239 F.3d 910 (7th Cir. 2001), 99-4239, Cox v Zale Delaware Inc.

Docket Nº:99-4239
Citation:239 F.3d 910
Party Name:Ralph M. Cox, on behalf of himself and others similarly situated, Plaintiff-Appellant, v. Zale Delaware, Inc., Defendant-Appellee.
Case Date:February 08, 2001
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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239 F.3d 910 (7th Cir. 2001)

Ralph M. Cox, on behalf of himself and others similarly situated, Plaintiff-Appellant,


Zale Delaware, Inc., Defendant-Appellee.

No. 99-4239

United States Court of Appeals, Seventh Circuit

February 8, 2001

Argued September 12, 2000

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 1670--Elaine E. Bucklo, Judge.

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Before Posner, Coffey, and Manion, Circuit Judges.

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Posner, Circuit Judge.

A large class-action suit has grown out of a tiny acorn of a dispute. In 1993 Ralph Cox filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. In the list of debts that he submitted to the bankruptcy court he listed a debt to Zale, from which he had bought (on credit) a ring in which Zale retained a security interest. About a month after the submission of the list of debts he signed an agreement with Zale reaffirming the debt and agreeing to pay the unpaid balance of $218.93 at the rate of $15 a month. The next month the bankruptcy proceeding wound up with an order discharging Cox from all his listed debts-- including the debt to Zale, because the reaffirmation agreement had not been filed with the bankruptcy court.

The failure to file had an additional significance besides preventing the court from learning of the agreement and so deleting the debt to Zale from the list of discharged debts. Section 524(c) of the Bankruptcy Code provides that an agreement reaffirming a dischargeable debt "is enforceable only if . . . such agreement has been filed with the court." 11 U.S.C. sec. 524(c)(3). The purpose is to help assure that the agreement is voluntary on the debtor's part rather than coerced and does not put such a crushing weight on his shoulders that it prevents him from making the "fresh start" that is one of the goals of bankruptcy law. In re Turner, 156 F.3d 713, 718 (7th Cir. 1998); In re Duke, 79 F.3d 43 (7th Cir. 1996); see generally Grogan v. Garner, 498 U.S. 279, 286 (1991); In re Renshaw, 222 F.3d 82, 86 (2d Cir. 2000). Provided there is no coercion or harassment of the debtor, the creditor's offer of reaffirmation is not deemed an attempt to collect the debt and therefore does not violate the automatic stay, the statutory injunction against creditors' seeking to collect their debts from a debtor after he's entered bankruptcy. In re Duke, supra; Pertuso v. Ford Motor Credit Corp., 233 F.3d 417, 423 (6th Cir. 2000); In re Brown, 851 F.2d 81, 84 (3d Cir. 1988). Cox's argument that Zale's offer violated the automatic stay is therefore frivolous.

But the reaffirmation agreement was never filed, and was therefore invalid even though the offer itself had not been improper. Bessette v. Avco Financial Services, 230 F.3d 439, 444 (1st Cir. 2000); In re Turner, supra, 156 F.3d at 718. Section 524(c) is explicit that such an agreement is enforceable only if all the statutory conditions, including filing, are satisfied. The record is silent on why the agreement was not filed. Cox argues that Zale has a practice of not filing such agreements because it fears that bankruptcy judges will disallow them, though the judge cannot do that if the debtor is represented by counsel, as Cox was. 11 U.S.C. sec. 524(c)(6)(A); In re Grinnell, 170 B.R. 495 (Bankr. D.R.I. 1994); In re Dabbs, 128 B.R. 307, 309 (Bankr. D. Fla. 1991). The argument, though implausible in a case such as this in which the debtor was represented by counsel in his bankruptcy proceeding, cannot be evaluated on the present record.

The reader may be wondering why a debtor would ever agree to pay a dischargeable debt, and why a secured creditor would care about securing an agreement that the debtor pay, since a discharge in bankruptcy does not extinguish a secured creditor's right to enforce his security interest. Dewsnup v. Timm, 502 U.S. 410 (1992); In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995); In re Be-Mac Transport Co., 83 F.3d 1020, 1025 (8th Cir. 1996). The answer to the second question, as explained in our Penrod opinion, 50 F.3d at 461-62, is that secured creditors are frequently undersecured, especially when the cost of foreclosing on a security interest is factored in, and so they would like to collect the debt directly from the debtor rather than liquidate their security interest. The answer to the first question is that the debtor may prefer to retain the property in which his creditor holds a secured interest,

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rather than avoid paying the creditor but lose the property to repossession or foreclosure. An understanding of the incentives of the parties to debt-reaffirmation agreements will turn out to be important to deciding on the proper remedy for violation of the statutory requirement that such agreements be filed with the bankruptcy court.

Back to our case. Years passed and the bankruptcy proceeding was long over with and Cox had paid off the reaffirmed debt in full when he brought this suit on behalf of himself and all others similarly situated--meaning all other customers of Zale who had signed debt- reaffirmation agreements that Zale had not filed with the bankruptcy court. The suit sought to rescind the agreement and recover the amounts that Cox (and the other members of the class in similar situations) had paid Zale after the bankruptcy court had entered its order discharging his listed debts. Cox based federal jurisdiction on 28 U.S.C. sec. 1334(a), which gives the federal district courts exclusive jurisdiction over suits arising under the Bankruptcy Code. The district court referred the suit to the bankruptcy court (which technically is a division of the district court) pursuant to 28 U.S.C. sec. 157(a)...

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