A recent trend among a handful of litigious debtor attorneys in our practice jurisdictions of Georgia, Tennessee, Alabama and Mississippi is the inclusion of “vesting provisions” in proposed Chapter 13 Plans. On multiple occasions, our firm has successfully defended against the confirmation of plans containing these almost hidden provisions. In each instance where our firm objected to a plan proposing to surrender the collateral and vest title in the secured creditor upon confirmation, opposing counsel agreed to remove the vesting provision from the plan prior to confirmation.
Savvy debtor attorneys have incorporated vesting provisions into their Chapter 13 Plans by adding a discrete, easily overlooked, seemingly innocuous, one-sentence special provision at the end of the plan stating that, upon confirmation of the plan, surrendered property will vest in lienholder. There is no mention of vesting in the section of the plan that surrenders the property or addresses secured claims, nor is there any bold font, asterisks, italics, or anything else that would call attention to this small sentence at the end of the plan that must often be overlooked as boiler plate language. And, instead of listing the property address, creditor name, or any other identifying information, the provision simply identifies the creditor as lienholder, noteholder, or some similarly nonspecific identifier. There is an argument to be made that by failing to identify a specific creditor or describe the collateral, the vesting provision is intended to be overlooked and also does not provide sufficient notice to any of the creditors in debtor’s bankruptcy case of debtor’s intent to vest the property out of the debtor.
The main reason a creditor should object to a Chapter 13 Plan that contains a vesting provision is that the proposed treatment, i.e., surrendering the property and vesting title in the creditor upon confirmation, potentially imposes excessive liability upon the creditor. If a Chapter 13 Plan is confirmed with a vesting provision, the creditor could be held liable for any damage to the property incurred between the time of plan confirmation and foreclosure. Such proposed treatment is unfair to the creditor but will be allowed as a term of the confirmed plan unless disputed via an objection. Additionally, another argument to be made against vesting provisions is that they are merely debtors’ attempts to improperly circumvent state law. Debtors’ plans have cited 11 U.S.C. § 1322(b)(9) as authority allowing the plan to vest title in creditor upon confirmation. However, as discussed below, this argument has been to no avail.
There are two specific cases cited in our Plan Objections due to vesting provisions. There is no binding legal authority in any state in which we practice, but the two cases discussed below are on point legal authority for this issue and they both have helped support our clients’ position in each instance thus far.
In In re Rosa, 495 B.R. 522 (D. Hawaii, 2013), the court held that the Debtor’s plan, which proposed surrendering property and vesting it in the first mortgagee, could be confirmed. Although the Rosa court interprets 11 U.S.C. § 1322(b)(9) as permitting the inclusion of a nonstandard provision which vests, i.e., transfers ownership, to a third party, the court emphasizes that the plan can be confirmed over the Chapter 13 Trustee’s objection only because the first mortgagee failed to object. Id.
Contrary to the holding in In re Rosa, a North Carolina court unequivocally “[…] decline[d] to adopt the Rosa interpretation of [11 U.S.C. § 1322(b)(9)].” See In In re Rose, 512 B.R. 790 (W.D. North Carolina, 2014). The Rose court sustained a creditor’s objection to a Debtor’s motion seeking to unilaterally quitclaim a residence back to the creditor. The Rose court further held that “[…] the section of the Code providing for vesting of estate property does not require a creditor to accept title to property.” Id.
Vesting provisions have proven to be a growing trend, but when properly identified and objected to by the creditor, debtor attorneys have backed down. Overall there is little to no law solidly in support of allowing vesting provisions over a creditor’s objection. We continue to carefully review plans for vesting provisions, but we have yet to encounter a debtor who wants the matter to be heard by the judge. Until that time, the future or effectiveness of vesting provisions in plans, when properly objected to by the affected creditor, reminds largely unknown.