In re Jenkins, Case No. 17-30753

Decision Date26 September 2017
Docket NumberCase No. 17-30753
PartiesIn re: TRACY MICHELLE JENKINS, Debtor
CourtU.S. Bankruptcy Court — Southern District of Ohio

Judge Humphrey

Chapter 7
Decision Determining that Notice of Rescission Filed By KH Network Credit Union is Unenforceable
I. Introduction

This decision concerns whether a creditor's right of rescission placed in an inconspicuous manner by the creditor in the Disclosures section of the Director's Form 2400A Reaffirmation Agreement is enforceable through a "Notice of Rescission" filed by the creditor. For the reasons discussed in this decision, the court finds that it is not.

II. Facts and Procedural Background

On June 5, 2017 Creditor KH Network Credit Union, Inc. (the "Credit Union") filed a Reaffirmation Agreement (doc. 12) it entered with the debtor, Tracy Michelle Jenkins ("Debtor"), in which the security was a 2005 Volvo 4D XC9 Turbo automobile. On July 31, 2017, 56 days after the Reaffirmation Agreement was filed and 13 days after the Debtor received her discharge, the Credit Union filed a Notice of Rescission of Reaffirmation Agreement by Creditor KH Network Credit Union (doc. 15). On the same day, the Debtor filed an Objection to Notice of Rescission of Reaffirmation Agreement by Creditor KH Network Credit Union (doc. 16). The Credit Union filed a Reply Memorandum to Objection to Notice of Rescission of Reaffirmation Agreement by Creditor KH Network Credit Union (doc. 17) on August 7, 2017. Each party also filed a hearing memorandum concerning the issues (docs. 20 and 21). The court heard oral argument on the contested matter on September 6, 2017 (doc. 18).

The Reaffirmation Agreement at issue uses Director's Form 2400A, revised as of December 2015 (the "Form"). However, the language at issue was added within Part V of the Form - labeled "Disclosure Statement and Instructions to Debtor(s)." While retaining the header on the Form identifying it as "Form 2400A (12/15)", the Credit Union altered the Form to include the following statements under paragraph 5 of Part V, section A - "Can you cancel the agreement?" After including the Director's Form language consistent with 11 U.S.C. § 524(c)(4) concerning the Debtor's statutory right to rescind, it contains the following additional two paragraphs which do not describe disclosures of a debtor's rights, but instead additional contractual provisions:

a. This agreement may be rescinded by the Creditor at any time prior to discharge or within 60 days after it is filed with the court, whichever occurs later. If Debtor rescinds this reaffirmation agreement, then Debtor will remain obligated for any monthly payments that were due hereunder prior to rescission.
b. If the debt being reaffirmed is secured by any collateral, then it is agreed that Debtor shall, during the interim until this Agreement is enforceable, and, thereafter, remain in possession of the collateral, which collateral is described in the original debt instrument. Provided, however, that Debtor agrees to surrender possession of said collateral to Creditor immediately upon: (a) failure of the Debtor to furnish sufficient proof of insurance; or b) failure of Debtor to make each payment when due or otherwise fail to comply with any term of this Agreement or any term of the original debt instrument. The return of the collateral, due to rescission, does not impair a Debtor's right to file a motion toredeem. If this Agreement is rescinded, then it is agreed that Creditor shall retain all payment made prior to the rescission.

doc. 12 at 8. This added language is not in bold type, all capital letters or otherwise made conspicuous, but instead blends in with the rest of the type on the Director's Form.

III. Positions of the Parties

The Credit Union argues that it had the legal ability under state contract law to negotiate and agree upon additional reaffirmation terms and that it is merely seeking to enforce that right provided in the agreement and voluntarily entered into by the Debtor. The Credit Union notes that the rescission provision added to Director's Form 2400A was placed with the disclosure of the Debtor's right of rescission and was not confusing or misleading. The Credit Union further asserts that the reason it desires to rescind the Reaffirmation Agreement is because the Debtor was to have entered a second reaffirmation agreement reaffirming an unsecured debt owed to the Credit Union and failed to do so. The Credit Union asserts that its agreement to enter into the Reaffirmation Agreement relating to the Volvo was contingent on the Debtor entering into the second reaffirmation agreement.

