UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 99-10826
_______________________
In the Matter Of: MELVIN DALE KINION;
CHARLOTTE JONES KINION,
Debtor.
CHASE AUTOMOTIVE FINANCE, INC.,
Appellant,
versus
MELVIN DALE KINION; CHARLOTTE
JONES KINION,
Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
_________________________________________________________________
March 24, 2000
Before JONES, DUHÉ, and WIENER, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Chase Automotive Finance, Inc., an auto lender, thought
it had secured a reaffirmation agreement with Chapter 7 debtors for
their Cadillac. See 11 U.S.C. § 524(c). Instead, six months
later, Chase was informed that not only had the reaffirmation
agreement been disapproved by the court, but the court had voided
Chase’s valid lien. We reverse the judgments of the bankruptcy and
district courts, which approved the abrogation of Chase
Automotive’s lien in an extraordinary train of events.
The debtors financed the purchase of a $25,000 Cadillac
through Chase in October, 1996. Less than a year later, the
Kinions filed a voluntary Chapter 7 petition in bankruptcy and duly
notified Chase. The case was processed as a no-asset case, in
which creditors are instructed not to file proofs of claim because
the trustee determines no unsecured, non-exempt assets are
available for distribution. On September 30, Chase forwarded a
proposed reaffirmation agreement to the debtors, who signed and
returned it to Chase. Counsel for the Kinions, on receipt of the
executed agreement, was to see to its filing with the bankruptcy
court.
A local bankruptcy rule of the Northern District of Texas
(Amarillo Division), is apparently predicated on the assumption
that only secured debt should be reaffirmed by debtors. The rule
consequently requires that the lender’s automotive finance contract
and title be attached to the motion for reaffirmation. To comply
with this rule, counsel for the Kinions wrote Chase twice seeking
copies of the documents.
At the debtors’ discharge hearing in January, 1998, the
bankruptcy court was informed by appellees’ counsel of the
reaffirmation agreement and of the absence of security documents
concerning the Cadillac.1 Significantly, the Kinions did not
dispute the secured status of the debt on the Cadillac and had
1
The Kinions reaffirmed their debt on a GMAC-financed
truck at the same hearing.
2
listed Chase on their bankruptcy schedules as a secured creditor.
Nevertheless, they requested the court to permit them to file the
reaffirmation agreement along with a proposed order that would
(1) deny the agreement, (2) find the debt unsecured, and (3) allow
Chase 30 days to file a motion for rehearing on the matter. The
court agreed to sign such an order.2
Only three days later, Chase furnished Kinion with the
necessary security documents.3 Debtors’ counsel did not turn those
documents over to the court. Instead, on February 3, after the
bankruptcy case had been closed, the Kinions filed the
reaffirmation agreement with the denial order.
On February 10, the court reopened the case sua sponte,
pursuant to 11 U.S.C. § 350, and signed the order. In its order,
the bankruptcy court enjoined Chase from attempting to collect any
pre-petition indebtedness from the Kinions personally and from
interfering with the Kinions’ possession of their property. The
Kinions then sent the thirty-day notice concerning the order to
Chase at an address different from the one to which their previous
correspondence had been directed.4
2
Apparently, this type of order has been entered by the
court in numerous bankruptcies .
3
The record does not reflect why the debtors did not
themselves possess copies of the relevant security documents.
4
The February 10 order was mailed only to Chase’s address
as originally reflected in official bankruptcy court files.
3
On March 17, the Kinions’ counsel wrote to Chase
demanding that it cease collection efforts and turn over title to
the Cadillac. Chase did not file a motion to reconsider the
court’s order until April 13, and the bankruptcy court found this
was too late. The district court affirmed the bankruptcy court’s
decisions, and this appeal followed.
DISCUSSION
This court reviews the lower courts’ findings of fact
under the clear error standard and their interpretations of the law
de novo. Richmond Leasing Co. v. Capital Bank, NA, 762 F.2d 1303,
1307 (5th Cir. 1985).
The upshot of these events is that the debtors made less
than a year’s monthly payments on their Cadillac, filed bankruptcy,
were discharged from personal liability for the debt, and have also
been relieved of Chase’s lien on the car, even though they have
repeatedly conceded that the debt was secured.
