United States Court of Appeals
For the First Circuit
No. 05-2453
IN RE CARLTON DANA PRATT AND CHRISTINE ANN PRATT,
Debtors
CARLTON DANA PRATT,
Appellant,
v.
GENERAL MOTORS ACCEPTANCE CORPORATION,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Gene Carter, Senior U.S. District Judge]
Before
Lipez, Circuit Judge,
Cyr, Senior Circuit Judge,
and Howard, Circuit Judge.
James F. Molleur, for appellant.
F. Bruce Sleeper, with whom Jensen, Baird, Gardner & Henry,
was on brief for appellee.
September 1, 2006
CYR, Senior Circuit Judge. Carlton and Christine Pratt,
chapter 7 debtors, appeal the district court judgment which
affirmed a bankruptcy court ruling that General Motors Acceptance
Corporation (GMAC) did not violate the chapter 7 discharge
injunction by declining to discharge its lien on the debtors'
automobile until they paid the remaining balance due on their
prepetition car loan. We now reverse and remand for further
proceedings.
I
BACKGROUND
In 1994, Carlton Pratt bought a new Chevrolet Cavalier
and financed the purchase through GMAC, which acquired a lien on
the vehicle. Four years later, the Pratts filed a chapter 13
petition, and estimated the current value of the vehicle at $4900.
The bankruptcy court allowed the GMAC proof of secured claim for
the outstanding loan balance (including interest) at $3,291.35, and
GMAC subsequently received $1,083.62 in distributions during the
course of the chapter 13 proceeding.
In 1999, the Pratts converted their chapter 13 case to
chapter 7, by which time the balance due on the GMAC secured claim
approximated $2620. Pursuant to Bankruptcy Code § 521(a)(2)(A),
the Pratts gave notice that they intended to “surrender” the
vehicle, viz., by ceding possession in lieu of reaffirming their
prepetition loan obligation to GMAC. The bankruptcy court granted
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the GMAC motion for relief from the automatic stay in order to
allow GMAC to realize on its lien. GMAC notified the Pratts in
writing of their right to cure the default. After concluding that
the expense of repossession would outstrip the value of its secured
claim, GMAC followed its customary practice of writing off the
remaining loan balance. The Pratts retained possession of the
vehicle. The bankruptcy court granted the Pratts a chapter 7
discharge, which released them from their outstanding personal
indebtedness for the balance due on the GMAC car loan.
By September 1999, the Pratts realized that the Cavalier
was inoperable, hence essentially worthless, and that they would
have to dispose of it. Before they could "junk" the car, however,
salvage dealers were required by Maine law to obtain a release of
the GMAC lien. During the next few months, the Pratts repeatedly
contacted GMAC and requested that it either repossess the car or
release the lien. GMAC refused to release its lien unless and
until the outstanding loan balance was paid in full.
The bankruptcy court allowed the Pratts’ motion to reopen
their chapter 7 case to permit them to file the instant adversary
proceeding against GMAC, which alleges that GMAC’s refusal either
to repossess the vehicle or to release the lien, absent full
payment of the discharged loan balance, violated the chapter 7
discharge injunction prescribed by Bankruptcy Code § 524(a)(2).
Cf., e.g., Arruda v. Sears, Roebuck & Co., 310 F.3d 13, 21 (1st
-3-
Cir. 2002) (“Even after the termination of a bankruptcy case, a
discharged debtor who wishes to redeem property pursuant to section
722, but who believes that the terms proposed by the lienholder are
unfair, can ask the bankruptcy court to reopen the bankruptcy case
and adjudicate the matter.”).
In due course, the court entered judgment for GMAC. In
re Pratt, 324 B.R. 1 (Bankr. D. Me. 2005). The court held that
(i) GMAC’s in rem right under Maine law to enforce its lien against
the vehicle survived intact the chapter 7 discharge of the Pratts’
unsecured personal liability on the loan; (ii) by Maine statute, a
secured creditor has an unqualified right to refuse to release its
lien until the loan balance is paid in full; (iii) the GMAC refusal
to release its lien did not coerce the Pratts to repay their
discharged personal liability on the car loan, but simply invoked
its legitimate in rem remedies as accorded under Maine law; and
(iv) the situation was no more coercive than had GMAC offered the
Pratts a reaffirmation agreement whereby they could consent to
repay both the secured and unsecured portions of the loan
indebtedness. See id. at 8-9. Following an unsuccessful
intermediate appeal to the district court, the Pratts initiated the
instant appeal.
