The lender’s efforts to coerce the debtors to reopen their bankruptcy case to reaffirm the mortgage agreement violated the discharge injunction where post-discharge reaffirmation was legally unavailable and the court found the lender was merely attempting to collect personally against the debtors. In re Go, No. 21-12657 (Bankr. D. Nev. June 29, 2022).
The debtors, Rolando Go and Cherry Tijam, borrowed money to purchase a mobile home. The lending agreement contained an ipso facto clause under which the borrowers were automatically deemed to be in default upon filing for bankruptcy without regard to whether they were current on monthly payments. The contract further provided that upon default, the lender would give the borrowers notice and 30 days to cure.
When the debtors filed for chapter 7 bankruptcy they were current on their payments under the contract. They claimed an exemption on the residence. They listed the lender as a secured creditor and, in their statement of intent, they declined the three specified options and checked “other,” indicating that they intended to retain the property and maintain monthly payments on the mortgage. They received their discharge and the case was closed on August 27, 2021.
Less than a month after the debtors received their discharge, the lender sent them a mortgage statement stating they must pay $653.25 by October 1, 2021. The letter acknowledged receiving that amount on September 8, 2021. The statement further said: “Our records indicate that either you are a debtor in bankruptcy or you discharged personal liability for your mortgage loan in bankruptcy. We are sending this statement to you for information and compliances purposes only. It is not an attempt to collect a debt against you. If you want to stop receiving statements, write to us at the General Correspondence address listed on page 2 of this statement.”
The lender also sent by certified mail a document titled “Non-Monetary Notice of Default.” That document informed the debtors that, because of their bankruptcy filing, the lender intended to foreclose on the property unless the debtors either 1) paid the debt in full, 2) vacated the property, or 3) reopened their bankruptcy case and reaffirmed the lending agreement. It also included the disclaimer that, because the debtors had received a discharge in bankruptcy, it was not attempting to collect a debt personally.
On October 11, the lender sent another letter informing the debtors that their payment on Sept. 8 was reversed and a late charge of $26.53 applied, that their payment of Oct. 4 was received, and demanding the next payment on Nov. 1, 2021. On October 26, the debtors received a notice from the lender that because they were in default, the lender would not accept payments, including the one received on October 4. The lender separately returned payments the debtors had made after the close of their bankruptcy.
The lender and the debtors had an exchange of correspondence in which the debtors continued to assert their desire to keep the property and continued to make the monthly payments, and the lender continued to demand payments, then return them and threaten foreclosure unless the debtors reopened their bankruptcy to reaffirm the agreement.
At one point, the debtors sent the lender a payment with a notification that Cherry Tijam was suffering from kidney disease and was on dialysis awaiting a kidney transplant. They indicated that though they were undergoing financial difficulties and other stresses due to her condition and the pandemic, they prioritized payments on their home loan in order to keep their home.
The lender responded by returning their payment with another notification of default and the list of the three alternatives to foreclosure.
The debtors moved to reopen their bankruptcy case to seek sanctions against the lender for violation of the discharge injunction.
The court began its discussion noting that the lending agreement specified that upon default the lender was obligated to give notice to the debtors of the default and allow them thirty days to cure. However, where the only default was filing bankruptcy, there was no “cure” available. The case could not be unfiled.
The court observed that the lender seemed to regard reaffirmation as the appropriate method to cure the default caused by the debtors’ bankruptcy filing. But reopening to reaffirm was legally impossible because section 524(c)(1) authorizes a court to approve a reaffirmation agreement only if it is made prior to discharge. Therefore, contrary to the terms of the lending agreement, the debtors had no opportunity to cure the default.
The court went on to find that because the lender failed to comply with the agreement to provide notice and an opportunity to cure, it could not accelerate the maturity date of the loan or initiate foreclosure proceedings.
The lender countered that the debtors failed to comply with section 521(a)(2)(A)’s statement of intent with respect to the property by checking one of the options: surrender, reaffirmation, or redemption. Instead, the debtors checked “other” and indicated an intention to retain their home and continue their regular mortgage payments.
The court agreed that BAPCPA eliminated this “ride through” option. It went on to observe that the consequence under section 362(b) of failing to provide a proper statement of intent is that the secured property drops out of the estate and is no longer subject to the automatic stay. It noted however that it does not prevent the debtor from discharging personal liability with respect to the loan. Nor does it relieve the lender of its obligation to comply with the terms of the lending agreement.
The court was decidedly unsympathetic to the lender’s plight. “The uncontradicted record demonstrates that the Debtors have attempted to make the monthly payments required by the Secured Note while the Lender has relied on a provision of its own contract creating an event of default that is impossible to cure while also requiring the Lender to provide a right to cure. In essence, the record establishes a purely self-inflicted wound.”
The court reasoned that because the lender failed to comply with the notice of default and right to cure provision of its own contract, its acceleration and foreclosure were never triggered. Therefore, all of the lender’s post-discharge communications with the debtors constituted attempts to collect personally from them. “The offer of a legally impermissible reaffirmation agreement to the Debtors appears to confirm that the Lender’s conduct is designed to pursue the balance as a personal liability. Such demands violate the discharge injunction protecting the Debtors under Section 524(a)(2).”
The court turned to whether it was appropriate to impose civil contempt sanctions against the lender under section 105(a). That inquiry asks whether the lender had an objectively reasonable belief that its conduct was lawful under Taggart’s “fair ground of doubt” standard. The court found the lender was aware of the impact of the bankruptcy discharge on its right to collect the debt against the debtors personally, and that the lender sought to do so through means that were legally unavailable to it. The court found the lender lacked a fair ground of doubt, and continued the case for a determination of the appropriate amount to sanction it.
In a footnote bringing to mind the rhetorical device praeteritio, the court stated: “The court expresses no view on whether, outside the bankruptcy context, the Debtors would have other remedies against the Lender under the terms of the Secured Note, including legal remedies based on breach of contract or equitable remedies for declaratory and injunctive relief.”
