Consensual Redemption Agreements Outside the Scope of Judicial Authority

Journal Issue

Jun 2000

Column Name

Journal HTML Content

The most embattled creditor in the consumer bankruptcy arena in recent years has been Sears Roebuck and
Co.<a href="#1" name="1a">1</a> In the following cases, Sears again finds itself at center stage in a consumer bankruptcy controversy.
This time, the controversy relates to the validity of obtaining consensual or non-judicial redemption
agreements from chapter 7 debtors—without formal court approval.

Section 722 of the Bankruptcy Code sets forth the parameters under which an individual debtor may
redeem property:
<blockquote>
An individual debtor may, whether or not the debtor has waived the right to redeem under this
section, redeem tangible personal property intended primarily for personal, family or household use,
from a lien securing a dischargable consumer debt, if such property is exempted under §522 of this
title or has been abandoned under §554 of this title, by paying the holder of such lien the amount
of the allowed secured claim of such holder that is secured by such lien.
</blockquote>

Three decisions, all involving Sears, have addressed the issue of consensual redemption agreements.

<h3>In re Lopez</h3>

In In re Lopez,<a href="#2" name="2a">2</a> Sears sought formal court approval for the Memorandum of Redemption into which
Sears had entered with the debtor and filed with the court. On May 6, 1998, the Lopezes filed chapter 7.
At the June 11 meeting of creditors, the debtors and a Sears representative executed the Memorandum of
Redemption, which specified an "agreed value" of $82.75 for a VCR and $197.96 for a television set, and
stated, "The above-listed property is either exempted under §522 of the Bankruptcy Code or was abandoned
under §554 of the Bankruptcy Code." The Memorandum of Redemption did not contain the signature of
the debtors' counsel, and was filed shortly after the meeting of creditors on June 15, along with the request
for a hearing. The hearing was requested to establish that such agreements did not require court approval
or, alternatively, to obtain court approval of the agreement.<a href="#3" name="3a">3</a>

Judge Robles conceded that §722 did not explicitly address whether redemption agreements must be
filed with the court or be subjected to judicial scrutiny. Nonetheless, he ruled that "court involvement" was
implied by the statutory redemption prerequisites.

First, the court noted that in order to be subject to redemption, property must either be exempt or
abandoned. Mere boiler-plate within an agreement stating, "the above-listed property is either exempted
under §522 of the Bankruptcy Code or was abandoned under §554 of the Bankruptcy Code," was viewed
as insufficient to satisfy the statutory requirement, leaving the court to determine if the subject property
qualified for redemption. The court reinforced its finding by pointing out that at the time the Memorandum
of Redemption with the boilerplate exemption/abandonment language was filed, the expiration of the
deadline for objecting to an exemption had yet to pass and no notice to abandon or other abandonment
proceedings had taken place.<a href="#4" name="4a">4</a>

The court further noted that §722 required a determination of the amount of the creditor's secured claim
pursuant to §506. The court was unwilling to surrender its valuation authority regardless of whether the
creditor and debtor were in agreement as to the value of the collateral.

Judge Robles found that the Memorandum of Redemption was defective from a procedural standpoint
as well. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Rule of Bankruptcy Procedure 6008</a> provides:

<blockquote>
On motion by the debtor, trustee or debtor-in-possession, and after hearing on notice as the court
made direct, the court may authorize the redemption of property from a lien or from sale to enforce
a lien in accordance with applicable law.
</blockquote>
Notwithstanding Rule 6008, Sears argued that a motion to approve a proposed redemption was required
only if there existed a dispute as to value. Citing the lack of support for Sears's argument within the text
of the Rule, the court reasoned that the Rule underscored the active role required of courts in the redemption
process.

