Grand Theft Auto 2.0: Bankruptcy Courts Allow Auto Title Lenders to Ride Off in Consumer Debtors' Vehicles and Rip Off the Cash Payout Owed to Unsecured Creditors.

• Author: Johnson, Creola

Table of Contents Introduction I. Auto Title Lenders Claim to Have Rights Beyond Those Afforded to Secured Creditors A. Auto Title Loans Are Easy to Obtain, but Very Difficult to Repay B. Borrowers Grant Auto Title Lenders Security Interests in Their Vehicles C. Relying on State Pawnbroker Laws, Title Lenders Claim Ownership of Debtors' Vehicles After Loan Default D. In Almost All States, the Debtors' UCC Rights, Including the Right of Redemption, Are Not Replaced by Pawnbroker Laws II. To Gain Ownership of Debtors' Vehicles, Car Title Lenders Maintain a Duplicitous Position in Chapter 13 Bankruptcy Cases A. Chapter 13 Bankruptcy Cases Afford Consumer Debtors a Fresh Start by Allowing Them to Repay Their Debts While Retaining Their Property B. The Bankruptcy Estate Includes the Debtor's Ownership in the Vehicle C. Ignoring the Plain Language of the Alabama Pawnshop Act, Bankruptcy Courts in Alabama Exclude the Debtor's Vehicle from the Estate D. Courts in Georgia Incorrectly Hold That a Title Lender Has Constructive Possession of a Debtor's Vehicle and the Debtor's Failure to Redeem Results in the Vehicle's Exclusion from the Bankruptcy Estate III. The Courts' Proper Use of Canons of Statutory Interpretation Would Accomplish the Objectives of Chapter 13 Cases A. The Plain Meaning Canon Requires That the Words "Tangible Personal Property" and "Possession" Be Given Their Ordinary Meaning B. Under the Russello Doctrine, Courts Should Not Look to State Law to Decide the Meaning of the Term "Possession" C. The Surplusage Canon Requires the Title Lender to Satisfy All [section] 541(b)(8)'s Provisions, Including the Physical Possession Provision D. Case Law from the Supreme Court Supports the Conclusion That a Debtor's Vehicle Constitutes Property of the Estate IV. Title Lenders Are Not Entitled to Super Priority Lienholder Status under the Bankruptcy Code A. Because Car Title Lenders Have Regular Security Interests, Courts Should Not Afford Them Rights Greater Than Auto Lenders That Hold Purchase Money Security Interests B. Proper Treatment of Title Lenders' Claims Would Result in Unsecured Creditors Receiving Partial Payment of Their Claims V. Congress Needs to Act to Afford Consumer Debtors a Fresh Start and to Treat Car Title Lenders as Ordinary Secured Creditors A. The Eleventh Circuit Needs to Right Its Course Because Title Lenders Are Incentivized to Get Other States to Follow Georgia B. The Proposed Statutory Amendments Would Ensure That All Debtors Have the Chance at Achieving a Fresh Start by Retaining Their Vehicles While Paying Back Their Title Loans Conclusion INTRODUCTION

Imagine seeing a man holding up a bag stuffed with cash while he drives off in a "sweet ride." A few feet away is a woman sobbing: "Please don't take my car." Next to her is a small crowd of people--the woman's creditors--yelling: "This ain't right!" Nothing is right about "grand theft auto." (1) The following bankruptcy case explains how such theft is facilitated by some courts.

Desperate for cash in 2019, Lisa Snyder borrowed $3,500 from TitleMax of Georgia, Inc., which in exchange for the loan took a security interest in Ms. Snyder's 2016 Nissan Pathfinder. (2) As is typical of these loans, referred to as "auto title" or "car title" loans, Ms. Snyder surrendered the vehicle's certificate of title to TitleMax and agreed to repay the loan, which carried a triple-digit interest rate and was due in a single payment in only 30 days. (3) Unable to repay the full amount by the due date, Ms. Snyder ended up following the typical path of many title loan borrowers. (4) She paid multiple "roll over" fees that extended the due date of the loan but did not reduce the principal owed. (5) After paying rollover fees for nearly two years, Ms. Snyder's $3,500 loan had mushroomed into a debt of $9,231.64. (6) Hoping to keep her vehicle and better manage this large debt, Ms. Snyder filed a chapter 13 bankruptcy petition, listed TitleMax as a secured creditor, and proposed a 60-month plan to repay TitleMax's debt in full via monthly payments of $350 at 6 percent interest. (7)