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II
DISCUSSION
A. The Putative Violation of the Chapter 7 Discharge Injunction
The Pratts reiterate on appeal that GMAC violated the
chapter 7 discharge injunction because its refusal either to
repossess the vehicle or to release its lien effectively coerced
them to repay the discharged personal liability on their car loan.
They insist that the GMAC decision effectively negated their right
to “surrender” the vehicle pursuant to Bankruptcy Code § 524(a)(2).
Following an intermediate appeal to the district court,
we directly review the bankruptcy court decision, conducting de
novo review of its legal conclusions, and clear error review of its
findings of fact. See In re New Seabury Co. Ltd. P’ship, 450 F.3d
24, 33 (1st Cir. 2006).
“A [bankruptcy] discharge . . . operates as an injunction
against the commencement or continuation of an action, the
employment of process, or an act, to collect, recover or offset any
such debt as a personal liability of the debtor, whether or not
discharge of such debt is waived.” 11 U.S.C. § 524(a)(2); Fleet
Mortgage Group, Inc. v. Kaneb, 196 F.3d 265, 267 n.4 (1st Cir.
1999). “[A] bankruptcy court is authorized to invoke § 105 to
enforce the discharge injunction imposed by § 524 and order damages
for the appellant in this case if the merits so require.” Bessette
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v. Avco Fin. Servs., Inc., 230 F.3d 439, 445 (1st Cir. 2000).1
Although the unsecured portion of a secured creditor’s
claim may be discharged in a chapter 7 or 13 case, its lien in the
collateral normally survives the bankruptcy proceeding and the
discharge, and is enforceable in accordance with state law. See In
re Valente, 360 F.3d 256, 259 n.1 (1st Cir. 2004); Arruda, 310 F.3d
at 21. The Bankruptcy Code nonetheless contains several provisions
which contemplate lien avoidance and/or modification. For example,
Bankruptcy Code § 521(a)(2) prescribes several remedies for the
debtor who desires to be freed from a prepetition lien:
[I]f an individual debtor's schedule of
assets and liabilities includes debts which
are secured by property of the estate –
(A) within thirty days after the date of the
filing of a petition under chapter 7 of this
title or on or before the date of the meeting
of creditors, whichever is earlier, or within
such additional time as the court, for cause,
within such period fixes, the debtor shall
file with the clerk a statement of his
intention with respect to the retention or
surrender of such property and, if applicable,
specifying that such property is claimed as
1
Section 105(a) provides:
The court may issue any order, process, or judgment that
is necessary or appropriate to carry out the provisions
of this title. No provision of this title providing for
the raising of an issue by a party in interest shall be
construed to preclude the court from, sua sponte, taking
any action or making any determination necessary or
appropriate to enforce or implement court orders or
rules, or to prevent an abuse of process.
11 U.S.C. § 105(a).
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exempt, that the debtor intends to redeem such
property, or that the debtor intends to
reaffirm debts secured by such property;
(B) within 30 days after the first date set
for the meeting of creditors under section
341(a), 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, as specified by
subparagraph (A) of this paragraph; and
(C) nothing in subparagraphs (A) and (B) of
this paragraph shall alter the debtor's or the
trustee's rights with regard to such property
under this title, except as provided in
section 362(h).
11 U.S.C. § 521(a)(2).
Subsection 521(a)(2) thus contemplates three distinct
debtor prerogatives: reaffirmation, redemption, or surrender. See
Bank of Boston v. Burr (In re Burr), 160 F.3d 843, 847-48 (1st Cir.
