In re Lopez, 02-15774BAP.

• Decision Date: 26 September 2003
• Docket Number: No. 02-15774BAP.,02-15774BAP.
• Citation: 345 F.3d 701
• Parties: In re Charles LOPEZ; In re Julie Lopez, Debtors, Bankruptcy Receivables Management, Appellant, v. Charles Lopez; Julie Lopez, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

345 F.3d 701

In re Charles LOPEZ; In re Julie Lopez, Debtors Bankruptcy Receivables Management, Appellant, v. Charles Lopez; Julie Lopez, Appellees.

No. 02-15774BAP.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 14, 2003 — San Francisco, California.

Filed September 26, 2003.

Matthew J. McGowan, Salter McGowan Sylvia & Leonard, Inc., Providence, Rhode

Island; and Richard W. Snyder, Law Office of Richard W. Snyder, Tustin, California, for the appellant.

John R. Roberts, John R. Roberts, A Professional Corp., Placerville, California, for the appellees.

John Rao, National Consumer Law Center, Boston, Massachusetts; and Norma L. Hammes & James J. Gold, San Jose, California, for Amicus Curiae National Association of Consumer Bankruptcy Attorneys.

Appeal from the Ninth Circuit, Bankruptcy Appellate Panel; Montali, Ryan and Hollowell, Bankruptcy Judges, Presiding.

Before PROCTER HUG, JR., JOHNSON R. GIBSON,^* and RAYMOND C. FISHER, Circuit Judges.

OPINION

HUG, Circuit Judge:

This case addresses the question of whether a creditor may enforce a post-bankruptcy discharge agreement entered into with a debtor retaining the collateral pursuant to its rights under McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir.1998). Creditor Bankruptcy Receivables Management ("BRM") seeks to enforce such an agreement on the grounds that it offered the debtors, Charles and Julia Lopez, new consideration in the form of waiving its right of replevin. The Bankruptcy Appellate Panel ("BAP") held that the agreement was an invalid reaffirmation agreement pursuant to Bankruptcy Code 11 U.S.C. § 524 because the consideration was based in part on the Lopezes' discharged debt. The BAP also rescinded the agreement under California law as having been executed under mistake of law. BRM appeals.

I

Charles and Julia Lopez bought a diamond ring and jewelry. The seller, Samuels Jewelers, Inc., financed the purchase of $5,623.01 and took a security interest in the jewelry.

Thereafter, the Lopezes filed a Chapter 7 bankruptcy petition. The Lopezes stated their intention to reaffirm their debt to Samuels. During the pendency of the case, Samuels assigned its rights in the jewelry to BRM. BRM subsequently sent a reaffirmation agreement to the Lopezes' attorney, who forwarded the proposed reaffirmation agreement to the Lopezes and counseled against reaffirmation. The Lopezes did not execute the reaffirmation agreement.

After the Lopezes received their bankruptcy discharge, Shannon Vinciguerra, a legal assistant employed by BRM, sent a letter to the Lopezes' attorney, American Law Center. The letter demanded the return of the jewelry, or alternatively, offered the Lopezes the option of retaining the jewelry if they paid a lump sum redemption or executed a post-discharge retention agreement. The agreement accompanied the letter. The terms of the retention agreement provided that the Lopezes could retain the jewelry if they paid the remaining balance of the debt in monthly installments with interest. Vinciguerra's letter warned that if counsel did not respond within 10 days, BRM would assume that it was no longer representing the Lopezes.

American Law Center was no longer representing the Lopezes. Counsel claims to have forwarded the letter to the Lopezes, but they claim to have never received the letter. The bankruptcy court found that the Lopezes never received the letter from American Law Center.

BRM next contacted the Lopezes directly. It sent the Lopezes a second post-discharge agreement, providing that BRM would forbear from repossessing the jewelry if the Lopezes would agree to make payments to BRM. The terms of the agreement mirrored the original contract. Under the agreement, the Lopezes would be obligated to pay the entire remaining contract debt, totaling $3030.35, plus interest at the contract rate of 22.8% per annum, payable in $100 monthly installments.

Vinciguerra telephoned the Lopezes concerning the second agreement. The bankruptcy court found that Vinciguerra or another agent of BRM told Mr. Lopez that he and his wife were required to sign the second agreement and return it to BRM immediately. The court also found that Vinciguerra did not discuss any other options with Mr. Lopez, did not explain that he had the right to simply return the jewelry, did not explain the terms of the second agreement, and did not suggest that they seek the advice of counsel.

