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In Re v. Christopher Dolan Obmann


December 9, 2011


Appeal from the United States Bankruptcy Court for the Central District of California Honorable Catherine Bauer, Bankruptcy Judge, Presiding Bk. No. 11-12906




Argued and Submitted on October 20, 2011 at San Diego, California

Filed - December 9, 2011

Before: HOLLOWELL, KIRSCHER and MARKELL, Bankruptcy Judges.

San Diego County Credit Union (SDCCU) appeals an order of the bankruptcy court that (1) disapproved a reaffirmation agreement that SDCCU entered into with the debtors, (2) ordered SDCCU to accept the debtors' payments, and (3) enjoined SDCCU from repossessing its collateral so long as the debtors made payments and otherwise fulfilled their obligations to SDCCU.

For the reasons given below, we AFFIRM the disapproval of the reaffirmation agreement, but VACATE the portion of the bankruptcy court's order that requires SDCCU to accept payments and refrain from exercising its state law contractual remedies.


Christopher and Rebecca Obmann (the Debtors) filed a joint petition for relief under chapter 7*fn2 on January 28, 2011. On their bankruptcy schedules, the Debtors listed an $18,496.00 obligation to SDCCU secured by a 2004 Chevrolet Silverado (Silverado). They also listed a $7,003.00 obligation to SDCCU secured by a 2004 Nissan Frontier (Nissan). According to the Debtors' schedules I and J, they had a combined average monthly income of $9,126.20 and expenditures of $9,938.00, which included a $778.00 payment on the Silverado, as well as a $261.00 payment on the Nissan.

Along with their schedules, the Debtors filed a Statement of Intention with respect to the Silverado. On the Statement of Intention form (Official Form 8), the Debtors checked the box indicating that they intended to retain the Silverado, but did not check either the "Redeem the property" box or the "Reaffirm the debt" box. Instead, the Debtors checked a box entitled "Other" and wrote "Retain and pay pursuant to contract." The Debtors indicated the same intention with respect to the Nissan.

On February 3, 2011, the Debtors attempted to make a payment on the Silverado under their loan agreement with SDCCU (the Loan). At that time, the Debtors were already behind on the Loan because they had failed, prepetition, to make their January payment. Under the terms of the Loan, a filing of a bankruptcy proceeding, as well as a failure to make any payment when due, were events of default, entitling SDCCU to accelerate all payment on the Loan and to exercise its state law rights against the Silverado, including repossession.

SDCCU refused to accept the Debtors' February 3, 2011, payment on the Loan. It told the Debtors it would not accept payments unless there was an enforceable reaffirmation agreement in place. On February 8, 2011, the Debtors and SDCCU executed an agreement to reaffirm the debt secured by the Silverado (the Reaffirmation).*fn3 The Reaffirmation reaffirmed the $13,495.58 remaining balance on the Silverado under the original terms of the Loan. The Debtors listed the value of the Silverado as $19,875.00. They filed the executed Reaffirmation with the bankruptcy court on February 14, 2011.

The § 341 meeting of creditors was scheduled for March 9, 2011.

Also on March 9, 2011, the bankruptcy court held a hearing on whether to approve the Reaffirmation (the Reaffirmation Hearing). At the Reaffirmation Hearing, the bankruptcy court expressed its concern that SDCCU, by refusing to accept payments, was purposely forcing debtors into defaulting on their loans until the court approved a reaffirmation agreement.

It continued the hearing to March 30, 2011, and entered an order requiring the president and CEO of SDCCU, Teresa Halleck (the CEO), to appear:*fn4 to explain its policies and procedures*fn5 regarding bankruptcy, since it appears that either the Credit Union fundamentally misunderstands the purpose and extent of the automatic stay and/or that it is purposely forcing debtors into defaulting on their car loans under some misconception that this Court will then be forced to approve reaffirmation agreements that are not advisable (especially in view of the forced defaults) . . .

The Debtors appeared at the continued hearing but did not testify. The CEO appeared and testified that SDCCU did not accept customer payments unless there was an enforceable agreement between the parties, otherwise she believed that SDCCU risked having to return any payments made if there was not a court-approved reaffirmation in effect. The CEO further testified that SDCCU believed that a failure to obtain an enforceable reaffirmation would compromise SDCCU's future ability to exercise its state law remedies.

