Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-01050/USCOURTS-ca10-89-01050-0/pdf.json

Nature of Suit Code: 442
Nature of Suit: Civil Rights Employment
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

LOWRY FEDERAL CREDIT UNION, 

Creditor-Appellant, 

v. 

JAMES DALE WEST and SHARON 

KAY WEST, 

Debtors-Appellees. 

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No. 89-1050 

Appeal from the United States District Court 

For th~ District of Colorado 

D.C. No. 88-F-1573 

Submitted on the Briefs: 

FI LED 

lkiiwd States Court of Appeals 

Tenth Ci~·::uir 

AUG 1 S 1.989 

ROBERT L. HOECKER 

Clerk 

Mary Pat Ellis, Barry Meinster, and Ann Gail Meinster, of Meinster 

and Brown, P.C., Denver, Colorado, for Creditor-Appellant. 

Bryan A. Nix, Denver, Colorado, for Debtors-Appellees. 

Before MOORE, ANDERSON, and BRORBY, Circuit Judges. 

MOORE, Circuit Judge. 

Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 1 
After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered 

submitted without oral argument. 

This is an appeal from a ruling of the district court sitting 

as an appellate court in bankruptcy. The question presented is 

whether the debtors' failure to comply with the mandatory 

requirements of 11 u.s.c. § 521(2) gives a secured creditor an 

automatic and conclusive right to repossess collateral. A 

secondary question is whether a bankruptcy court can permit 

debtors to retain the collateral upon performance of certain 

conditions even though the debtors have neither redeemed the 

collateral nor reaffirmed the debt for which the collateral 

provides security. We conclude the debtors' failure to file the 

notice of the.election required by§ 521(2)(A) does not result in 

an automatic benefit to the creditor. We also conclude, under the 

facts of this case, the bankruptcy court acted within its 

discretionary authority to permit the debtors to retain the 

collateral without either redeeming or reaffirming. We therefore 

affirm the judgment of the district court. 

The debtors, James and Sharon West, purchased a pickup truck 

with funds loaned to them by the creditor, Lowry Federal Credit 

Union. To secure the loan, the debtors executed a security 

agreement conveying to Lowry a security interest in the vehicle. 

The agreement called for monthly payments of $342 and required the 

debtors to maintain insurance coverage on the truck. The 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 2 
agreement also contained a clause that stated a default in the 

obligation would occur "if something happens which significantly 

reduces the credit union's .ability to realize on any property you 

have given as security." 

Approximately fourteen months later, debtors filed a petition 

for relief under Chapter 7 of the Bankruptcy Code. At the time of 

the filing, and, subsequently, the debtors were and have been 

current on their payments. They also have maintained adequate 

insurance on the vehicle. 

Lowry demanded debtors either reaffirm the debt or redeem the 

collateral and threatened to repossess the vehicle. Because they 

did not believe the debt to be in default, debtors filed in the 

bankruptcy court a complaint for declaratory judgment and 

injunctive relief. The bankruptcy court agreed the debtors were 

not in default under the terms of the security agreement; 

consequently, the court held the debtors could not be forced to 

relinquish possession of the collateral. Moreover, the court 

concluded the debtors' discharge in bankruptcy did not put the 

creditor at risk sufficient to invoke the default clause in the 

security agreement. 1 In addition, the bankruptcy court enjoined 

Lowry from repossessing the vehicle so long as the debtors "remain 

current on the payments, provide adequate insurance, and are not 

otherwise in default of their contractual obligations." On 

appeal, the district court affirmed, and Lowry appealed to this 

court. 

1The bankruptcy court rejected the creditor's argument that the 

discharge of a possible deficiency between the amount owed and the 

value of the collateral presented such a risk. 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 3 
At issue here is whether, as a condition of retaining 

possession of property, a debtor must redeem collateral or 

reaffirm a debt even though all obligations owed on that debt by 

the debtor are current. The genesis of the issue lies within 11 

U.S.C. § 521(2)(A) & (B). 