Turning to the specific Memorandum of Redemption before it, the court specified several reasons for
its disapproval. First, it pointed to the absence of a motion seeking approval of the Memorandum of
Redemption. Even if the Memorandum of Redemption was tacitly viewed as a motion, a creditor has no
standing under Rule 6008 to file such a motion. Second, the court took issue with the valuation contained
in the Memorandum of Redemption. Since the valuation of the underlying secured claim must be
determined as of the date of the hearing on the redemption motion,<a href="#5" name="5a">5</a> the valuation set out at the time of
the creditors' meeting was irrelevant. Finally, the Memorandum of Redemption did not provide a date
certain by which the lump-sum redemption amount would be paid. Following the well-established
principle that redemptions must be made by a lump-sum payment, the court stated it would not approve
a redemption agreement that fails to provide a lump sum payment by a specific date.<a href="#6" name="6a">6</a>

<h3>In re Spivey</h3>

The Lopez decision was filed on Aug. 12. Approximately two months later, Sears was faced with a
similar conflict in New York in In re Spivey.<a href="#7" name="7a">7</a> Unlike the setting in Lopez, Sears did not voluntarily seek
court approval of the Memorandum of Redemption filed in this case. Rather, the court in Spivey was
notified of the filing of a Memorandum of Redemption by the clerk of court. Having confirmed the absence
of judicial review and approval, the court issued the following Rule to Show Cause-type directive:

<blockquote>
A Memorandum of Redemption has been filed by [Sears] in the above-captioned case. Section 722
of the Bankruptcy Code and Rule 6008 of the Federal Rules of Bankruptcy Procedure provide that
property that is the subject of a security interest may be redeemed under certain circumstances if
authorized by the court upon motion by the debtor or the trustee. It is hereby ordered that if the
debtor wishes the redemption to be approved, a Motion for Approval must be filed with the court
and served on Sears within 20 days from the date hereof, returnable Nov. 19, 1998, at 2:00 p.m. In
the absence of such a motion, the Memorandum of Redemption will be null and void and Sears
shall refund to the debtor all monies paid pursuant thereto, certifying such refund to the court within
20 days after the motion filing deadlines set forth above.<a href="#8" name="8a">8</a>
</blockquote>

Mrs. Spivey filed chapter 7 on July 23, 1998, wherein she scheduled no secured creditors and claimed
a $750 exemption for unspecified household goods. Sears was scheduled as an unsecured creditor in the
amount of $439. The creditors' meeting took place on Aug. 31, and two days later Sears filed a
Memorandum of Redemption in which the debtor agreed to redeem her television/VCR for $153.89 and
stipulated that the item was "either exempted under §522 of the Bankruptcy Code or was abandoned under
§554 of the Bankruptcy Code."<a href="#9" name="9a">9</a> Finally, the redemption amount was due to be paid by no later than Sept.
30.

The debtor did not file a Motion for Redemption by the deadline specified by the court in its order.
Rather than file a separate motion for approval of the Memorandum of Redemption, Sears sought
reconsideration of the court's order. Sears sought to establish the reasonableness of its redemption
process.<a href="#10" name="10a">10</a> In the end, the court was not swayed and ruled that judicial review of a redemption agreement
is mandatory.

Judge Swain heartily endorsed the reasoning of Lopez with respect to the need for judicial review of
the issues concerning whether the property has been properly exempted or abandoned and whether the
property has been properly valued, as well as the applicability of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Rules of Bankruptcy Procedure
6008</a>. She also addressed the arguments raised by Sears on the issues of public policy, jurisdiction and the
chilling effect judicial review would work on redemption agreements.

Because "redemptions are equally subject to the types of abuses identified by Congress in establishing
reaffirmation procedure,"<a href="#11" name="11a">11</a> the court found unconvincing Sears's assertion that the dearth of legislative
history and the comprehensive nature of §524 indicated a Congressional intent to limit close judicial
scrutiny to reaffirmation agreements. The court further stated:
<blockquote>
The debtor's fresh start is no less impaired when she pays a lump sum out of non-estate property
in which she makes a number of smaller payments over an extended period of time of non-estate
property.<a href="#12" name="12a">12</a>
</blockquote>

The court summarily rejected the contention that jurisdiction was absent because of the lack of a "case
or controversy" arising out of a voluntarily redemption. To this end, the court cited §105 and its broad
jurisdiction to "ensure compliance with the Code during the administration of the case."<a href="#13" name="13a">13</a> Finally, Sears
argued that requiring debtors to file motions to redeem would discourage the redemption alternative.
Making something of a "best interest of debtors" argument, Sears pointed out that creditors would prefer
drawn-out reaffirmation agreements, with the attendant collection of interest payments.

