In re McBride
| Decision Date | 06 September 2011 |
| Docket Number | Case No. 11-03190-MAM-13 |
| Parties | In Re JOHN MCBRIDE and KATHY MCBRIDE Debtors |
| Court | U.S. Bankruptcy Court — Southern District of Alabama |
ORDER DECLARING THAT HOLMES MOTORS, INC. VIOLATED THE
AUTOMATIC STAY
Tyler Scott, Attorney for Debtors, Mobile, AL
Stephen Dummer, Attorney for Holmes Motors, Inc., Gulfport, MS
This case is before the Court on the Debtors' motion seeking to have Holmes Motors, Inc., show cause why it was not in violation of 11 U.S.C. § 362(a) of the Bankruptcy Code and, in conjunction with such a violation, why Holmes Motors, Inc. should not be required to pay damages to debtor Kathy McBride. This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) and the Court has the authority to enter a final order. For the reasons indicated below, the Court is granting the debtors' show cause motion and declaring that Holmes Motors did violate the automatic stay.
Kathy and John McBride filed this chapter 13 case on August 8, 2011. On August 10, 2011, Holmes Motors, Inc. repossessed the 2009 Chrysler PT Cruiser that Kathy McBride had possession of on the day of the bankruptcy filing. Holmes Motors and the McBrides dispute whether Ms. McBride was a lessor of the vehicle or whether she was the owner subject to a security interest in Holmes Motors. Holmes further claims that Ms. McBride had no interest atall in the auto as of the filing date due to her prepetition default in payments under their agreement.
On October 23, 2010, Kathy McBride entered into a "Closed End Motor Vehicle Lease" with Holmes Motors, Inc. for the PT Cruiser. She paid $2000 down of which $1242 constituted a "capitalized cost reduction." The remaining sum paid a $500 refundable security deposit, the first $185/biweekly payment and several fees and expenses. Under the lease she was to pay $185 twice each month for 78 payments. The lease has a $5 late fee charge for late payments. McBride's lease contains an option to purchase the vehicle after the 78 payments for $1981.51 with the payment of a $500 purchase option fee. The lease contains a paragraph which states (in bold):
NOTICE TO THE LESSEE: YOU HAVE NO OWNERSHIP
RIGHTS IN THE VEHICLE UNLESS AND UNTIL YOU
EXERCISE YOUR OPTION TO PURCHACE (sic)
The lease states that a lessee is in default if any payment is not made when it is due. If there is a default, the lessee "authorize[s] us (Holmes) to enter any property where the Vehicle may be to take possession of it and remove it." The lease contains a paragraph that says Holmes Motors does not "waive our rights or remedies under this Lease by failing to exercise them at any time."
Holmes introduced as its Exhibit B a "Collections Policy" that the Chief Operating Officer and General Manager stated was given to all lessees at the closing of the lease. It states:
After her bankruptcy filing, Ms. McBride called Holmes Motors to tell them she had filed bankruptcy and to give them her bankruptcy case number. Her attorneys had instructed her to do so. She called them on August 9, 2011. According to Ms. McBride, Holmes did not take the bankruptcy case number from her when she called. Holmes Motors acknowledges that McBride called it, but disregarded the information because of Ms. McBride's prior calls to them with information that Holmes believed was untrue or promises that McBride never completed. On August 10, 2011, the car was repossessed.
At filing, Ms. McBride had not made her second payment in July 2011. Her first payment in July was made with a check which was returned for nonsufficient funds. That check was replaced but the second payment for July was not made. The Court is unsure from the evidence if the payment due on or about August 6 was made. Although the Court is not sure of the exact amount owed, there is no dispute that there was some default in payment at the time of the bankruptcy filing and the repossession. McBride had been in default in January 2011 and had the car repossessed but had paid whatever had been required to have the lease reinstated.
In their bankruptcy schedules, the McBrides listed Holmes Motors as a secured creditor with a lien on the PT Cruiser. They did not list the lease on Schedule G which is the schedule on which executory contracts, including leases, would be listed. The McBrides had not filed a § 521 statement of intentions at the time of the repossession. Their chapter 13 plan listed a payment of $340 per month to Holmes Motors, Inc. at 5% for the life of the plan as payment for a debt "Secured by Collateral."