As part of the duties required of a bankruptcy debtor, 

§ 521(2)(A) mandates the debtor ''shall file with the clerk a 

statement of his intention with respect to the retention ... of 

[secured] property, and, if applicable, ••• that the debtor 

intends to redeem such property, or that the debtor intends to 

reaffirm debts secured by such property." Within forty-five days 

of filing such a statement, "the debtor shall perform his 

intention with respect to such property." 11 U.S.C. § 521(2)(B). 

In this case, debtors did not fully comply with § 521(2). They 

merely declared they intended to retain their truck and did not 

state whether they would redeem or reaffirm, nor did they do 

either within the forty-five day period. 

The creditor argues that the requirements of§ 521(2) are 

mandatory. That is obvious. There is no room within the direct 

language of the section to presume otherwise. 2 The issue, 

2To escape the mandatory language of the section, debtors argue 

the "if applicable" phrase gives a debtor some form of option. We 

are unpersuaded by that argument because it is inconsistent with 

the plain meaning of the statute. The words "if appropriate" are 

gratuitous and do not affect the mandatory duties prescribed by 

the statute. The plain English of the section requires every 

debtor in possession of collateral to make an election whether to 

retain or relinquish that property. If the debtor decides to 

retain, the debtor is required to elect whether to redeem or 

reaffirm. The section also requires the choice be effected within 

45 days no matter whether the decision is to retain or relinquish. 

No other meaning can be gained from the precise terms of the 

(Continued to next page.) 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 4 
however, is what are the consequences of the debtors' failure to 

comply? Neither party directly addresses that question. 

Although Lowry presumes to the contrary, there is nothing 

within the text of § 521 which suggests a creditor succeeds 

automatically to any rights as a consequence of the debtors' 

failure to comply with its mandatory directives. Indeed, only the 

trustee may take an interest in the property. When the debtor 

fails to comply with the§ 521(2) requirements, the trustee is 

vested by 11 U.S.C. § 704(3) 3 with ensuring the debtor's 

compliance with§ 521(2). That responsibility, however, is not 

coupled with any power of enforcement •. In short, there is a gap 

between the trustee's duty to obtain compliance and the trustee's 

power to enforce that duty because Congress provided neither a 

penalty for a debtor's failure to comply with § 521(2) 4 nor. a 

specific remedy for a creditor as a consequence of such a failure. 

We therefore conclude debtors' failure to comply fully with 

§ 521(2) does not give a secured creditor an automatic right to 

repossess collateral. The creditor's right to demand redemption 

or reaffirmation is neither enhanced nor diminished because of 

that failure. 

(Continued from previous page.) 

statute, and nothing suggests the 

retain the property and ignore 

§ 521(2). 

debtor can simply elect to 

the other duties required by 

311 The trustee shall . intention as specified 

u.s.c. § 704(3). 

ensure that the debtor shall perform his 

in section 521(2)(B) of this title." 11 

4The only exception would be the possible denial of discharge if a 

debtor disobeys an order requiring compliance with§ 521(2). See 

3 L. King, Collier on Bankruptcy~ 521.09[4) (15th ed. 1989). 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 5 
The next question is whether 11 u.s.c. § 521 must be read to 

limit a debtor's right to retain possession of collateral to 

redemption or reaffirmation. While a debtor may redeem pro~erty, 

subject to 11 U.S.C. § 722, or reaffirm a debt, subject to 11 

u.s.c. § 524(c)(4), nothing within the Code makes either course 

exclusive. We, therefore, cannot conclude the bankruptcy court 

acted without jurisdiction in this case. 

