In re Pratt

• Decision Date: 01 September 2006
• Docket Number: No. 05-2453.,05-2453.
• Citation: 462 F.3d 14
• Parties: In re Carlton Dana PRATT and Christine Ann Pratt, Debtors. Carlton Dana Pratt, Appellant, v. General Motors Acceptance Corporation, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 14

462 F.3d 14

In re Carlton Dana PRATT and Christine Ann Pratt, Debtors Carlton Dana Pratt, Appellant, v. General Motors Acceptance Corporation, Appellee.

No. 05-2453.

United States Court of Appeals, First Circuit.

Heard March 7, 2006.

Decided September 1, 2006.

James F. Molleur, for appellant.

F. Bruce Sleeper, with whom Jensen, Baird, Gardner & Henry, was on brief for appellee.

Before LIPEZ, Circuit Judge, CYR, Senior Circuit Judge, and HOWARD, Circuit Judge.

CYR, Senior Circuit Judge.

Carlton and Christine Pratt, chapter 7 debtors, appeal the district court judgment which affirmed a bankruptcy court ruling that General Motors Acceptance Corporation (GMAC) did not violate the chapter 7 discharge injunction by declining to discharge its lien on the debtors' automobile until they paid the remaining balance due on their prepetition car loan. We now reverse and remand for further proceedings.

I BACKGROUND

In 1994, Carlton Pratt bought a new Chevrolet Cavalier and financed the purchase through GMAC, which acquired a lien on the vehicle. Four years later, the Pratts filed a chapter 13 petition, and estimated the current value of the vehicle at $4900. The bankruptcy court allowed the GMAC proof of secured claim for the outstanding loan balance (including interest) at $3,291.35, and GMAC subsequently received $1,083.62 in distributions during the course of the chapter 13 proceeding.

In 1999, the Pratts converted their chapter 13 case to chapter 7, by which time the balance due on the GMAC secured claim approximated $2620. Pursuant to Bankruptcy Code § 521(a)(2)(A), the Pratts gave notice that they intended to "surrender" the vehicle, viz., by ceding possession in lieu of reaffirming their prepetition loan obligation to GMAC. The bankruptcy court granted the GMAC motion for relief from the automatic stay in order to allow GMAC to realize on its lien. GMAC notified the Pratts in writing of their right to cure the default. After concluding that the expense of repossession would outstrip the value of its secured claim, GMAC followed its customary practice of writing off the remaining loan balance. The Pratts retained possession of the vehicle. The bankruptcy court granted the Pratts a chapter 7 discharge, which released them from their outstanding personal indebtedness for the balance due on the GMAC car loan.

By September 1999, the Pratts realized that the Cavalier was inoperable, hence essentially worthless, and that they would have to dispose of it. Before they could "junk" the car, however, salvage dealers were required by Maine law to obtain a release of the GMAC lien. During the next few months, the Pratts repeatedly contacted GMAC and requested that it either repossess the car or release the lien. GMAC refused to release its lien unless and until the outstanding loan balance was paid in full.

The bankruptcy court allowed the Pratts' motion to reopen their chapter 7 case to permit them to file the instant adversary proceeding against GMAC, which alleges that GMAC's refusal either to repossess the vehicle or to release the lien, absent full payment of the discharged loan balance, violated the chapter 7 discharge injunction prescribed by Bankruptcy Code § 524(a)(2). Cf., e.g., Arruda v. Sears, Roebuck & Co., 310 F.3d 13, 21 (1st Cir.2002) ("Even after the termination of a bankruptcy case, a discharged debtor who wishes to redeem property pursuant to section 722, but who believes that the terms proposed by the lienholder are unfair, can ask the bankruptcy court to reopen the bankruptcy case and adjudicate the matter.").

In due course, the court entered judgment for GMAC. In re Pratt, 324 B.R. 1 (Bankr.D.Me.2005). The court held that (i) GMAC's in rem right under Maine law to enforce its lien against the vehicle survived intact the chapter 7 discharge of the Pratts' unsecured personal liability on the loan; (ii) by Maine statute, a secured creditor has an unqualified right to refuse to release its lien until the loan balance is paid in full; (iii) the GMAC refusal to release its lien did not coerce the Pratts to repay their discharged personal liability on the car loan, but simply invoked its legitimate in rem remedies as accorded under Maine law; and (iv) the situation was no more coercive than had GMAC offered the Pratts a reaffirmation agreement whereby they could consent to repay both the secured and unsecured portions of the loan indebtedness. See id. at 8-9. Following an unsuccessful intermediate appeal to the district court, the Pratts initiated the instant appeal.

II DISCUSSION

A. The Putative Violation of the Chapter 7 Discharge Injunction

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).

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).

"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

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:

[I]f an individual debtor's schedule of assets and liabilities includes 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 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 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

(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).

11 U.S.C. § 521(a)(2).

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.

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...