To Reaffirm or Not to Reaffirm: Much Ado About Nothing or the Tempest?

• Jurisdiction: United States,Federal
• Citation: Vol. 04 No. 2000 Pg. 86
• Pages: 86
• Publication year: 2000

Maine Bar Journal 2000.

April 2000, pg. 86. To Reaffirm or Not to Reaffirm: Much Ado About Nothing or The Tempest?

Maine Bar Journal
April 2000

To Reaffirm or Not to Reaffirm: Much Ado About Nothing or The Tempest?

Fred W. Bopp III, Esquire

I. Introduction

Section 521(2) of the United States Bankruptcy Code(Fn1) appears on the surface to be a fairly straightforward statutory provision. Notwithstanding its apparent clarity, however, courts and commentators have wrestled with the proper interpretation of §521(2) as it relates to an individual debtor in bankruptcy who has a consumer loan that is secured by property of the estate.(Fn2) This article will first examine whether an individual debtor with a secured consumer loan obligation has the unstated right simply to retain a creditor's collateral and maintain current payments on the loan, a so-called "fourth option," without electing to "perform" one of the three specified options under §521(2).(Fn3) Next, this article will address the potential consequences of a debtor's failure to perform timely his or her stated intention under §521(2)(B) within the context of the debtor's pending bankruptcy case. Finally, this article will conclude with an analysis of the potential ramifications under applicable state law(Fn4) of a consumer debtor's decision to continue in possession of the collateral and make current payments, without reaffirming the obligation or redeeming the collateral.

II. Section §521(2) and the "Fourth Option"

Section 521(2) of the Bankruptcy Code provides that an individual chapter 7(Fn5) debtor whose "schedule of assets and liabilities includes consumer debts which are secured by property of the estate...shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property...."(Fn6) This statement must be filed "within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes...."(Fn7) Thereafter, "within forty-five days after the filing of a notice of intent under this section, or within such additional time as the court, for cause, within such forty-five day period fixes, the debtor shall perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph...."(Fn8)

The debtor must prepare the statement of intention in conformity with the appropriate Official Form and must serve the statement on the chapter 7 trustee and the creditors named in the statement on or before the filing of the statement with the bankruptcy court.(Fn9) The debtor may amend the statement at any time before the expiration of the period for performance of his or her intention under §521(2)(B).(Fn10) If the debtor amends the statement, he or she must provide notice of the amendment to the chapter 7 trustee and to any entity affected by the amendment.(Fn11)

As an initial matter, courts have been called upon to resolve the issue as to whether, in filing a statement of intention, a consumer debtor is limited to the three options stated in §521(2)(A), namely surrendering the property,(Fn12) redeeming the property,(Fn13) or reaffirming the obligation secured by the property.(Fn14) This thorny question has caused bankruptcy courts the most trouble, dividing even the circuit courts of appeal that have considered this issue. In one camp are the circuit courts that have held that the debtor's options as stated in §521(2) are not exclusive. These courts have based their respective holdings on their reading of applicable legislative history,(Fn15) as well as on the section's plain language, namely the phrase "if applicable" contained in §521(2)(A), or the statement in §521(2)(C) that "nothing...shall alter the debtor's...rights with regard to such property under this title."(Fn16) Pursuant to this line of authority, the debtor has a fourth option _ stating his or her intention to keep the loan obligation current and then retaining the collateral post-petition, without either executing a reaffirmation agreement or redeeming the collateral. At least one court has adopted the term "reinstatement" to describe this option,(Fn17) although this is not a term utilized by the Bankruptcy Code.

Circuit courts in the other camp take a stricter view of §521(2), holding that a consumer debtor must confine himself or herself to the choices expressly indicated in §521(2), and that "reinstatement" is not a viable option for a debtor who wishes to retain possession of the secured collateral.(Fn18) For purposes of this article, we need not pause here for long, as the First Circuit has sided with those courts that have rejected the so-called "fourth option," holding that, based "on the plain language of the statute,...§521(2) unambiguously requires chapter 7 debtors wishing to retain property of the estate that secures a consumer debt to elect one of the retention options specified in 11 U.S.C. §521(2)(A), and then to perform the elected option in accordance with 11 U.S.C. §521(2)(B)."(Fn19)

Nevertheless, the analysis of each of these courts should be kept in mind going forward, as their view of the correct reading of §521(2) is generally determinative as to the outcome of the related issues outlined below regarding the effect of the debtor's noncompliance.