Ms. McBride has missed 2 days of work at $149/day due to the repossession and this trial. The McBrides rented 2 different vehicles as replacement transportation since therepossession. A vehicle from Eastern Shore Toyota cost $609.90 for 2 weeks of rental. A second vehicle cost $160.88 for a 1 week rental. Ms. McBride has incurred attorneys fees. She also claims that missing work on August 11, 2011 meant she missed a workshop and , as a teacher, "no price can be put on it." She also claims she should be compensated for aggravation and embarrassment.
Holmes, as stated above, does not dispute that McBride called and informed it of her bankruptcy filing. It did not believe anything she said according to the COO due to McBride's repeated untrue or unfulfilled promises and statements. In proceeding with the repossession, Holmes also relied upon a decision by a bankruptcy judge in the Southern District of Mississippi. Order, In re Williams, Case No. 11-50077-KMS (Bankr. S.D. Miss. March 1, 2011) (). She had ruled that the Holmes lease was a true lease and not a security interest and had allowed Holmes to keep an auto it had repossessed prepetition when the debtor filed a motion for turnover of the vehicle.
This is a motion seeking damages for violation of the automatic stay. The applicable Bankruptcy Code provision is 11 U.S.C. § 362(k). It states that "an individual injured by any willful violation of a stay . . . shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." The burden of proving that a violation has occurred and that damages should be awarded is on the debtors. Heghmann v. Indorf, et al. (In re Heghmann), 316 B.R. 395, 404-05 (B.A.P. 1st Cir. 2004). They must prove their case by a preponderance of the evidence. Id.
Section 362(a) (3) states that the automatic stay precludes "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of theestate." In this case, the section raises three issues that must be decided. First, is the automobile itself property of the estate? Two, if it is not, is the lease property of the estate? Three, if the auto and lease are not property of the estate is the debtor's possession of the vehicle at filing enough to trigger the stay? After the three issues are decided, the Court must then look to whether there has been a violation of the stay.
Whether the PT Cruiser is property of the estate hinges upon whether Holmes Motors has a true lease or whether its lease agreement creates a disguised security interest. The lease does not state what state law governs the parties' agreement. Either Mississippi or Alabama law applies. Holmes Motors is located in Mississippi and the agreement was signed there. Ms. McBride resides in Alabama and that is where the auto was located prior to its repossession. "Alabama law follows the traditional conflict-of-law principle of lex loci contractus." Lifestar Response of Alabama, Inc. v. Admiral Ins. Co., 17 So. 3d 200, 213 (Ala.2009). "Mississippi uses a 'center of gravity' test to resolve choice of law issues related to contracts." Sentinel Indus. Contracting Corp. v. Kimmins Indus. Serv. Corp, 743 So. 2d 954, 959-60 (Miss. 1999) (quoting Sheppard Pratt Physicians, P.A. v. Sakwa, 725 So. 2d 755, 757 (Miss. 1998)). The test requires a court to look at 5 factors: (1) where the contract was signed (2) where the contract was negotiated (3) where the contract was performed (4) where the subject matter of the contract is; and (5) where the parties to the contract are. Id. Both of these choice of law provisions favor use of Mississippi contract law. It does not matter which law is used to decide the issue however because both Alabama and Mississippi have similar law on the subject. Mississippi Code § 75-1-201 states that whether "a transaction in the form of a lease creates a 'security interest' is determined pursuant to Section 75-1-203" of the Mississippi Code. Alabama Code § 7-1-203 isan identical provision. The provision that both parties cited to as determinative of the issue was Mississippi Code § 75-1-203(b)(4) and Alabama Code § 7-1-203(b)(4). They state that a lease transaction creates a security interest if "the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement." Id. McBride must pay $1981.51 at the end of the lease for the car. This is approximately 13% of the agreed value of the vehicle as of October 23, 2010. Cases have concluded very low payments are "nominal consideration." E.g. In re 20th Century Enterprises, Inc., 152 B.R. 119 (Bankr. N.D. Miss.1992) (finding $100 after payment of $850,000 was nominal. One case found that a payment of 13-14% of the value of a vehicle at the time of the exercise of the option to purchase was nominal. In...
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