The Kinions employ the following reasoning in support of
the bankruptcy court’s orders. Chase voluntarily “sought out” the
bankruptcy court’s approval of its proposed reaffirmation agreement
with the debtors and thereby subjected itself to the court’s
further orders. Chase “put the debtors to a choice” whether to
reaffirm their debt on the car or discharge the unsecured portion
of the debt in bankruptcy while remaining liable for the secured
portion. The Amarillo division’s unique local rule required Chase
to provide copies of the definitive security documents along with
4
the executed reaffirmation agreement. Having taken advantage of
the possibility of reaffirmation, Chase failed to comply with the
local rule and did not “prove” the validity of its security
interest in the Kinions’ Cadillac.
According to the Kinions, the court was then justified in
reopening their bankruptcy, after discharge had been granted and
the case had been closed, in order to “deny” their incomplete
reaffirmation agreement and void Chase’s automobile lien. The
court was led to believe that the Chase loan was effectively
unsecured, and hence, it should enjoin post-bankruptcy collection
efforts directed at the Cadillac as well as the underlying debt.
Although Chase had no prior notice that its lien could be avoided,
any procedural defect arising from the lack of notice was allegedly
cured by the bankruptcy court’s order permitting Chase to move for
reconsideration within 30 days. Finally, Chase lost its chance to
defend its indisputably valid lien by failing to move timely for
reconsideration.
The Kinions’ self-serving interpretation of bankruptcy
procedure has carried their case to a most unusual conclusion.
Ordinarily, if a secured creditor failed to obtain the court’s
approval for a reaffirmation agreement, the reaffirmation agreement
would simply be rejected, and the creditor would retain its lien
(if any) on the property.5 Here, although the Kinions had the lien
5
As will be seen infra, the statute does not require the
court’s “approval” in most cases.
5
documents in their possession before the court entered its lien-
stripping order, and although the Kinions admitted the secured
status of the claim, the court voided the lien. It takes little
analysis to demonstrate that this result cannot be squared with the
Bankruptcy Code and rules.
First, to the extent that the local bankruptcy rule,
applicable only in the Amarillo division in the Northern District
of Texas, implies that reaffirmations can only be approved for
secured indebtedness, it is contrary to the Bankruptcy Code. The
Code permits reaffirmations of unsecured as well as secured debt.
The Amarillo division’s local rule may not impose a requirement of
secured status upon a creditor seeking court filing of a
reaffirmation agreement. Moreover, the Code requires neither a
court hearing nor court approval if the debtor is represented by
counsel. 11 U.S.C. § 524(c) and (d).6 Obtaining proof of a valid
6
11 U.S.C. § 524: . . . (c) An agreement between a holder
of a claim and the debtor, the consideration for which, in whole or
in part, is based on a debt that is dischargeable in a case under
this title is enforceable only to any extent enforceable under
applicable non-bankruptcy law, whether or not discharge of such
debt is waived, only if --
(1) such agreement was made before the granting of the
discharge under section 727, 1141, 1228, or 1328 of this
title;
(2) (A) such agreement contains a clear and conspicuous
statement which advises the debtor that the agreement may be
rescinded at any time prior to discharge or within sixty days
after such agreement is filed with the court, whichever occurs
later, by giving notice of rescission to the holder of such
claim; and
(B) such agreement contains a clear and conspicuous
statement which advises the debtor that such agreement is
not required under this title, under non-bankruptcy law,
or under any agreement not in accordance with the
6
provisions of this subsection;
(3) such agreement has been filed with the court and, if
applicable, accompanied by a declaration or an affidavit of
the attorney that represented the debtor during the course of
negotiating an agreement under this subsection, which states
that --
(A) such agreement represents a fully informed and
voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on
the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal
effect and consequences of --
(i) an agreement of the kind specified in this
subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time
prior to discharge or within sixty days after such agreement
is filed with the court, whichever occurs later, by giving
notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section have been
complied with; and
(6) (A) in a case concerning an individual who was not
represented by an attorney during the course of negotiating an
agreement under this subsection, the court approves such
agreement as --
(i) not imposing an undue hardship on the debtor or
a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such
debt is a consumer debt secured by real property.
(d) In a case concerning an individual, when the court has
determined whether to grant or not to grant a discharge under
section 727, 1141, 1228, or 1328 of this title, the court may hold
a hearing at which the debtor shall appear in person. at any such
hearing, the court shall inform the debtor that a discharge has
been granted or the reason why a discharge has not been granted.