The Lopezes signed the second agreement, altered the terms by reducing the monthly payment from $100 to $85, and returned it to BRM. They made one payment to BRM of $85. They also submitted a payment of $170, but stopped payment on the check before it was presented for payment by BRM. The bankruptcy court found that the Lopezes attempted to return the jewelry but BRM would not accept it.

BRM threatened to sue the Lopezes. In response, they reopened their bankruptcy case and filed a complaint against BRM. The original complaint included causes of action for violation of the discharge injunction, fraud, undue influence, and malice. BRM filed a counterclaim for breach of the second agreement, seeking declaratory relief, attorney's fees, and conversion. BRM asserted the second agreement was a valid contract, and that the Lopezes breached by failing to make payments.

BRM moved for summary judgment, which the bankruptcy court granted in part and denied in part. The court agreed that the Lopezes had no private right of action for damages arising from a violation of the discharge injunction. The court found, however, implicit in the Lopezes' claim for declaratory relief and damages, a request holding that the second agreement was an unenforceable reaffirmation agreement. The court also construed the complaint to include a request that the agreement was unenforceable.

The bankruptcy court ruled in its summary judgment order that the second agreement was not a valid reaffirmation agreement because it was not made before the court entered the Lopezes' discharge, as required by 11 U.S.C. § 524(c). It further concluded that the second agreement was not a valid redemption agreement pursuant to 11 U.S.C. § 722 because it was not approved by the court in accordance with Rule 6008 of the Federal Rules of Bankruptcy Procedure. The court indicated the agreement might be a valid post-petition agreement supported by new consideration, but found that a genuine issue of material fact existed as to whether BRM gave the Lopezes adequate consideration for the new contract.

After conducting a trial, the bankruptcy court ruled that BRM and the Lopezes did not form a new contract because the Lopezes were under the misapprehension that they had no alternative but to execute the second agreement. The court concluded that, pursuant to California law, the Lopezes did not freely consent, and such a mistake of law warranted rescission of the agreement.

Alternatively, the court held that the agreement was invalid because it was not supported by new consideration. Relying upon Parker, the court ruled that the Lopezes had the right to retain the jewelry and continue making payments without reaffirming the original contract. BRM's forbearance from foreclosing on the jewelry merely acquiesced to what Parker already allows — namely the debtor may retain the jewelry and keep current its payments pursuant to the original contract, and the creditor retains the right to foreclose should the debtor default. The reduction of the monthly installment by $15 was too insignificant to suffice as additional consideration.

The court rescinded the agreement, ordered BRM to refund the $85 payment to the Lopezes, and ordered the Lopezes to return the jewelry to BRM (or more appropriately, ordered BRM to accept the jewelry from them, something the Lopezes wished to do before the action commenced).

A Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed. Bankruptcy Receivables Mgmt. v. Lopez (In re Lopez), 274 B.R. 854, 856 (9th Cir. BAP 2002). The BAP held that the agreement was an invalid reaffirmation agreement for its failure to comply with § 524(c). Id. at 860.

Next, the BAP held that the bankruptcy court did not err when it determined that the Lopezes' complaint contained an implicit cause of action for declaratory relief. Id. at 862. BRM raised the validity of the agreement in its counterclaim, seeking a declaration that the contract was enforceable. Id. Also, the Lopezes' failure to expressly request declaratory relief did not constitute a waiver because Federal Rule of Civil Procedure 8(f) requires courts to construe pleadings "to do substantial justice," and BRM had notice from the complaint that the validity of the agreement was disputed. Id. Finally, BRM consented to trying the issue as amended by the bankruptcy court's post-summary judgment under Federal Rule of Civil Procedure Rule 15(b), providing that the issues tried by the express or implied consent of the parties are to be treated as if they had been raised in the pleadings. Id. at 862-63.

Finally, the BAP held that the bankruptcy court properly determined that the Lopezes were entitled to rescind the agreement. Id. at 864. The Lopezes' failure to plead mistake or request recision did not preclude the relief because the sole issue of the trial, raised by both BRM and the Lopezes, was the validity of the contract. Id. at 865. The court did not clearly err in finding that BRM improperly induced the Lopezes into signing the agreement. Id. at 866. The court also properly applied California Civil Code § 1691 because the Lopezes' offer to stop making payments and return the jewelry satisfied the notice and restore requirements of § 1691. Id. at 867.

Jurisdiction before this court is proper under 28 U.S.C. § 158(d).

II

Decisions of the BAP are reviewed de novo. Carillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir.2002). This court reviews the bankruptcy court's conclusions of law de novo and its...