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Consumer bankruptcy developments
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Bankruptcy courts remaining the most active vehicle for interpretation.
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Bankruptcy courts remain the most active vehicle for interpretation of creditors' and debtors' rights in the United States. The filing of a consumer bankruptcy petition may bring before the judge a need to decide almost any kind of commercial or consumer law issue, as well as other issues that commonly arise outside of bankruptcy. The issues may include such things as the validity and perfection of security interests, consumer compliance issues, state and federal exemptions, and the valuation of collateral, in addition to the ever-present bankruptcy law issues. (1) Furthermore, the filing of a bankruptcy petition adds issues unique to bankruptcy cases, such as the automatic stay, the dischargeability of debts, and what constitutes property of the bankruptcy estate. For example, in the past year appellate courts have rendered opinions on:
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* sending post-discharge accounting statements to the debtor
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* whether state law redemption periods with respect to real property are stayed in bankruptcy
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* whether (or when) a creditor becomes the owner of a repossessed vehicle
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* whether an agreed judgment makes an otherwise non-dischargeable debt subject to discharge
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* discriminatory treatment by employers and governmental units
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* Chapter 13 interest rates
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* the binding effect of Chapter 13 plans and discharge orders
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* the Chapter 13 plan as a federally created security agreement
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* student loans and the hardship discharge.
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As always, the sheer volume of bankruptcy cases means that there are a great number of decisions and issues which are not covered in this survey, including a large number of matters considered only at the trial level. We have tried to select bankruptcy cases of interest which have received attention from circuit courts and the U.S. Supreme Court. These cases reflect the diversity of issues noted above, but space limitations require a primary focus on traditional bankruptcy issues including the automatic stay, property of the estate, discriminatory treatment, and Chapter 13 cram downs.
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Courts interpreting bankruptcy law have used the automatic stay, as set forth in section 362 of the Bankruptcy Code, (2) not only as a shield to provide breathing room for debtors in bankruptcy, bringing all issues affecting administration of the property of the debtor's estate (3) into the bankruptcy arena, but also as a weapon to punish parties seeking to gain undue advantage. Often, the most egregious stay violations have resulted in punitive damage rewards. Foremost examples of such behavior include efforts to collect debts or to foreclose collateral after the automatic stay imposed by the filing of a bankruptcy case, whether voluntary (4) or involuntary. (5) Last year, circuit courts considered: (i) the effect of the automatic stay in delaying litigation
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In Spierer v. Federated Department Stores, Inc. (In re Federated Department Stores, Inc.), (6) the bankruptcy court stayed state court toxic tort litigation against the debtor in hopes that a global settlement could be reached through non-binding arbitration. (7) State court plaintiffs challenged the ruling. The stay was eventually lifted when it became clear that no global settlement would be reached. The state court plaintiffs then argued that they were injured by the imposition of the stay and its commensurate delays.
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The U.S. Court of Appeals for the Sixth Circuit ruled that the bankruptcy restriction on the state court plaintiffs was minimal and that "the power to stay other pending litigation involving the debtors or the estate is within the bankruptcy court's constitutional jurisdiction." (8) The nonbinding arbitration did not resolve the state court litigation, but only affected its timing. The decisions of the bankruptcy court were affirmed. (9)
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In Commodore Holdings, Inc. v. Exxon Mobil Corp., (10) the U.S. Court of Appeals for the Eleventh Circuit considered the culpability of a debt participant in connection with the stay violations of a co-participant. Esso Nederland B.V. ("Esso") held a claim against the debtor for products provided pre-bankruptcy. Esso assigned this claim to Pied Rich B.V. ("Pied Rich"), who then filed a post-bankruptcy arrest and lien on a cruise ship owned by the debtor and securing the assigned claim. The debtor filed a motion for contempt and sanctions against Esso and other creditors for violation of the automatic stay.
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The Eleventh Circuit found that, although Esso retained a portion of the debt after assignment to Pied Rich, Esso took no part in the collection efforts that violated the automatic stay, did not take any action to advise Pied Rich, and did not assist or request Pied Rich to engage in the collection efforts. (11) Therefore, Esso could not be held in contempt or subjected to sanctions. (12)
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The U.S. Court of Appeals for the Ninth Circuit, in Eskanos & Adler, P.C. v. Leetien, (13) addressed for the first time whether the automatic stay imposes an affirmative duty to dismiss a creditor's collection action rather than simply arresting the continued pursuit of a post-petition collection lawsuit. (14) The debtor filed a Chapter 7 bankruptcy petition on August 18, 2000, and the creditor was notified by mail on August 23, 2000. On August 28, 2000 the appellant, a law firm, filed a state court collection action against the debtor on behalf of the creditor. The debtor was served with the state court summons on September 5, 2000, and on September 6, 2000 the debtor's bankruptcy lawyer called the law firm and spoke with a legal assistant, notifying the assistant that the debtor had filed bankruptcy. The same day, the debtor's bankruptcy lawyer sent two faxes to the law firm requesting dismissal or stay of the state court action by September 20, 2000. The law firm did not dismiss the suit until September 29, 2000 without an explanation as to the delay.
