A post-discharge debt repayment agreement violated the discharge injunction because it was neither voluntary nor supported by new consideration. Venture Bank v. Lapides, No. 14-3085 (8th Cir. Aug. 25, 2015).
Howard Lapides had his debts discharged in chapter 7. At the time, Venture Bank held a third mortgage onthe Lapides’ residential property. While his bankruptcy was pending, Howard maintained payments on his loan with an eye toward refinancing with Venture Bank and keeping his home. Though the parties attempted to a reaffirmation agreement, Mr. Lapides’ attorney refused to sign and no agreement was ever submitted for court approval. After his bankruptcy discharge, Mr. Lapides and his wife Mary Holter-Lapides entered into two “Change in Terms” agreements with Venture Bank extending the maturity date on their loan by six months. When the Lapideses defaulted, Venture Bank filed suit in state court seeking declaratory judgment that the agreements were valid and enforceable and attempting to foreclose on their home.
The Lapideses removed the case to the bankruptcy court and counterclaimed that the lawsuit violated the discharge injunction. The bankruptcy court remanded the claim against Mary Holter-Lapides and the foreclosure claim to state court, then found in favor of Mr. Lapides on the remaining claims and counterclaims. The district court affirmed.
On appeal, the Eighth Circuit looked to the circumstances giving rise to a debtor’s obligation to repay a debt despite bankruptcy discharge. In 1978, Congress, seeking to level the playing field between unsophisticated debtors and experienced lenders, enacted section 524(c) governing reaffirmation of a debt. That section requires that in order to reaffirm a debt the reaffirmation agreement must comply with both state law and with federal requirements. [In this case, the bankruptcy court erred in finding that the agreement must comply with either state law or federal requirements. It did not matter, however, as the bankruptcy court found that the agreement did not comply with either state or federal requirements.] It was undisputed that no valid reaffirmation agreement was reached while the debtor’s case was pending. Venture Bank argued, however, that the post-discharge agreements stood on their own as separate contracts supported by adequate consideration in the form of Venture Bank’s agreement not to exercise its right to foreclose.
The court addressed the types of post-discharge agreements that could be deemed enforceable notwithstanding an absence of a valid reaffirmation agreement and found that “the prior case law and expert commentary [are] replete with irreconcilable conflict and confusion.” The court declined to sort out the controversy, instead finding that the case before it was sufficiently simple as to be resolvable under generally agreed upon principles. It held that “the post-discharge Change in Terms Agreements are unenforceable because they were nothing more than reaffirmation agreements that did not comply with § 524(c).” (Disagreeing with In re Heirholzer, 170 B.R. 938, 940-41 (Bankr. N.D. Ohio 1994), where court found lender’s agreement to forbear on its right to foreclose was sufficient consideration to support a new, post-discharge agreement.) The Eighth Circuit thus concluded that the post-discharge agreements were not valid and enforceable.
The court turned to whether Venture Bank violated the discharge injunction noting that, under 524(f), merely accepting voluntarily offered payments is not a violation in the absence of conduct on the lender’s part to collect on the debt. The question, therefore, turned on whether the Lapides’ payments were voluntary. The Eighth Circuit has defined “Voluntary” as “referring to repayment that is free from creditor influence or inducement, regardless of whether the debtor was motivated by forces unrelated to the creditor.” DuBois v. Ford Motor Credit Co., 276 F.3d 1019, 1022-23 (8th Cir. 2002). The court agreed with the bankruptcy court’s finding that there was ample evidence of pressure and inducements by Venture Bank. The court specified that Venture Bank did not attempt to justify its conduct as authorized by section 524(j). Rather, Venture Bank encouraged the debtor to continue his payments on the discharged debt by making him believe that it would consider helping him refinance his home if he agreed to pay the entire debt. It was significant that Venture Bank did not refinance the loans, but merely sought repayment on the previous terms. Thus, with promises of possible advantage at some future time, Venture Bank induced the Lapideses to agree to repay the entire discharged debt, in violation of the discharge injunction.
The court affirmed the district court’s award of $42,000.discharge injunction, reaffirmation