A fellow bankruptcy attorney recently posed an interesting question regarding a threatened foreclosure sale before the automatic stay is lifted in a Chapter 13 bankruptcy. Here is the exchange I had with her:
I just got an email from a Chapter 13 client who has a confirmation hearing on 8/21. She told me that auction.com just came by her house and posted a sign that her house is up for auction on 8/14. There has been no relief from the automatic stay issued in this case, nor has a motion for relief from the automatic stay been filed. When we filed the case in March, we stopped a foreclosure action and the client was going to try to save her home so we put the arrears and some IRS tax debt in the plan. Her original confirmation hearing was on 6/21 but the Chapter 13 Trustee’s office continued it to 8/21. In the interim she lost one of her jobs and decided that she would just surrender the home and pay the priority tax debt in the plan. We amended the plan indicating that she would be surrendering the home, but no arrangements have been made yet on the terms of the surrender.
Doesn’t the bank still need relief from the automatic stay to auction the house?
I. The Terms Of The Confirmed Plan Will Bind The Debtor
The Bankruptcy Code provides: “[T]he court shall confirm a plan if — . . . [for an] allowed secured claim provided for by the plan — . . . the debtor surrenders the property securing such claim to such holder . . .” 11 U.S.C. § 1325(a)(5)(c). Thus, your client is entitled to propose a plan in which she surrenders her home to the creditor holding the first mortgage. Once the Court confirms the plan, its provisions will “bind the debtor . . .” 11 U.S.C. § 1327(a), meaning that she will have to surrender the home.
II. Prior To Confirmation The Automatic Stay Protects The Debtor’s Home From Foreclosure
The Court has not confirmed the plan, so its terms are not yet binding on anyone, including your client. Therefore, since the confirmation hearing is scheduled for August 21, one week after the scheduled sale date, the creditor cannot appeal to the terms of the plan to justify the sale because the debtor won’t yet be bound by them. Instead, the creditor is bound by the automatic stay and, in the absence of an order lifting the stay, cannot conduct the sale prior to the plan being confirmed. If it sells the property on August 14, the sale will be void as a matter of law. See, e.g., In re Schwartz, 954 F. 2d 569, 571 (9th Cir. 1992) ( “. . . violations of the automatic stay are void . . .”). Since the creditor has received notice of the stay, the sale will constitute a willful violation of the stay (either under 11 U.S.C. § 362(a)(3), (4), (5), or some combination of them) and as such will be actionable under § 362(k).
III. Once The Court Confirms The Plan The Meaning Of The Term “Surrender” Will Be Crucial
If your client says she will surrender the property as part of the confirmed plan, then she will have to follow through on that commitment because the confirmed plan will bind her. “Surrender” is not defined in the Code. However, the following discussion may help:
Decisions construing § 1325(a)(5)(C), a provision containing identical language applicable in chapter 13 cases, reach a similar conclusion. In one of them, the Fourth Circuit noted that it was “clear enough that the `surrender’ spoken of [in § 1325(a)(5)(C)] entails the secured creditor ultimately holding all rights, including the right of possession, in the property securing the claim.” IRS v. White (In re White), 487 F.3d 199, 205 (4th Cir.2007). The court also advised that although the Code did not expressly define the term “surrender,” other legal and non-legal definitions of the term “focus on the complete relinquishment of rights.” Id. (citing Black’s Law Dictionary 1484 (8th ed.2005) (defining “surrender” as “yielding to another’s power or control” and “giving up of a right or claim”) and Merriam-Webster’s Collegiate Dictionary 1258 (11th ed.2003) (defining “surrender” as “the action of yielding one’s person or giving up the possession of something esp. into the power of another”)). Expressing the same view, other courts have explained that “[t]he term `surrender’ was contemplated by Congress to be a return of property and a relinquishing of possession or control to the holder of the claim.” In re Carter, 390 B.R. 648, 652 (Bankr. W.D. Mo. 2008) (citing In re Stone, 166 B.R. 621, 623 (Bankr. S.D. Tex. 1993)). See also Hosp. Auth. Credit Union v. Smith (In re Smith), 207 B.R. 26, 30 (Bankr. N.D. Ga. 1997) (observing that “[t]he operative phrase in section 1325(a)(5)(C) does not end with the word `property’ but continues with the words `to such holder,’ making it plain that a debtor must at least tender possession or control of the collateral to the creditor[.]”).
Based on the Gray-Bailey holding, it would appear that your client will not succeed in stopping a postconfirmation sale based on the lack of an order lifting the stay, since she will have no rights concerning the property. However, the ABI has a very thorough disquisition on “surrender” at http://materials.abi.org/sites/default/files/2011/Nov/SurrenderPropertyCh13.pdf that on page 10 of the PDF suggests otherwise:
Alternatively, can a debtor be compelled to immediately vacate a property and relinquish possession and control of property “surrendered” in a Chapter 13 Plan? Can a debtor be required to execute and deliver a deed to a creditor? Likely not.
i. Main St. Bank v. Hull, 2008 U.S. Dist. LEXIS 21815 (E.D. Mich. Mar. 20, 2008) – Chapter 7 case finding that the statement of intention indicating an intent to “surrender” did not affect the debtor’s substantive rights with respect to the property and the debtor did not have to execute a quit claim deed in favor of the creditor. The creditor must pursue its state law remedies to retake the collateral.
iii. But see In re Gray-Bailey, 427 B.R. 536, 539-40 (Bankr. D. Idaho 2010).
The obvious problem here is that Main St. Bank and Green Tree, the cases supporting the ABI’s position, are Chapter 7 cases, and the Chapter 7 statement of intention is not binding on anyone the way a confirmed Chapter 13 plan is; whereas Gray-Bailey is a Chapter 12 case, and 11 U.S.C. § 1227(a) closely parallels §1327(a).
IV. Once The Plan Is Confirmed The House May Be Sold Without Relief From Stay
Although the Court must grant relief from the stay for the bank to conduct its August 14 sale, if the Court confirms the plan on August 21, my understanding of the word “surrender” (based on Gray-Bailey) leads me to conclude that the bank can conduct the sale any time after that without obtaining such an order. Your client’s confirmed plan will have bound her to surrender the property without any time restriction. See, e.g., Associates Commercial Corp. v. Rash, 520 U.S. 953, 962 (1997) (emphasis added) (“When a debtor surrenders the property, a creditor obtains it immediately, and is free to sell it and reinvest the proceeds.”). If she fails to surrender immediately, she may be held in contempt of the order confirming the plan.
If you can convince your judge that “surrender” doesn’t require immediate surrender, your client may get more time. However, if the judge feels that surrender means what Gray-Bailey says it means, then I don’t see why the stay has to be lifted for the creditor to conduct the sale postconfirmation. In sum, if the confirmed plan commits your client to surrendering the property, she must make the property available to the creditor, without opposing the seizure or transfer of the home (In re Spencer, 457 B.R. 601, 612 (E.D. Mich. 2011).
Finally, we must fill in a conceptual lacuna in the preceding argument: Upon surrender of the property pursuant to the confirmed plan, the home ceases to be property of the debtor or of the bankruptcy estate. Therefore, based on § 362(c)(1) the stay terminates with respect to the property, so the creditor does not need to lift the stay postconfirmation to sell the property.
If you are a debtor facing overwhelming debt and need bankruptcy protection, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.