The Debtor asserts that the Form 2400A reaffirmation agreement was improperly modified with the addition of the Credit Union's rescission rights added to the disclosure section of the Form. The Debtor notes that the added language was not made conspicuous in any manner and is inconsistent with the Form's instructions. The Debtor also asserts that there was no agreement making one reaffirmation agreement contingent upon the other and that she simply signed the one relating to the Volvo reaffirmation agreement and returned it to the Credit Union's counsel who then signed and filed it. The Debtor asserts that if one reaffirmation agreement was contingent on the other, the Credit Union could have declined to enter the Volvo reaffirmation agreement until the second one was signed by the Debtor. The Debtor also asserts that under Ohio law a party to a contract may only rescind a contract for fraud or mutual mistake, neither of which occurred. If there was a mistake with respect to the entering of the Volvo Reaffirmation Agreement, that mistake was solely the mistake of the Credit Union.

IV. Conclusions of Law
A. Jurisdiction

This court has jurisdiction to determine whether the Reaffirmation Agreement may be rescinded by the Credit Union. 28 U.S.C. § 157(b)(2). The issue relates to whether the creditor's rescission provision complies with the requirements of 11 U.S.C. § 524, particularly the disclosures required under 11 U.S.C. §§ 524(c)(2) and (k).1

B. Analysis
1. Reaffirmation Agreements and § 524 of the Bankruptcy Code

Reaffirmation agreements are a very significant element of Chapter 7 consumer bankruptcy cases. Much of § 524 of the Bankruptcy Code addresses reaffirmation agreements.2 It is through reaffirmation agreements that debtors may continue to own motor vehicles, residences and other property which may be essential to their maintaining transportation, shelter, and other basic subsistence. Although it can involve any dischargeable debt, a reaffirmation agreement typically allows a debtor to retain collateral of a secured creditor in exchange for the debtor's continuing to make the payments on the underlying indebtedness. See Wheeler & Wedge, A Fully-Informed Decision: Reaffirmation, Disclosure and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 Am. Bankr. L.J. 789, 789 (2005). From an interpretation and enforcement perspective, they are simply contracts subject to ordinary contract principles and rules of construction. See In re Turner, 156 F.3d 713, 721 (7th Cir. 1998) (applying general contractual principles); Jamo v. Katahdin Federal Credit Union (In re Jamo), 283 F.3d 392, 397 (1st Cir. 2002) ("[S]ection 524(c) envisions reaffirmationagreements as the product of fully voluntary negotiations by all parties."); Albright v. Maumee Valley Credit Union (In re Albright), 554 B.R. 832, 837 (Bankr. N.D. Ohio 2016) (noting that state contract law applies to reaffirmation agreements and enforcing a reaffirmation agreement despite the form used having been superseded, "but still statutorily compliant").

However, while reaffirmation agreements are critical to debtors' retention of personal and real property, they can also result in devastating financial hardship. Because of the severity of the consequences of a debtor being saddled with burdensome debt, the Bankruptcy Code imposes several safeguards to protect debtors seeking to reaffirm debts, including the right to rescind a reaffirmation agreement within a specific period of time and the court's duty to review certain such agreements to ensure that they do not pose an undue hardship on the debtor and, for pro se debtors, are in the debtor's best interest. See 11 U.S.C. §§ 524 (c), (k), and (m). If the reaffirmation agreement is not rescinded within the statutory time period, a debtor will not be able to discharge that indebtedness through the bankruptcy and could owe a significant deficiency if the debtor defaults on the indebtedness, even if collateral securing the debt is repossessed or foreclosed.

Among changes enacted to the Bankruptcy Code through the Bankruptcy Abuse and Consumer Protection Act of 2005 ("BAPCPA") was the addition of new subsections (c)(2) and (k) to § 524 of the Code. As noted in one article, "The general procedure to obtain an enforceable reaffirmation [following BAPCPA] remains largely the same. The change is in the scope of the disclosures required to ensure that debtors understand the substance and ramifications of the reaffirmation agreement." Wheeler & Wedge, A Fully-Informed Decision: Reaffirmation, Disclosure and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, , 79 Am. Bankr. L.J. 789, 791 (2005). Subsection (c)(2) now requires that the debtor receive disclosures at or before the time that a reaffirmation agreement is signed. New subsection (k) details the disclosures which are required to be made. Specifically, subsection (k)(1) provides that:

The disclosures required under subsection (c)(2) shall consist of the disclosure statement described in paragraph (3), completed as required in that paragraph, together with the agreement specified in subsection (c), statement,declaration, motion and order described, respectively, in paragraphs (4) through (8), and shall be the only disclosures required in connection with entering into such
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