In re Sokolowski, Bankruptcy No. 97-21854

• Decision Date: 29 June 1998
• Docket Number: Adversary No. 98-2048.,Bankruptcy No. 97-21854
• Citation: 227 BR 16
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Cynthia L. SOKOLOWSKI, Debtor. Cynthia L. SOKOLOWSKI, Plaintiff, v. BANKBOSTON, Defendant.

227 B.R. 16 (1998)

In re Cynthia L. SOKOLOWSKI, Debtor Cynthia L. SOKOLOWSKI, Plaintiff, v. BANKBOSTON, Defendant.

Bankruptcy No. 97-21854, Adversary No. 98-2048.

United States Bankruptcy Court, D. Connecticut.

June 29, 1998.

David F. Falvey, Groton, CT, for plaintiff.

Matthew J. McGowan, Salter, McGowan, Swartz & Sylvia, Inc., c/o Linda C. Hadley, Krasow, Garlick & Hadley, Hartford, CT, for defendant.

MEMORANDUM OF DECISION

ROBERT L. KRECHEVSKY, Bankruptcy Judge.

ISSUE

The issue in this matter is the enforceability, after a debtor's Chapter 7 case has closed, of two clauses in a retail installment contract ("the contract"), secured by the debtor's automobile, providing that a bankruptcy filing by the buyer is an event of default permitting repossession of the automobile. Cynthia L. Sokolowski, the debtor ("the debtor"), has raised the issue in a complaint she filed against BankBoston ("the Bank"), the holder of the contract. The complaint seeks a declaratory judgment and an injunction enjoining the Bank from repossessing the automobile solely because the debtor filed a bankruptcy petition. The parties, agreeing that the adversary proceeding is a core proceeding, have submitted the matter to the court for determination upon a stipulation of facts and the parties' briefs.

BACKGROUND

The debtor, then aged 54, on or about March 19, 1996, executed a retail installment contract for $10,090.00, payable over five years at 10.9 percent interest, to finance the purchase of a 1993 Pontiac Grand Am ("the automobile" or "the vehicle") from The M.J. Sullivan Automotive Corner ("the seller"). The automobile purchase price was $10,100.00. The seller simultaneously assigned the contract to the Bank. The contract, in which the debtor granted a security interest in the automobile to the contract holder, contains the following paragraphs:

10. DEFAULT. You will be in default under the contract if any of the following things happen:

. . . .

(b) You declare or are forced into bankruptcy.

. . . .

12. REPOSSESSION. If you are in default, we can also take and sell the Collateral, even if we are not properly shown a "lienholder." If we decide to do this, you agree to deliver the Collateral to us. If you do not, we have the right to peaceably enter the premises where the Collateral is kept and take it ourselves. We may do this without going to court and without giving you advance notice. If we take and sell the Collateral, we will apply the proceeds of the sale as required by law. . . .

Exh. 2.

The debtor filed a Chapter 7 petition on May 1, 1997. The court granted her an uncontested discharge on September 29, 1997. On July 7, 1997, the Chapter 7 trustee filed a report of no distribution, and, on November 17, 1997, the court closed the case. The Chapter 7 trustee did not in any way administer the automobile as an estate asset.

During the Chapter 7 case, the debtor and the Bank entered into a reaffirmation agreement, but within the statutory rescission period the debtor rescinded the agreement. The debtor, at all relevant times, has been current in her monthly payments to the Bank and has maintained adequate insurance coverage on the automobile. At the time the debtor filed her Chapter 7 petition, she owed the Bank approximately $7,900 under the contract. The parties have not stipulated to the value of the automobile on the petition date.

The Bank, on December 2, 1997, after the debtor's Chapter 7 case was closed, sent to the debtor and to her attorney a letter which included the following statement:

Please be advised that by virtue of your bankruptcy filing, you are in default of the provisions of the Retail Installment Contract, as provided under ¶ 10 thereof. Pursuant to ¶ 12 of such Contract, the Bank has the right to proceed to repossess the Vehicle. You are hereby notified that on or after December 23, 1997, the Bank intends to repossess the Vehicle. (emphasis in original)

Exh. 3.

The debtor thereafter moved to reopen her Chapter 7 case in order to bring the declaratory judgment action. The court reopened the case on March 26, 1998, and the debtor filed the present amended complaint on April 2, 1998. The debtor has continued to make her monthly payments to the Bank under an agreement with the Bank that such payments are not to be considered a waiver. The Bank has agreed with the debtor not to attempt to repossess the automobile pending the court's ruling in this matter. The debtor represents that she needs the automobile "to continue with her economic existence."¹Order Granting Pl.'s Mot. Amend Agreed Statement of Facts.

