Venture Bank v. Lapides

• Decision Date: 25 August 2015
• Docket Number: No. 14–3085.,14–3085.
• Citation: 800 F.3d 442
• Parties: VENTURE BANK, Appellant v. Howard L. LAPIDES, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

800 F.3d 442

VENTURE BANK, Appellant

v.Howard L. LAPIDES, Appellee.

No. 14–3085.

United States Court of Appeals, Eighth Circuit.

Submitted: June 9, 2015.

Filed: Aug. 25, 2015.

Gregory Martin Erickson, argued, Minneapolis, MN, for Plaintiff–Appellant.

Scott Martin Hoffman, argued, Minneapolis, MN, for Defendant–Appellee.

Before LOKEN, BYE, and KELLY, Circuit Judges.

Opinion

LOKEN, Circuit Judge.

Howard Lapides (Howard) and his wife, Mary Holter–Lapides (collectively, “the Lapideses”), renewed a loan from Venture Bank secured by a third mortgage on their home. Howard subsequently filed for Chapter 7 bankruptcy. After Howard's personal debts were discharged, the Lapideses executed two “Change in Terms Agreements,” each of which extended the maturity date of the loan for six months. When Howard ceased making payments under these agreements, Venture Bank filed suit in Minnesota state court seeking, among other relief, a declaratory judgment that the agreements were valid and enforceable. The Lapideses removed the suit to bankruptcy court, and Howard asserted in a counterclaim that Venture Bank's efforts to obtain payments after his discharge violated the discharge injunction. See 11 U.S.C. § 524(a)(2). After a trial, the bankruptcy court¹ entered judgment denying Venture Bank's claim for a declaratory judgment and awarding Howard damages and attorney's fees on his counterclaim. Venture Bank appeals the district court's² decision affirming the bankruptcy court. Reviewing the bankruptcy court's factual findings for clear error and its conclusions of law de novo, we affirm. In re M & S Grading, Inc., 526 F.3d 363, 367 (8th Cir.2008) (standard of review).

I. Background

On August 30, 2007, Howard as President of his seafood import business signed a secured $400,000 promissory note evidencing a revolving line-of-credit loan by Venture Bank. Part of the collateral was a third mortgage on the Lapideses' home. Bank of America and Citizens Bank held the prior mortgages. In March 2008, the Lapideses signed a new $400,000 promissory note (number 12897) amending and restating the prior loan at a lower rate of interest. In September and November 2008, the Lapideses as borrowers signed Change in Terms Agreements extending the maturity date and modifying the credit terms of loan 12897. They signed a new promissory note (number 13317) in the amount of $357,456.35 in February 2009 providing that final payment was due three months later, and a new promissory note (number 13440) for $345,644 on June 30, 2009, payable on August 2, 2009. All notes and agreements were secured by the third mortgage on their home.

Howard filed for Chapter 7 bankruptcy protection on August 11, 2009. On October 12, Howard met with Venture Bank's president, Michael Zenk, and loan officer Nathan Urfer to discuss Venture Bank refinancing all three mortgages so the Lapideses could keep their home. Howard agreed to pay $3000 per month on loan 13440 to reestablish his credit with the Bank. On November 9, the Lapideses signed a Debt Re–Affirmation Agreement in which they promised to make five monthly payments of $3000, followed by payment of the outstanding principal and interest on May 9, 2010, and Venture Bank agreed to permit the Lapideses “the continued use and possession” of their home. Although Howard and Venture Bank knew the Re–Affirmation Agreement was unenforceable because Howard's bankruptcy attorney refused to sign the Agreement and it was never filed with the bankruptcy court, see 11 U.S.C. § 524(c), Howard continued to make regular loan payments to the Bank.

Howard's personal debts were discharged on November 16, 2009. On May 9, 2010, and November 9, 2010, the Lapideses executed Change in Terms Agreements extending the maturity date of Note 13440 to Venture Bank by six months. Each Agreement provided for payment in five monthly installments of $3500 followed by a final payment of the unpaid balance. Howard testified that he understood these agreements reflected the understanding reached at the October 12, 2009, meeting that he would make regular loan payments to reestablish his credit with Venture Bank to induce the Bank to refinance his three mortgages. The Lapideses made twelve $3500 payments to Venture Bank between June 2010 and May 2011. During this time, loan officer Urfer sent Howard numerous emails reminding him that payments were due and asking him to pay additional principal and accrued interest. Venture Bank never refinanced the mortgages. Howard ceased making monthly payments in May 2011.

