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Presentation will focus on three major topic areas: Secured Creditors and Vehicles What actions can a secured creditor take upon the debtor s stated intention to surrender the vehicle? For what actions is stay relief needed? How much control over the vehicle is too much control? Payday Lending and Post-Petition Collections What actions are excepted from the automatic stay under 11 U.S.C. 362(b)(11)? Can electronic transfers fall within this exception? 2
Credit Reports and Creditors Responsibilities Post- Discharge Is a creditor obligated to correct a credit report that does not reflect the status of the discharged debt? If not, are there circumstances where a refusal to correct can nevertheless violate the discharge injunction? 3
11 U.S.C. 362(a) Enjoins creditors from taking certain actions (subject to exceptions found in 362): Commencement or continuation of a judicial proceeding against the debtor Enforcement of a judgment Acts to obtain possession or exercise control over property of the estate Acts to collect against a debtor on a pre-petition claim 4
A party injured by the willful violation of 11 U.S.C. 362(a) is entitled to recover: Actual damages Costs Attorneys Fees Punitive Damages (only under appropriate circumstances) 5
When a chapter 7 debtor owns a car subject to a perfected lien, he or she has to decide among three options Surrender the car to the secured lender Retain the car and redeem (by paying the remaining amount owing to the secured lender) Retain the car and enter into a reaffirmation agreement with the secured lender 6
There is technically a fourth option: retain the car and not enter into a reaffirmation agreement This option typically called the ride through option discharges the debtor from his or her personal obligation to pay the secured lender, but the vehicle remains collateral for the loan Debtor must still pay the loan as agreed or else risk repossession of the car 7
If the debtor checks the box to surrender the car, does the creditor need stay relief before taking possession? Yes; See In re Gibson, 218 B.R. 900 (Bankr. E.D. Ark. 1997). While surrender may be evidence of debtor s consent to stay relief, creditor still must obtain order from the court before repossessing the vehicle. 8
If the debtor surrenders the vehicle, must the creditor accept it? No; surrender requires assent of both parties. In re Pratt, 462 F.3d 14 (1st Cir. 2006). Creditor may refuse to surrender the vehicle where it is not cost effective to do so However, if creditor refuses to accept vehicle and refuses to release lien, such refusal could be held to violate the discharge injunction if the purpose was to coerce repayment 9
Can a creditor retain ownership of the vehicle to protect itself against a bankruptcy filing? In re Heien, 528 B.R. 901 (E.D. Mo. 2015). Debtor purchased a car from Autocenters Signed contract that required: (1) cash deposit of $1,000, (2) principal loan of more than $19,000, and (3) 18.69% interest rate Contract said it was assigned to financing company Debtor filed bankruptcy one week later, before assignment of contract from Autocenters to finance company Finance company refused assignment upon commencement of bankruptcy case 10
Autocenters demanded Debtor return vehicle, Debtor refused, so Autocenters filed for stay relief Autocenters filed a motion for stay relief, arguing that the vehicle was not property of the estate Produced a bailment agreement dated one day after the petition date Agreement said that Debtor acknowledged and agreed that until financing was approved by and assigned to financing company, Autocenters was allowing Debtor to use the car for convenience and that Autocenters continued to own the car until the loan assignment was complete 11
Judge Surratt-States denied the motion and Autocenters appealed to the district court District court affirmed UCC 2-401(1): Any retention or reservation by the seller of the title in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Court held that the reservation of title in the bailment agreement only granted Autocenters a security interest in the vehicle 12
Remote Monitoring Devices (aka Black Boxes): The use of remote monitoring devices on vehicles is becoming increasingly common with companies who finance purchasers with poor credit These devices will turn off the vehicle if the buyer defaults or will require a code to start the vehicle Also includes GPS monitoring so vehicle can be more easily repossessed What are a creditor s options for using these devices when a debtor commences a bankruptcy case? Does it make a difference if the device is used pre-petition? 13
In re Hampton, 319 B.R. 163 (Bankr. E.D. Ark. 2005) Creditor installed a device in the car prepetition that required the debtor to have a code to start the car. Debtor defaulted and creditor disabled device. Debtor filed bankruptcy and creditor would not provide code to the debtor to use the car postpetition. Court ruled that creditor violated automatic stay by keeping the device without making sure that debtor would be able to start car. Remote control over car is an exercise of control over property of the estate Would decision have been different if creditor had repossessed vehicle pre-petition? 14
Debtor borrows $1,000 from payday lender in exchange for a post-dated check in the amount of $1,400 that is dated after the debtor is scheduled to receive his or her paycheck Payday lender advances the $1,000 and holds the $1,400 check to be deposited on or after the check s date What are the lender s options if the debtor files bankruptcy during the gap between loan advance and presentation of check? 15
11 U.S.C. 362(b)(11): The automatic stay does not apply to the presentment of a negotiable instrument and the giving of notice of and protest of the dishonor of such instrument Under this exception, a lender may present a check for payment post-petition, even with knowledge of the bankruptcy filing Majority of courts have held that presentment alone is not a stay violation (See, e.g., Thomas v. Money Mart Fin. Servs. Inc. (In re Thomas), 311 B.R. 75 (Bankr. W.D. Mo. 2004) affd 428 F.3d 735 (8th Cir. 2005). 16
