Sears, Roebuck & Co. v. Spivey

Decision Date08 August 2001
Docket NumberNo. 99-CV-3797 (NGG).,99-CV-3797 (NGG).
Citation265 BR 357
PartiesSEARS, ROEBUCK & CO., Appellant, v. Joan SPIVEY, Appellee.
CourtU.S. District Court — Eastern District of New York


Philip D. Anker, Bruce M. Berman, Wilmer, Cutler & Pickering, Washington, DC, Ronald L. Rose, Dykema Gossett, Bloomfield Hills, MI, for appellant.

Robert J. Musso, Rosenberg, Musso, & Weiner, LLP, Brooklyn, NY, for appellee.


GARAUFIS, District Judge.

This bankruptcy appeal presents the question of whether a bankruptcy judge may nullify a consensual redemption agreement in the absence of a motion for its approval. Although I answer the question in the affirmative, I nevertheless conclude that the court below erred in its legal holding and therefore vacate the bankruptcy court's order of October 15, 1998 and remand the matter back to the bankruptcy court.


Joan Spivey, represented by counsel, petitioned for voluntary Chapter 7 bankruptcy pursuant to 11 U.S.C. § 101 et seq. ("Bankruptcy Code") on July 23, 1998. Her creditors included, inter alia, Sears, Roebuck & Company ("Sears"). She valued her household goods, which she did not itemize and for which she claimed a collective exemption, at $750.00, and she scheduled Sears as an unsecured creditor owed $439.00. The proceeding was brought in bankruptcy court before then-Bankruptcy Judge Laura Taylor Swain.1

On August 31, at the creditors' meeting, Sears and Spivey entered into a redemption agreement ("Agreement"), concerning a particular piece of merchandise, a television/VCR unit ("TV") purchased by Spivey with her Sears credit card. The Agreement asserted that the TV was property exempted under § 522 or abandoned under § 554 and that Spivey was exercising her right under § 722 to redeem the TV for $153.89, a value agreed to by the parties as the fair market value for redemption purposes. The Agreement stated that Spivey would pay this amount in lump sum before September 30, 1998. Pursuant to the Agreement, Spivey made out two checks to Sears totaling $153.89. Sears deposited the check for $75.00 but not the other.

The appointed United States Trustee for Spivey's estate closed the meeting of creditors on August 31 and certified a no-distribution report on September 1. The report stated that the trustee had made a "diligent inquiry into the financial affairs" of the debtor and that there was "no property available for distribution from the estate over and above that exempted by law." Under the bankruptcy rules, the deadline to object to claimed exemptions expired thirty days later, on September 30. No one objected to the report, to any exemptions, or to the Agreement.

Sears filed the Agreement with the court. On October 15, 1998, after receiving the filed Agreement, Judge Swain sua sponte issued an order ("Bankruptcy Order"). Judge Swain ordered that, in the absence of a motion to approve the Agreement, the Agreement would be null and void and Sears should refund all monies paid by Spivey. No motion was made, and Sears remitted a check in the amount of $75.00 to Spivey.

On November 16, Sears moved for reconsideration of the Bankruptcy Order. Sears argued that redemption is a personal right of the debtor to arrange to retain personal property for household, family, or personal use without entering into less attractive reaffirmation agreements. Sears claimed that redemption is achieved, whether or not approved by the court, when a lump-sum payment is made pursuant to a consensual redemption agreement between the parties. Sears further submitted that if debtors were required to file a motion for court approval for every redemption agreement, redemption would become too expensive an option for many debtors. Judge Swain took Sears' motion under advisement. In the meantime, she granted Spivey a discharge under § 727.

On March 5, 1999, Judge Swain issued an Opinion and Order denying Sears' motion for reconsideration. See In re Spivey, 230 B.R. 484 (Bankr.E.D.N.Y.1999). She held that neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure authorizes the performance of redemption agreements absent judicial approval, and that policy reasons supported her conclusion. Accordingly, she declined to rescind or modify the Bankruptcy Order. See id. at 491. On March 15, Sears timely appealed her decision, pursuant to 28 U.S.C. § 158(a).2


"Bankruptcy law aims to serve both the debtor and the creditor." In re Morgan, 182 F.3d 775, 778 (11th Cir.1999) (per curiam). Upon filing a Chapter 7 bankruptcy petition, all non-exempted property of the debtor becomes property of the bankruptcy estate and managed by the trustee. See 11 U.S.C. § 541(a); Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). The bankruptcy estate is then liquidated and the proceeds partitioned to the various creditors in satisfaction of the debtor's obligations. In this way, Chapter 7 gives the debtor a fresh start by expunging her debts, see In re Boodrow, 126 F.3d 43, 51 (2d Cir.1997), cert. denied, 522 U.S. 1117, 118 S.Ct. 1055, 140 L.Ed.2d 118 (1998); see also Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970) (per curiam) (stating that bankruptcy is designed to "give the debtor a `new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt'") (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)), while enabling creditors to maximize their return through the liquidation of her assets.

