Because the secured lender gave the debtors no viable method for curing a default arising from the filing of a bankruptcy petition, Bankruptcy Judge Mike K. Nakagawa of Las Vegas held the lender in contempt of the discharge injunction.
The lender’s failure to exercise remedies in compliance with the loan agreement and bankruptcy law is evidently allowing the debtors to employ so-called ride-through, a tactic that was supposedly precluded by BAPCPA.
About one year before bankruptcy, the debtors purchased a manufactured home financed by a $63,000 secured loan. The note listed five events of default, including nonpayment and the filing of bankruptcy.
In the event of default, the note required the lender to give notice “and right to cure the default.” Absent cure within 30 days after notice, the note allowed the lender to accelerate and exercise remedies.
The debtor filed a chapter 7 petition, listed the manufactured home as an asset and claimed an exemption covering the home. The lender was scheduled and received notice of the filing.
In the statement of intention in Official Form 8 regarding the manufactured home, the debtors did not check any of the boxes for surrender, reaffirm or redeem. Instead, the debtor wrote, “Retain and pay current.”
The debtors received a discharge that was sent to the lender. Two weeks after discharge, the lender sent the debtors a notice of default, stating that the loan was in default as a consequence of the bankruptcy filing. The notice gave the debtors three methods of curing: (1) Pay the loan in full; (2) voluntarily vacate; or (3) reopen the bankruptcy and obtain a reaffirmation agreement.
The notice claimed it was not a demand for payment nor a notice of personal liability.
Before, during and after bankruptcy, the debtors never missed a payment. A few weeks later, the lender said it could not accept payments and sent checks to the debtors for the payments it had received.
Eventually, the lender gave notice that it would initiate foreclosure. The debtors responded by reopening the bankruptcy and filing a motion aiming to hold the lender in contempt of the discharge injunction.
In his June 29 opinion, Judge Nakagawa held the lender in contempt, in essence for attempting to collect a debt while breaching the note by failing to give the debtor a means for curing the bankruptcy default.
As mentioned earlier, the note required the lender to afford the debtor an opportunity to cure. The offered methods were to pay the loan in full, vacate the home or reopen the bankruptcy and obtain a reaffirmation agreement. Judge Nakagawa said that the notice “does not provide the Debtors a right to cure the only default specified inasmuch as the act of filing for bankruptcy relief cannot be undone.”
Furthermore, Judge Nakagawa said that “the Lender has identified no method for [the filing] to be cured because it is impossible to do so.” Reaffirming the loan agreement, he said, “is legally impossible” because reaffirmation may only occur before discharge.
Opposing the contempt motion, the lender pointed to the debtors’ failure to file a valid statement of intention by purporting to have the loan “ride through” bankruptcy. Judge Nakagawa agreed that the practice of having a loan ride through bankruptcy “generally did not survive the bankruptcy law amendments enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”
Judge Nakagawa conceded that the debtor’s failure to state a permissible intention “arguably triggered Section 362(h),” which had the effect of terminating the automatic stay as to personal property.
Nonetheless, the failure to state a proper intention did “not prevent the debtor’s personal liability from being discharged, nor does it relieve creditors from complying with a Chapter 7 discharge,” Judge Nakagawa said.
“More important,” Judge Nakagawa said, “the Debtors’ failure in this case to identify an available option in their Statement of Intention also did not excuse the Lender from complying with the requirements of the Secured Note to pursue its remedies against the Residence.” More specifically, he said that “the Lender’s action against the Debtors in this case appears to violate the terms of its own agreement.”
The only default alleged by the lender was the bankruptcy filing itself. Judge Nakagawa said that the “Lender has not offered a cure for the only default asserted under the Secured Note.”
“[T]he Debtors have attempted to make the monthly payments required by the Secured Note while the Lender has relied on a provision of its own contract creating an event of default that is impossible to cure while also requiring the Lender to provide a right to cure,” Judge Nakagawa said. “In essence, the record establishes a purely self-inflicted wound.”
Because the lender’s own contract precluded enforcement of the note by foreclosing, Judge Nakagawa said that the demands for payment amounted to an attempt at collecting the debt as a personal liability of the debtors. He therefore found a violation of the discharge injunction for which the lender had no reasonable basis to believe that its conduct was lawful.
Judge Nakagawa said that sanctions were “appropriate.” He called for a hearing to determine actual damages and consider an award of attorneys’ fees.
In a footnote, Judge Nakagawa said he was expressing no view on whether the debtor had “other remedies,” such as remedies based on breach of contract.
Observation
Judge Nakagawa pointed out the error of the lender’s ways and described how the lender could have enforced its rights. He said it was “not entirely clear” why the lender “did not offer a reaffirmation agreement before the Debtors received their discharges.”
Because the secured lender gave the debtors no viable method for curing a default arising from the filing of a bankruptcy petition, Bankruptcy Judge Mike K. Nakagawa of Las Vegas held the lender in contempt of the discharge injunction.
The lender’s failure to exercise remedies in compliance with the loan agreement and bankruptcy law is evidently allowing the debtors to employ so-called ride-through, a tactic that was supposedly precluded by BAPCPA.
About one year before bankruptcy, the debtors purchased a manufactured home financed by a $63,000 secured loan. The note listed five events of default, including nonpayment and the filing of bankruptcy.
In the event of default, the note required the lender to give notice “and right to cure the default.” Absent cure within 30 days after notice, the note allowed the lender to accelerate and exercise remedies.
The debtor filed a chapter 7 petition, listed the manufactured home as an asset and claimed an exemption covering the home. The lender was scheduled and received notice of the filing.