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In its defense, the law firm contended that the Bankruptcy Code, although staying post-petition actions, did not impose an affirmative duty to dismiss, and further that the debtor had not suffered damages. The Ninth Circuit held that Bankruptcy Code section 362(a) imposes an affirmative duty to discontinue collection actions, and that by its delay the law firm (and the creditor) violated that duty. (15) The court also found that sanctions were appropriate pursuant to Bankruptcy Code section 362(h) because the law firm "willfully violated the automatic stay by maintaining the active collection action and unjustifiably delaying its dismissal after receiving notice of the bankruptcy petition." (16) In addition, the court rejected the notion that because of its size, the principal creditor in the case had not noted the fact of the debtor's bankruptcy petition until it was input into its computer system on September 12, 2000. (17) Essentially, the Ninth Circuit appears to have imposed a duty of minimum due diligence on both the creditor and its law firm, coupled with an affirmative duty to immediately dismiss a post-petition lawsuit, regardless of whether that lawsuit was being actively pursued or caused injury. It is an instructive, and perhaps surprising, decision, particularly for those who might believe that a nine-day delay in dismissing a law suit seems inherently reasonable.
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In Bartucci v. O'Neil, (18) the debtor and creditor (Mr. Bartucci) lived together until she evicted him, allegedly for being violent. When the relationship ended, Mr. Bartucci moved away, leaving behind approximately $20,000 worth of vintage musical instruments. When Mr. Bartucci later returned, the debtor refused to return the instruments. Mr. Bartucci initiated a state court conversion and tortious interference action that was stayed by the debtor's subsequent Chapter 13 bankruptcy petition. Mr. Bartucci then moved for relief from the stay to pursue his claims based on a Bankruptcy Code section 362(d)(2) theory: that the stay did not apply because the debtor had no equity in the instruments and the instruments were not necessary for an effective reorganization. The bankruptcy court denied the motion because the creditor's debt could be dealt with within the bankruptcy. (19) Essentially the lower court seemed to indicate that the plan of reorganization would provide for Mr. Bartucci's claim, although no debt was asserted by Mr. Bartucci. Rather, Mr. Bartucci asserted that he owned the instruments and there was no equity interest of the debtor. The U.S. Court of Appeals for the Third Circuit indicated that Mr. Bartucci, the party requesting relief under Bankruptcy Code section 362(d), satisfied his burden of proof on the issue of the debtor's equity in the property. (20) The debtor, on the other hand, failed to carry her burden of proof on the issue of whether the instruments were necessary to her effective reorganization. "Only in cases where the court finds that the property is necessary to an effective reorganization, is it necessary to consider the first ground for relief from the stay-the adequacy of protection of the secured party seeking relief." (21) The Third Circuit thus remanded for the bankruptcy court to consider the creditor's section 362(d)(2) argument. (22)
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EXTENT OF STAY/PROPERTY OF THE ESTATE
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In Tax 58 v. Froehle (In re Froehle), the Bankruptcy Appellate Panel (BAP) for the Eighth Circuit reversed the bankruptcy court, holding that when a bankruptcy petition is filed after a tax sale of real estate it is only the right of redemption and not the property itself which passes to the bankruptcy estate. (23) Moreover, the automatic stay does nothing to toll the time period for expiration of the redemptive period. (24) The debtor's failure to tender a lump sum before the redemption period expired precluded treatment of the tax claim under the Chapter 13 plan. (25)
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The Eighth Circuit BAP, quoting from Johnson v. First National Bank of Montevideo, (26) recited that the Eighth Circuit has "expressly disagreed with those courts which have held that an automatic transfer of property, following the expiration of a period of redemption, constitutes either an 'act' or 'proceeding,' or the 'enforcement' of a right, within the meaning of [Bankruptcy Code section] 362(a)." (27) Congress in passing section 362 specifically listed affirmative acts which are stayed, yet failed "to use terms which appropriately describe the suspension or extension of a statutory time period." (28) The Eighth Circuit BAP noted, however, that if an affirmative act is required by applicable state law in order to transfer the property at the expiration of the redemption period, that act would in all probability be stayed. (29) In the case before the BAP, Iowa redemption statutes required that the holder of a certificate of purchase (issued at a tax sale) serve a notice of redemption on all parties holding an interest in the subject property notifying the parties that the right of redemption will expire in ninety days. (30) At the expiration of the ninety day period a deed is issued by the county treasurer to the holder of the redemption certificate, if redemption has not been exercised. (31) The making and recording of the deed to the new owner were not the sort of affirmative acts Congress intended to stay.
