debtor must achieve in order to gain confirmation of a plan that treats a secured claim. Only § 1325(a)(5)(B) involves a plan provision. Subsections (A) and (C) of § 1325(a)(5) require the debtor to either obtain the lender's consent or surrender to the lender its collateral. These are actions, not plan provisions. Furthermore § 1325(a)(5)(C) is written in the present tense—"the debtor surrenders the property securing such claim to such holder." 11 U.S.C. § 1325 (emphasis added).⁵ Thus, under the statute's plain language, a surrender a year-and-a-half in the future is not a surrender under § 1325(a)(5)(C). As Judge Bailey of this court held in In re Tosi , 546 B.R. 487, 492 (Bankr. D. Mass. 2016) :

When the plan proposes that the debtor will retain the creditor's collateral for a period of time, the plan impairs the creditor's state law rights by preventing the creditor

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