A recent ruling out of the First Circuit Court of Appeals found that GMAC violated a Chapter 7 Discharge Injunction when it refused to release a lien on an automobile unless the Debtors paid the pre-petition balance in full.
The Facts:
The Debtor purchased a 1994 Chevrolet Cavalier which was financed in part with a GMAC loan. Four years later, the Debtor and his spouse filed for protection under Chapter 13 in the US Bankruptcy Court for the District of Maine. A proof of claim filed by GMAC was allowed, and GMAC received approximately 1/3 of the amount in its proof of claim by the time the Debtors found the need to convert their case to Chapter 7.
When the Debtors converted their case, they gave notice on their Statement of Intention that they intended to “surrender” the Cavalier. GMAC then filed a motion for relief from stay seeking permission to pursue its rights under Maine state law. The court granted the motion. The Debtors continued to keep the car and they eventually received their Chapter 7 discharge, which had the effect of erasing all pre-petition obligations to GMAC. Apparently GMAC was not interested in repossessing the vehicle, because they did not think it was cost effective to do so.
In September 1999, the Debtors realized that the Chevy Cavalier was inoperable. Rather than pay to fix it, they opted to simply “junk” it. Under Maine law, salvage dealers require a release of lien. With this information, the Debtors repeatedly called GMAC and asked them to take the Cavalier or release the lien. GMAC’s response was basically “we aren’t doing anything until you pay us every penny owe us.”
The frustrated Debtors, who undoubtedly thought they were through with the bankruptcy process, filed a motion in the bankruptcy court to reopen their bankruptcy case. This would enable them to file an Adversary Proceeding in the bankruptcy court against GMAC. An Adversary Proceeding is a lawsuit within a bankruptcy proceeding the purpose of which is to litigate certain rights and obligations of the parties to the suit. In this case, the Debtors wanted to hold GMAC accountable for violating the Discharge Injunction.
While the case was reopened, the court eventually ruled in GMAC’s favor. The court found
(i) GMAC’s in rem right under Maine law to enforce its lien against the vehicle survived intact the chapter 7 discharge of the Pratts’ unsecured personal liability on the loan;
(ii) by Maine statute, a secured creditor has an unqualified right to refuse to release its lien until the loan balance is paid in full;
(iii) the GMAC refusal to release its lien did not coerce the Pratts to repay their discharged personal liability on the car loan, but simply invoked its legitimate in rem remedies as accorded under Maine law; and
(iv) the situation was no more coercive than had GMAC offered the Pratts a reaffirmation agreement whereby they could consent to repay both the secured and unsecured portions of the loan indebtedness.
Reaffirmation Agreements and Surrender
A reaffirmation agreement allows a debtor in bankruptcy to retain collateral and continue payment terms that are fair and acceptable to both parties. The agreement effectively takes the debt out of the bankruptcy – which is why they should not be entered into casually. But most important for these Debtors, the bankruptcy code expressly prohibits a debtor from being coerced into reaffirming a prepetition debt. The activity must be considered “objectively” coercive. In this case, the Debtors were not interested in reaffirming this debt. They declared their intent to “surrender” the collateral, and took no action to prevent its repossession.
Congress did not define the term “surrender”, so the Court refused to read more into the plain meaning of the word. For example, “surrender” does not mean “deliver.” The Court found it appropriate that if the Debtor’s have declared their intent to surrender the vehicle (which they did) and have made it available for surrender or repossession (which they did too), then the Debtors did all they needed to do.
Forceful Negotiations or Improper Coercion?
The Court noted that here is a fine line between what might be construed as a forceful negotiation and improper coercion. GMAC was resting its laurels on Maine law which allows it to refuse to release a lien until the outstanding balance on the loan is paid. But Maine law is superseded by federal law if federal law dictates a different result.
[E]ven legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a “fresh start” and are not unfairly coerced into repaying discharged prepetition debts.
The Holding
Based on the following:
1. That GMAC expressed that it was not going to repossess the vehicle because it was not “cost effective” to do so;
2. That GMAC conditioned the release of the lien on the payment of an outstanding balance that was covered by the Chapter 7 discharge injunction;
3. That these actions amounted to a demand for reaffirmation, but these actions did not comply with the anti-coercion provisions of the bankruptcy code; and
4. That the Debtors “were confronted with the grim prospect of retaining indefinite possession of a worthless vehicle unless they paid the GMAC loan balance, together with all the attendant costs of possessing, maintaining, insuring, and/or garaging the vehicle.”
The court held that GMAC violated the discharge injunction and the Debtors were entitled to damages.
This case affirms the strong policy behind the strict adherence to the Chapter 7 discharge. Curiously, GMAC did not think it was cost effective to repossess the vehicle. Undoubtedly, it would have been most cost effective to repossess the vehicle or release the lien, rather pay the legal fees and damages it now faces.
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In the state of MA, if you chose not to reaffirm your mortgage, can your lender legally(lenders if more than one mortgage) come after you at any point and repo your home? Or are you protected as long as you make your payments on time?
Bill Responds:
Sean, I think bankruptcy attorneys would agree that one need not expressly “reaffirm” a mortgage in bankruptcy as is contemplated by Section 524(c). While this should not be considered legal advice, and readers are reminded to get their own legal opinion from an attorney, I believe that so long as payments are current on the note, a lender may not foreclosure on a mortgage. -Bill