1998) (holding that reaffirmation, redemption, or surrender are the
exclusive debtor remedies contemplated by § 521(a)(2)). Where the
debtor wishes to retain the collateral, he may either “reaffirm”
his agreement to repay the prepetition debt under renegotiated
terms acceptable to the secured creditor, or “redeem” the
collateral by paying its current fair market value to the secured
creditor. Due to the importance of the Code’s “fresh start”
policy, however, reaffirmation agreements are subjected to very
stringent controls to ensure that debtors are neither coerced nor
harassed by secured creditors into reassuming debts which would
otherwise be entitled to discharge. See In re Jamo, 283 F.3d 392,
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398 (1st Cir. 2002); Whitehouse v. LaRoche, 277 F.3d 568, 574 (1st
Cir. 2002).2 Likewise, the Code contains provisions which fix the
amount at which the debtor will be entitled to redeem the
collateral unilaterally, which in some circumstances may not
reflect its current fair market value at redemption. See, e.g., 11
U.S.C. § 348(f)(1) (requiring that, when a case is converted to
chapter 7 from chapter 13, property be valuated at the same amount
as its determined value during the chapter 13 case).3 Where the
2
Subsection 524(c) requires that reaffirmation agreements
(i) be executed before the [general] discharge has
been granted;
(ii) be in consideration for a dischargeable debt,
whether or not the debtor waived discharge of
the debt;
(iii) include clear and conspicuous statements that
the debtor may rescind the reaffirmation
agreement at any time prior to the granting of
the general discharge, or within sixty days
after the execution of the reaffirmation
agreement, whichever occurs later, and that
reaffirmation is neither required by the
Bankruptcy Code nor by nonbankruptcy law;
(iv) be filed with the bankruptcy court; and
(v) be accompanied by an affidavit of the debtor's
attorney attesting that the debtor was fully
advised of the legal consequences of the
reaffirmation agreement, that the debtor
executed the reaffirmation agreement knowingly
and voluntarily, and that the reaffirmation
agreement would not cause the debtor “undue
[e.g., financial] hardship.”
11 U.S.C. § 524(c); see Jamo, 283 F.3d at 399.
3
Although we need not address the issue, the district court
noted that, even though the Pratts’ vehicle had become essentially
inoperable and worthless by 1999, subsection 348(f)(1) permanently
fixed its redemption value at $2620.73 – its assessed value during
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debtor decides not to reaffirm, or the parties cannot negotiate a
reaffirmation, or redemption is not economically feasible, the
debtor has but one option: “surrender” the collateral. The Pratts
elected the latter option.
Subsection 521(a)(2) does not, however, define the term
“surrender.” Since Congress did not use the term “deliver,”
however, one reasonably may assume that “surrender” does not
necessarily contemplate that the debtor physically have transferred
the collateral to the secured creditor. See, e.g., In re Cornejo,
342 B.R. 834, 836-37 (Bankr. M.D. Fla. 2005).4 Thus, the most
sensible connotation of “surrender” in the present context is that
the debtor agreed to make the collateral available to the secured
creditor – viz., to cede his possessory rights in the collateral –
within 30 days of the filing of the notice of intention to
surrender possession of the collateral. Similarly, nothing in
subsection 521(a)(2) remotely suggests that the secured creditor is
required to accept possession of the vehicle at the end of the 30-
their chapter 13 case – thus making § 521(a)(2) redemption
economically infeasible for the Pratts.
4
Some courts interpret subsection 521(a)(2) to require that
the debtor surrender possession of the collateral to the trustee,
and not to the secured creditor. See In re Claflin, 249 B.R. 840,
848 n.6 (BAP 1st Cir. 2000). But cf. Jamo, 283 F.3d at 397 (“The
debtor may, of course, surrender the collateral to the secured
creditor.”). In this case, we need not address the issue, as the
record contains no evidence that the Pratts concealed the vehicle
from estate representatives, nor that the latter had any interest
in administering the property. Consequently, we assume, arguendo,
that there has been an abandonment.
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day period, as such a reading would be at odds with well-
established law that a creditor’s decision whether to foreclose on
and/or repossess collateral is purely voluntary and discretionary.