This conclusion leaves for resolution Lowry's argument that 

the obligation is in default because of the terms of the so-called 

"ipso facto" clause in the loan agreement. Lowry argues that the 

parties have agreed that the mere filing of a bankruptcy petition 

results in the debtors' default, and allowing them to keep their 

truck is not only contrary to the terms of the agreement but also 

prejudicial to Lowry's financial interest. We disagree. 5 

We are in accord with the district and bankruptcy courts that 

the mere filing of the petition has not put Lowry in any more 

jeopardy than that which existed prior to the filing of the 

petition. Lowry did not introduce any evidence of actual 

prejudice but merely relied upon speculative arguments over 

dreadful possibilities that may result if the debtors fail to 

exercise proper care of the truck or ultimately fail to pay. 

While evidence of actual prejudice might persuade us to the 

contrary, we can see no harm resulting to Lowry from the order of 

the bankruptcy court. 

5we do not rule on the enforceability of such clauses because the 

issue has not been raised and thus is not before us; but see Riggs 

Nat'l Bank of Washington, D.C. v. Perry, 729 F.2d 982, 984-85 (4th 

Cir. 1984). 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 6 
In its brief, Lowry asks us to take "judicial notice" that 

the truck will depreciate in value over time. While taking 

judicial notice is part of the fact-finding process that occurs in 

a trial court, and thus is entirely foreign to the appellate 

process, we do not deem the fact of depreciation important to. our 

analysis. Indeed, we assume, in the scenario presented in the 

record before us, the amount of the outstanding obligation will 

also diminish with the passage of time. If depreciation will 

occur more rapidly, and if Lowry believed it would be harmed by 

that occurrence, Lowry should have introduced evidence to support 

its contention. In the absence of such evidence, however, we 

cannot assume the mere filing of the petition has caused a 

significant detriment to Lowry, and we decline the creditor's 

invitation to speculate. 

Since the debtors are current, and since nothing in the 

record suggest a significant disparity between the value of the 

collateral and the amount of the debt, the effect of the 

bankruptcy court's ruling is to put the parties where they were 

prior to bankruptcy. 6 Moreover, considering the practical effect 

of the bankruptcy court's order, we believe reaffirmation of the 

debt in its present postur~ would be simply cosmetic. 7 

6whether there will ever be a default that will leave in a portion 

of the debt subject to discharge is problematic. We will not, in 

the face of the record, entertain the speculative argument that 

the bankruptcy court has left Lowry in a worse position than it 

occupied before bankruptcy. 

7Because Lowry places great reliance upon General Motors 

Acceptance Corp. v. Bell, 700 F.2d 1053 (6th Cir. 1983), we should 

indicate we find the case inapposite. Bell considered only 

whether a debtor could redeem by installment payments ("This · (Continued to next page.) 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 7 
Applying the law as we find it, we cannot say the district 

court erred in affirming the judgment of the bankruptcy court. In 

sum, although. we regard as mandatory the provisions of Code 

§ 52l(b), we do not believe those provisions make redemption or 

reaffirmation the exclusive means by which a bankruptey court can 

allow a debtor to retain secured property. When the state of the 

evidence indicates neither the debtor nor the creditor would be 

prejudiced, a bankruptcy court may allow retention conditioned 

upon performance of the duties of the security agreement as a 

condition of retention. 

AFFIRMED. 

The mandate shall issue forthwith. 

(Continued from previous page.) 

action joins the legal issue of whether redemption of secured 

collateral in a Chapter 7 bankruptcy proceeding may be achieved 

through installment payments." Bell, 700 F.2d at 1054. The 

court's analysis must be read~thin that context. Since the 

issue here has nothing to do with redemption by installments, we 

find nothing in Bell applicable to the matter before us. Despite 

Lowry's argume~t to the contrary, the bankruptcy court did not 

allow the debtors to redeem in installments. Thus, we find 

nothing in Bell applicable to the matter before us. To the extent 

the Bell court's analysis goes beyond the issue it resolved, we 

conclude it is dicta, and we reject it out of hand. 

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Appellate Case: 89-1050 Document: 01019841910 Date Filed: 08/18/1989 Page: 8