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The U.S. Court of Appeals for the Second Circuit, in Rodgers v. County of Monroe (In re Rodgers), determined that a deed delivered and recorded post-petition but relating to a prepetition foreclosure sale was not avoidable. (32) Under New York law, a prepetition tax foreclosure sale extinguished the debtor's legal and equitable interests notwithstanding that the deed was delivered and recorded by the purchaser after the bankruptcy petition was filed. (33) The Second Circuit distinguished United States v. Whiting Pools, Inc., (34) which stated that: "Congress intended to exclude from the estate property of others in which the debtor had some minor interest such as a lien or bare legal title." (35) "Because Rodgers lost her legal and equitable interests in the property by virtue of the foreclosure sale, the property did not become property of the estate when the bankruptcy petition was filed." (36)
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ANNULLING THE STAY AND POST-PETITION TRANSFERS
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Value T Sales, Inc. v. Mitchell (In re Mitchell) (37) and Fjeldsted v. Lien (In re Fjeldsted) (38) each held that the post-petition sale of real estate to a good faith purchaser under Bankruptcy Code section 549(c) is not an exception to the automatic stay. (39) Section 549(c) of the Bankruptcy Code provides that a trustee may not avoid a transfer of real property to a good faith purchaser paying fair and equivalent value and having no knowledge of the bankruptcy filing. (40) In Fjeldsted, a foreclosure sale of the debtor's home was scheduled for 11:00 A.M., but was postponed to 1:00 P.M. when the debtor filed a Chapter 13 petition at 10:11 A.M. Lien was the successful bidder and claimed good faith purchaser status, asserting that he did not know the reason for the adjournment from 11:00 A.M. until 1:00 P.M. Rather than merely seeking relief from the stay, Lien sought to "annul" the stay, as annulment is retroactive while relief is prospective only. The Ninth Circuit BAP refused to uphold the lower court's annulment of the stay, indicating that a balancing of the equities is the proper standard for annulment, rather than "extreme circumstances." (41) Annulment, for example, may be proper in the case of a repeat or serial filer, but not necessarily in order to protect a bona fide purchaser, without more. Because the bankruptcy court did not balance the equities, but relied entirely on Lien's bona fide purchaser status under section 549(c) as the basis for annulling the stay, the bankruptcy court's order was in error. (42) The Ninth Circuit BAP also ruled in Fjeldsted that the good faith purchaser exception at section 549(c) applies only to transfers made post-petition under section 549(a) of the Code. (43) Any other such transfer made in violation of the stay is avoidable. (44)
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Bell-Tel Federal Credit Union v. Kalter (In re Kalter) (45) is an informative case from the U.S. Court of Appeals for the Eleventh Circuit reflecting on the relation between bankruptcy law, Article 9 of the Uniform Commercial Code (U.C.C.), and state certification of title laws. The case appears to be an important decision, at least as far as the Florida and Alabama motor vehicle codes and certificate of title statutes are concerned. In Kalter, the Eleventh Circuit considered whether a motor vehicle became property of the Kalters' bankruptcy estate when the vehicle was repossessed one day before the Kalters filed their bankruptcy petition. Fourteen days after filing, the Kalters filed a motion for turnover and for sanctions against their secured creditor, Bell-Tel. The bankruptcy court ordered the turnover of the vehicle. (46) Later, the bankruptcy court ordered Bell-Tel to pay damages including damages to the car's fuel injectors and for work time missed by the Kalters in the absence of their vehicle. (47) Bell-Tel appealed and the district court reversed the bankruptcy court
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First the Eleventh Circuit recognized a need to "harmonize" U.C.C. Article 9 with Florida's certificate of title statute. (49) In examining the provisions of Article 9, the Kalter court concluded that Article 9 does not indicate who owns the collateral from the point of repossession until its ultimate disposition. (50) The court concluded, however, that Article 9 essentially treats the repossessing secured creditor as the owner of the collateral from the time of repossession, subject to the debtor's right to certain notices and the right to redeem. (51) In turn, the bankruptcy estate retains only that right of redemption. The Eleventh Circuit went on to analogize that the secured party's retention of the collateral in satisfaction of the debt (52) harmonizes with the debtor giving up the right of redemption. (53)
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The Eleventh Circuit went on to analyze Florida's certificate of title statutes, e.g.: "[i]n the event of the transfer of ownership of a motor vehicle ... by operation of law ... whenever ... repossession is had ..., the department may issue to the applicant a certificate of title.... In such a situation, the creditor may submit an affidavit announcing the repossession as 'proof of ownership.'" (54) Although some of the court's discussion is arguably dicta, the Eleventh Circuit determined that Article 9 is largely silent as to the issue of who owns collateral which has been repossessed, leaving that issue to other law. (55) In the absence of other law to the contrary, the Eleventh Circuit concluded that the repossessing secured creditor effectively became the owner, even prior to a commercially reasonable sale, and that this is consistent with the Florida certificate of title statute and Article 9. (56) The authors find this reading of Article 9 to be interesting at best and inconsistent with the right of the secured party to "dispose" of the collateral without owning it.
