A bankruptcy judge in Savannah, Ga., said that a nonprecedential opinion by the Eleventh Circuit was “unpersuasive.” Instead, he followed an earlier precedential opinion from the Eleventh Circuit on a case with different facts regarding so-called title pawn loans.

The nonprecedential opinion that Chief Bankruptcy Judge Edward J. Coleman, III, declined to follow had facts that were functionally identical to the two cases before him. He said that the nonprecedential panel “misread” the prior precedential opinion “on a critical issue.”

Unmatured Title Loans

On January 13, Judge Coleman issued two opinions in similar chapter 13 cases.

Both debtors obtained title pawn loans and gave the titles to their cars to the lender. The debtors both filed chapter 13 petitions before the 30-day loans matured. Both debtors scheduled the lenders as holding secured claims. The plans promised to pay off the loans in full during the terms of the plans with interest in the range of 5% to 6%.

The debtors did not redeem their cars in bankruptcy during the 30-day redemption period after the loans matured, nor did they redeem their cars during the additional 60 days provided by Section 108(b)(2).

The lender filed motions for relief from the automatic stay, contending that ownership of the cars dropped out of the estate once the extended redemption periods expired. Judge Coleman agreed.

The Competing Precedents

Judge Coleman said he was tasked with deciding whether to follow TitleMax v. Northington (In re Northington), 876 F.3d 1302 (11th Cir. 2017), or TitleMax of Ala., Inc. v. Womack (In re Womack), No. 21-11476, 2021 BL 326887, 2021 US App Lexis 26127, 2021 WL 3856036 (11th Cir. Aug. 30, 2021) (per curiam).

In Northington, the earlier of the opinions, the debtor had pawned his car and did not repay the loan when the loan matured before the filing date. The debtor was in the so-called grace period when she filed a chapter 13 petition. The debtor did not redeem the car during the grace period. The Eleventh Circuit held that title had passed before bankruptcy, leaving the debtor unable to stretch out the loan in chapter 13.

In Womack, a nonprecedential, per curiam opinion, the debtor filed a chapter 13 petition before the maturity of the loan. In other words, the debtor was not in default on filing. The panel narrowed Northington by holding that a chapter 13 plan can stretch out a pawn loan under a chapter 13 plan if there was no default before filing. To read ABI’s report, click here.

Referring to Northington as “binding precedent,” Judge Coleman characterized the Eleventh Circuit as holding “that Georgia law continues to operate even when the borrower files for Chapter 13 bankruptcy before the expiration of the grace period, with the result that the vehicle ceases to be property of the bankruptcy estate.”

Judge Coleman characterized the Womack panel as saying that the Northington debtor only had possession and a right of redemption on filing, compared to the Womack debtor, who still owned the car on filing. The Womack panel, he said, ruled that the automatic stay froze the lender’s interest as a secured claim on filing.

Judge Coleman said “it is difficult to reconcile the holding of Womack with the analysis of Northington, which it seems to have rejected wholesale.” He found Womack “unpersuasive.”

Judge Coleman’s Analysis

Judge Coleman said that “the panel in Womack misread Northington on a critical issue, whether the vehicle ever became part of the bankruptcy estate.” He said that the factual distinction was “no distinction at all.”

Judge Coleman said that the Womack panel ignored Butner v. U.S., 440 U.S. 48, 55 (1979), where the Supreme Court said that property interests are created and defined by state law. Because Georgia law defines the interests of the parties in a pawn transaction, he cited Northington for the proposition that “the vehicle ceased to be part of the bankruptcy estate once the redemption periods expired.”

Section 541(b)(8) supplied another reason for the same result. That section says that estate property does not include tangible property that the debtor has pledged when the property is in the possession of the pledgee.

According to Judge Coleman, the Georgia pawn statute says that possession of a motor vehicle title is “conclusively deemed” to be possession of the vehicle itself. Consequently, he ruled that the car was no longer estate property and fell out of the estate when the extended redemption period lapsed.

Observations

The issue is a prime topic for the Eleventh Circuit to review en banc. A district judge on the Northington panel dissented. The three judges on the Womack panel, including the chief judge, were in agreement on limiting Northington. As it stands today, more Eleventh Circuit judges are on the debtors’ side than on the lender’s.

If the appeals court sits en banc, the judges should consider the implications of Northington if it were extended to cover loans that were not in default on the filing date. And consider the implications if the interpretation of bankruptcy law permits state law to specify across the board when a debtor loses title to property.

Suppose a state passes a law saying that title to any auto under any type of a loan automatically passes to the lender 30 days after default. And assume the state law also creates a legal fiction that the lender is in possession.

By extending Northington to auto loans not in default on filing, debtors would lose their cars, and bankruptcy courts wouldn’t be able to do anything about it. Laws of this type could cover all sorts of personal property, and possibly also real property.

Respectfully, this writer sees no functional difference between the Georgia pawn law and the more extreme law imagined above. Among other things, this writer does not believe that a state law should be allowed to create a legal fiction wedded to Section 541(b)(8).

The Eleventh Circuit should sit en banc to decide whether Womack correctly limited Northington.

The opinions are TitleMax of Georgia v. Hamilton (In re Hamilton), 21-40446 (Bankr. S.D. Ga. Jan. 13, 2022), and TitleMax of Georgia v. Snyder (In re Snyder), 21-40402 (Bankr. S.D. Ga. Jan. 13, 2022).