Most creditors are familiar with the phrase, “retain and pay”. The bankruptcy code provides for certain treatment of debt, which is secured by personal property in Chapter 7 bankruptcies. Specifically, the bankruptcy code provides that debtors must either reaffirm the existing debt, redeem the collateral or surrender the collateral (or assume or reject the lease.) Prior to the amendments of the bankruptcy code in 2005, most debtors opted for the unwritten fourth option, “retain and pay.”
However the 2005 amendment, “clearly provides that the debtor shall not only file a statement of intentions but also follow through with her express intent.” If the intent is not followed through by the debtor in the statutory number of days, the automatic stay terminates and the property is no longer property of the estate.
The Ninth Circuit Court of Appeals recently ruled that the “retain and pay” option is no longer viable. If a debtor opts for this unwritten alternative then the debtor will fail to meet his/her statutory obligation and the automatic stay will be terminated. The mere termination of the automatic stay, however, is not enough to authorize the Creditor to repossess the collateral.
In the case before the Ninth Circuit, the debtor’s failure to adhere to the code allowed for the stay’s termination. Once the stay is terminated, the right to repossess the collateral then goes to the parties’ contract, in conjunction with state law to determine when the debtor has a default on the automobile loan and if that default allows repossession. The debtor’s contract in the Ninth Circuit case contained an ipso facto clause that provided a default if the debtor filed for bankruptcy.
There is a bankruptcy code provision that, “generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a of a bankruptcy case.”(1) However, the 2005 amendment overrides the provision that renders ipso facto clauses unenforceable when debtors fail to state an applicable intention and also fail to perform that intention.
Learning Points
- Offer reaffirmation agreements (If a reaffirmation is offered but denied by the Bankruptcy Court then the creditor cannot repossess if debtors are current after bankruptcy)
- Contracts should contain ipso facto clauses
- Know your state law to make sure you can repossess the collateral
- The above statutory provisions only apply to personal property
(1) Dumont v. Ford Motor Credit Company, Appellate Case No. 08-60002 (September 15, 2009 9th Cir.)
There is a Connecticut statute called “AN ACT CONCERNING REPOSSESSION OF MOTOR VEHICLES FROM RETAIL BUYERS” which goes into effect October 1, 2009. The state statute provides that filing bankruptcy or being in a bankruptcy is no longer an event of default under an installment loan agreement and is not grounds for repossession.
The vast majority of installment loan agreements contain a provision that filing bankruptcy is a default under the agreement. This means the loan may be called and the collateral repossessed, even if the payments are current, so long as a bankruptcy was filed. Some lenders are willing to repossess collateral on current loans where the debtors refuse to reaffirm the debt.
The statute essentially re-writes the terms of the contract between the lender and its customers. The title of the statute refers to motor vehicles, but text refers to the Connecticut Retail Installment Sales Finance Act. Therefore, it applies to boats, cars, RV’s, ATV’s, etc.
If the debtor is current on the loan agreement and stays current, then the debtor no longer needs to sign a reaffirmation agreement to retain possession of the vehicle. This effectively is an end run around the Bankruptcy Code provision that ended the 4th Option or “If Pay, Let Pay” arrangement.
There are ten bankruptcy judges in the Northern District of Illinois (Chicago). Only one of these judges, Judge Schmetterer, has a standing order requiring supporting documents be filed with motions for relief.
Copies of the note and security interest must be filed as exhibits to the motion. If the collateral is real estate, a recorded copy of the mortgage is required. If it is a vehicle, the title is required, and if equipment, the UCC statement must be attached. None of the judges at this point require recorded assignments that show the moving party is the true party in interest, but Judge Schmetterer does require the relationship between the moving party and the original creditor be explained in the motion.
While vehicle titles and UCC statements are rarely challenged, debtor’s attorneys are increasingly asking for recorded documents and assignments or servicing agreements to prove that the moving party is the true party in interest. This trend has been driven somewhat by activist attorneys, but perhaps as much or more so by debtors who have been paying attention to the media and surfing the net on the troubles some mortgage holders may have in proving they are the real party in interest.