The court was not convinced that creditors would abandon pursuit of redemptions, in view of
redemption advantages, such as lump-sum payments and the reduced risk of default over time. Moreover,
the judicial review involved in a redemption involves a substantially less burdensome process than that
encountered in connection with a reaffirmation agreement. Ultimately, Sears was required to refund the
redemption payment to Mrs. Spivey.

<h3>In re White</h3>

One week after Spivey, Judge Conrad issued his decision in In re White.<a href="#14" name="14a">14</a> In this case, counsel for
Sears were asked to seek modification of a general order or local rule dealing with redemption, which had
been recently adopted by the bankruptcy court for the District of Vermont.

General Order 98-01 was adopted as a result of the increased filing of redemption agreements in that
district. The court noted the increased frequency of Memorandum of Redemption filed in favor of, or
involving, Sears. The general order provides:

The court has experienced an increase in the volume of motions to approve redemption agreements.
The sketchy pleadings often make it impossible to determine whether the redemption agreements
are authorized by law.<a href="#15" name="15a">15</a> Accordingly, to conserve judicial resources and to assure compliance with
the law, it is hereby ordered as follows:
<blockquote>
<ol>
<li>The signature of a debtor on a redemption agreement shall be deemed to authorize the
creditor to file a Joint Motion for Approval.

</li><li>The Motion to Approve a Redemption Agreement must include:
<blockquote>
(a) A copy of the Redemption Agreement. 
(b) A copy of the instruments creating and perfecting the security interest. 
(c) A complete description of the property including original purchase price, date of
purchase, amount paid, amount still due and any other necessary information upon
which the court may make a determination as to the appropriateness of the requested action.
</blockquote>
</li><li>All motions for approval of agreements to redeem property for payments totalling $1,000
or more in principal, interest and charges shall be set for hearing. Attendance by creditor's
counsel is mandatory.
</li><li>All other motions for approval may be submitted to the court for ex parte determination.
The court shall have discretion to set the matter for hearing and require attendance by the
creditor, creditor's counsel, debtor's counsel and/or the debtor.</li></ol>
</blockquote>

In this case, the debtor filed chapter 7 on Aug. 4. On Nov. 17, Sears filed a Memorandum of
Redemption in which the debtor agreed to redeem a refrigerator and a washer for $624.17. The
Memorandum of Redemption did not comply with the general order and was noticed for a hearing. Similar
to its posture in the preceding cases, Sears asserted that it had no statutory duty to submit its Memoranda
of Redemption to the court, the general order conflicted with §722 and that the court lacked jurisdiction to
entertain the validity of these agreements.

The court was quick to highlight the specter of Sears's past misdeeds in obtaining reaffirmation
agreements from its debtor customers. It then proceeded to sharply criticize Sears for its "intentional,
material and highly irrational [omission]"<a href="#16" name="16a">16</a> of the Lopez case in its argument that no authority existed for
the proposition that a debtor and creditor must file a redemption agreement. The court continued its
comments:
<blockquote>
Our own research revealed Lopez. We feel misled by Sears' actions. It seems little has been learned
from the reaffirmation fiasco. Counsel would have been better off arguing against the rationale set
forth in Lopez rather than attempting to bury its head, and ours, in the sand.<a href="#17" name="17a">17</a>

</blockquote>

Returning to the substance of Sears's arguments, the court joined the courts in Lopez and Spivey in
finding that judicial scrutiny did not interfere with the parties' right to redeem, providing the redemption
proceeded according to the requirements of §722.<a href="#18" name="18a">18</a> Rule 6008 was also cited in support of the mandatory
nature of judicial review.<a href="#19" name="19a">19</a> Consistent with the holdings in Lopez and Spivey, Judge Conrad noted that
nothing in either §722 or Rule 6008 required the court to adopt consensual evaluations. Moreover, the court
observed that "a debtor often lacks the requisite leverage to bargain for a proper redemption price."<a href="#20" name="20a">20</a>

The court also expressed Sears's concern about the utilization about of a "replacement value" in the
consensual agreements. Although the court stopped short of ruling on the correct means of determining a
redemption value, it engaged in a lengthy discussion of the In re Donnelly<a href="#21" name="21a">21</a> line of cases that peg
redemption values at something closer to a repossession than replacement value.

