Duane L. Bentley
A chapter 7 debtor who elected to surrender a vehicle contends that the lienholder must either repossess the vehicle or release its lien to avoid contempt. This is not the law. As explained below, a creditor that fails to do one or the other does not necessarily violate the discharge injunction.
This matter is before the Court to resolve Debtor’s Motion for Contempt [ECF No. 16] against Creditor OneMain Financial Group, LLC, based on its purported violation of
This Court has jurisdiction over this contested matter.
BACKGROUND
The parties agree on the material facts. In June 2017, Debtor obtained a loan from Creditor and granted Creditor a lien on a 2001 Dodge Dakota (the “Vehicle“). Debtor filed a chapter 7 petition on March 5, 2018, and Creditor received notice of the bankruptcy filing. Debtor’s Schedule D, filed with his petition, stated that Creditor had an $8,000 claim secured by the Vehicle, which Debtor valued at $150. Debtor also filed a statement of his intention to surrender the Vehicle to Creditor with his petition. Debtor did not reaffirm the debt to Creditor before entry of his discharge on June 11, 2018. Creditor’s lien was not avoided or eliminated in the bankruptcy, and Creditor received notice of entry of the discharge. Debtor never paid the balance of Creditor’s claim. Creditor never repossessed the Vehicle, which was stored on property owned by Debtor’s ex-father-in-law, Paul Reis.
On June 29, 2018, Debtor called Creditor2 and stated that he had received his discharge, wanted “to take the lien off the title of the vehicle that was in bankruptcy that you guys have the lien on,” and advised that the Vehicle “is old. It’s trash. It’s totaled.” [ECF No. 78-1 at 6.] Creditor’s representative told Debtor: “once there’s a discharge you are not responsible for the
Several weeks later, on August 1, 2018, Mr. Reis and Debtor called Creditor. Near the start of the call, Creditor’s representative advised Debtor: “If your personal liability to this debt has been discharged in bankruptcy, any payments you make on this account are voluntary[.] [A]lthough you may not be legally obligated to repay this debt, [a lien] on or against collateral securing the account may have survived the discharge[]. If such a lien exists, [Creditor] may enforce any applicable state release [sic] to recover such collateral.” [ECF No. 78-1 at 11.] The representative, speaking with Mr. Reis (at Debtor’s request and with his permission), advised that Creditor would not repossess the Vehicle because “[t]he value is too low,” and then said:
So the options that we can give now are working with a salvage yard, an individual or the customer himself. If it’s a customer or a third party wanting to make an offer on it against the lien, then we would require a mechanic’s estimate to come along with that offer. If it’s a really low offer just to support the value that you’re saying the vehicle is worth. If it’s a junk vehicle and doesn’t run and you’re wanting to just scrap it, you can contact the local salvage yard to see if they are interested in working with us. You would explain to them that we are the lienholders and they would call and make an offer on the lien and then once that is approved by management and we could work with them to get payment and release that lien to the salvage yard.
[Id. at 12.] Mr. Reis responded that he would have the Vehicle towed to the highway or to one of Creditor’s locations. Creditor’s representative then stated that Debtor still owned the Vehicle, that Creditor only had a lien on it, and that Debtor would be charged any fees associated with
Mr. Reis and Creditor’s representative then discussed the options presented to Debtor. Mr. Reis stated that his “neighbor down the road has a junkyard” and “offered me $100 for it….” [Id. at 15.] Mr. Reis and the representative also discussed whether Mr. Reis would buy the Vehicle himself for $100. Creditor’s representative stated that Mr. Reis could submit an offer along with “a mechanic’s estimate written up on a mechanic’s shop’s letterhead saying what’s wrong with the vehicle and how much it costs to repair that,” which Creditor would consider in deciding whether to accept his offer. [Id. at 12.] Although Mr. Reis first stated he did not intend “to go through a lot of hassle getting a mechanic to write it up,” he later said that he knew a mechanic who could provide a written statement. [Id. at 12, 15.] By the end of the call, Mr. Reis suggested that he would send via email or fax a $100 offer to Creditor with pictures of the Vehicle (that would show damage to the vehicle, high odometer mileage, or otherwise provide information to support his offer), and also that if a mechanic’s estimate ultimately was needed he could provide that from a local mechanic as well.
