On remand from the district court, Bankruptcy Judge Bess M. Parrish Creswell of Montgomery, Ala., defused an attempt by a title lender to establish a legal principle that would bar individuals from filing chapter 13 petitions after renewing loans secured by the titles to their automobiles.
To argue that the debtors had not filed their petitions and plans in good faith, the title lender contended that the debtors had violated the following provision in the standard loan agreement:
[The borrower] represents, warrants, acknowledges and agrees . . . [that the borrower is] not a debtor in bankruptcy [and does] not intend to file a federal bankruptcy petition.
Bankruptcy Judge William R. Sawyer had confirmed the debtors’ chapter 13 plans, but the title lender appealed. District Judge R. Austin Huffaker, Jr., reversed and remanded with instructions to reconsider whether the debtors filed their plans in good faith. In particular, Judge Huffaker wanted an analysis of the tenth Kitchens factor. See In re Kitchens, 702 F.2d 885 (11th Cir. 1983) (per curiam). To read ABI’s report on the district court opinion, TitleMax of Alabama Inc. v. Arnett, 21-00840 (M.D. Ala. Aug. 22, 2022), click here.
Ending his opinion, District Judge Huffaker said he expressed “no view as to what impact, if any, such reconsideration might have on the ultimate issue of whether the debtors proposed their plans in good faith.”
The Three Debtors
In reconsidering confirmation of three debtors’ chapter 13 plans, the critical facts were identical.
All three debtors had first taken down title loans months before bankruptcy and renewed them month by month. Each had renewed the loans for the last time on the day before filing or the day following. They had all consulted bankruptcy lawyers before renewing their loans or had taken the required credit management courses before renewing.
The loans had not matured on the day the debtors filed their petitions.
Inheriting the case on Judge Sawyer’s retirement, Judge Creswell said in her March 16b opinion that the debtors had a combined net monthly income after expenses of less than $800. None were serial filers, and there was no evidence that the lender had asked any of them about filing bankruptcy before they renewed their loans the last time. None of the debtors took down additional loans when they renewed.
Judge Creswell said that all three “were in obviously precarious financial conditions seeking to reorganize multiple debts (not just those of [title lender]) and to obtain the financial relief and fresh start bankruptcy offers.”
The lender objected to confirmation, contending that the debtors had not filed their plans in good faith and that the loans were void for fraud.
The Scylla and Charybdis in Eleventh Circuit Law
Two Eleventh Circuit precedents loomed over the cases: TitleMax v. Northington (In re Northington), 876 F.3d 1302 (11th Cir. 2017), and TitleMax of Ala., Inc. v. Womack (In re Womack), No. 21-11476, 2021 BL 326887, 2021 US App Lexis 26127, 2021 WL 3856036 (11th Cir. Aug. 30, 2021) (per curiam).
In Northington, the pawn loan had expired before bankruptcy. Once in chapter 13, the debtor did not redeem the car within the prescribed time, as extended by Section 108(g). The appeals court held that the car dropped out of the estate automatically, leaving the debtor no ability to keep the car and pay off the loan in chapter 13.
In Womack, the debtor had filed the chapter 13 petition before the loan matured. Because the estate included ownership of the car and not a mere right to redeem, the Eleventh Circuit allowed the debtor to retain the car and restructure the debt in chapter 13.
To avoid having the three debtors fall under Womack, the title lender cited Section 1325(a)(3) and (a)(7), contending that the filings and the plans were not in good faith in view of the representations that bankruptcy was not in the offing.
Good Faith
With regard to the lender’s contention that the loans were void for fraud, Judge Creswell said that the lender had not specified whether it was actual fraud or fraudulent inducement. Furthermore, she said that the lender “did not set forth or address the necessary elements to prove fraud.”
Therefore, Judge Creswell dealt with the fraud allegations as objections to confirmation. First, she tackled good faith in filing the petitions.
From the evidence, Judge Creswell said that the debtors’ financial conditions were “dire” and that “they could benefit from bankruptcy relief.” Because the determination of good faith is based on “the totality of the circumstances,” she said that “pre-petition conduct alone is not determinative on the issue of good faith.”
With regard to the representations that they were not filing bankruptcy, Judge Creswell found no basis in the record to “conclude . . . that these Debtors were intentionally deceptive or that they even understood the timing issues at play between In re Northington and In re Womack.”
Based on the preponderance of the evidence, Judge Creswell found that the debtor had filed in good faith. She was “not persuaded that Debtors’ use of the protections provided by the Bankruptcy Code and precedent in the Eleventh Circuit equates to ‘unmistakable manifestations of bad faith.’”
Filing the Plan in Good Faith
As requested by the district court, Judge Creswell examined the 11 Kitchens factors one by one. She said that “most” were “undisputed” and that they weighed in favor “of finding good faith.”
Among other considerations, Judge Creswell said that the debtors had not filed in chapter 13 solely to retain their cars.
Judge Creswell devoted most of her attention to the tenth Kitchens factor, “which looks at the circumstances under which a debtor has contracted his debts and demonstrated his bona fides in dealings with creditors.” The lender, she said, “centers its argument on the timing” of the final renewal of the loans.
Although she could not ignore the timing, Judge Creswell observed that the debtors were not new customers of the lender. She said “there was no evidence presented that Debtors understood the potential effects the timing of the pawn renewal would have on [the lender’s] rights in bankruptcy.”
In view of the “totality of the circumstances,” Judge Creswell overruled the objections and confirmed the plans, finding as follows:
[These records do] not reveal egregious misconduct, abuse, or bad faith to warrant such treatment. Debtors did not approach a new creditor asking for an unsecured loan with intent to not pay it back; instead, Debtors refinanced prior debts and proposed to pay the refinanced amounts with pawn shop fees and interest as secured debts over the life of their Chapter 13 plans. While the renewals of the pawn agreements were close in time to the filing of the bankruptcy petitions, in viewing the totality of the circumstances, the facts support that Debtors are sincere in seeking to reorganize their debts. The evidence and testimony do not support that Debtors entered into the contracts with no intentions to perform. Debtors are not seeking to thwart their debts; instead, Debtors are repaying their debts to [the lender] and their other creditors as permitted by the Bankruptcy Code and Eleventh Circuit precedent. In doing so, they should be afforded the opportunity of a fresh start.
On remand from the district court, Bankruptcy Judge Bess M. Parrish Creswell of Montgomery, Ala., defused an attempt by a title lender to establish a legal principle that would bar individuals from filing chapter 13 petitions after renewing loans secured by the titles to their automobiles.
To argue that the debtors had not filed their petitions and plans in good faith, the title lender contended that the debtors had violated the following provision in the standard loan agreement:
[The borrower] represents, warrants, acknowledges and agrees . . . [that the borrower is] not a debtor in bankruptcy [and does] not intend to file a federal bankruptcy petition.
Bankruptcy Judge William R. Sawyer had confirmed the debtors’ chapter 13 plans, but the title lender appealed. District Judge R. Austin Huffaker, Jr., reversed and remanded with instructions to reconsider whether the debtors filed their plans in good faith.