The bankruptcy court disapproved the Reaffirmation as not in the Debtors' best interest because, despite reaffirming the debt, they would still be exposed to potential repossession of the Silverado due to payment defaults, which the bankruptcy court apparently believed were solely the result of SDCCU's refusal to accept the Debtors' post-petition payments. On March 31, 2011, the bankruptcy court entered an order disapproving the Reaffirmation (Reaffirmation Order).*fn6

In its Reaffirmation Order, the bankruptcy court found that the Reaffirmation posed an undue hardship on the Debtors and was not in their best interest. Additionally, the Reaffirmation Order stated that "SDCCU shall accept any and all payments that Debtors are past due and shall have no right to repossess the 1 subject vehicle so long as Debtors make their payments, keep the 2 vehicle insured, and otherwise fulfill their obligations to 3 SDCCU." SDCCU timely appealed.


5 The bankruptcy court had jurisdiction under 28 U.S.C. 6 § 157(b)(2)(O). We have jurisdiction under 28 U.S.C. § 158.


8 Did the bankruptcy court err in entering the Reaffirmation 9 Order?


11 We review the bankruptcy court's interpretation of the 12 Bankruptcy Code de novo. Bankr. Receivables Mgmt. v. Lopez 13 (In re Lopez), 274 B.R. 854, 859 (9th Cir. BAP 2002), aff'd, 14 345 F.3d 701 (9th Cir. 2003), cert. denied, 124 S.Ct. 2015 15 (2004); Dumont v. Ford Motor Credit Co. (In re Dumont), 16 383 B.R. 481, 484 (9th Cir. BAP 2008), aff'd, 581 F.3d 1104 (9th 17 Cir. 2009). The requisite procedure for issuing injunctions is a 18 question of law that we review de novo. Demos v. Brown 19 (In re Graves), 279 B.R. 266, 270 (9th Cir. BAP 2002).

20 Additionally, whether adequate due process was given in a 21 particular instance is a mixed question of law and fact that we 22 also review de novo. Id.

23 The bankruptcy court's factual findings are reviewed for 24 clear error. United States v. Hinkson, 585 F.3d 1247, 1262-63 25 (9th Cir. 2009) (en banc). A factual finding is clearly 26 erroneous if it is illogical, implausible, or without support in 27 inferences that can be drawn from the facts in the record. Id. 28 at 1263.


2 An individual debtor in a chapter 7 case is required to 3 timely redeem, surrender, or reaffirm debts secured by personal 4 property. 11 U.S.C. § 521(a)(2). Section 521(a)(2) requires 5 that for every debt secured by personal property of the estate, a 6 debtor must file a statement of intention with respect to the 7 retention or surrender of the property. The debtor must file his 8 statement of intention within 30 days of the filing of a petition 9 or before the first date scheduled for the meeting of creditors, 10 whichever is earlier. When a debtor elects to retain the 11 property, he must specify in his statement of intention whether 12 he will redeem it or reaffirm the debt secured by the property. 13 11 U.S.C. § 521(a)(2)(A). Additionally, the debtor must perform 14 on his stated intention within 30-days of the § 341 meeting of 15 creditors. 11 U.S.C. § 521(a)(2)(B).

16 A failure to comply with the requirements of § 521(a)(2)(A) 17 and (B) results in the termination of the automatic stay "with 18 respect to personal property of the estate or of the debtor 19 securing in whole or in part a claim, . . . and such property 20 shall no longer be property of the estate." 11 U.S.C. 21 § 362(h)(1); Samson v. W. Capital Partners, LLC (In re Blixseth), 22 454 B.R. 92 (9th Cir. BAP 2011) (the exception to the rule is if 23 on the bankruptcy trustee's timely motion the bankruptcy court 24 determines the property is of consequential value to the estate).

25 In this case, the Debtors filed a statement of intention and 26 indicated that they intended to retain the Silverado. However, 27 the Debtor's statement of intention did not state whether they 28 intended to redeem the Silverado or reaffirm the Loan.

