Bankruptcy Newsletter

Filing Motion Unnecessary to "Perform" Intention to Redeem
To timely "perform" his stated intent to redeem the motor vehicle securing a creditor's claim, a Chapter 7 debtor did not have to file a motion to redeem within the applicable time frame, an Illinois bankruptcy court concluded, finding, instead, that performance of the debtor's stated intent could be accomplished less formally.

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To timely "perform" his stated intent to redeem the motor vehicle securing a creditor's claim, a Chapter 7 debtor did not have to file a motion to redeem within 30 days of the first date set for the meeting of creditors, an Illinois bankruptcy court concluded, finding, instead, that performance of the debtor's stated intent could be accomplished less formally.

The debtor, who appeared pro se in this matter, filed a Chapter 7 petition and then a statement of intention expressing his intent to redeem his automobile or, in the alternative, to reaffirm the debt secured by it. Three weeks after the statement of intention was filed, the first meeting of creditors was held, and some two weeks after the meeting, the debtor filed an amended statement of intention, stating his intention to redeem the vehicle and attaching an "Offer to Redeem Debt." The debtor sent a copy of the amended statement and offer to the creditor whose claim was secured by an interest in the vehicle. In the approximately seven weeks after he filed the initial statement of intention, the debtor communicated with the creditor on ten separate occasions; on nine of those occasions, the debtor initiated the communication with a telephone call to the company's bankruptcy department. Although the debtor stated his intention to redeem the vehicle and asked to discuss the possible terms of the redemption with a representative of the creditor, no one from the company responded in any meaningful way to the debtor's communications, except to suggest that he discuss with his attorney the possibility of filing such a motion - to which he responded that he had no lawyer. Approximately six weeks after the first meeting of creditors, the debtor filed with the court a motion to extend the stay and to redeem, followed by a second motion to redeem four days later.

The creditor moved for a determination that the automatic stay had terminated as to the vehicle as a result of the debtor's alleged failure to timely "perform" his stated intent to redeem the motor vehicle by filing a motion to redeem with the court. The creditor asserted that, pursuant to 11 U.S.C.A. §§ 521(a)(2) and 362(h)(1), the automatic stay had terminated automatically as to the debtor's vehicle 30 days after the first meeting of creditors.

The Bankruptcy Code requires a debtor who intends to redeem "personal property . . . securing in whole or in part a claim" to file a statement of intention stating his desire to redeem the property. In addition, § 521(a)(2)(B) provides that: "within 30 days after the first date set for the meeting of creditors . . . or within such additional time as the court, for cause, within such 30-day period fixes, the debtor shall perform his intention with respect to such property." (Emphasis added by the court). "Section 362(h)(1) also states that the automatic stay will terminate, and the property will no longer be part of the bankruptcy estate, if the debtor fails to take the necessary action within the time frame set by § 521(a)(2)." Section 521(a)(6), however, provides that an individual Chapter 7 debtor will "not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors . . . (B) redeems such property from the security interest . . . ."

Hence, both § 521(a)(2) and § 521(a)(6) describe what an individual Chapter 7 debtor that wishes to redeem secured property must do, with § 521(a)(2) requiring the debtor to act within 30 days and § 521(a)(6) allowing 45 days, and both provisions provide, as a consequence of a debtor's failure to follow these steps, for the termination of the automatic stay with respect to the property. In the present case, the debtor filed his motions to redeem and for an extension of the stay between 30 and 45 days after the first meeting of creditors.

This case presented two separate legal issues with respect to the debtor's attempt to redeem his motor vehicle, the bankruptcy court found. The first such issue concerned the time frame within which the debtor was obliged to act, namely, whether it was the 30-day period of § 521(a)(2) or the 45-day period set forth in § 521(a)(6), the latter of which was added to the Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) and has been found "confusing." After determining that the time frame of § 521(a)(2) was the one that had to be considered in this case, the court turned to the second issue: what actions must a debtor take within the applicable time period in order to prevent the stay from being lifted.

In the 30 days following the first meeting of creditors, the bankruptcy court reiterated, the debtor repeatedly called the creditor, stating his intention to redeem the vehicle and requesting to discuss the terms of the redemption with someone from the company. The debtor also filed an amended statement of intention with an attached offer to redeem, and forwarded those documents to the creditor. Because of an error in understanding § 521(a)(2) and § 521(a)(6), the debtor filed motions to extend the stay and to redeem after the 30-day period of § 521(a)(2) had passed.

The creditor argued that the debtor's actions during the 30-day period were not sufficient to "perform his intentions." Noting that redemption is governed by F.R.B.P. 6008 and 9014, and that both rules require a motion and hearing on notice, the creditor contended that the minimum that qualifies as "performance" is the filing of an actual timely motion to redeem. In support of its position, the creditor cited an unpublished opinion in which an Ohio bankruptcy court had held that a lender's repossession of a Chapter 7 debtor's van did not violate the automatic stay because the debtor, who never executed a reaffirmation agreement, failed to perform his "expressed intention" under § 521(a)(2)(B), and the stay was therefore terminated. According to the Ohio court, to find "performance," the debtor must minimally attempt to enter into a reaffirmation agreement, which is generally evidenced by "at least" drafting a reaffirmation agreement.

In support of his position that his actions within the 30-day period were enough to "perform his intentions," the debtor cited In re Parker, 363 B.R. 621 (Bankr.M.D.Fla. 2007), in which Chapter 7 debtors sought sanctions for asserted stay violations against a creditor who had repossessed their van 47 days after the first meeting of creditors, despite knowing that the debtors intended to redeem the vehicle. In discussing the duties that § 521 imposes on debtors intending to redeem, the Parker court noted that the simplest and clearest way debtors can establish that they timely performed their duties is by filing a motion to redeem or a reaffirmation agreement prior to the end of the allowed time. The Parker court made clear, however, that compliance could be established in "less formal ways," such as by a debtor calling the creditor and obtaining its consent for an extension of the performance period. "In Parker, however, the debtors were found not to have kept the creditor informed, and so did not demonstrate a 'minimal effort to perform' their stated intentions," such that the creditor's actions were not found to have violated the stay.

