Ostrander v. Source One Fin. Corp. (In re Mollison)

• Decision Date: 06 January 2012
• Docket Number: Adversary No. 11–3025.,Bankruptcy No. 10–32291.
• Citation: 463 B.R. 169
• Parties: In re Brett M. MOLLISON, Debtor.David W. Ostrander, Trustee, Plaintiff, v. Source One Financial Corporation, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

463 B.R. 169

In re Brett M. MOLLISON, Debtor.David W. Ostrander, Trustee, Plaintiff,

v.Source One Financial Corporation, Defendant.

Bankruptcy No. 10–32291.

Adversary No. 11–3025.

United States Bankruptcy Court, D. Massachusetts,Western Division.

Jan. 6, 2012.

John R. Roden, Roden & Casavant, Springfield, MA, for Debtor.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court are two matters, both of which center around § 362(h) of the Bankruptcy Code,¹ added by the Bankruptcy Abuse and Consumer Protection Act of 2005 (the “BAPCPA”).² Pursuant to the relatively new § 362(h), the automatic stay under § 362(a) (the “Automatic Stay”) terminates with regard to personal property that secures a prepetition debt if the debtor fails to timely state and then perform his or her intention to surrender, redeem, or reaffirm the property. The issues before the Court involve not only the scope and operation of § 362(h), but also the impact of that section on a Chapter 7 trustee's powers under other sections of the Bankruptcy Code.

I. FACTS AND TRAVEL OF THE CASE

Brett M. Mollison (the “Debtor”) filed this Chapter 7 case on November 8, 2010 (the “Petition Date”). On the Petition Date, the Debtor owned a 2003 Cadillac CTS (the “Cadillac”), which he disclosed on his Schedule B, estimating the current value as $6,000.³ On his Schedule D, the Debtor indicated that “Source One Financial Corp.” (“Source One”) held a lien on the Cadillac to secure a claim in the amount of $8,800. And on Schedule J, the Debtor indicated that his monthly installment payment on that auto loan was $320.

On the Petition Date, the Debtor also filed a “Chapter 7 Individual Debtor's Statement of Intention” (the “Statement of Intent”). In his Statement of Intent, the Debtor listed the debt owed to Source One and Source One's security interest in the Cadillac and indicated that the Cadillac would be “retained.” The Debtor did not, however, indicate on the Statement of Intent that the Cadillac would be redeemed or the underlying debt reaffirmed. Instead, the Debtor wrote on the Statement of Intent that he intended to “make regular monthly payments” on account of the debt.

At the meeting of creditors required by § 341 (the “341 Meeting”) held on December 7, 2010, David W. Ostrander, the Chapter 7 trustee (the “Trustee”), questioned the Debtor about the Cadillac. The Debtor testified that he was in possession of the certificate of title for the Cadillac (the “Title”). The Trustee requested a copy of the Title, which he received on December 22, 2010. Despite various indications in the Debtor's schedules that Source One was a secured creditor with respect to the Cadillac, the Title did not identify any lienholders.

In addition to requesting a copy of the Title, the Trustee had also requested a copy of the purchase contract between the Debtor and Source One (the “Contract”). While the submitted pleadings do not explain why the Debtor was delayed in producing a copy of the Contract, it is undisputed that the Trustee did not receive a copy of the Contract until April 5, 2011.⁴

Upon receipt of the Contract on April 5, the Trustee ran a search of the Title in the database maintained by the Massachusetts Department of Transportation Registry of Motor Vehicles (the “Registry”) and confirmed that Source One was not listed as a lienholder. See Trustee's Mot. for Sanctions, Ex. D, Mass. Registry of Motor Vehicles Title/Lien Inquiry–Details 4/5/2011. That day, the Trustee contacted Source One by telephone and spoke with an Attorney Matthew E. Mitchell (“Attorney Mitchell”). The Trustee followed that conversation with an email to Attorney Mitchell confirming the Trustee's position that Source One's lien was unperfected and avoidable. Apparently, the Trustee hoped Source One would concede its unsecured position vis-à-vis the bankruptcy estate, and he proposed a settlement to Source One. Attorney Mitchell did not immediately acquiesce, however, and responded to the Trustee's further email sent April 11 by indicating that he was still “checking into it.” Stipulated Facts, 3 ¶ 18, Aug. 4, 2011, ECF No. 42.

In fact, Source One was not prepared to readily concede unsecured status, and, unbeknownst to the Trustee, began to take steps to perfect its lien on the Cadillac. After the Trustee's initial contact, Source One contacted the Registry in an attempt to figure out why its lien was not noted on the Title. Michael Cain, a Source One representative (who had been copied on the emails sent between the Trustee and Attorney Mitchell), traveled to the Registry office and spoke with at least one Registry employee, setting into motion the process of correcting the Title. By April 27, when Attorney Mitchell again emailed the Trustee, Source One had succeeded in having the title “suspended” by the Registry after a Registry hearing in which it was determined that the original dealer had made a clerical error in processing the Title.⁵ And in a May 4 email, Attorney Mitchell reported to the Trustee his belief that “Source One will ultimately be listed as the First Lienholder after the hearing.” Stipulated Facts, 4 ¶ 23.

