Bankruptcy: Redemption - Exercising the Right of Redemption

Can debtors exercise the right of redemption after discharge has been ordered?

     A decision by Judge Krumm for the Western District of Virginia appears to have answered this question. The case was In Re Hawkins. The debtors sought to reaffirm the bank loan secured by their Dodge Colt. The debtors later learned of Bankruptcy Code §722 redemption rights, and sought to redeem instead of reaffirm. Before redemption was achieved, the chapter 7 discharge was granted.  The creditor opposed the motion and alleged that debtors' right of redemption expired when they were discharged in bankruptcy. The court found for the debtors and held that the debtors' discharge did not bar their motion for redemption under § 722. Debtors were clearly entitled to reaffirm debts after discharge under 11 U.S.C.S. § 524. While 11 U.S.C.S. § 722 was silent on whether they were allowed to redeem property after discharge, the court found that it was Congress' intent to consider the concepts of reaffirmation and redemption together. The court reasoned that although the Code is silent as to when debtors may exercise their right to redeem, since concepts from reaffirmation and redemption were considered by Congress together, the time frame for exercising one option should be applicable to the other option. Therefore, the time frame for exercising redemption rights was the same as that for exercising reaffirmation rights.

      Right to redeem / repossess property in Chapter 13 cases:

      In the case of Tidewater Finance Co. v. Moffett, the Fourth Circuit Court of Appeals ruled that a Chapter 13 debtor was entitled to the return of her car, which had been repossessed by a finance company.  This decision affirmed the original bankruptcy court decision, as well as the appellate decision of the District Court.

     In Moffett, the debtor, in her reorganization plan, exercised her right to redeem under the Virginia Uniform Commercial Code (“UCC”); the plan provided for full payment of her debt to the finance company, plus interest on the delinquent payments.

     The debtor worked at the Federal Emergency Management Agency, forty miles from her home.  A couple of years prior to the bankruptcy filing she had bought a previously owned, three year old Honda Accord from a dealer in Woodbridge, which assigned its loan to the finance company creditor.  The car was the debtor’s only means to get to work each day.  The debtor made her payments in a timely fashion for a year, and then missed two payments.  This prompted the finance company to repossess the car.  Later that same day the debtor filed for Chapter 13 bankruptcy.  A week after that the debtor’s lawyer demanded that the finance company return the car.  The finance company filed a motion for relief from the automatic stay so that it could sell the vehicle.  The bankruptcy court denied the motion, however, and ordered the finance company to return the car.  In doing so, the bankruptcy judge required adequate protection for the creditor in the debtor’s Chapter 13 plan.  The debtor’s Chapter 13 plan provided for full payment of the loan.  The finance company returned the car, but appealed to the District Court.

     The District Court Judge found that the debtor had a statutory right of redemption, and also found that the finance company was required to turn over the car once its interest was adequately protected in the Chapter 13 plan.

     The finance company appealed again, this time to the Fourth Circuit Court of Appeals. In his opinion, the Fourth Circuit Court Judge cited that pursuant to the federal bankruptcy code, once a petition is filed, an automatic stay goes in effect. Any party with property that the trustee can use, sell or lease must turn it over to the trustee, after that party’s interest is protected. The district judge said the question in this case was whether the finance company and the car at issue were subject to the referenced code provisions. The judge looked at the UCC as controlling, since the case involved default on a purchase agreement with a secured creditor. The UCC allows the creditor the right of repossession, but within limits. The debtor also has rights upon repossession, including the right to redeem the property under UCC Section 8.9A-623 (c)(2). The Judge ruled that the debtor’s right to redemption becomes one of the “legal or equitable interests” of her bankruptcy estate.

     The 4th Circuit agreed with the lower courts that if the creditor’s interest is protected in the plan, then it must turn over the car. UCC Section 8.9-623(b) allows a debtor to redeem collateral by tendering in full its obligations to the creditor. In this case, the Judge noted that the debtor’s plan did just that. The plan even provided interest to the finance company for the delinquent payments. The Judge wrote: “[T]he bankruptcy plan here provided for the payment of all future installments, the curing of all delinquent payments, and the payment of all applicable interest over the course of the plan”. “Such a flexible approach to repaying claims is precisely what the Bankruptcy Code allows in order to facilitate a debtor’s successful rehabilitation.” The Judge affirmed the lower court’s decision.

Real Estate: Homeowners' Association Wins Damages on Owner Violations

     There has been much litigation over HOA violations in the last few years. Circuit Courts have been scrutinizing HOA violation claims very carefully. Enforcement and damages for violations can be won. The December 2011 Loudon County Circuit Court case of Lee’s Crossing Homeowners’ Association v. Zinone is a good example of such enforcement. In Lee’s Crossing, the court found that in building her home, the homeowner committed multiple violations of the plan approved by the Architectural Review Board. Ultimately, the court assessed damages in favor of the homeowners’ association on the basis of “one overriding violation,” the failure to comply with the ARB-approved application.