Finally, the court addressed the argument that it lacked jurisdiction to oversee the disposition of
redeemable property because once exempted or abandoned, it was no longer property of the estate. The
court bristled at the notion that Sears or any other creditor would have the authority to determine whether
redemption agreements "meet statutory muster."<a href="#22" name="22a">22</a>

In the end, the court's analysis comes down to the convincing rationale that it is obligated to assure the
satisfaction of the underlying requirements of §722, including whether 1) the claim is allowed under §502;
2) the redemption amount comports with the statutory allowed price under §506(a); 3) the goods sought
to be redeemed are redeemable under the Code; and 4) the creditor is, in fact, secured, and if so, whether
the security interest attaches to redeemable goods.<a href="#23" name="23a">23</a>

It seems highly unlikely that Sears or any other creditor would pursue the use of consensual,
non-judicial redemption agreements any further. In those jurisdictions where a debtor is not required to
either reaffirm or redeem personal or household goods absent a pre-petition, non-bankruptcy default,<a href="#24" name="24a">24</a>

reaffirmations and redemptions are difficult for debtor's counsel to justify. However, the majority of circuits
that have considered the issue are now requiring reaffirmation, redemption or surrender of such property
in chapter 7.<a href="#25" name="25a">25</a> In these jurisdictions, redemption agreements are a consideration in a great number of
consumer cases. Strict compliance with §722 and Rule 6008 and seeking judicial approval appear to
provide the best prospect for assuring the validity and enforceability of a consensual redemption agreement.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Latanowich, 207 B.R. 326 (Bankr. D. Mass. 1997)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Sears Roebuck & Co., 222 B.R. 181 (Bankr. D. Mass. 1998)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 439 (Bankr. C.D. Cal. 1998)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 441</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> But, see, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Jewell, 232 B.R. 904 (Bankr. E.D. Texas 1999)</a>, in which the court overruled Sears's objection
to a debtor's redemption motion prior to the lapse of the referenced deadlines, finding that it would be inequitable to require the debtor
to await the expiration of such deadlines before allowing him to pursue redemption. <a href="#4a">Return to article</a>

5 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re King, 75 B.R. 287 (Bankr. S.D. Ohio 1987)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Pierce, 5 B.R. 346 (Bankr. D. Neb. 1980)</a>;
Accord, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Henderson, 235 B.R. 425 (Bankr. S.D. Ill. 1999)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> Id. at 144. <a href="#6a">Return to article</a>

<a name="7">7</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 484 (Bankr. E.D.N.Y. 1999)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 486</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#9a">Return to article</a>

<a name="10">10</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 486-488</a>. It is noteworthy that the value employed in this and all memoranda of redemption is the "replacement value" of the property. <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 490</a>. <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 551 (Bankr. D. Vt. 1999)</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §722</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Rules of Bankruptcy Procedure 6008</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 553</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 554</a>. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 554-555</a>. <a href="#19a">Return to article</a>

<a name="20">20</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 556</a>. <a href="#20a">Return to article</a>

<a name="21">21</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 1004 (Bankr. S.D. Ohio 1998)</a>. <a href="#21a">Return to article</a>

<a name="22">22</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Footnote 13 goes on to say, "in fact, we would be reluctant to defer to any interpretations of statute offered by Sears,
especially due to its penchant for omitting applicable case law in making such interpretations." <a href="#22a">Return to article</a>

<a name="23">23</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 556</a>. <a href="#23a">Return to article</a>

24 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Belanger, 962 F.2d 345 (4th Cir. 1992)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Parker, 139 F.3d 668 (9th Cir. 1998)</a>, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
Federal Credit Union v. West, 882 F.2d 1543 (10th Cir. 1989)</a>. <a href="#24a">Return to article</a>

<a name="25">25</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Burr, 160 F.3d 843 (1st Cir. 1998)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Johnson, 89 F.3d 1512 (5th Cir. 1996)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re
Bell, 700 F.2d 1053 (6th Cir. 1983)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Edwards, 901 F.2d 1383 (7th Cir. 1990)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Taylor, 3 F.3d 1512 (11th Cir. 1993)</a>. <a href="#25a">Return to article</a>

Journal Authors

David B. Wheeler

Journal Date

Thursday, June 1, 2000 - 12:00