Duke, Matter of

• Citation: 79 F.3d 43
• Decision Date: 15 March 1996
• Docket Number: No. 95-2029,95-2029
• Parties: , 28 Bankr.Ct.Dec. 1035, Bankr. L. Rep. P 76,829 In the Matter of William DUKE, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 43

79 F.3d 43

64 USLW 2583, 28 Bankr.Ct.Dec. 1035,

Bankr. L. Rep. P 76,829

In the Matter of William DUKE, Debtor-Appellant.

No. 95-2029.

United States Court of Appeals Seventh Circuit.

Argued Nov. 1, 1995.

Decided March 15, 1996.

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 95 C 774; Suzanne B. Conlon, Judge.

Scott C. Frost (argued), Blatt, Hasenmiller, Leibsker, Moore & Pellettieri, Chicago, IL, Joseph Kehoe, Wilson & McIlvaine, Chicago IL, Steven H. Kuh, Chicago, IL, for Appellee Sears, Roebuck & Company.

Robert J. Adams, Brian C. Pedersen (argued), Jennifer Hogarty, Adams & Associates, Chicago, IL, for debtor-appellant Duke.

Before POSNER, Chief Judge, and MANION and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

Although bankruptcy is normally viewed as a process through which a debtor obtains relief from pre-petition obligations and gets a fresh start in life (financially, at least), things are not always that simple. This case presents a wrinkle that occurs when, during the bankruptcy proceeding, a creditor makes an offer to a debtor to reaffirm a pre-petition debt, in exchange for certain benefits. The debtor's lawyer here believes that the creditor was too heavy-handed in its tactics, and thus ran afoul of the automatic stay rule of 11 U.S.C. § 362(a). The district court disagreed and ruled that the creditor had played by the rules. We affirm.

On September 23, 1994, William Duke filed a Chapter 7 bankruptcy petition in which he listed Sears, Roebuck & Co. (Sears) as one of his creditors. Duke's filing triggered the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a)(6), which prohibits a creditor from engaging in "any act to collect, assess, or recover a claim against the debtor that arose before commencement of the case under this title." After it received notice of the automatic stay, Sears sent the following letter to Duke's attorney, with a copy to Duke himself "for information purposes":

Dear Robert L. Adams:

We have been notified that you are representing our customer in Chapter 7 bankruptcy proceedings.

There is a balance of $317.10 on this account.

Should your client elect to reaffirm the Sears account upon liquidation of the outstanding balance in accordance with the Reaffirmation Agreement, charge privileges will be reinstated with a line of credit in the amount of $500.00.

Enclosed are copies of the proposed Reaffirmation Agreement. Your courtesy and cooperation in this matter are greatly appreciated. Please let me know if we may be of further assistance.

Very truly yours,

K. Jaggers

Bankruptcy Representative

cc: Debtor (For information purposes only)

First before the bankruptcy court, then in the district court, and now here, Duke claimed that this letter amounted to an impermissible attempt to "collect, assess, or recover a claim" in violation of § 362(a)(6).

In essence, this case presents a question about the relation between the automatic stay of § 362(a)(6) and reaffirmation agreements, which are authorized and regulated by 11 U.S.C. § 524. A reaffirmation agreement is one in which the debtor agrees to repay all or part of a dischargeable debt after a bankruptcy petition has been filed. As one bankruptcy court explained it, "a reaffirmation agreement has the effect of reaffirming a debtor's preexisting in personam liability on the underlying obligations giving rise to the debt." In re Walker, 180 B.R. 834, 846 (Bankr.W.D.La.1995). See also In re Grabinski, 150 B.R. 427, 430 (Bankr.N.D.Ill.1993). The debtor choice to reaffirm creates a voluntary exception to the "fresh start" that bankruptcy otherwise confers. For that reason, the Bankruptcy Code contains various safeguards designed to assure that reaffirmations are genuine and that they are not the product of abusive creditor practices. See 11 U.S.C. § 524(d); Richard A. Hesse, "Consumer Bankruptcy," Consumer Credit and Other Retail Banking Developments 1986, PLI, Part VII; Ned W. Waxman, "Redemption or Reaffirmation: The Debtor's Exclusive Means of Retaining Possession of Collateral in Chapter 7," 56 U.Pitt.L.Rev. 187, 188 (1994); Collier on Bankruptcy, para. 524.04 (15th ed. 1995). See also In re Edwards, 901 F.2d 1383, 1386 (7th Cir.1990) (reaffirmation is a fully voluntary negotiation on both sides).

The automatic stay provision of § 362, as noted above, generally prohibits the creditor from taking "any act" to collect pre-petition debts. Its purpose, as this Court explained in Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir.1984), is "to benefit a debtor by preventing harassment and frustration of rehabilitation efforts through pursuit by creditors in individual actions." Taken to its logical extreme, § 362 could be construed to prohibit all contact between creditors and debtors after a petition has been filed, with respect to dischargeable debts. The courts have not pushed it that far, however, not least because to do so would create significant tension with the right to reaffirm. Instead, they have focussed on the anti-harassment purpose of § 362. The Court of Appeals for the Ninth Circuit found that "mere requests for repayment are not barred absent coercion or harassment by the creditor." Morgan Guaranty Trust Co. v. American Sav. & Loan, 804 F.2d 1487, 1491 & n. 4 (9th Cir.1986), cert. denied, 482 U.S. 929, 107 S.Ct. 3214, 96 L.Ed.2d 701 (1987). The Third Circuit explained that the respite provided by § 362 "is not from communication with creditors, but from the threat of immediate action by creditors, such as a foreclosure or a lawsuit." Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 86 (3d Cir.1988).

This Court has not yet had the occasion to decide whether a creditor violates § 362(a)(6) when it sends a letter to a debtor offering to reaffirm a pre-petition debt. A majority of the bankruptcy courts have found that these actions do not violate § 362(a)(6) as long as the letter is nonthreatening and non-coercive. See, e.g., In re Hazzard, 1995 WL 110588 (Bankr.N.D.Ill.1995); In re Jefferson, 144 B.R. 620, 623 (Bankr.D.R.I.1992) (citing additional cases); see also In re Epperson, 189 B.R. 195, 198 (E.D.Mo.1995). Duke can prevail here only if we accept one of two propositions: (1) that all creditor-initiated offers to reaffirm debts violate § 362(a)(6); or (2) that offers to reaffirm in general are permissible if they are not threatening or coercive, but this one falls within the prohibited group.

As we note above, other courts have rejected the extreme reading of § 362(a)(6) that the first of these propositions would require, and we think rightly so. The option of reaffirming would be empty if creditors were forbidden to engage in any communication whatsoever with debtors who have pre-petition obligations. If that were the rule, it is also hard to see what purpose the detailed rules governing enforceability of reaffirmation agreements contained in § 524(c) would serve. By requiring a right to rescind, filing with the court, and an attorney's affidavit attesting that the debtor was fully informed, acted voluntarily, and that the agreement does not impose an undue hardship on the debtor, § 524(c) addresses the fairness of a completed reaffirmation agreement. The assumption behind these provisions is that debtors will be agreeing to enter into some reaffirmation agreements, and that it is important to have in place certain institutional protections to guard against creditor overreaching. See Collier on Bankruptcy, para. 524.04 & n.2 (15th ed. 1995).

There is no reason to believe that reaffirmation agreements inevitably disadvantage debtors, and thus that the automatic stay should be used to protect debtors against this type of creditor effort to collect a pre-petition debt. Debtors might find the idea...