It is always the best practice to send your attorney the note and/or security agreement, evidence of security, and any assignments or documents showing a servicing agreement. However, not every loan is equipped with a perfect portfolio of documents. This is a problem only when the court requires them or debtors demand them. In these cases, your WWR attorney will work with you to overcome or satisfy the debtors’ demands.
With the proposed amendments to the Bankruptcy Code placed on temporary hold by Congress until at least late April, it seems appropriate to take a step back and examine the possible unintended consequences of the passage of such a law.
While providing troubled borrowers with an effective tool to rework their mortgage terms under the protection of the Bankruptcy Code, is it possible that the mere threat of such a modification by a borrower could lead an increasing number of lenders to agree to rework the loan terms outside of the bankruptcy process?
Debtor’s counsel have always operated with the knowledge that, while they have the ability to tie up a pending foreclosure for months or even years by aggressively opposing the case, the reality has always been that mortgage lenders held the upper hand once a Chapter 13 bankruptcy was filed. A borrower could not alter the terms of the loan, but could only seek breathing room to bring delinquent payments current.
If the proposed amendments become a reality, the leverage will clearly shift into the borrower’s favor, which may lead more and more lenders to seek a negotiated modification prior to bankruptcy, saving both sides from litigating over valuation of the home and risking assessment prior to plan confirmation. The end result could be a decrease in Chapter 13 filings within the pool of borrowers who, but for their mortgage delinquency, might not be in financial difficulty.
Of course, the flip side to this argument would be that with all the economic indicators clearly showing a downturn, the actual number of borrowers whose only financial difficulty consists of their mortgage, is likely becoming smaller and smaller each month. Therefore, it is likely that even with the offer of a voluntary loan modification by the lender, the vast majority of borrowers will still seek bankruptcy relief.
Yesterday, representatives from the United States Trustee’s Office (“UST”) conducted a town hall meeting with representatives from the creditor’s bar to provide details on a new initiative they are moving forward with called the “Credit Abuse Program.” During the meeting, the UST indicated that it will be more closely scrutinizing documentation submitted by mortgage lenders with their proofs of claim, Reaffirmation Agreements and attachments to Motions for Relief from Stay. This increased scrutiny will not just be limited to the Cleveland Bankruptcy Court, but will extend to all five (5) courts in the Northern District of Ohio. The UST will be focusing its inquiry on the following issues:
- Whether the collateral was properly perfected
- Whether the moving party is entitled to enforce the claim
- Whether payments were misapplied
- Whether escrow was miscalculated
- Whether certification attesting to lost notes is in a blank form
- Whether certification attesting to missed payments was pre-signed
- Whether the documents filed with the courts are legally and factually sufficient
If an issue comes to light, the UST will informally contact creditors by phone or letter to correct an issue or provide additional documentation. Also, the UST may formally make its requests through objections to proof of claims or objections to motions for relief and abandonment. In extreme situations, the UST indicated that it would file motions for an order to show cause or motions for sanctions to correct an issue or provide additional documentation.
Specific Areas of Concern
The UST is paying particular attention to the following issues that come up with mortgage creditors:
- Failure to attach assignments of mortgage
- Failure to attach documents showing who owns the claim
- Failure to itemize statement of amounts (UST is requesting the items be specific)
- Failure to take out improper fees or fees that are vague, estimated, excessive or unsubstantiated by law or contract
- Miscalculation of arrearage
- Failure to attach supporting documents
- Attaching boilerplate affidavits of lost note
- Disclosing personal identifiable information in violation of Rule 9037
What does this mean to mortgage creditors?
With closer scrutiny by the UST, it is imperative to have your documents together before any timelines or deadlines come due. Also, review the documents you are providing to the court and omit any items that are not appropriate. If this additional work is not done on the front end, the result may very well be increased cost and time in attempting to respond to and comply with UST inquiries and/or requests.
What does this mean to all creditors?
Documentation is important to substantiate your claim. All creditors should make it a practice to attach the appropriate documentation and make sure all personal identifiable information is omitted or risk contact from the UST seeking remedial action.