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In Kalter, the debtors were not entitled to turnover because a right to redeem a car repossessed before the bankruptcy petition is filed is not a possessory property interest of the bankruptcy estate under Florida's U.C.C., nor is it relevant that certificate of title did not pass to the creditor under Florida's certificate of title law. (57) Only the right of redemption becomes property of the estate, and this requires a turnover of possession only if the right of redemption is exercised.
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There was a slightly different fact pattern, but with the same result, in Manufacturers & Traders Trust Co. v. Alberto (In re Alberto). (58) Again in Alberto the post-petition sale of a car repossessed before the bankruptcy petition date did not violate the automatic stay. (59) In Alberto, the district court found that the debtor failed to move for turnover before the secured creditor sold the car. (60) The debtor filed a Chapter 13 bankruptcy case, which was converted to Chapter 7. After the Chapter 7 discharge/dismissal, the secured party repossessed the vehicle. The debtor then filed another Chapter 13 petition, but did not seek turnover of the vehicle. The secured creditor sent the debtor notification that the vehicle would be sold unless redeemed. The court found that the debtor did not have an unqualified right under U.C.C. Article 9 to "possess the vehicle
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In another case, the Ninth Circuit concluded that a trust with respect to which the debtor controlled both the principal and net income was property of the debtor's estate. (65) The degree of debtor control over the trust res brought the res into the estate. At the time the debtor filed her Chapter 7 petition, she had access to both the net income and the principal of a family living trust and used the assets of the trust for her benefit. The debtor showed the trust on her bankruptcy schedules, with a value of one dollar, but failed to list any assets of the trust. The district court held that the "Trustee's duty to administer assets of the bankruptcy estate does not extend so far as to require the Trustee to uncover assets intentionally concealed by the debtor." (66) The Ninth Circuit affirmed the lower court holding that the listing of the trust in the bankruptcy schedules did not constitute a proper scheduling of the assets or provide the trustee with constructive notice of the assets in the trust so as to permit a "technical abandonment" by the trustee. (67) To make matters worse for the debtor's argument, she filed a claim for an administrative expense for her maintenance of a condominium which was an asset of the trust.
