In re Donald
| Decision Date | 12 June 2006 |
| Docket Number | No. 06-00100-5-ATS.,06-00100-5-ATS. |
| Citation | 343 B.R. 524 |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re Chester A. DONALD and Mary S. Donald, Debtors. |
William E. Brewer, Jr., The Brewer Law Firm, Raleigh, NC, for Debtors.
Pamela P. Keenan, Kirschbaum, Nanney, Keenan & Griffin, PA, Raleigh, NC, for Coastal Federal Credit Union.
ORDER APPROVING REAFFIRMATION AGREEMENT
A discharge hearing pursuant to 11 U.S.C. § 524(d) was held on April 26, 2006, for the court to consider whether to approve the reaffirmation agreement between the chapter 7 debtors, Chester Arthur Donald and Mary Scales Donald, and Coastal Federal Credit Union ("Coastal"). After the hearing, the court gave the debtors and Coastal additional time to file briefs. The briefs have been filed, and the issue is ready for determination.
The issue before the court is whether, under § 524(c)(6)(A), the reaffirmation agreement is in the "best interest" of the debtors. To make that determination the court must decide the broader issue of whether, under the Bankruptcy Code as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. No. 109-8, 119 Stat. 23, §§ 304, 305, debtors may keep the property that secures their debts, without reaffirming those debts. Or, stated more colloquially, has the "ride-through" (sometimes called "pay and drive" or the "fourth option") method of dealing with a secured debt in a chapter 7 case survived the changes to the Bankruptcy Code made by BAPCPA? Specifically, in this case, the question is whether the chapter 7 debtors can retain their automobile by keeping current their installment payments, without reaffirming the debt.
If the court determines, as Coastal contends it must, that debtors no longer have the "ride-through" option, the court must then consider the ultimate effect of the court's decision to approve or disapprove the agreement. The debtors offer the ingenious argument that disapproval by the court of their reaffirmation agreement is in their best interest because by entering into a reaffirmation agreement the debtors have complied with all reaffirmation requirements, even if the agreement is disapproved by the court. According to the debtors, because they entered into the reaffirmation agreement, they are not subject to the consequences of failing to reaffirm the debt. For that reason, they argue that they may retain their automobile by making their payments even if the court disapproves the reaffirmation agreement, thereby making it unenforceable.
Before addressing the merits of whether the "ride-through" option has been terminated by BAPCPA, it would be helpful to explain the procedure that brings this issue before the court. For a reaffirmation agreement to be enforceable, the agreement must satisfy the requirements of § 524(c). In a case in which the debtor is an individual "who is not represented by an attorney during the course of negotiating an agreement," the court must hold a discharge hearing pursuant to § 524(d). If the debt to be reaffirmed is not based in whole or in part on a consumer debt secured by real property, the court must determine whether to approve the reaffirmation agreement under § 524(c)(6)(A) as "(I) not imposing an undue hardship on the debtor or a dependent of the debtor; and (ii) in the best interest of the debtor." 11 U.S.C. §§ 524(d) and 524(c)(6)(A).1
It has been the practice of this court for more than 20 years to schedule discharge hearings under § 524(d) any time a reaffirmation agreement is filed by a debtor who is not represented by counsel. The court also schedules discharge hearings where debtors who are represented by counsel in their cases have not been represented by their attorneys in connection with the negotiation of the reaffirmation agreements.
If a debtor is represented by an attorney during the course of negotiating the reaffirmation agreement, the attorney must, pursuant to § 524(c)(3), file a declaration or affidavit which states that
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of —
(I) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement[.]
11 U.S.C. § 524(c)(3). If the debtor has been represented by an attorney during the course of negotiating the reaffirmation agreement and no affidavit or declaration is filed by the attorney, the agreement is not enforceable and no hearing is necessary. Section 524(c)(3) was not changed by BAPCPA.
