In re Pine, Bankruptcy No. 1-80-02549

• Decision Date: 26 May 1981
• Docket Number: Adv. No. 1-80-0073.,Bankruptcy No. 1-80-02549
• Citation: 11 BR 595
• Parties: In re Lamar Barclay PINE, Sr., and Shirlene Tucker Pine, Debtors. Lamar Barclay PINE, Sr. and Shirlene Tucker Pine, Plaintiffs, v. CREDITHRIFT OF AMERICA, INC., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

11 B.R. 595 (1981)

In re Lamar Barclay PINE, Sr., and Shirlene Tucker Pine, Debtors Lamar Barclay PINE, Sr. and Shirlene Tucker Pine, Plaintiffs, v. CREDITHRIFT OF AMERICA, INC., Defendant.

Bankruptcy No. 1-80-02549, Adv. No. 1-80-0073.

United States Bankruptcy Court, E.D. Tennessee.

May 26, 1981.

Ronald J. Berke, Chattanooga, Tenn., for plaintiffs.

Mark J. Mayfield, Chattanooga, Tenn., for defendant.

MEMORANDUM

RALPH H. KELLEY, Bankruptcy Judge.

On December 31, 1980, debtors filed a voluntary Petition under Chapter 7 of the Bankruptcy Reform Act of 1978. 11 U.S.C. § 101 et seq. (the "Code").

The debtors scheduled certain household goods and claimed them as exempt. No objection was filed to the claim of exemptions.

Debtors filed an adversary proceeding against Credithrift of America, Inc., seeking to avoid a nonpossessory, nonpurchase money security interest in household goods under 11 U.S.C. § 522(f)(2).

The creditor filed an answer and cross complaint as follows:

ANSWER

For answer to the complaint herein filed against it, Credithrift of America, Inc., through its attorney, respectfully shows:

1. It admits jurisdiction.

2. It admits plaintiffs-debtors filed a bankruptcy under Chapter 7, Title 11, U.S.C. on December 31, 1980, and that this defendant-creditor was duly scheduled.

3. It admits it has a non-purchase money security interest in household goods.

4. It denies the Bankruptcy Reform Act of 1978, Title 11, United States Code, provides for the voiding of its security interest.

5. If wrong under paragraph 4, above, then, the State of Tennessee has opted out of the Federal Exemptions under 11 U.S.C. § 522, and Tennessee Exemptions do not interfere with plaintiffs-debtors\' exemptions. The portion of the property subject to the security interest is not exempt under Tennessee law.

6. Defendant-creditor has a valid security interest which survives this proceeding.

And, now, having fully answered, this defendant-creditor prays to be dismissed with its costs.

CROSS-COMPLAINT

And now assuming the position of a cross-complainant, Credithrift of America, Inc. respectfully shows:

7. That it is entitled to recover possession of its security under its security agreement, with damages for the detention.

WHEREFORE, cross-complainant prays that it be permitted to reclaim its security, and that debtors be ordered to surrender up same upon demand, with damages for the detention, and costs.

Generally, the issues raised by Credithrift have been dealt with by this court in two earlier decisions. In re Giles, 9 B.R. 135 (Bkrtcy.1981) (Giles v. Credithrift of America, Inc.); In re Farris, 8 B.R. 186 (Bkrtcy. 1981) (Farris v. Barclays American Financial, Inc.).

The court's opinions in Farris and Giles are attached and incorporated as a part of this memorandum.

Those opinions do not outline the legislative history regarding the enactment of 11 U.S.C. § 522(f). This opinion will provide some background and commentary on the subject of avoidance of nonpossessory, nonpurchase money security interest in household items.

We will start with a report of the Commission on the Bankruptcy Laws of the United States in its 1973 Report to The President, The Chief Justice of the United States and The Congress. House Document No. 93-127, Part II, 93rd Congress, 1st Session.

The following appears in the report:

At page 169:

Of particular importance to the consumer debtor are exemptions and discharge.

These are essential features of a system of financial rehabilitation of financially troubled individuals. Although the need for exemptions and discharge is recognized by the present Act, its provisions are ineffective.

* * * * * *

The Commission is also of the opinion that nonpurchase-money security interests should not be enforceable as to items of property essential to a debtor\'s well-being, such as wearing apparel, which are of little or no value to a creditor, other than as a means of coercing payment.

At page 170:

In order to make the exemption policy more effective, the Commission recommends that a waiver of the federal exemptions be unenforceable by a creditor that does not have security in the property, and that nonpurchase money security be unenforceable as to wearing apparel, household goods, and health aids.