The Trustee's response to Attorney Mitchell's reports was understandably less-than-positive. In an email dated April 27, the Trustee warned Attorney Mitchell that efforts to fix any problems with the Title would be “void,” id. at 4 ¶ 22, and on May 5, the Trustee informed Attorney Mitchell via email that any attempt to have Source One's lien on the Cadillac perfected would violate the Automatic Stay, id. at 4 ¶ 24. But despite the fact that Source One was taking fairly aggressive steps to perfect its lien, the Trustee continued to correspond with Attorney Mitchell, exchanging further settlement offers (all of which were rejected). On May 18, 2011, the Trustee was contacted by a new attorney for Source One, James McGinley. When the Trustee and Attorney McGinley were unable to reach a resolution, the Trustee finally took action with the Court, filing an expedited “Motion to Compel Turnover of Estate Property” (the “Turnover Motion”) on May 19, 2011.

In the Turnover Motion, the Trustee averred that the Cadillac was property of the bankruptcy estate, that the alleged lienholder (Source One) did not have a perfected lien as of the Petition Date, and that the Trustee believed that “Source One may be attempting to note its lien on the Title.” Turnover Motion, 2 ¶ 13, ECF No. 22. The Trustee also indicated his intention to file an adversary proceeding seeking to avoid Source One's lien and preserve it for the benefit of the bankruptcy estate under §§ 544 and 551, respectively. Accordingly, in the Turnover Motion, the Trustee asked the Court for an order compelling the Debtor to turn over the Cadillac, the Title, and the keys to the Trustee pending the outcome of the adversary proceeding or, alternatively, the entry of an order compelling the Debtor to make his $320 monthly car payments directly to the Trustee.

At an expedited hearing on the Turnover Motion held on May 25, 2011 (the “Turnover Hearing”), the Trustee informed the Court that he had been told that very morning by Debtor's counsel that Source One had sent paperwork to the Debtor to have the Title corrected and that the Debtor had completed the paperwork and mailed the Title and the paperwork to Source One in the envelope that was provided to him. Based on the Trustee's representations, the Court unhesitatingly stated that Source One's actions appeared to be blatantly in violation of the Automatic Stay and ordered the Debtor to turn the Cadillac over to the Trustee.

On May 31, 2011, the Trustee filed an adversary proceeding against Source One, seeking to avoid Source One's unperfected lien on the Cadillac and to preserve the avoided lien for the benefit of the bankruptcy estate (the “Adversary Proceeding”). Shortly thereafter, on June 10, 2011, the Trustee filed a “Motion for Sanctions Against Source One Financial Corporation for Willful Violation of the Automatic Stay” (the “Sanctions Motion”) in the Debtor's main case. In the Sanctions Motion, the Trustee provided the Court with more detailed information on Source One's postpetition attempts to perfect its lien, asserting that those actions were clear violations of the Automatic Stay. On June 28 and June 30, respectively, Source One filed an opposition to the Sanctions Motion and a motion to dismiss the Adversary Proceeding (the “Motion to Dismiss”). After a hearing on both motions, the Court took both the Sanctions Motion and the Motion to Dismiss under advisement.

II. POSITIONS OF THE PARTIESA. The Sanctions Motion

There is no dispute that the postpetition actions taken by Source One to perfect its lien in the Cadillac would be contravention of the Automatic Stay, assuming that the Automatic Stay remained in effect when those actions were taken. Source One contends, however, that the motion must be denied because, pursuant to § 362(h), the Automatic Stay had terminated with respect to the Cadillac at the time it took steps to perfect its lien.⁶ According to Source One, because the Debtor failed to elect in his Statement of Intent either reaffirmation of Source One's secured claim or redemption of the Cadillac, the Automatic Stay terminated by operation of § 362(h)(1) on January 7, 2011, thirty days after the first date set for the 341 Meeting.

The Trustee raises several arguments against the applicability of § 362(h)(1) to the facts of this case. First, the Trustee argues that § 362(h)(1) does not apply because the Debtor did file a Statement of Intent and acted consistent with his stated intent—retaining the Cadillac and continuing monthly payments to Source One. The Trustee contends that this was sufficient compliance under § 362(h)(1) to prevent the termination of the Automatic Stay. In response, Source One argues that the Debtor failed to comply with § 362(h)(1)(A) ab initio by failing to choose one of the elections with...