However, Mr. Reis did not send in an offer. Instead, on October 19, 2018, Mr. Reis again called Creditor and stated that a local salvage yard owner was willing to remove the car from Mr. Reis’s property, pay $100 for it, and waive the tow fee.3 Creditor’s representative stated: “It would probably be best if the guy from the salvage yard would contact us and let us know he’s
But, again, this did not occur. Instead, on November 21, 2018, Debtor moved to reopen his bankruptcy case to pursue Creditor for an alleged violation of the discharge injunction, which motion was granted. Then, on December 18, 2018, Debtor filed his Motion for Contempt against Creditor, in which Debtor alleged that Creditor violated “the discharge injunction under
Ten days after Debtor filed the Motion for Contempt, Creditor released its lien on the Vehicle.
ANALYSIS
I. Summary judgment standard.
Summary judgment is appropriate when the evidence, construed in the light most favorable to the non-movant, confirms that there is no genuine issue of material fact and the movant is entitled to a judgment as a matter of law.
II. Violations of the discharge injunction and Taggart v. Lorenzen.
III. Creditor did not violate the discharge injunction because its conduct was not objectively coercive.
Debtor contends that Creditor should be found liable for violating the discharge injunction, citing extensively to an out-of-circuit decision that also concerned a creditor’s refusal to release a lien on a vehicle after the debtors obtained a chapter 7 discharge. Pratt v. GMAC (In re Pratt), 462 F.3d 14 (1st Cir. 2006). In Pratt, the debtors filed an adversary proceeding against an automobile lender (GMAC) seeking a contempt finding because GMAC refused to either repossess a vehicle surrendered in the debtors’ chapter 7 case or to release its lien post-discharge unless the debtors paid their full loan balance. Under Maine law, the debtors could not dispose of the vehicle absent a lien release, and they argued that GMAC prevented them through its conduct from “surrendering” their vehicle as
The particular record facts material to our assessment of objective coercion are: (i) the Pratts timely filed a
§ 521(a)(2) notice of their intention to surrender the vehicle; (ii) they did nothing to prevent GMAC from repossessing the vehicle; (iii) the value of the inoperable vehicle had plummeted to such an extent that it needed to be towed to a junkyard, which declined to accept it absent a valid lien release; (iv) GMAC determined - presumably based upon the precipitous drop in the vehicle’s worth - that it was not cost effective to repossess and resell the vehicle; and (v) according to state law, the vehicle could not be junked unless GMAC released its lien.
Id. at 19. The court explained that, “[i]n assessing violations of the automatic stay and the discharge injunction, the core issue is whether the creditor acted in such a way as to ‘coerce’ or ‘harass’ the debtor improperly.” Id. (citation omitted). As a result, “even legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a ‘fresh start’ and are not unfairly coerced into repaying discharged prepetition debts.” Id.
The First Circuit concluded that GMAC’s refusal to release its lien was objectively coercive and “had the practical effect of eliminating the Pratts’ ‘surrender’ option under
Debtor contends that Pratt controls the outcome in his case.4 He states that he (i) timely filed a notice of intention to surrender the Vehicle, (ii) did not prevent Creditor from repossessing the Vehicle, (iii) the Vehicle had minimal value and needed to be towed to a salvage yard, which could not accept it absent a lien release, (iv) Creditor decided that it was not economically feasible to repossess and re-sell the vehicle, and (v) Kentucky law (
In response, and to support its own motion for summary judgment, Creditor argues that a key fact in Pratt that led to the First Circuit’s decision was that GMAC demanded full payment of the discharged debt before it would release its lien, which Creditor did not demand here. Creditor also heavily relies on a subsequent First Circuit decision that clarifies the holding in Pratt. In re Canning, 706 F.3d 64 (1st Cir. 2013). Creditor further argues that the “fair grounds for doubt” standard for discharge injunction violation and civil contempt cases in Taggart v. Lorenzen precludes a determination in Debtor’s favor in this contested matter.