DISCUSSION

The debtor, in her brief, submitted a list of rulings in which courts have refused to enforce default-on-bankruptcy clauses. Four courts have held that such clauses are invalid post bankruptcy. See GNC Community Fed. Credit Union v. Stefano (In re Stefano), 134 B.R. 824, 827 (Bankr.W.D.Pa.1991) (finding that a bankruptcy court may, post bankruptcy, determine that a default-on-bankruptcy clause is unenforceable because it defeats the purpose of providing a fresh start to debtors and, pursuant to Bankruptcy Code § 105(a), prohibit a creditor from enforcing such clause); Century Bank at Broadway v. Peacock (In re Peacock), 87 B.R. 657, 659-60 (Bankr.D.Colo.1988) (concluding that default-on-bankruptcy clauses are unenforceable both during and after bankruptcy because they thwart the debtor's fresh start and impose a penalty on debtors for exercising their constitutional right to file bankruptcy); In re Cassell, 41 B.R. 737, 740 (Bankr.E.D.Va. 1984) (refusing to enforce a default-on-bankruptcy clause after the debtor had received a discharge because such clauses are unenforceable as a matter of law); Brock v. Amer. Sec. Bank (In re Brock), 23 B.R. 998, 1003 (Bankr.D.C.1982) (finding a default-on-bankruptcy clause unenforceable post discharge because "(1) to permit repossession by sole reliance on invocation of the bankruptcy clause would in effect result in a forfeiture, which courts of equity traditionally abhor" and "(2) the invocation of such a clause is contrary to the well-established public policy now evinced by the provisions of the Bankruptcy Code").

Other courts, while not reaching the question of their validity post discharge, have declined to enforce default-on-bankruptcy clauses before the debtor received a discharge. See Riggs Nat'l Bank of Wash., D.C. v. Perry (In re Perry), 729 F.2d 982, 984-85 (4th Cir.1984) (holding default-on-bankruptcy clauses unenforceable as a matter of law because they "clearly intrude upon" a "clear Congressional purpose to create a way by which debtors may obtain a fresh start towards reorganization of their financial obligations"); In re Winters, 69 B.R. 145, 146-47 (Bankr.D.Or.1986) (construing Bankruptcy Code § 541(c)(1)(B) as voiding default-on-bankruptcy clauses, which "threaten the fresh start which is the purpose of bankruptcy"); In re Bryant, 43 B.R. 189, 195-96 (Bankr.E.D.Mich.1984) (holding that Code § 541(c)(1)(B) invalidates default-on-bankruptcy clauses and noting that "the Code is devoid of language which would revive or reinstate such clauses," which "create a penalty upon individuals who seek the protection afforded by the Bankruptcy Code" and "are a form of discriminatory treatment the bankruptcy laws were intended to prohibit"); First and Merchants Nat'l Bank v. Ballance (In re Ballance), 33 B.R. 89, 91 (Bankr.E.D.Va.1983) ("A part of the `fresh start' Congress provided is invalidation of those boiler plate, ipso facto, bankruptcy clauses"); General Motors Acceptance Corp. v. Rose (In re Rose), 21 B.R. 272, 277 (Bankr.D.N.J.1982) (concluding that default-on-bankruptcy clauses are unenforceable because, if valid, they would "defeat the purpose of providing a `fresh start' to debtors" and "render a penalty on debtors.")

The Bank, on its part, proffers in its brief a list of authorities concluding that there is no basis in the Bankruptcy Code, public policy, or legislative intent, to deny post-discharge or post-case-closing enforcement of a default-on-bankruptcy clause. See General Motors Acceptance Corp. v. Bell (In re Bell), 700 F.2d 1053, 1058 (6th Cir.1983) (finding that once the trustee abandoned the vehicle and it was no longer property of the estate, the bankruptcy clause became effective and the debtors were no longer entitled to possession); Forlini v. Northeast Sav., F.A., 200 B.R. 9, 12-13 (D.R.I.1996) (suggesting that the bankruptcy court lacked authority to enjoin secured creditors from enforcing a default-on-bankruptcy clause after termination of the bankruptcy proceeding); In re Mitchell, 85 B.R. 564, 566 (Bankr.D.Nev.1988) ("Where the asset is no longer part of the bankruptcy estate, the bankruptcy default clause becomes operative and enforceable"); Chrysler Credit Corp. v. Schweitzer (In re Schweitzer), 19 B.R. 860, 867 (Bankr. E.D.N.Y.1982) (finding that the Bankruptcy Code's legislative history...