Bankruptcy: Punitive Damages - Failure to Return Vehicle

     Judge Tice of the United States Bankruptcy Court, in Richmond, in the case of Brown v. Town & Country Sales and Service, Inc., ruled that a creditor that repeatedly refused to give the debtors’ pickup truck back to the debtors, despite the debtors’ entitlement to the truck after they filed for bankruptcy, violated the automatic stay in bankruptcy and must pay debtors’ attorney’s fees and punitive damages. 

     The creditor’s registered agent testified at trial that, despite the fact that they had always returned repossessed property post-petition in the past, the creditor elected not to return debtors’ vehicle. Instead, she testified that this time the creditor decided it would not return debtors’ vehicle upon demand because the creditor was unhappy that a large number of its customers had declared bankruptcy in the past year. 

     The debtors provided the lender with proof of adequate insurance. The debtors were currently awaiting confirmation of their modified Chapter 13 plan in which the debtors proposed to pay the lender in full. The debtors owed the lender $1,689.02 for the initial truck loan, as well as $1,764.95 for the replacement motor, for a total of $3,453.97.

     The Court concluded that the creditor’s demand for full payment, coupled with its inaction and retention of the vehicle, amount to an exercise of control sufficient to find a violation of the automatic stay for failure to turn over the vehicle pursuant to Bankruptcy Code §542(a). The Bankruptcy Court ruled that the debtors were entitled to recover the truck upon filing bankruptcy. Thus, the creditor’s retention of the vehicle post-petition constituted an exercise of control in violation of the automatic stay and Bankruptcy Code §362(h), which permits a court to impose attorney’s fees, costs and punitive damages for a willful violation of the automatic stay. The Court awarded these.

     The Bankruptcy Court further awarded punitive damages against the creditor in the form of cancellation of both of the creditor’s security interests against debtors’ vehicle. Any balance which debtors owed the creditor was treated as an unsecured claim.

    The lesson in Brown - know the rules and always consult experienced counsel. 

Bankruptcy: Punitive Damages - Failure to Return Vehicle

     Judge Tice of the United States Bankruptcy Court, in Richmond, in the case of Brown v. Town & Country Sales and Service, Inc., ruled that a creditor that repeatedly refused to give the debtors’ pickup truck back to the debtors, despite the debtors’ entitlement to the truck after they filed for bankruptcy, violated the automatic stay in bankruptcy and must pay debtors’ attorney’s fees and punitive damages. 

     The creditor’s registered agent testified at trial that, despite the fact that they had always returned repossessed property post-petition in the past, the creditor elected not to return debtors’ vehicle. Instead, she testified that this time the creditor decided it would not return debtors’ vehicle upon demand because the creditor was unhappy that a large number of its customers had declared bankruptcy in the past year. 

     The debtors provided the lender with proof of adequate insurance. The debtors were currently awaiting confirmation of their modified Chapter 13 plan in which the debtors proposed to pay the lender in full. The debtors owed the lender $1,689.02 for the initial truck loan, as well as $1,764.95 for the replacement motor, for a total of $3,453.97. 

     The Court concluded that the creditor’s demand for full payment, coupled with its inaction and retention of the vehicle, amount to an exercise of control sufficient to find a violation of the automatic stay for failure to turn over the vehicle pursuant to Bankruptcy Code §542(a). The Bankruptcy Court ruled that the debtors were entitled to recover the truck upon filing bankruptcy. Thus, the creditor’s retention of the vehicle post-petition constituted an exercise of control in violation of the automatic stay and Bankruptcy Code §362(h), which permits a court to impose attorney’s fees, costs and punitive damages for a willful violation of the automatic stay. The Court awarded these. 

   The Bankruptcy Court further awarded punitive damages against the creditor in the form of cancellation of both of the creditor’s security interests against debtors’ vehicle. Any balance which debtors owed the creditor was treated as an unsecured claim. 

   The lesson in Brown - know the rules and always consult experienced counsel.

Bankruptcy: Plan Confirmation - Value of Vehicle

     In the case of In re: Rodnok the United States Bankruptcy Court at Richmond, Virginia, sustained a creditor's objection to the debtors' second modified Chapter 13 plan based upon the valuation of collateral. 

     In Rodnok the creditor, who had a Ford Aerostar van as collateral, filed a proof of claim stating the value as $13,075, which the debtors had not objected to. The debtors argued that the value of the van was already decided in the approved first modified plan to be $9,300, and that a redetermination was barred by the doctrine or res judicata. The creditor argued that the Court was not bound by the value determined in the first modified plan when it was determining approval of the second modified plan. 

     The Court stated that in determining whether a secured creditor should be bound to the value of its collateral as provided for in a confirmed Chapter 13 plan, the Court had to look at Bankruptcy Code §506 (a). This code section states that a claim is a secured claim to the extent of the value of the creditor's collateral and is unsecured as to the extent that the debt owed to the creditor exceeds the value of the collateral. Value of the collateral can be determined in any hearing concerning the disposition or use of the collateral or the confirmation of a plan affecting the secured creditor's interest. Bankruptcy Rule 3012 requires that notice of the hearing be given to the holder of the secured claim before a court may determine the value of that creditor's collateral. 

