Opinion ID: 202388
Heading Depth: 2
Heading Rank: 1

Heading: The Putative Violation of the Chapter 7 Discharge Injunction

Text: 8 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). 9 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). 10 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 v. Avco Fin. Servs., Inc., 230 F.3d 439, 445 (1st Cir.2000). 1 11 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: 12 [I]f an individual debtor's schedule of assets and liabilities includes debts which are secured by property of the estate— 13 (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 exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property; 14 (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 15 (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). 16 11 U.S.C. § 521(a)(2). 17 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, 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 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. 18 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-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. 19 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. 20 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. 21 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, 99 S.Ct. 914, 59 L.Ed.2d 136, (1979); In re LAN Tamers, 329 F.3d 204, 213-14 (1st Cir.), cert. denied, 540 U.S. 1047, 124 S.Ct. 808, 157 L.Ed.2d 695 (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. 22 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 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). 23 We do not suggest that a secured creditor invariably 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 24 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).