1 Therefore, the Debtors failed to comply with § 362(h)(1)(A). See 2 e.g., In re Steinhaus, 349 B.R. 694, 701 (Bankr. D. Idaho 2006). 3 SDCCU argues, therefore, that the automatic stay terminated at 4 the time the bankruptcy court held the Reaffirmation Hearing. 5 Nevertheless, SDCCU concedes that the bankruptcy court had 6 jurisdiction to review the Reaffirmation. Consequently, we need 7 not decide whether the automatic stay was, in fact, terminated at 8 the time of the Reaffirmation Hearing, or, whether a debtor may 9 amend his original intention prior to the time he must perform on 10 that intention and thereby cure any previous defect. See e.g., 11 In re Norton, 347 B.R. 291, 296-98 (Bankr. E.D. Tenn. 2006) 12 (finding termination of automatic stay could not occur until the 13 deadline of § 521(a)(2)(B) had passed); Arizona Fed. Credit Union 14 v. DeSalvo, 2009 WL 5322428 *3 (Bankr. S.D. Ga. 2009); In re 15 Bower, 2007 WL 2163472 *2 n.2 (Bankr. D. Or. 2007) (an improper 16 statement of intention can be "cured" by a timely filed 17 reaffirmation agreement); In re Baker, 390 B.R. 524, 529 (Bankr. 18 D. Del. 2008) (same).

19 Debtors may reaffirm dischargeable debts. 11 U.S.C. § 524. 20 However, in order to protect debtors from compromising their 21 fresh start by making unwise agreements to repay such debts, the 22 Bankruptcy Code sets out various procedures and requirements for 23 approval of reaffirmation agreements. Id.; Gordon v. Hines 24 (In re Hines), 147 F.3d 1185, 1190 (9th Cir. 1998); Rogers v. 25 NationsCredit Fin. Servs. Corp., 233 B.R. 98, 107 (N.D. Cal. 26 1999). These include requiring creditors to make detailed 27 disclosures of the legal ramifications of reaffirmation. 28 11 U.S.C. § 524(k). Additionally, when, as here, the debtor is 1 not represented by an attorney, the bankruptcy court must inform 2 the debtor that reaffirmation is not required, describe the legal 3 consequences of reaffirming a debt, and decide whether 4 reaffirmation is in the debtor's best interest or poses an undue 5 hardship. 11 U.S.C. § 524(d), (c)(6).

6 Section 524(m)(1) raises a rebuttable presumption that a 7 reaffirmation agreement imposes an undue hardship on the debtor 8 when the debtor's monthly income, less the debtor's monthly 9 expenses, is less than the scheduled payments on the reaffirmed 10 debt. 11 U.S.C. § 524(m)(1). The bankruptcy court is required 11 to review all agreements, regardless of whether a debtor is 12 represented or appearing in pro se, when the presumption of undue 13 hardship exists; however, the presumption is waived when the 14 creditor of a reaffirmed debt is a credit union. 11 U.S.C. 15 § 524(m)(2).

16 Even though there was no presumption of undue hardship that 17 required rebuttal by the Debtors, because they were 18 unrepresented, the bankruptcy court was required to decide 19 whether the Reaffirmation imposed an undue hardship and was in 20 their best interest. 11 U.S.C. § 524(c)(6)(A)(i),(ii); Coastal 21 Fed. Credit Union v. Hardiman, 398 B.R. 161, 178 (E.D. N.C. 22 2008); In re Smith, 2011 WL 671994 *1 (Bankr. N.D. Iowa 2011); 23 In re Huskinson, 2008 WL 2388113 *2 n.7 (Bankr. N.D. Ohio 2008). 24 To that end, the bankruptcy court found that the payments on 25 the Silverado were large and that the Debtors' expenses 26 significantly exceeded their income making it an undue hardship 27 on the Debtors. Furthermore, the bankruptcy court found it was 28 not in the Debtors' best interest to reaffirm the debt because 1 there was no assurance that SDCCU would honor a purported verbal 2 agreement to work with the Debtors to cure any default, and 3 reaffirmation would make the Debtors personally liable for any 4 deficiency balance on the Loan.

