In the words of the dissenter, the Eleventh Circuit penned an opinion on Dec. 11 “that will impede the effectiveness of our bankruptcy system and will undermine its purpose.”
The majority held that property covered by Georgia’s pawn statute, although remaining in the debtor’s possession, automatically drops out of the estate once the redemption period elapses. Even a chapter 13 plan is incapable of paying the lender’s claim in full and allowing the debtor to retain his car.
More surprisingly, the majority held that the title lender was not required to file an objection to confirmation of the plan. Although the lender also did not appeal confirmation of the plan, the majority nonetheless held that the confirmed plan did not bind the creditor because the lender had previously filed a motion to declare that the car was no longer estate property.
The decision has a number of shortcomings, among them the majority’s lack of discussion of Section 541(b)(8), which gives only limited protections to pawn brokers and title lenders. The opinion does not explain why a confirmed plan is not binding and thereby insinuates that a creditor need not oppose confirmation if a related issue is in litigation.
The majority opinion, written by a circuit judge appointed by President Donald Trump, means that states can pass laws eviscerating debtors’ rights under the Bankruptcy Code by taking property automatically out of the estate. The opinion also says that state laws prevail unless Congress has shown an intent for the Bankruptcy Code to be paramount.
The Typical Title Loan
The debtor obtained a loan before bankruptcy, secured by the title to his car, but he retained possession of the car. Before the redemption period elapsed under state law, the debtor filed a chapter 13 petition. The debtor did not pay off the title loan within the additional 60 days provided by Section 108(b).
Georgia’s automobile pawn statute gives the borrower a 30-day grace period after maturity to redeem the car. If not redeemed, title automatically passes to the lender.
After the additional 60 days had run, the lender filed a motion to declare that the car was no longer property of the estate and to modify the automatic stay permitting repossession of the car. The debtor opposed the motion, which was not decided before the bankruptcy court confirmed the chapter 13 plan.
The lender had filed a secured claim. Approved by a confirmation order that the lender did not appeal, the plan provided for paying the claim in full with interest at 5%.
At the hearing on the stay relief motion after confirmation, the lender conceded that it had not objected to confirmation. The bankruptcy judge denied the stay relief motion, holding that the car remained property of the estate even after expiration of the extended redemption period. The bankruptcy court also held that the lender was bound by the confirmed plan.
The district court affirmed, holding that the chapter 13 plan could modify the lender’s rights. To read ABI’s discussion of the district court opinion, click here.
The Eleventh Circuit reversed in a Dec. 11 opinion by Circuit Judge Kevin Newsom. Judge Newsom was Articles Editor for the Harvard Law Review. After clerking on the Ninth Circuit, he clerked on the Supreme Court for Justice David H. Souter.
The Plan Was Not Binding
Judge Newsom first ruled that the plan was not binding because the title lender had not “slept on its rights” by failing to object to confirmation of the plan.
“[O]n the unique facts of this case,” Judge Newsom said, the lender’s motion to modify the stay “adequately preserved its position.” He said there was “no substantive difference between the styled-as-such [objection to confirmation] that the dissent would seemingly require and the motion for relief [from the stay that the title lender] actually filed.”
The lender “put the substance of its position . . . squarely before the bankruptcy court,” Judge Newsom said. [Emphasis in original.] He went on to say that the lender was not required to file a confirmation objection to preserve the contention that the car was no longer estate property, because that issue “was adequately teed up” in the stay relief motion.
Although Judge Newsom said the facts of the case were “unique,” his opinion could be interpreted to mean that previously filed pleadings in chapter 11 or 13 cases will suffice as confirmation objections, although not denominated as such. Evidently, the bankruptcy judge must scour the docket for pleadings raising issues that might also pertain to confirmation.
Even if the lender had preserved the issue, Judge Newsom’s opinion does not explain why the appeal was not moot as a consequence of the confirmation order that the lender did not appeal.
The Car ‘Dropped Out’ of the Estate
Next, Judge Newsom held that the car “dropped out” of the estate by “the ‘automatic’ operation of Georgia’s pawn statute.” He said that a “clear majority” of lower courts have held that property subject to a pawn statute can cease automatically to be estate property.
Judge Newsom cited Butner v. U.S., 440 U.S. 48, 55 (1979), and Barnhill v. Johnson, 503 U.S. 393, 398 (1992), for the proposition that property interests are created and defined by state law. However, he did not mention Barnhill’s more important holding that federal law nonetheless determines the time of a transfer, an issue not discussed but pertinent to the case at hand.
Since state law automatically divests an owner of title, Judge Newsom said that the Bankruptcy Code could alter the outcome “only if we find some clear textual indication that Congress intended that result.”
The “likeliest candidate,” Judge Newsom said, was the automatic stay. Section 362(a), though, “has no application to the particular circumstances of this case,” he said.
