Retention of Voluntary Post-Petition Payment Doesn’t Violate the Automatic Stay

Without violating the automatic stay, may a creditor retain a payment made voluntarily by a debtor after bankruptcy with non-estate property?

Bankruptcy Judge John T. Laney, III of Columbus, Ga., said the answer is “yes.”

The result turned on atypical facts.

The chapter 7 debtor owed a lender about $7,000 secured by a non-purchase money lien on personal property. The debtor’s counsel had moved to avoid the lien under Section 522(f)(1)(B) as a security interest that impairs an exemption.

On advice of a friend, the debtor obtained a loan from another lender after bankruptcy, without the knowledge of her counsel, and used the proceeds to pay off the pre-bankruptcy loan. The parties stipulated that the pre-bankruptcy lender did not ask for the payment and did nothing to encourage or facilitate the payment.

The debtor’s counsel demanded repayment, but the lender refused. Counsel then filed a motion in bankruptcy court to compel repayment and hold the lender in contempt for violating the automatic stay.

In his September 12 opinion, Judge Laney found no stay violation.

The debtor conceded that receiving the unsolicited payment did not violate the stay. The debtor argued, though, that retention of the payment after demand did violate the stay.

Judge Laney said there is no provision in the Bankruptcy Code that “explicitly creates a right for a creditor to receive voluntary payments on a dischargeable debt.” On the other hand, he said that Section 524(f) “does imply that a creditor may receive a voluntary payment on a dischargeable debt.”

Section 524(f) says that nothing in subsections (c) and (d), pertaining to reaffirmation agreements, “prevents a debtor from voluntarily repaying any debt.”

Nonetheless, Section 524(f) does not answer the question of whether acceptance or retention does violate the stay, Judge Laney said.

Judge Laney distinguished two cases where acceptance or retention of a voluntary repayment was held to violate the stay. Those cases, he said, involved the use of estate property or a pre-bankruptcy repayment agreement. In the case at bar, the debtor had made the payment voluntarily and with non-estate property.

Judge Laney rejected the debtor’s argument under Section 524(k), because a creditor’s obligation to make disclosures in connection with a reaffirmation agreement only pertains to future payments.

Judge Laney concluded by saying that finding a stay violation “would unreasonably limit Code sections allowing a debtor to voluntarily repay a debt with non-bankruptcy estate funds. Further, there are no important policy implications that would direct this Court to consider the application of these funds a violation of the automatic stay.”

Judge Laney had deferred ruling on the lien-avoidance motion because finding a stay violation would have mooted the issue. The remaining questions about lien avoidance would make a fine (but difficult) final exam question or moot court topic. A few of them could be:

Even though retention of the payment did not violate the stay, was the payment itself an unauthorized post-petition transfer under Section 549(c)?

Was the lien avoidance motion rendered moot?

Would the bankruptcy court be unable to avoid the lien under Section 522(f)(1)(B) because the debtor had paid the underlying debt?

If the payment was not in violation of the Bankruptcy Code, does the lender have a complete defense to the lien avoidance motion?

Was the payment a constructive fraudulent transfer because the lien would be avoided and underlying debt would be discharged?

Did the payment amount to a waiver by the debtor of her lien-avoidance motion?

Would the payment have been avoidable if it were made by a chapter 13 debtor who was necessarily using estate assets? Why should the result be any different in chapter 7?

Does the bankruptcy court have an extra-statutory equitable power to set aside the debtor’s ill-advised, voluntary payment of the debt, perhaps based on the impairment of the debtor’s fresh start?

Does the trustee have a remedy that the debtor was unable to waive?

We eagerly await Judge Laney’s next opinion.