The bankruptcy court also noted a case that was not provided by either party, In re Hinson, 352 B.R. 48 (Bankr.E.D.N.C. 2006), in which the court held that a Chapter 7 debtor's actions in signing a draft reaffirmation agreement provided by the lender, but striking a clause requiring the debtor to reimburse the lender for collection fees, were enough to fulfill the mandates of § 521(a)(2)(B). In so ruling, the Hinson court relied on In re Price, 370 F.3d 362 (C.A.3-Del. 2004), which held that "debtors were not required to 'entirely consummate their stated intention within' the time frame allowed." According to the Third Circuit in Price, all that is required of debtors is to take steps to act on an intention to either retain or surrender the property.

"Unlike the debtors in Parker, and like the debtor in Hinson, [the debtor in the case at bar] took several steps to perform his stated intention and certainly kept [the creditor] informed," the bankruptcy court stated, noting that the debtor filed an amended statement of intention and "did what he could" to redeem. "[B]eing a pro se debtor, his honest and repeated attempts to discuss redemption with [the creditor] clearly 'took steps to act on his intention' [citation omitted] and demonstrated more than 'minimal effort to perform' [citation omitted] his stated intentions," the court found. In addition, "whether or not intended, [the creditor] strung Debtor along," never informing the debtor that it did not wish to allow him to redeem and never disagreeing with the debtor's proposed terms. "Debtor was thereby misled, at least insofar as he thought [the creditor] would at some point discuss the redemption with him, and as a pro se debtor he did not then understand the possible motion he could file to safely preserve the issue and his rights before time ran out." Consequently, given the debtor's "repeated and strenuous efforts to redeem his vehicle during the thirty-day period," and the fact that he "[did] all that he knew to perform," the court concluded that the debtor did "perform his intention" within the required time frame, and that the automatic stay therefore remained in effect. In re Molnar, 2010 WL 5136038 (Bkrtcy.N.D.Ill., Judge Schmetterer).

An insurer's purposeful misconduct or reckless indifference to its disclosure obligations, in never advising the debtors or the court of the fact that the debtors' counterclaims were virtually identical to claims asserted by other health care providers in pending class litigation in which the insurer had been involved for more than four years and which was just on the verge of settling, and in allowing the debtors to needlessly expend hundreds of thousands of dollars in litigating the counterclaims as time for them to opt out of the class settlement expired, only to abruptly change course once this opt-out time had passed and to raise the settlement as a bar to the debtors' continued pursuit of the counterclaims in bankruptcy court, was sufficiently egregious to warrant the extreme sanction of dismissal of the insurer's claims against the debtors. However, the court could not enter judgment for the debtors based on the alleged value of the counterclaims, something which the bankruptcy court was barred on res judicata grounds from determining. The debtors could not indirectly obtain, as a sanction, a damages remedy that they were barred from obtaining on their counterclaims. In re Jemsek Clinic, P.A., 2010 WL 5128366 (Bkrtcy.W.D.N.C., Judge Whitley).

The funds that were deposited in an annuity contract account with a life insurance company by a Chapter 11 debtor-employer pursuant to its deferred compensation plan were not "withheld" from the plan participants' wages. The funds thus did not fall within 11 U.S.C.A. § 541(b)(7), the section of the Bankruptcy Code that excludes from the bankruptcy estate amounts that were withheld by an employer from the wages of its employees for payment as contributions to an employee benefit plan subject to Employee Retirement Income Security Act (ERISA). "Since § 541(b)(7) was added to the Code in 2005, only a few courts have considered whether that section applies to unfunded top hat plans," the Ninth Circuit's Bankruptcy Appellate Panel (BAP) noted, adding that "[t]hose few courts have uniformly concluded . . . that an agreement to defer income is qualitatively different from the type of 'withholding' contemplated in § 541(b)(7)(A)(i)(I)." In re Downey Regional Medical Center-Hosp., Inc., 2010 WL 5059586 (9th Cir.BAP-Cal.).

Even assuming that the statutory cap on a debtor's ability to claim a state law homestead exemption for any interest in property acquired within 1,215 days of the petition date applied not just when a debtor acquired legal title to property within this 1,215-day period, but also when the debtor increased his equity in property to which he already held title, such as by paying down a mortgage or making improvements, the statutory cap of $136,875.00 was doubled in a joint Chapter 7 case filed by married debtors. Thus, as long as the total amount by which the debtors' equity increased as a result of their mortgage payments and improvements during the 1,215 days preceding the petition date did not exceed $273,750.00 ($136,875.00 x 2), the debtors' state law homestead exemption rights were not limited by 11 U.S.C.A. § 522(p). In so ruling, the Tenth Circuit's Bankruptcy Appellate Panel (BAP) noted its disagreement with those courts that examine state law to determine whether the § 522(p) homestead exemption cap should be doubled under § 522(m) for joint debtors. State law is irrelevant to the application of § 522(m) to § 522(p), the BAP found, as the § 522 cap is purely a federal concept. The BAP, moreover, could not conceive of any reason why joint debtors in different states should be subject to different federal caps. Because § 522(m) provides that § 522 "shall apply separately with respect to each debtor in a joint case," § 522(p) is modified by § 522(m), and the § 522(p) exemption cap is doubled in a joint case. In re Nestlen, 2010 WL 5162563 (10th Cir.BAP-Okla.).