reaffirmation

“A party to a reaffirmation agreement cannot bootstrap contract terms into the reaffirmation agreement through inconspicuous additions to the statutory disclosures on a form represented to be a Director’s Form.” In re Jenkins, No. 17-30753 (Bankr. S.D. Ohio Sept. 26, 2017).

Chapter 7 debtor, Tracy Michelle Jenkins, entered into a reaffirmation agreement with KH Network Credit Union concerning Ms. Jenkins’ 2015 Volvo. After Ms. Jenkins received her discharge, the Credit Union rescinded the reaffirmation agreement. The Credit Union pointed to language it had added to the “Disclosure Statement” on Director’s Form 2400A, in which it asserted a right to rescind the agreement in the manner it followed.

As an initial matter, the court found that it had jurisdiction over the action because, rather than being a disagreement as to the terms of a contract requiring application of state law, the disagreement involved interpretation of Ms. Jenkins’s rights under section 524 of the Code.

The court began its substantive analysis with the general principles that reaffirmation agreements serve the valuable purpose of permitting a debtor to retain necessities but often at the cost of a heavy financial obligation to the debtor. For that reason, safeguards such as the disclosures on Director’s Form 2400A are statutorily mandated and, under section 524(k)(1), must be made “clearly and conspicuously and in writing.”

The court found that, while in theory a creditor may negotiate and add to a reaffirmation agreement terms allowing it to rescind, the Credit Union here did not comply with the requirements necessary to alter the standard terms of the agreement. The court pointed to several deficiencies in the terms the Credit Union sought to enforce: 1) it was not visually conspicuous, 2) it was appended to the disclosure section of the agreement which is a recitation of the debtor’s statutory rights, and 3) it was not included in the Agreement section where it would have been properly included in the negotiated contractual terms. Where the disclosure requirements are intended for the protection of debtors, the Credit Union’s inclusion of its own rescission rights in that section of the agreement contradicted and diluted its purpose.

The Credit Union argued that it rescinded the agreement due to Ms. Jenkins’s failure to enter into a separate reaffirmation agreement with it for an unsecured debt. The court found that there was no evidence of any agreement between the parties as to this separate contractual term and, under Ohio law, a contract may be rescinded upon fraud or mistake of fact, but that no such justification existed here. The credit union opted to sign the reaffirmation agreement with no contingency provision included. Ms. Jenkins could not be said to have breached the contract by reason of noncompliance with a term that was not in it.

The court found that under section 105(b), it had the power to alter the terms of the reaffirmation agreement to conform to the provisions and principles of the Bankruptcy Code.

Jenkins Bankr SD Ohio Sept 2017