A debtor may exempt from the bankruptcy estate particular articles of property needed to facilitate her fresh start. See 11 U.S.C. § 522(b); Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991); In re Bell, 225 F.3d 203, 215-16 (2d Cir.2000); see also H.R.Rep. No. 95-595, at 126 (Sept. 8, 1977) ("The historical purpose of these exemption laws has been to protect a debtor from his creditors, to provide him with the basic necessities of life so that even if his creditors levy on all of his nonexempt property, the debtor will not be left destitute and a public charge."), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6087. Only specific property may be claimed as exempt; exemptable property includes, inter alia, the debtor's interest in certain personal, family, or household goods. See 11 U.S.C. § 522(d)(3).

Because the debtor retains ownership and possession of exempt property, a secured creditor's lien on the property remains unsatisfied. Although a bankruptcy discharge disposes of all personal liability of the debtor, see id. § 524(a)(2), a discharge does not dissolve a creditor's lien on exempt property, see Dewsnup v. Timm, 502 U.S. 410, 418, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); Farrey v. Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). Instead, the lien survives the bankruptcy proceedings and remains a vehicle for actions against the debtor in rem. See Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). Thus, although bankruptcy staves off actions against the debtor personally, it does not prevent in rem actions, such as repossession or foreclosure, to recover exempted secured collateral.

Of course, a debtor discharged from bankruptcy is unlikely to be able to meet her continuing obligations on liens securing exempt property, which she may then lose to foreclosure or repossession immediately after discharge. Such a loss would contravene the primary purpose of exemption in the first place. The Bankruptcy Code provides two methods by which a debtor may protect her exempt property against in rem actions: reaffirmation and redemption.3

A debtor may reaffirm her personal liability on a dischargeable debt in exchange for less burdensome repayment options.4 See 11 U.S.C. § 524(c). This option may be attractive to the debtor for several reasons. If she cannot afford redemption, as many bankruptcy debtors cannot, reaffirmation may be the only way for her to keep necessary property which would otherwise be extremely costly to replace. See Cox v. Zale Del., Inc., 239 F.3d 910, 912-13 (7th Cir.2001) (Posner, J.). If she is a skilled negotiator, she might obtain a renegotiated lien with more favorable terms. See Boodrow, 126 F.3d at 52. Finally, reaffirmation may help reestablish her good credit standing after the bankruptcy discharge. See id. at 52.

The secured creditor might also value reaffirmation. In the absence of redemption or reaffirmation, the debtor's personal debt is extinguished and the creditor is left with in rem proceedings as its only recourse. See id. at 52. Repossession and foreclosure can be costly endeavors for a creditor. See Cox, 239 F.3d at 912; In re Pendlebury, 94 B.R. 120, 125 (Bankr. E.D.Tenn.1988). Moreover, resale may be unattractive where the collateral's value depreciates quickly. See Pendlebury, 94 B.R. at 125. For these reasons, most creditors realize that reaffirmation is a more favorable option than foreclosure. See id. at 125.

Reaffirmed terms are a matter of negotiation and subject to the creditor's approval. See Boodrow, 126 F.3d at 49; In re Bushey, 204 B.R. 661, 662-63 (Bankr.N.D.N.Y.1997). Because bankruptcy negotiations ordinarily involve disparate bargaining power between the debtor and creditor, courts have suggested that reaffirmation gives the creditor an effective veto on the debtor's ability to keep much-needed property if the debtor does not accede to the creditor's reaffirmation demands. See Boodrow, 126 F.3d at 51; cf. H.R.Rep. No. 95-595, at 127 ("In consumer cases, very often a secured creditor with a security interest in all of the debtor's property, including household and personal goods, uses the threat of foreclosure to obtain a reaffirmation of a debt. Otherwise, the secured creditor is able to deprive a debtor of even the most insignificant household effects, . . . even though the items have little if...

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