Bankruptcy: Redemption - An Introduction

     In this and future blogs I will explore Redemption.
     In general. Bankruptcy Code §722 provides debtors with the right to redeem property. The redemption option is being exercised more often (as opposed to reaffirmation) because collateral loan balances are frequently much greater than the value of the underlying collateral, and, because redemption financing options are growing. The code states:
     [a]n individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempt under section 522 of this title or had been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.
     Financing options. In the past redemption has been rare, as what debtor in bankruptcy has the ability to raise money for a lump sum purchase price, and what lender would make such a loan? There is, however, an option available for debtors, and debtor attorneys are aware of it. The option is to borrow the redemption price from “specialized” lenders, such as the company called “722 Redemption Funding, Inc.” This company is based in Cincinnati, Ohio. The company has been in business for a number of years and has expanded into other states - Virginia is one of them. Once the loan is made, this company takes a non-purchase money security interest in the vehicle and has first priority since the debtor has redeemed from (and therefore extinguished) the lien if the prior lender. To add insult to injury, this company uses another Cincinnati company (Collateral Valuation Services, L.L.C.) to prepare a vehicle condition report in an effort to determine the lowest possible value for the vehicle. If you have yet to see redemption by this method, I am sure that you will see one soon.
     How do you value the collateral? This is a good question that does not always have a clear answer. To make it complicated, the method for determining redemption value differs in Chapters 7 and 13.
     To determine collateral value in Chapter 7 cases, the case law is clear that the retail value should be used. The law is not so clear, however, in Chapter 13 cases. In 2004 I tried two cases before Judge Tice in the United States Bankruptcy Court, Eastern District of Virginia, Richmond Virginia, involving this very issue. The debtors’ attorneys filed motions for redemption proposing to pay the trade-in value rather than the retail value. I objected to the motions, arguing that they were not proposed in good faith based upon these proposed values, and, that the creditors would be irreparably harmed. In doing the legal research it became clear that there was no preexisting Virginia decision controlling the decision, and that different states were taking different positions – some states use the wholesale value, some use the retail value, and, some use something other value determined by either an average of the two or utilizing other factors, such as the expected return to the creditor from a disposal of the collateral in a commercially reasonable manner. Of course I argued that it is unfair to place the entire burden and the risk of loss on the creditor, especially since it was the debtor who was in default! Ultimately, Judge Tice, having reviewed all of the tests applied across the country, wrote a detailed opinion. Judge Tice ruled that debtors should not be forced to redeem at retail valuation because the purpose of Bankruptcy Code §722 is to allow debtors to avoid having to pay the cost for replacing a vehicle. He ruled that a close approximation to the wholesale or liquidation value would be fair to creditors given the fact that creditors will save the cost of repossession and resale – that the redemption value should resemble an amount which the secured creditor would expect to recover upon the repossession and reasonable commercial disposition of the property.
      Since these decisions, the law has not become clearer. Judge Tice was presented with a similar issue in In re Hutchinson, where the court found that the fair redemption value was to be determined after considering the varying appraisals submitted. The court did not choose the trade in appraisal or the retail appraisal, but stated that debtors should not have been forced to redeem their car at a retail valuation (replacement value) of the property. Further, a close approximation to the wholesale or liquidation value was fair to the creditor in light of the fact that the repossession and resale costs would not have been incurred in light of the redemption. The court held that the redemption value should resemble an amount which the secured creditor would expect to recover upon repossession and reasonable commercial disposition of the property. The fair redemption value ultimately was determined to be a value between the trade in appraisal and the retail appraisal.

Collection: Attacking Fraudulent Conveyances

     It seems to happen more and more often. You are able to obtain your judgment against your debtor, but when you go to collect, he has recently transferred his assets. Can you pursue the assets to the transferee? Under the right circumstances, yes.
     The case of Price v. Hawkins, from the Newport News Circuit Court, appealed to the Virginia Supreme Court, stands for the position that a court may enter personal judgments against a transferee to provide a creditor with a remedy when, due to fraud, there is no other remedy.
     In Price the Court found that the debtor, a father, enlisted the help of his son and his son's girlfriend in the debtor's scheme to defraud his creditors. Specifically, the son and his girlfriend, who were not legitimate creditors of the debtor, assisted the debtor in hiding assets ($14,058.77) that the creditor would have otherwise reached in his judgment collection efforts. The transfers occurred after the judgment order was entered, and $10,000.00 was transferred to the son and the girlfriend three months later while the creditor was attempting to collect on the judgment.
     The Court found that simply declaring the fraudulent transfer "void" pursuant to Virginia Code §55-80 would be meaningless, as the conveyance was of money. In cases involving the fraudulent conveyance of real estate, title to the real estate is restored by a declaration, thus, subjecting the property to a creditor's bill. The Court ruled in Price that unless the money was delivered to the Court for the creditor to attach, then personal judgments were the only remedy.
     Perhaps the lesson of Price is: Ask questions! When your debtor is under oath for interrogatories, ask what assets have been conveyed to whom, when, and for what consideration.