5 These findings were supported by the record. The Debtors' 6 schedules demonstrated that their expenses significantly exceeded 7 their income. The record, including the testimony provided by 8 the CEO, demonstrated that the Debtors had defaulted on the Loan, 9 and that as a result of those defaults, SDCCU was entitled to 10 enforce its rights under the Loan. Accordingly, we perceive no 11 error in the bankruptcy court's decision in disapproving the 12 Reaffirmation under § 524(c)(6)(A)(i) and (ii). 13 SDCCU contends that even though the bankruptcy court could 14 disapprove the Reaffirmation under § 524(c)(6)(A), it could not 15 enjoin SDCCU from enforcing its rights under the Loan. SDCCU 16 particularly assigns error to the bankruptcy court's issuance of 17 an injunction without an adversary proceeding.

18 SDCCU contends that the issuance of injunctive relief and 19 declaratory relief may only result from an adversary proceeding. 20 Rule 7001, 7065. SDCCU relies on case authority where a 21 bankruptcy court was asked to grant injunctive relief. We agree 22 that in those situations, the request must procedurally be made 23 through an adversary proceeding. However, SDCCU's premise that 24 an adversary proceeding is always required before an injunction 25 can by issued by a bankruptcy court is belied by the plain language of § 105(a)*fn7 , which allows the bankruptcy court to act sua sponte to issue any order that is necessary to carry out the provisions of the Bankruptcy Code. 11 U.S.C. § 105(a).

Therefore, "[i]njunctive relief is available in bankruptcy court in two ways: pursuant to the court's discretionary and inherent equitable power under section 105(a) 'to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,' or under the auspices of Bankruptcy Rule 7065." Rinard v. Positive Invest., Inc. (In re Rinard), 451 B.R. 12, 22 (Bankr. C.D. Cal. 2011); Eisen v. Golden (In re Eisen), 2006 WL 6810928 (9th Cir. BAP 2006) (unpublished).

The bankruptcy court did not cite to § 105(a) as the basis of its authority, but we presume that it relied on its equitable powers when it required SDCCU to accept payments and to suspend its state law contractual rights to the Silverado. While § 105(a) permits the bankruptcy court to impose injunctions, there are limitations on that power. In re Graves, 279 B.R. 266 at 274. First, when acting in a matter that ordinarily requires an adversary proceeding, the bankruptcy court must assure that the defendant is afforded the procedural protection of due process. Id. at 272. Second, the remedy must conform to the objectives of the Bankruptcy Code. Id.; Beck v. Fort James Corp. (In re Crown Vantage, Inc.), 421 F.3d 963, 975 (9th Cir. 2005).

Due process requires a notice and an opportunity to be heard. Tennant v. Rojas (In re Tennant), 318 B.R. 860, 870 (9th Cir. BAP 2004). "Notice and an opportunity to be heard" is a flexible concept that depends on what is appropriate in the particular circumstance. Id. At a minimum, however, notice must be "reasonably calculated, under all of the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank & Trust, Co., 339 U.S. 306, 314 (1956). Here, SDCCU was provided notice of the bankruptcy court's concern that SDCCU misunderstood "the purpose and extent of the automatic stay and/or that it is purposely forcing debtors into defaulting on their car loans under some misconception that this Court will then be forced to approve reaffirmation agreements that are not advisable (especially in view of the forced defaults)." SDCCU was given the opportunity to be heard with respect to that concern when the CEO testified about SDCCU's policies and procedures.*fn8 Accordingly, SDCCU was afforded the requisite due 1 process prior to the entry of the bankruptcy court's 2 Reaffirmation Order.

3 Nevertheless, the bankruptcy court acted outside the limits 4 of its § 105(a) authority because it imposed a remedy that was 5 not contemplated by the Bankruptcy Code. Bankruptcy courts have 6 "broad authority" under § 105(a) to take action necessary to 7 prevent an abuse of process. Marrama v. Citizens Bank of Mass., 8 549 U.S. 365, 375 (2007). Indeed, that power has been used to 9 craft various remedies for a range of conduct. See In re Kmart 10 Corp. 359 F.3d 866, 871 (7th Cir. 2004) (compiling cases).