Does it make a difference if the check is presented after the debtor receives a discharge? Yes; See In re Kearns, 432 B.R. 276 (Bankr. D. Idaho 2010) In Kearns, debtor argued that creditor s presentment of check was an attempt to collect a discharged debt Under 3-305 of the UCC, the right to enforce a negotiable instrument is subject to a defense of the obligor based on discharge of the obligor in insolvency proceedings. 17
Court rejected debtor s argument because at the time the check was presented, the debtor had not been discharged so his debt was merely dischargeable. But presentment of instrument to collect discharged debt would violate discharge injunction 18
Do electronic transfers falls within the 362(b)(11) exception? Depends; In re Snowden, 422 B.R. 737, 743 (W.D. Wash. 2009). In Snowden, the debtor gave a post-dated check to the lender and filed bankruptcy during the gap period Lender used the information on the post-dated check to process and electronic funds transfer (EFT) from debtor s bank account Debtor brought stay violation action against lender 19
Lender argued that its transfer fell within the exception as a presentment of a negotiable instrument Court rejected lender s argument, holding that the EFT was not a negotiable instrument because the EFT was not a signed written instrument Court did say, in dicta, that under some circumstances, an EFT could constitute a presentment of a negotiable instrument, but it would necessarily have to specify the particular instrument 20
Is presentment of a check after debtor issues a stop-payment order a stay violation? Is presentment of a certified check covered under the exception? Can a lender exchange a check for a certified check? 21
Remember the distinction between the right to present the check and the right to retain the funds If the funds are property of the estate, the lender s retention of the funds is subject to an action by the trustee for an unauthorized post-petition transfer under 11 U.S.C. 549 In chapter 7, this turns on whether the funds in the account are pre-petition funds or postpetition funds 22
Often after a debtor has received a discharge in his or her bankruptcy case, the credit reports will still list debts that have been discharged Credit reporting services will often refuse to change the report unless they receive some authorization from the creditor to do so When debtor requests that the creditor work to change the report, is the refusal or failure to do so a violation of the discharge injunction? 23
In re Mahoney, 368 B.R. 579 (Bankr. D. Tex. 2007) Debtor received discharge of a debt, but credit report still listed the debt as delinquent Creditor refused to communicate with reporting service to change report Debtor brought an action for violation of the discharge injunction Court held that no violation occurs where a creditor refuses to correct the report, without any other conduct A credit report is merely a report of information about a debtor and is not an act to collect 24
Court said this could change if there was evidence that the creditor used the report as leverage to obtain repayment The main inquiry is whether the conduct has the practical, concrete effect of coercing payment of discharged debt In re Paul, 534 F.3d 1303 (10th Cir. 2008) What are a creditor s options for collecting a secured debt that was not reaffirmed in the bankruptcy case? 25
The debtor is no longer personally liable for the debt, but the property continues to secure repayment How can a creditor attempt to collect the debt without violating the discharge injunction? In re Henriquez, 536 B.R. 341(N.D. Ga. 2015) Debtor failed to reaffirm debt secured by his residence Creditor sent debtor several notices of non-payment and of loss mitigation options Each notice contained disclaimer that the letter was not an attempt to collect a discharged debt but was for informational purposes only 26
Court held that none of the letters had the objective effect of pressuring the debtor to pay the discharged debt because they each included a conspicuous bankruptcy disclaimer Can a creditor enforce a post-petition agreement to pay the debt? Venture Bank v. Lapides, 800 F.3d 442 (8th Cir. 2015) Creditor held a 3 rd -position mortgage on debtor s real property No reaffirmation agreement approved by the bankruptcy court and debtor received a discharge 27
Debtor and creditor entered into multiple change in terms agreements after the bankruptcy case closed These agreements extended the maturity date, but also included the debtor s promise to repay the debt When debtor defaulted, creditor brought action against debtor to enforce the debt and for a declaration that the modifications were enforceable Debtor removed case to bankruptcy court and counterclaimed for violation of the discharge injunction 28
Bankruptcy court held that agreements were not enforceable under state law and that debtor s postdischarge payments were made involuntarily At hearing, debtor testified that he made payment voluntarily Eighth Circuit affirmed the result, but held that the bankruptcy court erred in analyzing the agreements under state law Court held that the only way to reaffirm a debt is through a reaffirmation agreement that meets the requirements of 11 U.S.C. 524(c). 29
Court also looked at creditor s conduct in dangling the prospect of a potential refinance in front of the debtor as an inducement to sign the change in terms agreements as evidence that the debtor s post-petition payments were not voluntary This case is a good lesson for creditors to always obtain a reaffirmation agreement that is approved by the bankruptcy court prior to a debtor s discharge If no such agreement is obtained, then the creditor may accept voluntary post-discharge payments, but may not demand payment or request additional payments 30
Questions? 31