Lienholder May Seek Value for Post-Discharge Release of Lien

Posted by NCBRC - July 24, 2020

The discharge injunction does not prohibit a lienholder from seeking value for release of its lien so long as, under the specific facts of the case, its conduct is not an improper attempt to coerce repayment of the discharged debt. Bentley v. OneMain Financial Group, No. 19-8026 (B.A.P. 6th Cir. July 8, 2020).

At the time the debtor filed his chapter 7 bankruptcy, he owed $8,000 on his vehicle. He valued the vehicle at $150.00 and elected to surrender it to the lienholder. After he received his discharge, the debtor contacted the lienholder asking it to take possession of the vehicle or release the lien. The debtor and the creditor had several conversations about the possibility of releasing the lien in exchange for a payment of an unspecified amount reflecting the scrap value of the vehicle. But instead of completing those negotiations, the debtor reopened his bankruptcy and moved for an order of contempt against the creditor for violation of the discharge injunction under section 524(a)(2). Ruling on competing motions for summary judgment, the bankruptcy court found that there was no violation of the discharge injunction and ruled in favor of the creditor. In re Bentley, 607 B.R. 889 (Bankr. E.D. Ky. 2019). The debtor appealed to the Bankruptcy Appellate Panel for Sixth Circuit.

On review, the panel rejected a hard and fast rule of “foreclose or release,” stating that a debtor’s surrender of the collateral does not impose a burden on the lienholder to take possession. In addressing whether the creditor’s post-discharge conduct violated the discharge injunction, the panel, like the bankruptcy court below, adopted the reasoning set forth by the First Circuit in Pratt v. GMAC (In re Pratt), 462 F.3d 14 (1st Cir. 2006), and Canning v. Beneficial Me., Inc. (In re Canning), 706 F.3d 64 (1st Cir. 2013).

In Pratt, the debtor surrendered his car and received his bankruptcy discharge. He then had his inoperable car towed to a junk yard which refused to accept it with the creditor’s lien attached. The creditor conditioned release of the lien upon the debtor’s payment of the balance of the pre-petition debt. The First Circuit conducted a fact-specific analysis and held that, while the creditor retained its state law in rem rights and was not obligated under section 521(a) to take possession of the surrendered collateral, its conduct constituted improper coercion to repay the prepetition debt in violation of the discharge injunction.

In re Canning involved a lien on residential property. In answer to the debtor’s demand that it foreclose or release its lien, the mortgage creditor acknowledged that the debtor had no personal liability on the debt and stated that it would release the lien only upon settlement or short sale. The First Circuit distinguished the case from Pratt by the fact that the creditor offered to negotiate and ultimately sought only the value secured by the lien rather than the entire prepetition debt.

The panel in the present case found the facts more closely resembled those of Canning where the lienholder did not try to leverage power to collect the entire discharged debt, but sought to negotiate a settlement reflecting the value of the collateral. It found the creditor here did not do anything other than refuse to take possession of the vehicle and that its conduct was not “objectively coercive.” The panel noted that, contrary to the debtor’s arguments, it was not the creditor’s burden to prove that the collateral had value or that its offer of settlement was feasible.

Because the panel found that the creditor’s conduct did not violate the discharge injunction, it was not necessary to determine sanctions under Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019).

Bentley BAP 6th July 2020

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