In July 2011, Venture Bank sued the Lapideses in state court, asserting a claim against borrower Holter–Lapides under the November 9, 2010, Change in Terms Agreement; foreclosure of the Bank's third mortgage on the Lapideses' home; and a declaratory judgment that the Change in Terms Agreement was enforceable against Howard. The Lapideses removed the case to bankruptcy court, and Howard filed a counterclaim for damages, alleging that Venture Bank's efforts to obtain loan payments after his debts were discharged violated the discharge injunction imposed by 11 U.S.C. § 524(a)(2). Citizens Bank, holder of the second mortgage, foreclosed on the Lapideses' home and it was sold at public auction in December 2012. Venture Bank received none of the sale proceeds.

After the bankruptcy court remanded Venture Bank's claim against Holter–Lapides and the foreclosure claim to state court, the parties filed cross motions for summary judgment on the retained claims. In denying Venture Bank's motion for summary judgment and setting the case for trial, the bankruptcy court ruled that, to be valid and enforceable, the post-discharge Change in Terms Agreements must either comply with the requirements of a reaffirmation agreement under 11 U.S.C. § 524(c), which they admittedly did not do, or they must contain “all of the essential elements of a contract” under state law. After trial, the court concluded that the post-discharge agreements did not meet two essential elements of a valid and enforceable contract, consideration and mutual assent. The court further found that all monthly payments made by Howard after the first Change in Terms Agreement were involuntary, see § 524(f), and Venture Bank's efforts to obtain those payments violated the discharge injunction. The district court affirmed, concluding the post-discharge agreements lacked consideration because Venture Bank did not provide the Lapideses new consideration and Venture Bank had violated the discharge injunction. Correcting an error in calculating the number of monthly payments, the district court increased the damage award to $42,000. Venture Bank appeals.

II. Discussion

A bankruptcy discharge extinguishes only the debtor's personal liability; a secured creditor's right to foreclose on loan collateral, such as a mortgage on the debtor's residence, “survives or passes through the bankruptcy.” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). When a debtor's schedule of assets includes debts secured by property of the bankruptcy estate, the debtor must file a statement of his intent to surrender or retain the property and, if he elects to retain non-exempt property, whether he will redeem the property (i.e., pay off the secured loan before discharge) or “reaffirm debts secured by such property.” 11 U.S.C. § 521(a)(2)(A) ; see In re Pratt, 462 F.3d 14, 18–19 (1st Cir.2006).

A. Validity of the Post–Discharge Agreements

“A reaffirmation agreement is one in which the debtor agrees to repay all or part of a dischargeable debt after a bankruptcy petition has been filed.” In re Duke, 79 F.3d 43, 44 (7th Cir.1996). Prior to 1978, the Bankruptcy Act looked to state law to determine the validity of reaffirmation agreements. In many States, the moral obligation to repay a discharged debt was regarded as sufficient consideration. See In re Bennett, 298 F.3d 1059, 1066 (9th Cir.2002). In the 1978 Bankruptcy Code, Congress sought to equalize the unequal bargaining positions of experienced creditors and unsophisticated bankruptcy debtors by enacting § 524(c) of the Code, which provides in relevant part:

(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law ... only if—

(1) such agreement was made before the granting of the discharge ...;

(2) the debtor received the disclosures described in subsection (k) ...;

(2) such agreement has been filed with the court ....

Section 524(c) “reflects Congress's intent to ... safeguard [ ] debtors against unsound or unduly pressured judgments about whether to attempt to repay dischargeable debts.” In re Jamo, 283 F.3d 392, 398 (1st Cir.2002).

Under § 524(c), reaffirmation agreements are enforceable only if they are enforceable under state law and meet the requirements of federal law in § 524(c). See, e.g., Bennett, 298 F.3d at 1066. Thus, the bankruptcy court erred in ruling that the Change in Terms Agreements are valid if either (1) “the post-petition agreements comply with the requirements of 11 U.S.C. section 524(c) or (2) all of the essential elements of a contract are present in the post-petition agreements.” If the Agreements violate § 524(c), they are unenforceable as a matter of federal law, whether or not they would be enforceable under applicable state law contract principles.

It is undisputed that the post-discharge Change in Terms Agreements were not enforceable § 524(c) reaffirmation agreements, most obviously because they were entered into after Howard's bankruptcy discharge and were not filed with the bankruptcy court. Venture Bank argues, however, that the agreements are nonetheless valid because they are supported by consideration separate from Howard's discharged personal debt. The Bank had a right to foreclose on the family home after Howard's discharge...