CA1: when vindictive creditors just can’t let go

IN RE Pratt, Pratt v. GMAC, 05-2453 (9/1/06), reverses the bankruptcy court’s decision that GMAC did not violate “chapter 7 discharge injunction by declining to discharge its lien on the debtors' automobile until they paid the remaining balance due on their prepetition car loan.” This case involves a car owned by a couple that, I bankruptcy, tried to pay off the car loan. Then, they tried to surrender it to GMAC under 11 U.S.C. § 521(a)(2)(A). GMAC concluded it was worthless, and seems to have not accepted it. A Chapter 7 discharge was granted. But, GMAC retained a lien on the car, that continued to run for a few years. When it came time to junk it, GMAC refused to lease its lien on the car! So, they went back to the bankruptcy court, who allowed the debtors to reopen the case, who now argued that GMAC violated a putative violation of the Chapter 7 discharge injunction. Strangely, lower court sided with GMAC, and held that held that because the liens were in rem, under Maine law (11 Me. Rev. Stat. Ann. tit. 11, §§ 9-1620 to 1624) they survived.

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The First reverses. It holds that under 11 U.S.C. § 521(a)(2), the word “surrender” means:

that the debtor agreed to make the collateral available to the secured creditor – viz., to cede his possessory rights in the collateral – within 30 days of the filing of the notice of intention to surrender possession of the collateral.

 The First discusses whether GMAC’s behavior was not necessarily in bad faith, its behavior was “coercive.” It concludes that because the debtors played fair with GMAC: giving them notice, not preventing them from taking the car, and were not operating in bad faith. The Bankrupty Code’s interest in giving parties a “fresh start” as “even legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a ‘fresh start’ and are not unfairly coerced into repaying discharged prepetition debts.” So, in this case, GMAC’s refusal to release the liens, effectively eliminated the important “safety valve” of surrender. (The court tries to limit its opinion to the fact.)

 The court doesn’t answer the question what quantum of proof is required.

Finally, it is remanded to determine the extent of the Pratt’s damages.