     In Rodnok the Court determined that the creditor was not provided the appropriate notice that the debtors were going to modify their secured claim, and therefore the creditor cannot be bound by the value assigned in the debtors' first modified plan, which was book value. 

     The Court found that the value of the van was $12,000. The creditor based its determination that the van had a value of $13,075 on the N.A.D.A. As evidenced by the certificate of title, the van came with numerous extras, adding to the overall value of the vehicle. The debtors claimed a deduction for excessive mileage, but the Court noted that at the first meeting of the creditors the debtors stated that the van had only 25,000 miles on it. Overall, the Court found that the value of the van more closely resembled that proposed by the creditor. Accordingly, the Court sustained the creditor's objection to the debtors' second modified plan. 

     The lesson of Rodnok, as it is in so many cases, is that creditors should retain the serves of counsel who has extensive experience in creditor representation.

Collections: Perfection of Vehicle Liens

     In almost all circumstances, courts will recognize a lien as being valid only when it has been "perfected". Perfected means registered with the appropriate governmental agency - DMV, Board of Inland Game and Fisheries, etc.; language on a promissory note that the loan is secured by the vehicle is not enough. Although the result of failed perfection could be harsh (a lost lien), it makes sense; without a registration, no one could ever know who has liens. Understanding this, it is important to have someone in your creditor organization be designated to follow-up on lien perfection to ensure that it is done, to ensure that it is done promptly, and to ensure that it is done right.

     What happens when your debtor moves to another state? As long as the creditor holds the original certificate of title reflecting the lien, the creditor will usually be protected. If the vehicle is taken to another state but is never re-registered or re-titled, the original secured creditor who is listed as lienholder on the original certificate of title maintains its perfection. The original secured creditor also maintains its lien if the debtor moves and obtains a new certificate of title with the creditor's name on it. However, what happens if the debtor moves, obtains a new certificate without the lien recorded? There could be a problem. To avoid the possible problem, follow up on your transient debtors like you do your new liens.

Bankruptcy: Discharged Debt Collection - Violation of Bankruptcy Injunction

     The United States Bankruptcy Court at Alexandria, in the case of In Re Billy Ray Evans, ruled that a bank and its attorney violated 11 U.S.C. §524 by attempting to collect a discharged debt. As a result of this the Court ordered both the bank and the attorney to pay to the debtor damages in the amount of $1,000.00, as well as attorney’s fees in the amount of $24,954.00, costs in the amount of $1,159.00 and punitive damages in the amount of $2,500.00.
     In Evans the Court found that the bank had filed a lawsuit in state court seeking to recover possession of the vehicle leased to debtor, or, in the alternative, to recover the value of the vehicle. The Court, however, found that the lawsuit was a mere subterfuge for the bank’s actual intention to enforce a pre-petition debt in violation of the bankruptcy discharge injunction. Cited by the Court in making this finding was the Court’s feeling that the bank made only minimal effort to determine whether the debtor actually had possession of the vehicle prior to filing its lawsuit. It twice referred the matter to repossession services after the bankruptcy case was closed, but the vehicle could not be located. The Court stated that the referrals, rather than confirming that the debtor had possession of the vehicle, raised questions about the bank’s motives. The Court found that the bank used minimal effort, simply to give the appearance that it was interested in recovering the vehicle. The Court stated that if the bank was truly interested in recovering the vehicle (rather than the debt) that there were many things that it could have done that it did not do. The bank made no effort to confirm that it had an immediate right of possession to the vehicle and that it was a proper party to bring the lawsuit.
     Without all of the facts of a particular case I am always reluctant to criticize a court’s decision. However, this decision seems very harsh to me. The lesson for Evans, though, is that creditors must be more aggressive while the debtor is still in bankruptcy court. Creditors must seek non dischargeability motions based upon conversion of property, damage of property, and the like. Also, if post bankruptcy lawsuits for recovery of property become necessary, and, undoubtedly they will, creditors must be certain to use best efforts to reclaim the property, but if unsuccessful in doing so, then to accurately value the property - not simply value the property at the balance due on the debt.

Collection: Perfection of Vehicle Liens

     In almost all circumstances, courts will recognize a lien as being valid only when it has been "perfected". Perfected means registered with the appropriate governmental agency - DMV, Board of Inland Game and Fisheries, etc.; language on a promissory note that the loan is secured by the vehicle is not enough. Although the result of failed perfection could be harsh (a lost lien), it makes sense; without a registration, no one could ever know who has liens. Understanding this, it is important to have someone in your creditor organization be designated to follow-up on lien perfection to ensure that it is done, to ensure that it is done promptly, and to ensure that it is done right.
     What happens when your debtor moves to another state? As long as the creditor holds the original certificate of title reflecting the lien, the creditor will usually be protected. If the vehicle is taken to another state but is never re-registered or re-titled, the original secured creditor who is listed as lienholder on the original certificate of title maintains its perfection. The original secured creditor also maintains its lien if the debtor moves and obtains a new certificate of title with the creditor's name on it. However, what happens if the debtor moves, obtains a new certificate without the lien recorded? There could be a problem. To avoid the possible problem, follow up on your transient debtors like you do your new liens.