Although conceding that “some courts” have held that the automatic stay tolls an unexpired redemption period, Judge Newsom cited Section 108(b) as making the automatic stay inapplicable. Were it otherwise, he said, the general would control the specific, and Section 108(b) would be superfluous.
Although the automatic stay prevents creditors from prying assets out of the estate, Judge Newsom said “it does not separately prevent those assets from evaporating on their own — as here, ‘automatically’ — pursuant to the ordinary operation of state law.”
Next, Judge Newsom said that Section 541 does not freeze estate property as of the filing date. The statute, he said, “neither clearly says nor unambiguously implies . . . that a bankruptcy estate, once created, necessarily remains static.”
Finally, Judge Newsom held that Section 1322(b)(2) “has no field of application in this case.” Although that section allows a chapter 13 plan to modify the claims of secured creditors, it did not apply because the car was no longer estate property by the time of confirmation.
Joining Judge Newsom’s opinion was District Judge Federico A. Moreno from the Southern District of Florida, sitting by designation.
The Dissent
Circuit Judge Charles R. Wilson, appointed by President Bill Clinton, dissented, saying this “should be an easy case,” because “a confirmed chapter 13 bankruptcy plan enjoys a preclusive, binding effect.”
The law, he said, “required an objection before plan confirmation, not a retroactive recasting of motions as objections.”
Judge Wilson pointed to the lender’s concession in bankruptcy court and the bankruptcy judge’s consequently finding that the lender had not filed an objection to confirmation. Reviewed for clear error, that finding, he said, “is insurmountable.” He also said there was “ample evidence to support the fact that [the lender] affirmatively declined to object.” [Emphasis in original.]
Therefore, Judge Wilson said he would have ruled that the lender was “bound by the confirmed plan.”
Taking the stay relief motion as a confirmation objection, Judge Wilson said, means that “judges will need to scour the docket prior to each confirmation hearing.”
Next, Judge Wilson cited United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010), for the idea that even an “illegal” plan provision binds a creditor.
With regard to the question of estate property, Judge Wilson said that “state law cannot operate to alter the bankruptcy estate after its creation — and it certainly cannot serve to dispossess the bankruptcy estate of property.”
On the filing of the chapter 13 petition, the lender had a secured claim that the debtor could modify under Section 1322(b)(2). Congress, Judge Wilson said, “provided no mechanism for property of the estate to evaporate.”
Judge Wilson pointed to Section 541(b)(8) as authority for the idea that the car remained estate property. That section was added along with the BAPCPA amendments in 2005 to give additional protections to pawn brokers and title lenders.
Section 541(b)(8) says that estate property does not include tangible property, other than written evidences of title, if the property is collateral for a loan, the property is in the possession of the lender, the debtor has no obligation to repay the loan, and the debtor has not redeemed the property within the time provided by state law.
Judge Wilson said that the section would have applied if the lender were in possession of the car, but that was not the case.
The majority cited Section 541(b)(8), but as evidence of a situation where property can drop out of the estate automatically. Arguably, Congress intended for Section 541(b)(8) to be the only circumstance when a title lender or pawn broker can automatically obtain title to property after bankruptcy, and that section by its terms was inapplicable to the case at hand.
Overview
The majority opinion gives states the ability to write laws automatically taking property out of a bankruptcy estate. Theoretically, states could make reorganization impossible in chapter 13 or chapter 11 by transferring all manner of property automatically to lenders or other creditors.
By requiring specific evidence that Congress intended for the Bankruptcy Code to override state law, the majority would make bankruptcy law less uniform and more a reflection of the idiosyncrasies of state law. Judge Newsom seemed to import rules regarding implied repeal of federal statutes to cases involving federal preemption of state law.
The majority opinion in some ways resembles WD Equipment v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. Feb. 27, 2017), where the Tenth Circuit held that passively holding an asset of the estate, in the face of a demand for turnover, does not violate the automatic stay in Section 362(a)(3) as an act to “exercise control over property of the estate.” The majority opinion and Cowen both chip away at the primacy of the Bankruptcy Code and diminish debtors’ rights and remedies.
The issue decided in Cowen is on direct appeal to the Tenth Circuit in Davis v. Tyson Prepared Foods Inc. (In re Garcia), 17-3247 (10th Cir.), where the debtor will presumably ask for en banc argument or rehearing. For ABI’s discussion, click here.
A debtor who does not redeem a car is not without relief. Presumably, the loan typically would be far smaller than the value of the car, thus allowing the debtor to mount a constructive fraudulent transfer suit against the lender. Nonetheless, the cost of an avoidance suit will be greater than and in addition to the cost of confirming a plan. Notably, a pawn broker or title lender entitled to retain property is still subject to an avoidance action under Section 541(b)(8).