If a discharge has been granted and if the debtor desires to make
an agreement of the kind specified in subsection (c) of this
section and was not represented by an attorney during the course of
negotiating such agreement, then the court shall hold a hearing at
which the debtor shall appear in person and at such hearing the
court shall --
(1) inform the debtor --
(A) that such an agreement is not required under
this title, under non-bankruptcy law, or under any
agreement not made in accordance with the provisions of
subsection (c) of this section; and
(B) of the legal effect and consequences of --
7
security agreement may be important for the debtor’s counsel to
fulfill his statutory and ethical duties in connection with a
reaffirmation. 11 U.S.C. § 524(c)(3). Proof of secured status
might also inform the court’s admonishment during hearings that are
required only for debtors not represented by counsel. 11 U.S.C. §
524(d). But the unsecured status of the debt may not in and of
itself prevent a debtor from agreeing to reaffirm. Thus, the local
rule’s “requirement” that a creditor furnish its security documents
could not be dispositive of the court’s duty in reaffirmation.
Second, the Kinions err in suggesting that Chase in any
way forced them to reaffirm their debt on the Cadillac. The
Bankruptcy Code specifies that within thirty days after filing a
Chapter 7 petition, “the debtor shall file” a statement of
intention with respect to consumer debt secured by property of the
estate. 11 U.S.C. § 521(2)(A) & (B).7 The filing announces the
(i) an agreement of the kind specified in
subsection (c) of this section; and
(ii) a default under such an agreement; and
(2) determine whether the agreement that the debtor
desires to make complies with the requirements of subsection
(c)(6) of this section, if the consideration for such
agreement is based in whole or in part on a consumer debt that
is not secured by real property of the debtor.
7
11 U.S.C. § 521: . . . (2) if an individual debtor’s
schedule of assets and liabilities includes consumer 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
8
debtor’s intention to retain or surrender the property and, if
applicable, to redeem the collateral or reaffirm the debt. Johnson
v. Sun Finance Co. (In re Johnson), 89 F.3d 249, 251 (5th Cir.
1996). By sending the debtors a proposed reaffirmation agreement,
Chase was offering them an option under section 521, but it could
compel neither their signatures nor performance of the agreement.
Indeed, it is clear from the record that the Kinions’ counsel felt
an ethical obligation to review the reaffirmation agreement
carefully before filing it with the court. In any event, Chase
could not unilaterally consummate the reaffirmation. The debtors
were required by bankruptcy law to choose promptly how they would
treat the Cadillac and the associated debt. Their first choice was
to reaffirm.
Third, though executed by the parties, the reaffirmation
agreement never complied with the Bankruptcy Code and should not
have been filed at court. The agreement was not complete “before
the granting of the discharge”, 11 U.S.C. § 524(c)(1), and it was
not accompanied by the required declaration of the Kinions’
to the retention or surrender of such property and, if
applicable specifying that such property is claimed as
exempt, that the debtor intends to redeem such property,
or that the debtor intends to reaffirm debts secured by
such property;
(B) within forty-five days after the filing of a
notice of intent under this section, or within such
additional time as the court, for cause, within such
forty-five day period fixes, the debtor shall perform his
intention with respect to such property, as specified by
subparagraph (A) of this paragraph; and
9
counsel. 11 U.S.C. § 524(c)(3).8 Twice flawed as it was, the
proposed reaffirmation agreement was unenforceable.
Fourth, why the bankruptcy court thought it should reopen
the Kinions’ Chapter 7 case in order to “deny” the reaffirmation
agreement and strip Chase’s lien is hard to discern. The court had
already granted the Kinions a discharge, the trustee had
administered their “no asset” case, and the case had been closed.
The Bankruptcy Code permits reopening “to administer assets, to
accord relief to the debtor, or for other cause.” 11 U.S.C.
§ 350(b).9 Here, the debtors required no relief from the
reaffirmation agreement. As shown above, there was no enforceable
agreement between the Kinions and Chase. They were in the same
position as any other Chapter 7 debtor who is discharged while a
creditor retains a lien on the debtor’s property: their personal
liability for the debt was extinguished, but some rapprochement
with the creditor would have to be reached concerning the debtor’s
continuing lien on the collateral. To go through the motions of
“denying” an ineffective, incomplete reaffirmation agreement was at
best futile. To “reopen” for this purpose, or for the further
purpose of voiding Chase’s lien, was an abuse of discretion.
8
See note 6 supra.
9
The court may have believed that it should reopen the
case because it was closed before a standard discharge order --
enjoining creditors from seeking to collect discharged debts -- was
entered. Such a purpose is acceptable. But the reopening could
not, under the circumstances described above, serve as a pretext to
avoid a lien.
