A title lender in Alabama once again failed to defeat a debtor who renewed her loan just before filing a chapter 13 petition, but don’t count the lender out just yet. With every setback, the lender is learning how to present the case in a light more favorable to defeating the bankruptcy filing.
One of these days, the question before a circuit court will boil down to this: Is renewal of a title loan on the eve of bankruptcy a bad faith filing, if the debtor has represented that she has no intention of filing bankruptcy?
If a circuit court eventually rules that a false representation on the eve of bankruptcy is ipso facto bad faith, short-term lenders can craft their loan agreements to escape the bankruptcy power.
The Usual Facts, with a Twist
The debtor pawned her automobile for the first time and renewed the loan every month for four months. The debtor didn’t pay the $5,300 redemption price by the maturity date, and the lender repossessed the car.
About two months later, the debtor obtained possession of her car by entering into a new pawn agreement with the same lender. The loan documents contained a representation by the debtor that she was not in bankruptcy and did not intend to file bankruptcy.
A few hours after taking possession of the car, the debtor filed a chapter 13 petition and a plan to deal with the debt to the auto lender. In fact, the debtor admitted at trial that she had consulted a bankruptcy lawyer and taken a credit counseling course before renewing the title loan.
The lender objected to confirmation of the debtor’s plan on several grounds. Primarily, the lender contended that the misrepresentation made the bankruptcy a bad faith filing.
Ruling on three similar cases simultaneously, Bankruptcy Judge Bess M. Parrish Creswell of Montgomery, Ala., decided that the debtors had filed bankruptcy in good faith, overruled the lender’s objections and confirmed the plans. In re Roby, 649 B.R. 583 (Bankr. M.D. Ala. March 16, 2023). To read ABI’s report, click here.
The lender appealed.
Good Faith Finding Not Clearly Erroneous
In her October 18 opinion dealing with one of the three debtors, Chief District Judge Emily C. Marks of Montgomery, Ala., said that the good faith finding is reviewed for clear error.
On the law, Judge Marks was obliged to navigate between two Eleventh Circuit precedents: 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. To read ABI’s report, click here.
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 read ABI’s report, click here.
To bring the appeal under Northington and take the car away from the debtor, the lender contended that the misrepresentation was a default under the loan agreement, which was not cured within the redemption period.
The bankruptcy judge found no default, and Judge Marks said that the lender did not explain how the finding was clearly erroneous. There being no default, the debtor fell under Womack and had the right to restructure the auto debt in chapter 13.
Next, the lender argued that the plan was not filed in good faith.
On the debtor’s good faith in filing the chapter 13 plan, Judge Marks laid out the 11 so-called Kitchens factors. See In re Kitchens, 702 F.2d 885 (11th Cir. 1983) (per curiam). She focused on the tenth factor: “the circumstances under which the debtor has contracted [her] debts and [her] demonstrated bona fides, or lack of same, in dealings with [her] creditors.” Kitchens, 702 F.2d at 889.
The bankruptcy judge had said that the misrepresentation “may be indicative of bad faith.” Examining the “totality of the circumstances,” however, the bankruptcy judge found no bad faith because the debtor intended to repay the loan.
Judge Marks upheld confirmation of the debtor’s plan, because the lender did not “show that the bankruptcy court clearly erred in making the factual finding that, under the totality of the circumstances, [the debtor] proposed her plan in good faith.”
Observation
The lender’s quest to avoid bankruptcy is not over, because Judge Marks mentioned several items of pleading and proof that might have improved the lender’s case.
A title lender in Alabama once again failed to defeat a debtor who renewed her loan just before filing a chapter 13 petition, but don’t count the lender out just yet. With every setback, the lender is learning how to present the case in a light more favorable to defeating the bankruptcy filing.
One of these days, the question before a circuit court will boil down to this: Is renewal of a title loan on the eve of bankruptcy a bad faith filing, if the debtor has represented that she has no intention of filing bankruptcy?
If a circuit court eventually rules that a false representation on the eve of bankruptcy is ipso facto bad faith, short-term lenders can craft their loan agreements to escape the bankruptcy power.