by A pawn agreement requiring the borrower to affirm that she was not in bankruptcy and did not intend to file for bankruptcy was not unenforceable as against public policy because the agreement did not commit the borrower to an agreement not to file for bankruptcy at a later date. TitleMax v. Roby, No. 21-630 (M.D. Ala. Sept. 19, 2022).
The debtor pawned her vehicle in October, 2020. TitleMax’s pawn agreement included a requirement in paragraph 22(j) that the debtor affirm that she was not in bankruptcy and had no intention of filing for bankruptcy. When the maturity date of the pawn contract arrived the following month, she exercised her option to renew. She continued this practice until April 23, 2021, when she renewed the pawn agreement for the final time. Later that same day, she filed for chapter 13 bankruptcy listing TitleMax as a secured creditor. TitleMax objected to confirmation of her plan arguing that her plan was proposed in bad faith, that she’d entered into the pawn agreement fraudulently, and that she lost her interest in the pawned vehicle prior to filing her bankruptcy petition. The bankruptcy court found paragraph 22(j) of the agreement was unenforceable as against public policy, and confirmed the debtor’s plan treating TitleMax’s claim as a secured debt.
TitleMax appealed.
Before the district court, the parties disagreed as to whether the case was governed by In re Womack, 2021 WL 3856036 (11th Cir. Aug. 30, 2021), or In re Northington, 876 F.3d 1302 (11th Cir. 2017).
In Womack, the debtor filed for bankruptcy before the maturity date of her pawn agreement. The bankruptcy court held that the debtor retained title to the pawned vehicle and that the pawn broker was a secured creditor. In contrast, the debtor in Northington filed for bankruptcy after the maturity date of the pawn agreement but before the expiration of the redemption period. The court there found the debtor’s interest was limited to the right of redemption as extended by federal law.
On appeal, the district court found the question of which of the two cases was applicable depended on whether paragraph 22(j) of the pawn agreement was enforceable.
The bankruptcy court cited In re Lucas, 477 B.R. 236, 245–46 (Bankr. M.D. Ala. 2012), in support of its finding that the clause was impermissible. In Lucas, the court prohibited a clause in a lending agreement requiring the debtor to agree not to discharge the debt in a future bankruptcy.
The district court found that paragraph 22(j) of TitleMax’s agreement differed from the agreement in Lucas in that TitleMax did not require the debtor to promise not to discharge the debt in bankruptcy but rather, to affirm that she lacked the present intention to do so. Thus, a debtor subject to TitleMax’s pawn agreement could file for bankruptcy without violating the clause so long as she did not enter into the agreement with that intention.
In fact, the district court pointed out that it had recently reached the same conclusion under an identical set of facts. In TitleMax of Ala., Inc. v. Arnett, 2022 WL 3587339 (M.D. Ala. Aug. 22, 2022), the court rejected the bankruptcy court’s finding that paragraph 22(j) was unenforceable as against public policy because it “did not prohibit debtors from filing for bankruptcy, did not waive the protection of the automatic stay, and did not waive the debtors’ rights to discharge. Id. Rather, the clause only required the debtors to affirm ‘that they were not presently in bankruptcy and that they had no present intent to file for bankruptcy protection.’”
The court thus concluded that paragraph 22(j) was enforceable, and it went on to address the bankruptcy court’s finding that the debtor proposed her chapter 13 plan in good faith.
In finding that the debtor’s plan was proposed in good faith, the bankruptcy court focused on the factors set forth in In re Kitchens, 702 F.2d 885 (11th Cir. 1983) (per curiam). Specifically, the court addressed the tenth factor which examines “the circumstances under which the debtor has contracted [her] debts and [her] demonstrated bona fides, or lack of same, in dealings with [her] creditors.”
The bankruptcy court was persuaded that the debtor’s conduct demonstrated the necessary good faith based on several factors including the length of her relationship with TitleMax, the fact that her plan proposed to pay the debt in full, the high interest rate charged by TitleMax, and the fact that the debtor declined TitleMax’s offer to lend more money when she entered into the final pawn extension.
As an initial matter, the district court found error in the bankruptcy court’s reliance on TitleMax’s interest rate as an indicator of the debtor’s good faith. The court stated that good faith is based on the conduct of the debtor and the creditor’s conduct is not an appropriate consideration.
The court next found that because it found paragraph 22(j) unenforceable, the bankruptcy court failed to address whether, when the debtor signed the final agreement with TitleMax, she planned to file for bankruptcy and did not intend to honor that provision. It vacated the bankruptcy court’s finding of good faith and remanded with instructions to apply the Kitchen factors with the applicability of paragraph 22(j) in mind.
TitleMax argued that the debtor was in default at the time she filed for bankruptcy under the terms of another provision in the contract which places a borrower in default in the event of a false representation. The court declined to address the argument because TitleMax raised it for the first time on appeal.
Finally, TitleMax argued that, under state law, a contract entered into by fraud is void and, therefore, the final agreement signed by the debtor was on March 21, 2021. Based on that date, TitleMax argued that the redemption period expired on April 20, 2021, before the debtor filed her bankruptcy petition, and therefore Northington rather than Womack applied.
The district court found that the bankruptcy court did not address this issue due to its finding that paragraph 22(j) was unenforceable. Therefore, the court remanded for consideration of fraud.
The court vacated and remanded.