• Reaffirmation Agreements in Bankruptcy-Where Does the Judge’s Discretion to Approve End?
  • March 22, 2012 | Author: Spencer P. Scheer
  • Law Firm: Scheer Law Group, LLP - San Rafael Office
  • Many lenders file reaffirmation agreements in bankruptcy court, only to find that the judge independently sets a hearing and “throws them out”.  This happens in both real and personal property cases. While bankruptcy judge’s have discretion to do this in certain instances, it has recently become a troubling development in automobile cases, as the primary motivation appears to be the judge’s intention  to allow the debtors to “ride through[1]”  the bankruptcy without retaining personal liability (via reaffirmation ) of the loan.  In real property cases, reaffirmation can benefit the creditor later on in the event of a short sale (can in limited transactions allow negotiations re potential deficiency), [2] or if the lender becomes a sold out junior lienor)[3]. The recent case of  Bay Fed. Credit Union v. Ong (In re Ong), 461 B.R. 559 (B.A.P. 9th Cir. 2011)  could change things dramatically for credit unions and may generally assists all lenders in limiting the rights of bankruptcy judges to throw out reaffirmation agreements they do not like. [4]       Specific Holding and Implications of the ruling: A.        For Credit Unions: The case holds that a bankruptcy court cannot review a reaffirmation agreement to determine if there is an undue hardship on the debtor, when the agreement is between a credit union and its member,  and is properly certified by the member/debtor’s counsel, and is properly and timely filed with the court (See 11 U.S.C. §524 (m)(2)).  Therefore, a bankruptcy court has no further authority to  set a hearing and make a further inquiry (under11 U.S.C. § 524(d)) to determine  whether the reaffirmation agreement is in the Debtor’s best interests. B.        For All Lenders:  The case holds that where there is no presumption of undue hardship, and a reaffirmation agreement is  properly certified by the Debtor’s counsel and filed with the court, the bankruptcy court cannot set a hearing and independently review the agreement to determine if it is in the debtor’s best interests under 11 U.S.C. § 524(d). A review by the bankruptcy court to determine if a reaffirmation agreement is in the debtor’s best interests can only occur where there is a presumption of hardship (again not applicable to properly filed and certified credit union agreements) and the debtor is not represented by an attorney (See 11 U.S.C. § 524(c )(6)). C.        Limitations: The Ong court found that only instance where a bankruptcy court can review an attorney certified reaffirmation agreement, where there is no undue hardship shown, is in an exceptional case where the certification is improper or insufficient and would violate Rule 9011. This is the first known ruling on this issue in the 9th Circuit. This case should be cited in instances where a reaffirmation agreement is filed under the specified conditions mentioned above and the bankruptcy judge improperly seeks to review and deny it. [1] A “ride through” allows a debtor  who is current on the loan to retain collateral i.e. a vehicle, without performing his intentions to reaffirm as required by (§ 521(a)(2),). The “ride through” was determined to be prohibited in the 9th Circuit, by court in the case of Dumont v. Ford Motor Credit Co. (In re Dumont), 581 F.3d 1104 (9th Cir. 2009).  Still, many bankruptcy court judges dislike the idea of a lender repossessing a vehicle if the loan is current (based on the fact that the filing of the bankruptcy is a default under the loan) and use their office to deny debtors the right to reaffirm (even if they obtain ancillary benefits i.e. continued good standing in a credit union etc.).    [2] Important Note:  In light of the passage of SB 458 in California in July 0f 2011, most instances where a lender could seek a deficiency in a “short sale” transaction have been removed, where the loan is a covered loan.   [3] A lender should value the retention of personal liability in a case where a deficiency can be maintained absent a discharge. Conversely, since “lien strips” and “cram downs” are not allowed in a Chapter 7 proceeding, a Debtor may want to reaffirm a real property debt in exchange for concessions on the loan.   [4] The precedential value of BAP decisions in the 9th Circuit may be as much symbolic as binding. See e.g. Rinard v. Positive Invs., Inc. (In re Rinard), 2011 Bankr. LEXIS 1731 (Bankr. C.D. Cal. May 9, 2011), holding that a decision by the BAP only binds the court from which the appeal was taken, and is mere “persuasive” authority on all other courts. This holding is based on the court’s finding that the BAPCPA changes in 2005 that allowed certification of an appeal directly to the Circuit Court of Appeals on new issues of law (and which required that the BAP comply with the certification process), shows the lack of BAP precedential  authority, beyond the lower court that the appeal is taken from.  Rinard is one view on the issue. However, this author believes that the logic and holdings in the Ong case are sound and should be and will be supported whether or not binding.