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The bankruptcy court denied the administrative claim and the debtor appealed the denial and further argued that the bankruptcy judge violated her constitutional right of due process by "'prejudging' the issue and by failing to hold a separate hearing." (68) The Ninth Circuit again affirmed the lower court finding that "the bankruptcy court did not abuse its discretion in determining that the money spent by [the a]ppellant in maintaining a condominium that she was concealing from the estate for her personal benefit did not directly and substantially benefit the estate" pursuant to Bankruptcy Code section 503(b)(1)(A). (69) The Ninth Circuit further noted that "[f]ederal judges are entitled to absolute immunity for all judicial acts unless they act entirely without jurisdiction." (70)
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The U.S. Supreme Court, in Archer v. Warner, (71) found that "[a] debt embodied in the settlement of a fraud case 'arises' no less 'out of' the underlying fraud than a debt embodied in a stipulation and consent decree." (72) The Supreme Court concluded that "the Archers' settlement agreement and releases may have worked a kind of novation, but that fact does not bar the Archers from showing that the settlement debt arose out of 'false [pretenses], a false representation, or actual fraud,' and consequently is nondischargeable." (73)
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The Archers sued Leonard and Arlene Warner for fraud associated with the sale of the Warners' business to the Archers. The parties settled the lawsuit and executed a settlement agreement, which specified the Warners would pay the Archers $300,000. The Warners paid the Archers $200,000 and executed a promissory note for the remaining $100,000. In return for the settlement amount, the Archers agreed to dismiss the lawsuit with prejudice. The Warners missed the first payment and the Archers sued in state court. The Warners subsequently filed bankruptcy and the bankruptcy court ordered a liquidation under Chapter 7. (74) Archer sued for non-dischargeability of the debt under Bankruptcy Code section 523(a)(2)(A). Leonard Warner agreed to a consent order holding his part of the debt nondischargeable. Arlene Warner contested the dischargeability of the debt. The bankruptcy court found the promissory note debt dischargeable and the district court affirmed. (75) The U.S. Court of Appeals for the Fourth Circuit affirmed the district court. (76) The Fourth Circuit "reasoned that the settlement agreement, releases, and promissory note had "worked a kind of 'novation.'" (77) According to the Fourth Circuit, the "novation replaced (1) an original potential debt to the Archers for money obtained by fraud with (2) a new debt." (78) The Supreme Court granted certiorari. (79) The issue before the Court was whether the debt evidenced by the promissory note and settlement agreement could also amount to a debt for money obtained by fraud within the terms of the non-dischargeability statute. The Supreme Court stated that the governing case was Brown vs. Felsen. (80) Similar to Archer, in that case Brown sued Felsen in state court seeking a judgment that the money Brown had loaned to Felsen had been obtained through fraud. The state court entered an Agreed Judgment, which stated that Felsen would pay Brown a certain amount. (81) Subsequently Felsen filed bankruptcy and Brown asked the bankruptcy court to find the debt non-dischargeable. (82) The lower courts ruled against Brown, holding that the relevant debt was for money owed pursuant to the agreed judgment. (83) In Brown, the Court unanimously rejected the lower court's reasoning and held that [c]laim preclusion did not prevent the Bankruptcy Court from looking beyond the record of the state-court proceeding and the documents that terminated that proceeding (the stipulation and consent judgment) in order to decide whether the debt at issue (namely, the debt embodied in the consent decree and stipulation) was a debt for money obtained by fraud. (84)
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In Archer, the Supreme Court pointed out that the only difference between Brown and Archer was that the debt was embodied in a settlement agreement and not in an Agreed Judgment. (85)
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The Bankruptcy Code prohibits discriminatory treatment both by governmental units engaged in enforcement and administration of governmental activities (86) and when engaged in the administration of student loan programs. (87) Discrimination by employers is also prohibited. (88) Put in its simplest terms, the Bankruptcy Code prohibits any such discrimination merely because the debtor becomes a debtor in bankruptcy or is insolvent before the granting of a discharge. (89)
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Although F.C.C. v. NextWave Personal Communications, Inc. (90) is not a consumer case, the Supreme Court opinion provides an excellent analysis of Bankruptcy Code section 525 in cases where, as is often the case, there is an administrative directive coupled with a debt. Pursuant to the amended provisions of the Federal Communications Act of 1934, the Federal Communications Commission (FCC) was authorized to award spectrum licenses to small businesses through competitive bidding and to allow the businesses to pay for these licenses in installments. NextWave was awarded certain C-Block and F-Block licenses. Pursuant to FCC regulations, NextWave made a down payment on the purchase price and executed a promissory note for the balance and a security agreement granting the FCC a security interest in all of NextWave's rights and interests in each license. The security agreement stated that the licenses were conditioned upon the full and timely payment of all monies due
