Matter of Bell

• Decision Date: 26 January 1981
• Docket Number: Bankruptcy No. 80-01510-B,Adv. No. 80-1527-B.
• Citation: 8 BR 549
• Parties: In the Matter of Thomas Howard BELL and Margaret Louise Bell, Debtors. GENERAL MOTORS ACCEPTANCE CORPORATION, Plaintiff, v. Thomas Howard BELL and Margaret Louise Bell, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

8 B.R. 549 (1981)

In the Matter of Thomas Howard BELL and Margaret Louise Bell, Debtors GENERAL MOTORS ACCEPTANCE CORPORATION, Plaintiff, v. Thomas Howard BELL and Margaret Louise Bell, Defendants.

Bankruptcy No. 80-01510-B, Adv. No. 80-1527-B.

United States Bankruptcy Court, E.D. Michigan.

January 26, 1981.

Stewart, O'Reilly, Cornell, Lascoe & Rancilio, P.C. by Richard G. Szymczak, Sterling Heights, Mich., for plaintiff.

Professional Legal Centers, P.C. by William M. Crawforth and Kurt A. O'Keefe, Detroit, Mich., for defendants.

OPINION

GEORGE BRODY, Bankruptcy Judge.

This action raises the question of whether a secured creditor may require a debtor, who files a petition in bankruptcy, to turn over exempt personal property, unless the debtor redeems the property pursuant to section 722, or enters into an agreement providing for redemption pursuant to section 524(c).

Thomas Howard Bell and Margaret Louise Bell, husband and wife, filed a joint petition in bankruptcy on March 28, 1980. At the time of the filing of the petition, the debtors owned a 1978 Chevrolet Van automobile with a value of approximately $6,075.00, subject to a security interest held by General Motors Acceptance Corporation ("G.M.A.C."), to secure the payment of an outstanding debt of $5,095.36. The debtors claimed as exempt their equity in the automobile. The debtors were not in default in the payments due G.M.A.C. when they filed the petition in bankruptcy, and have continued to make the required contract payments. After the filing of the bankruptcy petition, G.M.A.C. filed a complaint to reclaim the automobile.

Initially, G.M.A.C. contends that since it bargained for the personal liability of the debtors, the discharge of that liability, by virtue of the filing of the petition in bankruptcy, permits it to terminate the contract and reclaim its collateral.

The Constitution of the United States grants to Congress the power to establish "uniform Laws on the subject of Bankruptcies . . .," (Art. 1, § 8, Cl. 4) and "To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers. . . ." Art. 1, § 8, Cl. 18.

Pursuant to this grant, "Congress may discharge the debtor's personal obligations because, unlike States, it is not prohibited from impairing the obligations of contracts." Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 589, 55 S.Ct. 854, 863, 79 L.Ed. 1593 (1935). See also Continental Illinois National Bank and Trust Co. v. Chicago, Rock Island and Pacific Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110 (1935); Hanover National Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113 (1902).

In addition, parties to a contract are chargeable with the knowledge that their contracts are not only subject to existing laws, but also to bankruptcy legislation which may thereafter be enacted.

"All parties to a contract are, of necessity, aware of the existence of, and subject to, the power of Congress to legislate on the subject of bankruptcies. They were and are chargeable with knowledge that their rights and remedies, in case the debtor becomes insolvent and is adjudicated a bankrupt, are affected by existing bankruptcy laws and all future lawful bankruptcy legislation which might be enacted. . . ." In re Prima Co., 88 F.2d 785, 788 (C.A.1937).

G.M.A.C., therefore, was aware, or should have been aware, that if the debtors filed a petition in bankruptcy, their personal liability on the contract would be extinguished. The discharge in bankruptcy did not affect the creditor's security interest in the collateral. A valid security interest in property, whether exempt or nonexempt, survived the filing of a petition under the Bankruptcy Act. Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886). It continues to do so under the Bankruptcy Code. The Code specifically provides that a secured creditor retains his secured claim "to the extent of the value of such secured creditor's interest . . . in such property." § 506(a). If the debtor ultimately pays to the creditor the lesser of the amount owing or the fair market value of the property, the creditor has no cause to complain. "There is no constitutional claim of the creditor to more than that." Wright v. Union Central Life Insurance Co., 311 U.S. 273, 278, 61 S.Ct. 196, 199, 85 L.Ed. 184 (1940).

Thus, the fact that the debtors filed a petition in bankruptcy and, pursuant to that petition, their unsecured debts were discharged, does not confer upon G.M.A.C. the right to repossess the motor vehicle.

Additionally, G.M.A.C. contends that it may reclaim the automobile, since the contract entered into with the debtors gave G.M.A.C. the option to terminate if the debtors instituted a bankruptcy proceeding.

The Code invalidates such so-called bankruptcy clauses. § 365(e) and § 541(c)(1). Section 365(e) invalidates such clauses as they relate to executory contracts and unexpired leases. This section is not applicable here. Clearly, this action does not involve an unexpired lease. And the contract is not executory, since G.M.A.C. has completely performed its part of the bargain. Inter Continental Promotions, Inc. v. MacDonald, 367 F.2d 293, 303 (5th Cir. 1966). See also Countryman, "Executory Contracts in Bankruptcy," Part I, 57 Minn.L.Rev. 439 (1973), and Part II, 58 Minn.L.Rev. 479 (1974). Section 541(c)(1), however, is applicable. Section 541(c)(1) provides that an interest of the debtor in property becomes property of the estate, notwithstanding any provision in the contract between the debtor and the other contracting party, which gives that party an option to terminate the debtor's interest in such property upon the filing of a bankruptcy petition. The motor vehicle became property of the...