I'm swamped. Absolutely swamped. And yet I love this case. Absolutely love it. So I couldn't help but share it with you. If only because the fact that it's a bankruptcy case didn't in the slightest diminish my interest.
Judge O'Scannlain writes the majority opinion, and Judge Graber respectfully dissents. Both opinions are extremely well-written as well as substantively great. I can't even say which one I find more persuasive; it's that close (at least to me).
I'll let Judge O'Scannlain set the stage. Adding, by the way, that this is a pretty good case (on the facts) in which to articulate his position:
"Antoinette Dumont purchased a car in 2003 from Ford Motor Credit Company (“Ford”). The loan agreement contained a clause stating that Dumont would be in default if she was involved in a bankruptcy proceeding, also known as an “ipso facto” clause. Dumont filed for Chapter 7 bankruptcy protection in 2006, subsequent to the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). The vehicle was listed on the bankruptcy petition as having a value of $5,800. At the time, she owed $8,288 on it and was making payments of $335.78 per month. In her Bankruptcy Statement of Intentions, Dumont stated that she would retain the car and continue to make monthly payments.
Ford’s attorney e-mailed Dumont’s attorney, asking that Dumont reaffirm the debt. Her attorney declined the offer. It is not clear from the record what the terms of the proposed reaffirmation were. Ford filed a proof of claim, to which there was no objection; thus Ford’s claim was allowed. See 11 U.S.C. § 502(a). Dumont received a discharge on August 15, 2006. After the discharge, she continued making payments on the car loan. Without advance notice, Ford repossessed her car on November 14, 2006. Dumont successfully moved to reopen her bankruptcy case and claimed that Ford had violated the discharge injunction by repossessing her car. The bankruptcy court denied the motion to find Ford in violation of the discharge injunction, and the Bankruptcy Appellate Panel (BAP) unanimously affirmed."
So, to summarize, the question is whether a debtor can continue to make payments on an underwater car and retain possession of it, or can a creditor repossess the item even though the debtor's still current?
Judge O'Scannlain then cogently summarizes the applicable law, as well as the underlying policy choices. All of which was new to me (as a non-BK lawyer), and all of which I thought showed a lot of foresight and talent. Here's his take on the underlying stuff, with citations omitted:
"When a debtor files for Chapter 7 bankruptcy, she is required to state her intentions with regard to any property which is subject to a security interest. Prior to BAPCPA, our circuit law allowed the debtor to choose among four options. First, she could merely surrender the collateral. Second, she could redeem such collateral—that is, pay the creditor its present fair market value. The debtor could also reaffirm the debt on terms she and the creditor agreed on. Reaffirmation allowed the debtor to keep her collateral, but re-exposed her to personal liability should she fail to make payments as promised. The final option—recognized in only some circuits—was the so-called “ride-through” or “pay and drive.” Under this plan, the debtor continued to make payments as if the bankruptcy had never occurred. The creditor was forbidden by the automatic stay (and later, by the discharge injunction) from repossessing the collateral unless the buyer defaulted. If the buyer stopped making payments or otherwise defaulted, then the creditor could reclaim its collateral but could not pursue a deficiency judgment against the debtor.
Unsurprisingly, the ride-through system proved popular for debtors. Debtors usually need a car to travel to and from work, school, medical appointments, and other important activities. Having just filed for bankruptcy, they understandably expect to experience difficulty securing financing for another vehicle. Accordingly, they were often willing to continue payments on loans that were “underwater” (i.e., loans for which the amount due exceeded the value of the collateral). Some creditors embraced ride-through, even allowing the debtor to keep making payments in circuits which did not recognize the option. On the other hand, creditors might believe that the buyer was unlikely to follow through with the plan or that the collateral might decrease in value faster than payments were coming in."
So to frame the debate in terms with which I'm familiar, the question is whether we grant the option -- and I mean that in its classical economic sense -- to the debtor or the creditor. Who gets the cost-free put option?
Prior to BAPCPA, the Ninth Circuit, alongside many other (but not all) circuits, held debtors had the ability to ride-through. So the question here is whether BAPCPA changed that. And Judge O'Scannlain held that it did. So no more car unless you strike a deal, debtors. Walking's good for you anyway.
I won't go through the statutory analysis, since that's too much to reiterate even for me. But I will say that Judge O'Scannlain has a point. Then again, so does Judge Graber, who thinks that BAPCPA didn't change the applicable rule. Here's some of what she has to say (which, again, I liked):
"Because of confusing and contradictory statutory text, courts have struggled for decades to discern congressional intent on the answer to that simple question. Indeed, before the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), the circuit courts were split five to four. Five circuits—including ours—had held that the ride-through option was available to debtors, while four circuits had held that it was not. The disagreement at the circuit court level represented only the tip of the iceberg. In scores of cases, district courts, bankruptcy appellate panels, and bankruptcy courts had weighed in on the debate, as had commentators. . . .
[When BAPCPA was passed, the relevant section] remains entirely unchanged. The all-important “if applicable” phrase—the very source of disagreement among circuit courts, district courts, bankruptcy courts, and commentators—remains intact. Congress not only declined to adopt the Fourth Circuit’s suggested text, it declined to make any change whatsoever. I acknowledge, of course, that Congress did modify § 521(a)(2)(C) to include an exception for new § 362(h). But my examination of that section suggests that, if anything, Congress intended no change to the existing circuit split."
Judge Graber concludes by saying what it clearly the case: that Congress should fix this mess. But that's been said repeatedly already, to no avail. But if only for emphasis, she says it again, using language that a different panel of the Ninth Circuit said just last month regarding a different bankruptcy issue -- words equally applicable here:
"The “correct” answer to the question before us, which the courts have been struggling with for years
—at the unnecessary cost of thousands of hours of valuable judicial time—depends ultimately not upon our interpretation of the statute, but upon what Congress wants the answer to be. We would hope, in this regard, that we the judiciary would be relieved of this Sisyphean adventure by legislation clearly answering a straightforward policy question: [May debtors invoke the “ride-through” option?]"
Which is true, of course. And good luck with that. I'm sure that Congress will get right on it. As, I'm sure, is Judge Graber.
But you can always hope.
