Here is a recent case courtesy of the National Consumer Bankruptcy Rights Center regarding title loan companies …
Posted by NCBRC – January 5, 2018
A chapter 13 plan treating a loan secured by property which had been title-pawned prior to bankruptcy should not have been confirmed where the debtor failed to redeem the property within the redemption grace period. TitleMax v. Northington, Nos. 16-17467, 16-17468 (11th Cir. Dec. 11, 2017). In so holding, the Eleventh Circuit deemed TitleMax’s continued prosecution of its motion for relief from stay as equivalent to an objection to confirmation.
Debtor, Gustavius Wilber, entered into a title pawn agreement with TitleMax pledging his car as security for a loan. After the payment due date for the loan expired but before the statutorily-mandated redemption period had lapsed, Mr. Wilber filed for chapter 13 bankruptcy and proposed a plan to repay the loan with interest. TitleMax filed a motion for relief from stay. At the confirmation hearing, which took place after the redemption period had lapsed, TitleMax continued to press for relief from stay but specifically indicated that it was not objecting to confirmation of the plan. The bankruptcy court confirmed the debtor’s plan and later denied TitleMax’s motion for relief from stay. In re Wilber, 551 B.R. 542, 544–47 (Bankr. M.D. Ga. 2016). The district court affirmed. Title Max v. Northington, 559 B.R. 542, 545 (M.D. Ga. 2016).
On appeal, it was undisputed that the pawned vehicle, in Mr. Wilber’s possession at the time of the petition, entered the bankruptcy estate under section 541(a)(1) and that the loan remained outstanding and amenable to modification under section 1322(b)(2). The question was whether Mr. Wilber’s failure to redeem the vehicle within the redemption grace period triggered Georgia’s law, Ga. Code Ann. § 44-14-403(b)(3), automatically transferring ownership of the vehicle to the pawnbroker thereby removing it from the estate.
The circuit court began with the initial question of whether, as the bankruptcy held, the doctrine of res judicata bound TitleMax to the confirmed plan under section 1327, due to TitleMax’s failure to timely object. It found that it did not. The court distinguished the case relied on by the bankruptcy court, In re Young, 281 B.R. 74 (Bankr. S.D. Ala. 2001). Young involved a pawnbroker who failed to respond in any way to the bankruptcy proceedings, but simply attempted to sell the pawned property post-confirmation. In contrast, the circuit court reasoned, while TitleMax did not object to confirmation, it introduced the court to its position that the car was not property of the estate prior to the confirmation hearing and continued to promote that position during and after confirmation. The court determined that, “on the unique facts of this case,” while TitleMax failed to object to confirmation, it nonetheless preserved its rights to complain about its treatment under plan by presenting its argument in its motion for relief from stay.
Turning to the issue of the property status of the vehicle, the circuit court stated, “we must decide whether the filing of a bankruptcy petition necessarily freezes the debtor’s estate and thereby forestalls the operation of the state-law rules that define and regulate the property interests that comprise that estate.” The court found that the bankruptcy court failed to adequately address the impact the lapse of the redemption period post-petition had on the status of the property.
The court began with the reminder that while bankruptcy law determines what property rights enter the estate, state law determines the nature of those rights. The court found that the Code can be read to circumvent state property law only upon indications of clear congressional intent. Given the extensive history of state regulation of the pawn industry, the court did not find that such intent was manifest. It rejected the “minority view” that the automatic stay prevents the lapse of a redemption period as ignoring section 108(a)’s more specific tolling provision, and it noted that the automatic stay prohibited action on the part of the creditor while, in this case, the only action was the automatic operation of state law.
Turning to section 541(a)’s provision “freezing” assets in their petition-date form, the court found that even that provision allows for contraction or expansion of property rights post-petition depending upon the static or non-static nature of the state property right. The court offered as examples increases to the bankruptcy estate through the accumulation of interest, or diminution of the estate due to the debtor’s failure to exercise an option in an option contract. The court concluded that while the debtor’s interest in the property as of the petition date entered the estate, operation of automatic state law extinguished that interest by automatically turning ownership interest over to the pawnbroker.
The court reversed and remanded.
Circuit Judge Wilson dissented on the basis that TitleMax’s failure to object to confirmation should have precluded TitleMax from later protesting its treatment under the plan. This was particularly so where counsel for TitleMax specifically informed the court at the confirmation hearing that his client did not object despite the court’s repeated invitations to lodge an objection. “Title Max did not merely sleep on its rights; it woke up, entered an appearance, and then affirmatively renounced them.” Where the bankruptcy court relied, at least in part, on TitleMax’s failure to object and TitleMax did not dispute that finding, the dissent argued that the circuit court had no basis for a finding of clear error on appeal. Judge Wilson further expressed concern that the majority decision would set a precedent requiring courts to disregard assurances of non-objection, and scour previous filings for any argument that could later be construed as an objection.
The dissent noted that the practical effect of TitleMax’s conduct was to put itself in a win/win situation. By not objecting to plan confirmation it stood to benefit from the plan’s favorable treatment of its claim, and by later casting its motion for relief from stay as an objection it stood to benefit from ownership of the vehicle and favorable precedential case law.
The dissent also disagreed with the majority’s decision on the merits, finding that the bankruptcy court’s treatment of TitleMax’s claim was within its power to modify claims. Furthermore, where section 541(a) lists the property that becomes part of the estate upon filing, section 541(b)(8) specifies situations in which pawned property does not enter the estate. One such exception is when pawned property is in the possession of the lender and the redemption period has lapsed. The dissent maintained that, under the doctrine of expressio unius est exclusio alterius, where the statute specifically treats property in the possession of the lender as an exception to the estate property presumption, the implication is that property in the hands of the debtor does not fall under that exception.
A bankruptcy attorney needs to keep track of state laws that are tangential to bankruptcy. This is a Georgia case and not necessarily applicable in Illinois, but it is worth keeping an eye on in the event a creditor brings this case up in a repossession matter!