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NextWave subsequently filed bankruptcy under Chapter 11 and suspended all payments to creditors. The FCC objected to the debtor's proposed plan, asserting that the licenses had been cancelled automatically when NextWave missed its first payment. The bankruptcy court invalidated the cancellation of the licenses as a violation of various Bankruptcy Code provisions, but the U.S. Court of Appeals for the Second Circuit reversed, stating that the exclusive jurisdiction to review the FCC's regulatory actions lay in the court of appeals. (91) NextWave filed a petition with the FCC seeking reconsideration of the cancellation, but the petition was denied. NextWave then appealed the denial to the Court of Appeals for the District of Columbia, asserting that the cancellation was arbitrary and capricious, and contrary to law, in violation of the administrative procedures at 5 U.S.C. [section] 706, which require courts interpreting the Administrative Procedures Act to set aside actions "not in accordance with [the] law." (92) The D.C. Circuit found that the FCC's cancellation of the licenses violated the law, namely section 525 of the Bankruptcy Code. (93) Section 525(a) in pertinent part states that "[al governmental unit may not ... revoke ... a license ... to ... a person that is ... a debtor under this title ... solely because such ... debtor ... has not paid a debt that is dischargeable in the case under this title." (94) The Supreme Court granted certiorari. (95) The FCC argued that it did not revoke the debtor's licenses "solely because" of nonpayment. It further contended that "NextWave's obligations are not 'dischargeable' 'debt[s]' within the meaning of the Bankruptcy Code and that a contrary interpretation would unnecessarily bring [section] 525 into conflict with the Communications Act." (96)
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The Supreme Court rejected each of these arguments. The fact that the FCC has a valid regulatory motive was irrelevant. (97) The Court stated that "[s]ection 525 means nothing more or less than that the failure to pay a dischargeable debt must alone be the proximate cause of the cancellation ... whatever the agency's ultimate motive in pulling the trigger may be." (98) The Court further stated that "'debt' means 'liability on a claim' and 'claim,' in turn, includes any 'right to payment.'" (99) Thus, the "right to payment" is nothing short of an enforceable obligation. (100) Finally, the Court held that section 525 did not run afoul of the Communications Act because there is nothing in the provisions of that Act demanding that cancellation be the sanction for a failure to make an agreed upon periodic payment. (101)
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What petitioners describe as a conflict boils down to nothing more than a policy preference on the FCC's part for (1) selling licenses on credit and (2) canceling licenses rather than asserting security interests in licenses when there is a default. Such administrative preferences cannot be the basis for denying respondent rights provided by the plain terms of a law. (102)
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The Supreme Court ultimately held that Bankruptcy Code section 525 prohibited the FCC from revoking the licenses held by NextWave upon NextWave's failure to make timely payment to the FCC for the purchases of the license. (103)
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In Leonard v. St. Rose Dominican Hospital (In re Majewski), (104) the U.S. Court of Appeals for the Ninth Circuit applied the discrimination provisions of Bankruptcy Code section 525(b) to employment discrimination. In Leonard, the debtor incurred large medical expenses at the hospital where he was also employed. After three years he was still unable to repay the expenses. After repayment negotiations failed, he informed the hospital that he intended to file bankruptcy. He was then fired
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The Ninth Circuit held that section 525(b) forbids the firing of an employee "solely because that person 'is or has been' a debtor." (105) At the time the hospital fired the debtor he was not, however, and had not yet become, a debtor in bankruptcy. The Ninth Circuit concluded that the debtor's bankruptcy status therefore did not preclude the hospital from firing him. (106) The court refrained from a more liberal interpretation because the purpose of section 525(b) and the Bankruptcy Code as a whole should not encourage filing but, rather, should protect those persons who have invoked its protections to obtain a fresh start. (107)
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CRAM DOWN OF INTEREST RATE
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Secured creditors are entitled to interest on all secured claims qualifying for secured treatment under a confirmed Chapter 13 plan under Bankruptcy Code sections 1325(a)(4) and (5). (108) In Household Automotive Finance Corp. v. Burden (In re Kidd), (109) the U.S. Court of Appeals for the Sixth Circuit considered the rate of interest which should be paid. The debtors entered into a retail installment contract and security agreement for the purchase of a vehicle. Pursuant to the terms of the contract, the contractual rate of interest was 20.95 percent. The debtors subsequently filed a Chapter 13 case in which the debtors proposed to pay the secured creditor eight percent interest on the allowed secured portion of the claim. The parties did not dispute the value of the collateral, but the creditor objected to the proposed interest rate, arguing that it was entitled to the contract rate of interest. At trial, three witnesses offered testimony as to the market rate of interest that would be applicable to the installment payments for the debtor's truck.
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The secured creditor (Household) testified that it was a sub-prime lender. Based on the debtor's financial condition, including the debtor's poor credit scores, the debtor's loan rate would be between 20.95 percent and 24.95 percent. Richard Newsome, senior vice president at a local bank, testified that for a similar high-risk borrower, the interest rate for a similar bank loan would be 16.25 percent. Mr. Newsome testified that the average rate for all used truck loans at the bank was 13.5 percent. For all motor vehicle loans, both new and used and averaging the creditworthiness of all such borrowers, the rate was 9.3 percent. Finally, the Chapter 13 Trustee, through its lawyer, testified as to Chapter 13 practice indicating rates common in confirmed plans ranged from 8 percent to 12 percent.