Thus, we agree with the GMAC contention that the Pratts’ surrender
did not require that it repossess the vehicle if GMAC deemed such
repossession cost ineffective.
The more difficult question is whether the “surrender”
provision required that GMAC release its lien. In 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. See In re Diamond, 346
F.3d 224, 227 (1st Cir. 2003); Jamo, 283 F.3d at 399. Although the
fact that the Pratts (and not GMAC) initiated all the inquiries
about releasing the lien might preclude a finding that GMAC
“harassed” the Pratts, that does not foreclose the possibility that
GMAC's refusal was objectively and improperly “coercive” in the
circumstances. However, the line between forceful negotiation and
improper coercion is not always easy to delineate, and each case
must therefore be assessed in the context of its particular facts.
See id.
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
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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.
Although GMAC did not create all these circumstances, and
we find no record evidence that it acted in bad faith, in these
circumstances its actions were objectively coercive. Maine law
unqualifiedly entitled GMAC to refuse to release its lien unless
and until the outstanding loan balance was paid, see 11 Me. Rev.
Stat. Ann. tit. 11, §§ 9-1620 to -1624, but state law governs in a
bankruptcy proceeding “unless some federal interest requires a
different result.” Butner v. United States, 440 U.S. 48, 55,
(1979); In re LAN Tamers, 329 F.3d 204, 213-14 (1st Cir.), cert.
denied, 540 U.S. 1047 (2003). Thus, 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.
In our view, the particular confluence of the above-
mentioned circumstances renders the GMAC refusal to release its
lien objectively coercive. First, GMAC announced that it did not
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intend to repossess the “surrendered” vehicle because it was of
insufficient value, then expressly conditioned its release of the
lien upon the Pratts’ agreement to repay the loan balance in full.
Whatever the bona fides of the state-law basis for the GMAC
statement, its pronouncement effectively amounted to a demand for
a “reaffirmation,” which obviously never purported to comply with
the stringent “anti-coercion” requirements of Bankruptcy Code §
524(c). See supra note 2. Moreover, as the Pratts could not junk
the vehicle without a release of the GMAC lien, see Me. Rev. Stat.
Ann. tit. 29-A, § 664-A(4), they were confronted with the grim
prospect of retaining indefinite possession of a worthless vehicle
unless they paid the GMAC loan balance, together with all the
attendant costs of possessing, maintaining, insuring, and/or
garaging the vehicle. Therefore, the GMAC refusal had the
practical effect of eliminating the Pratts’ “surrender” option
under § 521(a)(2). This court previously has noted that the
“surrender” option is an important safety-valve, inasmuch as a
debtor ultimately cannot be coerced into a reaffirmation where he
retains the option to surrender the collateral to the secured
creditor. See, e.g., In re Burr, 160 F.3d at 848 (noting that
debtors cannot be compelled to reaffirm, since “they can always
surrender the property and be discharged of the underlying debt”);
see also Jamo, 283 F.3d at 400 (same).
We do not suggest that a secured creditor invariably
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would be in violation of the discharge injunction were it to insist
upon its in rem rights under state law. However, GMAC identifies
no compelling reason for doing so in this instance, relying instead
upon its bare right of refusal under state law. Since this motor
vehicle was essentially worthless, and vehicles rarely (if ever)
appreciate in value over time, there was no reasonable prospect
that the automobile would generate future sale proceeds (to which
the GMAC lien automatically would have attached, see Me. Rev. Stat.