Distinguishing Pratt, the First Circuit explained that the lender did not condition the release of the mortgage on the full payment of the discharged indebtedness, and instead proposed to negotiate a resolution with the debtors via a short sale of the residence or a settlement offer. Therefore, the court concluded,
the record here does not paint a picture in which a secured creditor cornered the debtors between a rock and hard place. The record before us contains no evidence showing that the alternatives [the lender] proposed were unfeasible--that is, the Cannings never explained to the court exactly why a short sale or a settlement was out of the question for them. The record is also devoid of any other indicia of coercion, such as, for example, [the lender]’s refusal to negotiate with the Cannings a compromise different to the one originally proposed. In fact, from the record available to us, it seems that the Cannings employed a “take it or leave it” approach in negotiating with their mortgage lender, who, given its state-law rights over the collateral, did not have to accept the two choices presented. Bankruptcy law, we must emphasize, cannot alter a secured creditor’s state-law rights, unless it is shown that those rights are relied upon to coerce payment of a discharged debt. The record before us simply lacks that evidence.
Canning, 706 F.3d at 71-72. The First Circuit rejected the Cannings’ reading of Pratt that “we would have to find a discharge injunction violation every time a secured creditor opposes a debtor’s ‘foreclose or release’ demand based on the business determination that repossession is not cost effective,” because ”Pratt sought to strike a balance between the competing state-law
While Debtor’s case involves a nearly valueless vehicle, like Pratt, and not real property, as in Canning, the First Circuit’s guidance in Canning is apropos here. As in Canning, Creditor did not demand full payment of its discharged debt in exchange for a lien release; rather, Creditor presented options to Debtor. Debtor failed to act on any of those options and offers no evidence that those options were unreasonable.
Debtor scheduled the Vehicle as having a value of $150 and thus recognized that the Vehicle was not entirely worthless. While Debtor’s Motion for Contempt expressly alleges that Creditor demanded full payment of its discharged ($8,000) debt in exchange for the release of its lien on the Vehicle [ECF No. 16 ¶ 11], the transcripts establish that Creditor did not even demand $150 from Debtor in exchange for a lien release; in fact, Creditor did not ask Debtor to pay any funds to Creditor at all, let alone pay any specific amount. Instead, when Debtor called Creditor post-discharge, Creditor’s representative stated that a third-party salvage yard could pay “minimal consideration” in exchange for the lien release. Then, when Debtor and Mr. Reis called Creditor together a few weeks later, Creditor’s representative discussed different options to accomplish a lien release with Mr. Reis, and ultimately suggested that Mr. Reis put a $100 verbal offer in writing and send it to Creditor, along with pictures or a mechanic’s estimate that would support the offer. The representative also stated that the salvage yard owner (which Mr. Reis said was “down the road“) could call and negotiate directly with Creditor to obtain a lien release. Finally, in the last call, Mr. Reis and Creditor’s representative discussed having the
The Court must digress for two simple observations. First, the Debtor had another option available to secure the lien release. He could have filed a request to redeem pursuant to
Thus, the Court generally agrees with the First Circuit’s statements in both Pratt and Canning that whether coercive behavior occurred is dependent on the facts of each case. In this case, Creditor’s conduct was not objectively coercive. When speaking with Debtor, Creditor’s representatives explained that his debt to Creditor had been discharged but that Creditor still had state law in rem lien rights in the Vehicle that survived the bankruptcy process. Creditor offered options to accomplish a release of that lien, and requested objective information (such as a mechanic’s estimate, pictures, or a call from a salvage yard) that would permit it to evaluate a
Because Creditor’s conduct in its dealings with Debtor was not objectively coercive, no discharge injunction violation occurred. As a result, the Court need not apply the standard in Taggart v. Lorenzen and consider whether an objectively reasonable basis exists to conclude that Creditor’s conduct was lawful. Taggart, 139 S.Ct. at 1801.
Finally, Debtor sought to certify this contested matter as a class action. See, e.g., In re Biery, Case No. 10-23338, 2014 Bankr. LEXIS 1603 (Bankr. E.D. Ky. April 14, 2014) (holding that Rule 7023 may be applied to motions for contempt for violations of
CONCLUSION
There is no dispute of material fact and Creditor is entitled to a judgment as a matter of law. As a result, it is ORDERED that Creditor’s Motion for Summary Judgment [ECF No. 78] is GRANTED, Debtor’s Motion for Summary Judgment [ECF No. 75] is DENIED, and Debtor’s Motion for Contempt [ECF No. 16] is DENIED.
Signed By:
Tracey N. Wise
Bankruptcy Judge
Dated: Wednesday, October 2, 2019
(tnw)