10
Fifth, if at some point the Kinions believed they had
grounds to challenge the secured status of Chase’s loan, the
procedure sanctioned by the Bankruptcy Rules calls for an adversary
proceeding. See Bankruptcy Rule 7001, et seq. An adversary
proceeding to determine the validity, priority, or extent of a lien
proceeds is a lawsuit, incorporating nearly verbatim most of the
Federal Rules of Civil Procedure. The court’s order stripping
Chase’s lien complied with none of the usual procedures. Chase was
never served with notice that its lien would be challenged; it
never received notice of the hearing date for any such challenge;
and no evidentiary hearing was held.10 The court’s allowance of
thirty days to file a motion for reconsideration cannot substitute
for the before-the-fact protections of creditors’ interests
embodied in the adversary rules.
Sixth, it cannot be contended that Chase should have been
aware that the bankruptcy court’s local reaffirmation rule and
practice would bring its lien into question and subject it to an ex
parte lien-stripping order. This court has repeatedly stated that
“a secured creditor may remain outside the bankruptcy proceedings
until an interested party objects to his allowed secured claim.”
In re Howard, 972 F.2d 639, 641 (5th Cir. 1992). See also In re
Simmons, 765 F.2d 547 (5th Cir. 1985) (a Chapter 13 plan may not
substitute for an objection to a secured creditor’s proof of
10
Adding insult to injury, the Kinions’ counsel was
actually in possession of the relevant lien documents when he
requested the court to enter the lien-stripping order.
11
claim).11 See also In re Orr, 180 F.3d 656, 660 (5th Cir. 1999)
(“Ordinarily, liens and other secured interests survive
bankruptcy”), citing Farrey v. Sanderfoot, 500 U.S. 291, 297, 111
S.Ct. 1825, 1829 (1991).12 The court could not, consistent with
these precedents, utilize the statutory reaffirmation process to
invalidate without notice a secured creditor’s lien.13
Seventh, because the court had no authority to strip
Chase’s secured interest, its injunctive order preventing Chase
from taking steps against the collateral cannot be justified by the
Bankruptcy Code either. A bankruptcy discharge operates as an
injunction against the commencement or continuation of an act to
collect a pre-petition unsecured debt from property of the debtor.
11 U.S.C. § 524(a). But the injunction may not prevent a secured
11
Technically, as the Kinions’ case was a no asset case,
claims against it were not to be filed by creditors. Nevertheless,
a party could challenge the validity of Chase’s lien had it been in
the party’s interest to do so. As noted, however, the debtors
identified the debt they owed to Chase as “secured” and not
“disputed”.
12
A creditor’s liens ride through bankruptcy unaffected
unless the Bankruptcy Code clearly permits their modification, e.g.
in reorganization cases. See Dewsnup v. Timm, 502 U.S. 410, 420,
112 S.Ct. 773, 779 (1992), citing Long v. Bullard, 117 U.S. 620-21,
6 S.Ct. 917, 918 (1886). No such provisions of the Bankruptcy Code
are applicable to the Kinions’ case.
13
The Kinions rely heavily on the Seventh Circuit’s
statement that “the principle that liens pass through bankruptcy
unaffected cannot be taken literally.” In re Penrod, 50 F.3d 459,
462 (7th Cir. 1995). Penrod involved a Chapter 11 reorganization
and is distinguishable for that reason alone. Penrod also
distinguishes expressly and may well conflict with this court’s
decision in In re Simmons, supra. Penrod, 50 F.3d at 464. If it
does conflict, we are bound by this court’s precedent.
12
creditor from exercising its legal remedies against the collateral
if the secured status of the loan has not been challenged by
appropriate and customary bankruptcy procedures. See In re Howard,
supra. The bankruptcy court’s injunction against Chase was
unauthorized and invalid.
Finally, the bankruptcy court abused its discretion in
failing to grant Chase’s motion to reconsider. Whether
reconsideration was authorized under 11 U.S.C. § 350, Bankruptcy
Rule 8015, or by some other device, it should have been granted to
correct the procedural errors that led to the unauthorized
stripping of Chase’s valid lien.
The actions that occurred here do not survive scrutiny
under a cursory analysis of applicable bankruptcy law. To the
extent that these events were set in motion by the local rule of
the Amarillo division, a rule designed in part to limit
reaffirmations to secured debt, the rule is plainly inconsistent
with the Code and invalid. The judgments of the bankruptcy and
district courts, which abrogated Chase’s lien, and the injunction
against future actions by Chase to recover on its lien, are
accordingly reversed.
REVERSED.
13