TitleMax, however, was not satisfied with this plan-being treated as a secured creditor and getting paid in full. (8) Instead, TitleMax argued that its loan constituted a "pawn" transaction and that it owned the Nissan outright. (9) Specifically, it argued that once Ms. Snyder failed to pay the amount owed to "redeem" her vehicle under Georgia's pawnbroker statute, the vehicle ceased to be a part of the bankruptcy estate and that complete ownership of her vehicle was forfeited to TitleMax. (10) A bankruptcy court ultimately agreed with TitleMax and allowed it to take Ms. Snyder's vehicle worth $22,000 and permitted it to keep the surplus, namely the remaining proceeds after selling the vehicle to satisfy the debt owed. (11)

The above ruling is a disastrous outcome for consumer debtors, especially for those in bankruptcy cases filed in Georgia and Alabama. (12) TitleMax and other title lenders have in essence implemented a business practice referred to here as "Grand Theft Auto .2.0." (13) Title lenders have not only increased the billions in rollover fees that they derive annually from their triple-digit-interest-rate loans, (14) but they have convinced some federal courts to ignore the plain meaning of a bankruptcy statute to erroneously allow title lenders to repossess consumer debtors' vehicles and keep all their equity. (15)

Part I of this Article discusses the dual status claimed by car title lenders both as secured creditors under the Uniform Commercial Code (UCC) and as pawnbrokers under state pawnshop statutes. (16) Under Article 9 of the UCC, title lenders obtain the status of perfected secured creditors; however, lenders cannot use that status to deprive borrowers of certain basic rights. (17) Article 9 of the UCC has been adopted in all 50 states, and it affords debtors several rights, including the right of redemption and the right to surplus funds after the post-default sale of their property. (18) Unwilling to concede that debtors have UCC rights, title lenders often persuade courts to ignore the real essence of the title loan, which constitutes a secured transaction under the UCC, and, instead, characterize title loans as pawn transactions under state pawnbroker laws. (19) As pawnbrokers, title lenders assert that after a debtor fails to pay amounts necessary to redeem their vehicles, title lenders own outright the vehicles and, therefore, have the right to keep surplus funds from the sale of the vehicles. (20) As a result, title lenders seek to avoid the burdens of the UCC while they enjoy all of the benefits of pawnbroker laws--in essence having their proverbial cake and eating it too. (21)

Part II explains why title lenders argue that they should be treated as pawnbrokers, not as secured creditors, in a debtor's chapter (13) bankruptcy case. (22) Generally-speaking, for a chapter (13) debtor to be able to retain property in which a secured creditor has an interest, the debtor must show that she has a legal or equitable interest in the property and, therefore, the property qualifies as "property of the estate." (23) Prior to (2005), courts recognized the debtor's vehicle as estate property; however, buried in the hundreds of pages of a bankruptcy reform law enacted in (2005), the U.S. Congress included a provision, which states that "pledged goods" are not "property of estate" if, among other things, the pledged goods are in the possession of the pawnbroker. (24) Because debtors retain possession of their vehicles when they obtain a title loan, this Article contends that the lack of possession by the title lender means (1) the vehicles do not constitute "pledged goods," (2) the debtors' vehicles constitute property of the estate, and (3) the debtors have the right to retain their vehicles while they pay back their title loans. (25) However, as fully explained in Part II, the U.S. Court of the Appeals for the Eleventh Circuit and its progeny have failed to apply the plain meaning of the 2005 statutory provision at issue and have violated several canons of statutory construction followed by the U.S. Supreme Court. (26) For example, these courts have incorrectly concluded that the lenders' possession of the vehicles' certificates of title constitutes constructive possession of the vehicles. (27) As result, these courts have erroneously held that constructive possession is superior to the debtors' actual physical possession of their vehicles and that constructive possession prevents the vehicles from becoming property of the estate. (28) These courts have in essence stripped away the debtors' ownership rights under the UCC (29) and have allowed lenders to rob debtors of their vehicles (e.g., repossess a vehicle worth $22,000 to satisfy a $9,300 debt). (30)

Part III explains that because some courts have incorrectly interpreted bankruptcy law by ignoring canons of statutory construction, they have permitted car title lenders to completely frustrate fundamental goals of the bankruptcy system to the detriment of unsecured creditors. (31) For example, one fundamental goal of the bankruptcy system is to treat similarly-situated creditors equally. (32) Under their own loan contracts, title lenders are secured creditors, and that means they are entitled to have their secured claims paid via the debtor's chapter 13 plan. (33) However, title lenders have persuaded some courts to treat them as pawnbrokers while ignoring the reality that the debtor is still in possession of the vehicle and still owns it. (34) Such a result gives title lenders preferential treatment over ordinary secured creditors. (35) These courts have also blocked debtors from achieving a financial "fresh start"--the other fundamental goal of the bankruptcy system--which allows debtors in chapter 13 cases to keep essential assets, such as cars and homes, while paying back their creditors. (36)

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