At page 173:

a. Nonwaiver. The Commission recommends that the federal exemption policy not be frustrated by consensual waivers. A creditor should be allowed to prevail over the allowable exemptions only if security is taken. What is often an unknowing or uniformed surrender of exemption right should no longer be countenanced under the federal bankruptcy law. And in recognition of the possibility that creditors will simply obtain security, both as to existing and after-acquired assets, rather than rely on waivers, the Commission recommends that nonpurchase-money security interests in wearing apparel, household goods, and health aids be unenforceable against property allowed to the debtor as exempt.

Following the report of the Commission on Bankruptcy Laws of the United States the Congress commenced hearings on revision of the Bankruptcy Act.

One witness who testified before the House Judiciary Committee was David H. Williams, an attorney with the Division of Special Projects, Bureau of Consumer Protection, Federal Trade Commission. His testimony commences on page 166, H.R. Report 95-595, 95th Congress, 1st Session, U.S.Code Cong. & Admin.News 1978, pp. 5787, 6127, 6128. He testified that from

1972-1974 the staff of the Division of Special Projects visited one hundred and thirty branch offices of twelve major consumer finance companies. Thirty states were visited.

* * * * * *

Overall, this investigation afforded us with in depth exposure to the day to day activities of the consumer finance industry. It enabled us to develop a composite picture of thousands of debtors who experienced default and collection during the years in question.

The purpose of this investigation was to identify certain statutory and contractual collection remedies and procedures which might be unfair to consumers within the meaning of Section Five of the Federal Trade Commission Act.

It was the conclusion of the witness that

One of the most important and widely abused devices available to the large credit institution is a blanket security interest in household necessities.

* * * * * *

Virtually every creditor we investigated retained such a lien in all appropriate contracts. Some liens are specific, enumerating furniture, bedding, linens, pots and pans, and the like. Other were cast in general form merely applying to every household good of every kind and description.

. . . A blanket lien on household goods is among the most effective levers available for securing an anticipatory reaffirmation of a debt which is otherwise dischargeable in bankruptcy.

Based on the cases we examined in our investigation, and on the findings and recommendations prepared by the National Commission on Consumer Finance, we believe that there is no justification whatsoever for the common practice of requiring debtors to pledge all of their household property to small lenders. For this reason, we support the proposed unwaivable exemption with respect to assets in the bankrupt estate of an individual consumer. We can conceive of few practices in today\'s consumer market which are more debilitating and demoralizing than the repeated threat to seize the household necessities of an insolvent and his family, items which, as a practical matter, have little if any economic value to the creditor. These kinds of threats do not enhance the economic situation of either party. They subvert the specific policy which underpins personal bankruptcy.

In 1977 the House of Representatives ordered printed a report on Bankruptcy Law Revision. H.R. Report No. 95-595, 95th Congress, 1st Session. It contains 549 pages.

The following portions of the report appear relevant to the present case. At pages 116-118, U.S.Code Cong. & Admin.News 1978, p. 6076:

As we have become a consumer society, we have also become a credit society. The Bankruptcy Commission documented the tremendous rise in the amount of credit outstanding for personal, family, or household purposes, and it is not necessary to reiterate those data here.

The result of the increase in consumer credit has been a corresponding increase in the number of consumers who have overburdened themselves with debt.

. . . When the crises finally erupt, the experience of the credit industry in collecting from overburdened debtors allows it an enormous advantage against the inexperienced and generally distraught consumer . . . Bankruptcy often provides the only remedy.

However, under current law, the resort to bankruptcy has not always provided an effective remedy . . .

Creditors have developed techniques that enable them to avoid the effects of a debtor\'s bankruptcy, and bankrupts have suffered accordingly. Frequently they come through bankruptcy little better off than they were before. Overbroad security interests on all of a consumer\'s household and personal goods, reaffirmations, limited State exemption laws, and litigation over dischargeability of certain debts have all contributed to the consumer debtor\'s postbankruptcy plight.

This bill attempts to cure these inadequacies in the Bankruptcy Act and to prevent the frequent problems confronting consumer debtors that have occurred both in the bankruptcy court and out.

* * * * * *

. . . Whether the debtor uses chapter 7, Liquidation, or chapter 13, Adjustment of Debts of an Individual, bankruptcy relief should be effective, and should provide the debtor with a fresh start.

The report examines the subject of exemptions. At pages 126 and 127, U.S.Code Cong. & Admin.News 1978, p. 6087, it is stated:

. . . 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

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