Judges in Alabama narrowed Eleventh Circuit precedent that seemed to make pawnbrokers immune from bankruptcy.
Affirming Bankruptcy Judge William R. Sawyer of Montgomery, District Judge W. Keith Watkins held that a chapter 13 plan can stretch out a pawn loan if there had been no default before filing.
In In re Northington, 876 F.3d 1302 (11th Cir. 2017), the debtor had pawned his car and defaulted. The debtor was in the so-called grace period when she filed a chapter 13 petition. The Eleventh Circuit held that title had passed before bankruptcy, leaving the debtor unable to stretch out the loan in chapter 13.
The case before Judges Sawyer and Watkins was much the same, but different in a critical detail: The debtor did not default until after filing his chapter 13 petition.
More precisely, the debtor had pawned her car for a $3,800 loan. Before the maturity date of the loan, the debtor filed a chapter 13 petition and proposed repaying the loan over the life of the plan.
The pawnbroker objected to the plan, contending that the debtor had lost title to the car when she failed to repay the loan by the maturity date, citing Northington. Bankruptcy Judge Sawyer overruled the objection and confirmed the plan.
In his April 9 opinion, Judge Watkins affirmed and laid out the elements of Alabama law on pawn loans. Holding title to the car, the pawnbroker has both a lien and a security interest in the car.
On the maturity date, a pawnbroker in Alabama is entitled to take possession of the car if the loan was not repaid. However, the debtor has a 30-day grace period after maturity to redeem the car. During the grace period, the lender may hold but may not sell the car. If not redeemed during the grace period, the debtor forfeits all right, title and interest in the car.
Under Butner v. United States, 440 U.S. 48 (1979), Judge Watkins explained that state law creates and defines property interests, but “federal bankruptcy law then determines the status of that interest with respect to the bankruptcy estate.” Northington, supra, 876 F.3d at 1311.
Applying the rules, Judge Watkins said that the lender had a lien on the car on the filing date because the loan had not matured. In other words, the debtor was the owner of the car on the filing date.
Deciding how the debtor’s ownership would be treated under chapter 13 required resolution of a seeming contradiction between two provisions of the Bankruptcy Code.
Under Section 1322(b)(2), the debtor could modify the lender’s security interest under a plan because the car was not real property constituting the debtor’s principal residence. On the other hand, Section 108(b), if it were applicable, would only give the debtor 60 days after filing to redeem the car. If not redeemed, Section 108(b) would cause the debtor to lose ownership, removing the car from the estate and causing the car to lose protection from the automatic stay.
Which section to apply was the question for Judge Watkins. To find the answer, he parsed Northington.
Northington said that the outcome hinges on the “estate’s constituent property interests.” If it was “static” on the filing date, it would remain in the estate. If it was “dynamic,” the dynamic nature of the property interest would “follow the asset into the estate.” Id. at 1314.
In Northington, title had passed to the lender on the filing date, because the loan had matured. The debtor therefore only had a right to redeem within the time prescribed by Section 108(b).
In the case on appeal, Judge Watkins said that the debtor on the filing date had more than a right to possess the car. She was the owner. The difference, the judge said, was “critical.” The debtor’s “ownership interest lacked the dynamism that would cause it to leave the estate over time.”
Judge Watkins rejected the lender’s argument that Northington extended to the case at hand. That approach, he said, “would wrongly render the date of default irrelevant with respect to the bankruptcy estate — and therefore would fail to recognize that the parties’ property interests change when that date passes.”
Because the debtor owned the car on the filing date, Judge Watkins said that her interest “could not be reduced by the mere passage of time” and was not “subject to expiration under Section 108(b).”
Judge Watkins upheld Judge Sawyer and ruled that the debtor was entitled to modify the lender’s security interest under Section 1322(b)(2).
Judges in Alabama narrowed Eleventh Circuit precedent that seemed to make pawnbrokers immune from bankruptcy.
Affirming Bankruptcy Judge William R. Sawyer of Montgomery, District Judge W. Keith Watkins held that a chapter 13 plan can stretch out a pawn loan if there had been no default before filing.
In In re Northington, 876 F.3d 1302 (11th Cir. 2017), the debtor had pawned his car and defaulted. The debtor was in the so-called grace period when she filed a chapter 13 petition. The Eleventh Circuit held that title had passed before bankruptcy, leaving the debtor unable to stretch out the loan in chapter 13.
The case before Judges Sawyer and Watkins was much the same, but different in a critical detail: The debtor did not default until after filing his chapter 13 petition.