III. Potential Consequences to the debtor under the bankruptcy code for failure to perform under §521(2)(B)

Assuming that the debtor complies with §521(2)(A),(Fn20) and files a timely statement of intention that indicates one of the three specified options as an initial matter, what is the consequence of the debtor's subsequent failure to "perform" his or her stated intention within the time period required under §521(2)(B)? More to the point, what remedies are available to the secured creditor in the face of the consumer debtor's noncompliance with §521(2)(B)? Any attempt to answer these questions conclusively is frustrated by the fact that §521(2) contains no enforcement mechanism on its face.(Fn21) For those courts that hold that the debtor has available the "fourth option" of retaining the collateral and maintaining current payments, however, the statement of intention serves merely a notice function.(Fn22) For these courts, §521(2)'s central purpose is served when the debtor files his or her statement of intention, thereby indicating to the creditor how the debtor intends to treat the consumer loan and collateral at issue. Obviously, these courts impose no penalty at all for noncompliance.

The consequences of a debtor's failure to "perform" under §521(2)(B) vary, however, for those courts that read §521(2) more narrowly.(Fn23) Since the First Circuit's decision in Burr, which did not address the issue directly, at least one court(Fn24) within the jurisdiction of the First Circuit has held that a debtor's failure to perform under §521(2)(B) normally entitles the creditor to relief from the automatic stay for "cause" under §362(d)(1) of the Bankruptcy Code.(Fn25) In In re Donnell, Judge Deasey of the United States Bankruptcy Court for the District of New Hampshire reviewed the decisions that had addressed this issue and, after considering the available alternatives,(Fn26) concluded that "relief from the automatic stay is the preferred remedy for a debtor's failure to comply with the requirements of §521(2)(B). Such a violation will constitute `cause' for purposes of §362(d)(1) in all but the most unusual cases."(Fn27) Although Judge Deasey ultimately held that "[r]elief from the automatic stay constitutes the appropriate remedy for `garden variety' violations of §521(2)(B)," the court also stated that:

Whether a given case is a "garden variety" one turns on its individual facts. For example, if collateral cannot be reasonably obtained through state law self-help measures, then relief from the stay alone may be ineffectual and thus may not be the appropriate remedy. Instead, a more serious remedy, such as an order to compel surrender or a motion for an order to show cause why the case should not be dismissed, may be appropriate.(Fn28)

Accordingly, it appears that the most likely consequence of the debtor's failure to comply with §521(2)(B)is that the bankruptcy court will grant relief from the automatic stay.(Fn29)

Prior to pursuing a motion for relief from stay based on a debtor's noncompliance with §521(2)(B), however, it is advisable for the creditor to be prepared to establish to the bankruptcy court that it first attempted to enlist the aid of the chapter 7 trustee in seeking the debtor's compliance.(Fn30) Section 704(3) of the Bankruptcy Code provides that the chapter 7 trustee shall "ensure that the debtor shall perform his intention as specified in §521(2)(B) of this title."(Fn31) Of course, this step is likely to be more perfunctory than effective because the chapter 7 trustee will generally have little incentive to assist the creditor in this context.(Fn32) Moreover, as noted above, the chapter 7 trustee has no designated enforcement powers under the Bankruptcy Code.(Fn33) Finally, not all courts are willing to grant a creditor relief from the automatic stay for cause in this situation.(Fn3)

IV. IPSO FACTO Clauses and Potential Consequences to the Debtor Under Applicable State Law for Noncompliance Under §521(2)(B)

For purposes of this section of the article, we will assume the following scenario: 1) the debtor has filed a proper statement of intention under §521(2)(A); 2) during the bankruptcy case, the debtor has not performed his or her stated intention under §521(2)(B) within the required time period;(Fn35) and...