Ann. tit. 11, § 9-1315(1)). GMAC determined that repossession was
not feasible. The Pratts maintained, and the bankruptcy court
found, that the vehicle had no significant value. Thus, the
legitimate raison d’etre for the GMAC lien no longer obtained, and
the federal bankruptcy-law interest in according debtors a fresh
start, free from objectively coercive reaffirmation demands, must
be accorded supremacy. Cf. In re Groth, 269 B.R. 766, 767-68
(Bankr. S.D. Ohio 2001) (“[A] debtor in a chapter 7 case, as part
of his fresh economic start, should be permitted to surrender
[worthless] collateral he does not intend to keep. If the secured
creditor determines that its collateral is worth less than the cost
of taking it into its possession, the creditor must waive the
effect of its lien so that the debtor is able to dispose of the
collateral.”).5
5
GMAC could have arranged for adequate protection of its
interests: for example, by entering into a contractual agreement
with the Pratts that it would release the lien in return for their
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Although the bankruptcy court aptly noted that this
precise situation is likely to arise infrequently (if ever) in
future cases, the “coerciveness” involved in each case must be
assessed on its particular facts. We can only conclude that the
GMAC refusal to release its valueless lien so that the vehicle
could be junked – though presumably not made in bad faith – was
“coercive” in its effect, and thus willfully violated the discharge
injunction. The Pratts are therefore entitled to establish and
recover their compensatory damages, together with other appropriate
relief under Bankruptcy Code § 105(a).
B. The Burden of Proof
The bankruptcy court opined that the Pratts needed to
prove a GMAC violation simply by a preponderance of the evidence,
rather than by clear and convincing evidence, citing our decision
in Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265 (1st Cir.
1999). Pratt, 324 B.R. at 5. As the bankruptcy court ultimately
found no violation under either standard, however, it did not
resolve the issue. Id. Since the bankruptcy court decision on the
liability issue must be reversed, the burden of proof issue is
before us on appeal.
Kaneb did not speak to the question whether a bankruptcy
debtor must prove an alleged violation of the automatic stay (or by
analogy, of the discharge injunction) by the heightened evidentiary
promise to arrange to have the vehicle junked.
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standard of clear and convincing evidence, which is normally
required to establish civil contempt outside of the bankruptcy
context. Rather, Kaneb involved a related but distinct issue:
namely, what facts must a debtor adduce to prove a violation. We
rejected the proposition that a stay violation could not be
actionable (viz., “willful”) if the creditor had made a good faith
mistake, and we held that “the standard for a willful violation of
the automatic stay under § 362(h) is met if there is knowledge of
the stay and the defendant intended the actions which constituted
the violation.” Kaneb, 196 F.3d at 265. By contrast, the
distinction presently at issue – between preponderance of the
evidence and clear and convincing evidence – entails the quantum of
proof; viz., how much of this factual evidence of knowledge and
general intent – the debtor must adduce to survive a "sufficiency
of the evidence" challenge. See Lamphere v. Brown Univ., 798 F.2d
532, 536 (1st Cir. 1986) (defining "clear and convincing" as more
than a preponderance but less than beyond a reasonable doubt).
Given the present record, we need not now address or
determine the quantum-of-evidence issue. Compare, e.g., In re
Dunn, 324 B.R. 175, 179 (D. Mass. 2005) (holding that § 105
contempt action triggers "clear and convincing" standard); In re
Parker, 334 B.R. 529, 538 (Bankr. D. Mass. 2005) (same); In re
Feldmeier, 335 B.R. 807, 811-12 (Bankr. D. Or. 2005) (same), with
In re Silberkraus, 253 B.R. 890, 913-14 (Bankr. C.D. Cal. 2000)
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(holding that § 105 contains no evidence of a "clear and
convincing" requirement), aff’d, 336 F.3d 864 (9th Cir. 2003).
Whichever the appropriate evidentiary standard, GMAC has not
suggested – nor could it plausibly do so on these record facts –
that it did not know of the existence of the Pratts’ chapter 7
discharge, or that it did not intend to communicate to the Pratts
its refusal to release its lien in the automobile so that it could
be junked. Given the clarity of the present record as to both the
"notice" and "general intent" elements, therefore, we conclude that
the Pratts adduced sufficient evidence that GMAC’s violation of the
discharge injunction was “willful.”
C. Damages
Finally, the parties are in agreement that the bankruptcy
court was to determine the issue as to whether GMAC violated the
discharge injunction prior to determining damages. As the damages
issue remains extant for factual determination, we remand to the
bankruptcy court for that purpose.
The judgment of the district court affirming the
bankruptcy court decision is hereby reversed, and the case is
remanded to the bankruptcy court for the determination of damages.
SO ORDERED.
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