11 Nevertheless, § 105(a) does not allow "free-floating discretion 12 in accordance with the court's personal views of justice and 13 fairness" (Id. at 871) or amount to "a roving commission to do 14 equity." Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 15 F.3d 1168, 1174 (9th Cir. 2003). A bankruptcy court may only 16 exercise its equitable power as a means to fulfil some specific 17 provision within the Bankruptcy Code. Marrama v. Citizens Bank 18 of Mass., 549 U.S. at 382 (citing N.W. Bank Worthington v. 19 Ahlers, 485 U.S. 197, 206 (1988)). Its authority may be invoked 20 "only if, and to the extent that, the equitable remedy dispensed 21 by the court is necessary to preserve an identifiable right 22 conferred elsewhere in the Bankruptcy Code." Jamo v. Katahdin 23 Fed. Credit Union (In re Jamo), 283 F.3d 392, 403 (1st Cir. 2002) 24 (internal citations omitted).

25 The bankruptcy court did not identify any Bankruptcy Code 26 section to support its conclusion that SDCCU had to accept 27 payments that were tendered by a debtor. The bankruptcy court's 28 statements on this issue included:

"[I]f I don't approve a reaffirmation where the people have been trying to make the payments, you're going to go pick up the car unless they pay it off? . . . it's not compliant with federal bankruptcy law."

Hr'g Tr. (March 31, 2011) at 12:2-5, 16-17. and, "[Y]ou are purposefully putting people in default . . .

And I don't think that's a good thing to do. I don't think it's a good policy."

Id. at 12:21-22, 13:1-2.

Section 524(l) provides that a creditor "may accept" payments from a debtor before and after the filing of a reaffirmation agreement. However, a creditor does not violate the Bankruptcy Code by refusing to accept payments tendered by a debtor. Additionally, we did not find any other federal law that may apply. For example, we reviewed provisions regarding creditor/debtor relationships, including payments on debt obligations, contained in the Truth In Lending Act (TILA). See 15 U.S.C. § 1601 et. seq. While TILA provides that a creditor shall credit a payment*fn9 to a consumer's account as of the date of receipt, it allows the creditor to specify reasonable requirements for conforming payments, which can include designating certain procedures, or cut off times, for payments. Id. Implementing Regulation Z, 12 C.F.R. § 226.10. We found 1 nothing within TILA that requires a creditor to accept the 2 tender.

3 We also did not find other federal banking laws that 4 include provisions regarding payment obligations between 5 creditors and debtors. Neither do we find any California law 6 that requires a creditor to accept payments tendered to it. In 7 any event, the bankruptcy court could not use its § 105 powers 8 to implement state law unless there was also a comparable 9 objective set out in the Bankruptcy Code.

10 In this case, the Debtors were in default on the Loan 11 prepetition. By requiring that SDCCU accept the Debtors' 12 payments and refrain from exercising its state law rights under 13 the Loan, the bankruptcy court ordered SDCCU to accept a cure of 14 the Debtors' default. Such authority is beyond the reach of the 15 bankruptcy court. In re Jamo, 283 F.3d at 403 (court lacked 16 power to modify proposed reaffirmation arrangement and compel 17 credit union to enter into judicially-crafted reaffirmation 18 agreement).

19 SDCCU makes a final argument that the bankruptcy court's 20 injunction effects an impermissible expansion of the discharge 21 injunction or the automatic stay that is not intended by the 22 Bankruptcy Code. It asserts that the bankruptcy court 23 "expressly [stated] that if the Debtors wanted to return the 24 vehicle at some point in the future, the Debtors could also 25 demand their payments on this 'discharged debt' back from SDCCU 26 and SDCCU would be obligated to return the payments." See 27 Appellant's Opening Brief at 20. However, neither the record 28 nor the terms of the Reaffirmation Order supports SDCCU's assertion. Whether a discharged debt that is voluntarily paid by a debtor must later be refunded is not at issue in this appeal, and therefore, will not be addressed.*fn10


The bankruptcy court did not abuse its discretion in denying the Reaffirmation; however, it acted beyond its authority in ordering SDCCU to accept a cure of the Debtors' default on the Loan and enjoining SDCCU from pursuing its state law remedies. Therefore, we AFFIRM the bankruptcy court's disapproval of the Reaffirmation, but VACATE the portion of the Reaffirmation Order that orders SDCCU to accept the Debtors' payments, and that enjoins SDCCU from repossessing the Silverado so long as the Debtors make payments and otherwise fulfill their obligations to SDCCU.

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