So prior to BAPCPA, if a reaffirmation agreement was filed without an attorney's certification in a case in which the debtor was represented by an attorney, the court assumed that the debtor was not represented by the attorney in connection with the negotiation of the reaffirmation agreement and a discharge hearing was scheduled. BAPCPA, however, added § 524(k), which makes such assumptions unnecessary. Section 524(k)(3)(J) requires that the following statements be included in the reaffirmation agreement: "... and If the reaffirmation agreement does not contain the attorney's certification, the agreement is not enforceable unless there is also a motion for court approval, in which case a hearing will be scheduled.
Whether or not the debtors were represented by their attorney "during" the negotiation of the reaffirmation agreement is relevant to whether or not the court has the authority to approve or disapprove the agreement. In this case the attorney's certification was not filed, and there was no motion for court approval. Furthermore, the debtors' brief includes a statement that the debtors were represented by counsel in connection with the "execution" of the reaffirmation agreement.
These facts might suggest that the court has no authority to approve or disapprove the reaffirmation agreement. Yet, no one raised this issue, and the two parties have presumed that the court has the authority to approve or disapprove the reaffirmation agreement. The parties specifically intended this to be a test of the new law, and the issue was presented to the court in a manner that puts neither party at risk. The debtors will keep their car whether the court decides that the "ride-through" option has been terminated and approves the reaffirmation agreement or whether the court rules that the "ride-through" option is still available and the reaffirmation agreement is disapproved. From Coastal's perspective the issue will be decided without exposing Coastal to the risk of violating the automatic stay.
The court finds that although the debtors have been ably represented by their attorney in connection with the issues presented to the court in connection with their reaffirmation agreement, the debtors were not represented by their attorney during the course of the negotiation of the reaffirmation agreement with Coastal.
The facts in this case are not disputed. Mr. and Mrs. Donald filed a joint petition for relief under chapter 7 of the. Bankruptcy Code on January 27, 2006. Coastal holds a secured claim secured by the debtors' automobile, a 1999 Lexus ES-V6. The secured claim arises from a $12,335 advance made by Coastal to the debtors on July 28, 2004, in connection with the purchase of the 1999 Lexus. According to the loan documents, the purpose of the loan was to "Purchase Vehicle Lease Buy Out." Although the reaffirmation agreement states that the purchase price for the automobile was $12,335, it is not clear from the loan documents whether the advance was for the full purchase price of the automobile. The balance outstanding at the time of the debtors' bankruptcy petition was $8,502.90, an amount that was clearly less than the purchase price.
The loan documents contain a standard bankruptcy default provision that says "[y]ou will be in default if you ... file for bankruptcy, become insolvent . . . or if something happens we believe may substantially reduce your ability to repay what you owe." Loan Documents at ¶ 14. Coastal has stated that if the debtors "refused or were not permitted by the Court to reaffirm their obligations," it intends "to exercise its right contained in the Contract to declare a default thereunder based on the Debtors' filing for bankruptcy protection and move forward with repossessing and selling the Vehicle under the relevant provisions of the Contract and applicable state law." Coastal Mem. of Law in Conn. with Reaff. Agmt. at 2-3.
The debtors were obligated to repay the loan to Coastal in monthly payments of $296.57, and when the debtors filed their petition on January 27, 2006, with the exception of the January 22 payment, the monthly payments were current. The reaffirmation agreement was signed by Coastal on March 8, 2006, and was subsequently signed by the debtors on a date not included in the agreement. The debtors' attorney, William E. Brewer, Jr., did not sign a declaration or affidavit of the kind referred to in § 524(c)(3), and the agreement was filed with the court on April 5, 2006.
The reaffirmation agreement provided that the installment payment due on January 22, 2006, and the payment due on February 22, 2006, would be added to the end of the loan and the loan term extended accordingly. The agreement also provided for the payment of attorney's fees to Coastal in the amount of $350. Notwithstanding Coastal's...
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