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The bankruptcy court accepted the Richard Newsome testimony that 9.3 percent is credible evidence of the market rate of interest. (110) The court concluded that the current market rate for similar loans in the region was 9.3 percent but had recently risen by one percentage point. (111) Thus the interest rate for the debtor's plan was set at 10.3 percent. (112) Both parties appealed the decision and the district court affirmed. (113) The creditor appealed the decision of the district court to the Sixth Circuit.
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The Sixth Circuit indicated that although the Bankruptcy Code does not reference the term "'cram down[]' the term has come to denote the confirmation of a plan over the objection of a secured creditor." (114) Pursuant to the provisions of Bankruptcy Code section 1325(a)(5)(B), the terms of a proposed Chapter 13 plan must be confirmed by the bankruptcy court if
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(i) the plan provides that the holder of such claim retain the lien securing such claim 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. (115)
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In Memphis Bank & Trust Co. v. Whitman, (116) the Sixth Circuit adopted the "coerced loan method," (117) and later affirmed that adoption in U.S. v. Arnold. (118) The Sixth Circuit recognized that the law essentially requires the creditor to "make a new loan in the amount of the value of the collateral rather than repossess it, [and] the creditor is entitled to interest on his loan." (119) The Memphis Bank decision stated that "[i]n the absence of special circumstances bankruptcy courts should use the current market rate of interest used for similar loans in the region," under the theory that the creditor is essentially making a new loan. (120) Based on the holding in Memphis Bank, the Sixth Circuit held that the proper interest rate to be applied to a Chapter 13 cram down is the current conventional market rate used for similar loans in the region, and not necessarily the contract rate. Such a determination does not entail an analysis of any particular debtor's credit rating but rather involves a more objective determination of the value of money over time so as to compensate a creditor according to the present value of its secured claim. (121)
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The Sixth Circuit affirmed the decision of the district court, sustaining the conclusion of the bankruptcy court. (122)
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"CRAM DOWN" AND RESIDENTIAL MORTGAGES
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Perhaps not surprisingly, on Christmas Eve of 2002 the Ninth Circuit (123) joined the Sixth Circuit, (124) Second Circuit, (125) Eleventh Circuit, (126) Third Circuit, (127) and Fifth Circuit (128) in finding that a mortgage that is wholly unsecured as opposed to partially secured is not entitled to the protections of section 1322(b)(2) of the Bankruptcy Code. (129) In order for a secured claim to exist, the Bankruptcy Code requires that there be value in the collateral. (130) In Zimmer, the debtor's residence was worth less than the amount of the first mortgage. Thus, the mortgagee's second mortgage was a wholly unsecured claim within the meaning of the Bankruptcy Code. Notwithstanding section 1322(b)(2) and Nobelman, courts must still look to section 506(a) to determine if any secured claim is present. (131)
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(1.) Relations between some of these laws are explored in FRED H. MILLER & ALVIN C. HARRELL, THE ABCS OF THE UCC-RELATED INSOLVENCY LAW (2002).
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(2.) 11 U.S.C. [section] 362 (2000).
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(3.) Defined at id. [section] 541.
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(5.) 11 U.S.C. [section] 303 (2000 & Supp. 2000).
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(6.) 328 F.3d 829 (6th Cir. 2003), cert. denied, 124 S. Ct. 926 (2003).
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(10.) 331 F.3d 1257 (11th Cir. 2003).
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(13.) 309 F.3d 1210 (9th Cir. 2002).
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(14.) See 11 U.S.C. [section] 362(a).
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(15.) Eskanos, 309 F.3d at 1215-16.
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(18.) 64 Fed. Appx. 344 (3rd Cir. 2003).
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(23.) 286 B.R. 94, 97, 99 (B.A.P. 8th Cir. 2002).
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(26.) 719 F.2d 270 (8th Cir. 1983).
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(27.) In re Froehle, 286 B.R. at 99 (citing Johnson, 719 F.2d at 276).
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(30.) IOWA CODE [section] 447.9 (1998 & Supp. 2003).
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(31.) Id. [section] 448.1.
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(32.) 333 F.3d 64, 67-68 (2d Cir. 2003).
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(34.) 462 U.S. 198 (1983).
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(36.) In re Rogers, 333 F.3d at 69.
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(37.) 279 B.R. 839 (B.A.P. 9th Cir. 2002).
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(38.) 293 B.R. 12 (B.A.P. 9th Cir. 2003).
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(39.) In re Fjeldsted, 293 B.R. at 15
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(40.) 11 U.S.C. [section] 549(c) (2000).
