Debtor Who Made Payments Can Still Lose Car

Wednesday, September 16, 2009

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Debtor Who Made Payments Can Still Lose Car—Court

Divided Panel Says New Bankruptcy Law Eliminated ‘Ride-Through’ Option

By STEVEN M. ELLIS, Staff Writer

A Chapter 7 bankruptcy debtor who stays current on car payments instead of reaffirming the validity of the debt runs the risk that the creditor can repossess the vehicle anyway, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

A split panel held that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 eliminated the so-called “ride-through” option by which creditors were forbidden from repossessing collateral unless the debtor stopped making payments or otherwise defaulted.

Under prior circuit precedent, a creditor who repossessed collateral from a debtor who exercised the option was prohibited from pursuing a default judgment in the event the collateral was “underwater,” or worth less than the amount owed on the loan it secured.

Some, but not all, of the other federal circuits recognized the option’s availability prior to the BAPCPA, but Judge Diarmuid F. O’Scannlain wrote yesterday that Congress eliminated the option’s availability—at least to drivers who did not seek reaffirmation—in the 2005 amendments.

Protection Sought

Antoinette Dumont sought bankruptcy protection in 2006 and continued making monthly payments to Ford Motor Credit Company on a car she purchased three years earlier, even though the car was worth approximately $2,500 less than the amount she owed.

Chapter 7 debtors are required to state their intentions with respect to any property subject to a security interest, and prior to the BAPCPA, Ninth Circuit law allowed debtors to choose from among four options: surrender the collateral, redeem it for fair market value, reaffirm the debt—and personal liability on it—on terms mutually agreeable to the creditor, or select the ride-through or “pay to drive” option.

The Ninth Circuit recognized the existence of the latter choice in McClellan Fed. Credit Union v. Parker (In re Parker) (1998) 139 F.3d 668.

Dumont filed a statement of intention indicating her intent to retain the car, but declined to enter into a reaffirmation agreement with Ford. She also filed no objection to Ford’s proof of claim on the vehicle, and the bankruptcy court entered an order discharging the debts identified in Dumont’s bankruptcy case.

However, the loan agreement with Ford contained an “ipso facto” clause stating that Dumont would be in default if she was involved in a bankruptcy proceeding, and Ford repossessed the vehicle after entry of the discharge.

Dumont successfully moved to reopen her bankruptcy case and claimed that Ford had violated the discharge injunction, which prevented collection activity on discharged debts, but the bankruptcy court denied her motion.

As explained by O’Scannlain, the Bankruptcy Appellate Panel then “unanimously agreed, following the lead of every bankruptcy court to have considered whether ride-through is still available to debtors, at least those who did not seek reaffirmation.”

Noting that changes to the automatic stay imposed by the BAPCPA now require debtors to indicate in their statement of intention whether they will surrender or retain the collateral, and if the latter, to then indicate redemption, reaffirmation or assumption, the judge said that Dumont’s statement of intention failed to indicate one of the latter three options.

Stay Terminated

As a result, he wrote, the automatic stay—and the discharge injunction—were terminated against Ford with respect to the vehicle, and Ford was free to proceed to exercise its rights under state law given that amendments to 11 U.S.C. § 521 trumped a Bankruptcy Code provision rendering unenforceable contractual terms basing a default on commencement of a bankruptcy case.

Senior Judge Alfred T. Goodwin joined O’Scannlain in his opinion.

Judge Susan P. Graber dissented, arguing:

“The legislative history is completely silent on the issue, with nary a reference to the vigorous public debate by the courts and commentators. In my view, the changes to the text indicate an intent to perpetuate the extant circuit split, not resolve it.”

Quoting the Ninth Circuit’s Aug. 14 decision in another case “concerning a different perplexing provision,” Ransom v. MBNA, Am. Bank, N.A. (In re Ransom) 08-15066, she continued:

“The ‘correct’ answer to the question before us, which the courts have been struggling with for years—at the unnecessary cost of thousands of hours of valuable judicial time—depends ultimately not upon our interpretation of the statute, but upon what Congress wants the answer to be. We would hope, in this regard, that we the judiciary would be relieved of this Sisyphean adventure by legislation clearly answering a straightforward policy question: [May debtors invoke the ‘ride-through’ option?]….

“In contrast to the situation in In re Ransom, we have already answered the question at hand….Because the BAPCPA amendments add only confusion, I would not overrule In re Parker.”

The case is In re Dumont, 08-60002.