Modification of Pawn Contract

Posted by NCBRC - July 1, 2021

Where the debtor entered bankruptcy prior to the maturation date of her pawn contract, she had an ownership interest in her pawned vehicle, the lender was a lienholder, and the pawn contract could be modified under section 1322(b). TitleMax of Alabama, Inc. v. Womack, 2021 WL 1343051 (M.D. Ala. April 9, 2021) (case no. 2:20-cv-416).

The debtor pawned her Ford Fusion to TitleMax. Shortly before the maturity date of the pawn contract, she filed for chapter 13 bankruptcy. Her plan proposed to pay off the loan pursuant to section 1322(b). Over TitleMax’s objection, the bankruptcy court confirmed the plan, and TitleMax appealed to the district court.

On appeal, the case turned on what interest in the vehicle entered the bankruptcy estate and what interest remained once the loan matured and the statutory redemption period expired.

The court began with the Alabama Pawn Act to determine what the debtor’s property rights were at the time she filed for bankruptcy. The court found that, upon entering into the pawn agreement, TitleMax obtained a title lien on the vehicle allowing it to take possession of the vehicle if the debtor failed to repay the loan by the maturity date. However, in the event of default, state law gave the debtor an additional grace period of thirty days to redeem the vehicle after which time, if she failed to redeem, the lender would obtain absolute title to it. Based on operation of state law, therefore, the court found the debtor had an ownership interest in the vehicle prior to the maturity date of the pawn agreement and, during the post-default grace period, she had a conditional possessory interest.

In this case, the debtor filed her petition before the maturity date of the pawn agreement. Therefore, the property interest that entered the estate was one of ownership subject to TitleMax’s title lien and security interest.

The court turned to the impact of federal bankruptcy law on that property interest and whether the debtor could modify TitleMax’s interest in the vehicle pursuant to section 1322(b)(2). TitleMax argued that once the statutory grace period expired, the debtor ceased to be the owner of the vehicle and it dropped out of the bankruptcy estate. TitleMax pointed to section 108(b) as providing authority for a bankruptcy estate to expand or contract post-petition.

Section 108 provides:

(b) Except as provided in subsection (a) of this section, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of—

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) 60 days after the order for relief.

TitleMax argued that once the expanded time provided by section 108(b) expired, the debtor’s vehicle fell out of the bankruptcy estate and the loan agreement could no longer be modified under section 1322(b).

The court looked to In re Northington, 876 F.3d 1302, 1311 (11th Cir. 2017), for guidance. In that case, the debtor filed for bankruptcy post-maturity of his pawn agreement but prior to the expiration of the statutory grace period. The court found that section 108(b) applied to extend the debtor’s rights beyond the grace period but that, after the lapse of 60 days, the ownership right to the vehicle fell to the lender. The Northington court made a distinction between a property interest that is “static” under state law when it enters the estate, and property that enters the estate as a “dynamic” interest. An interest that is static when it enters the estate remains so during the bankruptcy, while a dynamic interest may change during bankruptcy. The Northington court found that, because title had passed to the lender prior to the bankruptcy petition by operation of the pawn agreement, the debtor possessed a dynamic interest consisting of a conditional right to possess that would be converted to an ownership interest only by the affirmative act of redemption.

In contrast, the debtor here entered bankruptcy with an ownership interest rather than the “conditional right to possess and a right to redeem” held by the debtor in Northington. This interest, the court found, was static and unchangeable in bankruptcy.

Thus, the court concluded that “[w]hen she filed her petition, then, Debtor owned her Ford Fusion and her right to redeem, both of which entered and remained in the bankruptcy estate. TitleMax held a secured claim. Accordingly, TitleMax’s claims must be governed by § 1322(b)(2).”

The court affirmed.

TitleMax has appealed to the Eleventh Circuit, Case No. 21-11476.



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