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(41.) In re Fjeldsted, 293 B.R. at 24.
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(45.) 292 F.3d 1350 (11th Cir. 2002).
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(49.) Id. at 1356-57. Generally, Article 9 applies to security interests, not issues of ownership. See U.C.C. [section] 9-109 (2003). In addition, Article 9 defers to state certificate of title laws with respect to some issues. See id. [section] 9-303.
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(50.) In re Kalter, 292 F.3d at 1354.
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(52.) FLA. STAT. [section] 679.505(2) (2002) (repealed 2001)
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(53.) In re Kalter, 292 F.3d at 1355-56.
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(54.) Id. at 1357-58 (citing FLA STAT. [section] 319.28(2)(b)) (alteration in original).
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(56.) Id. at 1360. Note again that this is a different issue from, and does not alter, the secured party's obligations under the default and enforcement provisions at Article 9, part 6. See, e.g., U.C.C. [section] 9-619(c) (2003). The Kalter holding does implicate certain bankruptcy issues, however, including the automatic stay.
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(57.) In re Kalter, 292 F.3d at 1355, 1357.
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(58.) 271 B.R. 223 (N.D.N.Y. 2001).
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(62.) 11 U.S.C. [subsection] 542-543 (2000).
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(63.) In re Alberto, 271 B.R. at 227.
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(64.) Id. at 226 (alteration in original) (citing In re Fitch, 217 B.R. 286, 290 (Bankr. S.D. Cal. 1998)). For a contrary analysis, see In re Robinson, 285 B.R. 732 (Bankr. W. D. Okla. 2002).
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(65.) Schafler v. Spear (In re Schafler), Nos. 01-16250, 01-16270, 01-17516, 02-15619, 2003 U.S. App. LEXIS 5806, at * 139 (9th Cir. Mar. 13, 2003), cert. denied, 124 S. Ct. 544 (2003) & cert. denied sub nom., Schafler v. Newsome, 124 S. Ct. 808 (2003).
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(70.) Id. (citing Cleavinger v. Saxner, 474 U.S. 193, 199 (1985)).
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(71.) 538 U.S. 314 (2003).
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(73.) Id. at 323 (citation omitted).
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(80.) 442 U.S. 127 (1979).
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(84.) Archer, 538 U.S. at 320 (citing Brown, 442 U.S. at 138-39).
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(86.) 11 U.S.C. [section] 525(a) (2000).
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(87.) Id. [section] 525(c).
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(88.) Id. [section] 525(b).
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(89.) See id. [section] 525.
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(90.) 537 U.S. 293 (2003).
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(94.) Id. at 300 (citing 11 U.S.C. [section] 525(a)).
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(99.) Id. at 302 (citing 11 U.S.C. [subsection] 101(5)(A), (12)) (citations omitted).
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(104.) 310 F.3d 653 (9th Cir. 2002).
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(108.) 11 U.S.C. [subsection] 1325(a)(4), (5) (2000).
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(109.) 315 F.3d 671 (6th Cir. 2003).
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(115.) 11 U.S.C. [section] 1325(a)(5)(B).
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(116.) 692 F.2d 427 (6th Cir. 1982).
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(118.) 878 F.2d 925 (6th Cir. 1989).
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(119.) Id. at 928 (quoting Memphis Bank, 692 F.2d at 429).
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(120.) Id. at 929 (quoting 692 F.2d at 431).
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(121.) In re Kidd, 315 F.3d at 678.
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(123.) Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002).
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(124.) Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir. 2002).
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(125.) Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122 (2d Cir. 2001).
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(126.) Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d.1357 (11th Cir. 2000).
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(127.) McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606 (3d Cir. 2000).
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(128.) Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277 (5th Cir. 2000).
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(129.) See, e.g., Nobelman v. Am. Sav. Bank, 508 U.S. 324, 330-31 (1993).
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(130.) Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, 1224 (9th Cir. 2002).
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(131.) See, e.g., Zimmer, 313 F.3d at 1224.
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Ernest B. Williams IV and Alvin C. Harrell *
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* Ernest B. Williams IV is the managing shareholder of Williams & Prochaska, PC with offices in Nashville and Memphis, Tennessee. He is former chair of the Consumer Bankruptcy Committee of the Section of Business Law of the American Bar Association. Alvin C. Harrell is a professor of law at Oklahoma City University, Executive Director of the Conference on Consumer Finance Law, and Editor of the annual survey. He is a member of the Oklahoma Bar Association.
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