The most embattled creditor in the consumer bankruptcy arena in recent years has been Sears Roebuck and Co.¹ In the following cases, Sears again finds itself at center stage in a consumer bankruptcy controversy. This time, the controversy relates to the validity of obtaining consensual or non-judicial redemption agreements from chapter 7 debtors—without formal court approval.

Section 722 of the Bankruptcy Code sets forth the parameters under which an individual debtor may redeem property:

An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family or household use, from a lien securing a dischargable consumer debt, if such property is exempted under §522 of this title or has been abandoned under §554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien.

Three decisions, all involving Sears, have addressed the issue of consensual redemption agreements.

In re Lopez

In In re Lopez,² Sears sought formal court approval for the Memorandum of Redemption into which Sears had entered with the debtor and filed with the court. On May 6, 1998, the Lopezes filed chapter 7. At the June 11 meeting of creditors, the debtors and a Sears representative executed the Memorandum of Redemption, which specified an "agreed value" of $82.75 for a VCR and $197.96 for a television set, and stated, "The above-listed property is either exempted under §522 of the Bankruptcy Code or was abandoned under §554 of the Bankruptcy Code." The Memorandum of Redemption did not contain the signature of the debtors' counsel, and was filed shortly after the meeting of creditors on June 15, along with the request for a hearing. The hearing was requested to establish that such agreements did not require court approval or, alternatively, to obtain court approval of the agreement.³

Judge Robles conceded that §722 did not explicitly address whether redemption agreements must be filed with the court or be subjected to judicial scrutiny. Nonetheless, he ruled that "court involvement" was implied by the statutory redemption prerequisites.

First, the court noted that in order to be subject to redemption, property must either be exempt or abandoned. Mere boiler-plate within an agreement stating, "the above-listed property is either exempted under §522 of the Bankruptcy Code or was abandoned under §554 of the Bankruptcy Code," was viewed as insufficient to satisfy the statutory requirement, leaving the court to determine if the subject property qualified for redemption. The court reinforced its finding by pointing out that at the time the Memorandum of Redemption with the boilerplate exemption/abandonment language was filed, the expiration of the deadline for objecting to an exemption had yet to pass and no notice to abandon or other abandonment proceedings had taken place.⁴

The court further noted that §722 required a determination of the amount of the creditor's secured claim pursuant to §506. The court was unwilling to surrender its valuation authority regardless of whether the creditor and debtor were in agreement as to the value of the collateral.

Judge Robles found that the Memorandum of Redemption was defective from a procedural standpoint as well. Federal Rule of Bankruptcy Procedure 6008 provides:

On motion by the debtor, trustee or debtor-in-possession, and after hearing on notice as the court made direct, the court may authorize the redemption of property from a lien or from sale to enforce a lien in accordance with applicable law.

Notwithstanding Rule 6008, Sears argued that a motion to approve a proposed redemption was required only if there existed a dispute as to value. Citing the lack of support for Sears's argument within the text of the Rule, the court reasoned that the Rule underscored the active role required of courts in the redemption process.

Turning to the specific Memorandum of Redemption before it, the court specified several reasons for its disapproval. First, it pointed to the absence of a motion seeking approval of the Memorandum of Redemption. Even if the Memorandum of Redemption was tacitly viewed as a motion, a creditor has no standing under Rule 6008 to file such a motion. Second, the court took issue with the valuation contained in the Memorandum of Redemption. Since the valuation of the underlying secured claim must be determined as of the date of the hearing on the redemption motion,⁵ the valuation set out at the time of the creditors' meeting was irrelevant. Finally, the Memorandum of Redemption did not provide a date certain by which the lump-sum redemption amount would be paid. Following the well-established principle that redemptions must be made by a lump-sum payment, the court stated it would not approve a redemption agreement that fails to provide a lump sum payment by a specific date.⁶

In re Spivey

The Lopez decision was filed on Aug. 12. Approximately two months later, Sears was faced with a similar conflict in New York in In re Spivey.⁷ Unlike the setting in Lopez, Sears did not voluntarily seek court approval of the Memorandum of Redemption filed in this case. Rather, the court in Spivey was notified of the filing of a Memorandum of Redemption by the clerk of court. Having confirmed the absence of judicial review and approval, the court issued the following Rule to Show Cause-type directive:

A Memorandum of Redemption has been filed by [Sears] in the above-captioned case. Section 722 of the Bankruptcy Code and Rule 6008 of the Federal Rules of Bankruptcy Procedure provide that property that is the subject of a security interest may be redeemed under certain circumstances if authorized by the court upon motion by the debtor or the trustee. It is hereby ordered that if the debtor wishes the redemption to be approved, a Motion for Approval must be filed with the court and served on Sears within 20 days from the date hereof, returnable Nov. 19, 1998, at 2:00 p.m. In the absence of such a motion, the Memorandum of Redemption will be null and void and Sears shall refund to the debtor all monies paid pursuant thereto, certifying such refund to the court within 20 days after the motion filing deadlines set forth above.⁸

Mrs. Spivey filed chapter 7 on July 23, 1998, wherein she scheduled no secured creditors and claimed a $750 exemption for unspecified household goods. Sears was scheduled as an unsecured creditor in the amount of $439. The creditors' meeting took place on Aug. 31, and two days later Sears filed a Memorandum of Redemption in which the debtor agreed to redeem her television/VCR for $153.89 and stipulated that the item was "either exempted under §522 of the Bankruptcy Code or was abandoned under §554 of the Bankruptcy Code."⁹ Finally, the redemption amount was due to be paid by no later than Sept. 30.

The debtor did not file a Motion for Redemption by the deadline specified by the court in its order. Rather than file a separate motion for approval of the Memorandum of Redemption, Sears sought reconsideration of the court's order. Sears sought to establish the reasonableness of its redemption process.¹⁰ In the end, the court was not swayed and ruled that judicial review of a redemption agreement is mandatory.

Judge Swain heartily endorsed the reasoning of Lopez with respect to the need for judicial review of the issues concerning whether the property has been properly exempted or abandoned and whether the property has been properly valued, as well as the applicability of Federal Rules of Bankruptcy Procedure 6008. She also addressed the arguments raised by Sears on the issues of public policy, jurisdiction and the chilling effect judicial review would work on redemption agreements.

Because "redemptions are equally subject to the types of abuses identified by Congress in establishing reaffirmation procedure,"¹¹ the court found unconvincing Sears's assertion that the dearth of legislative history and the comprehensive nature of §524 indicated a Congressional intent to limit close judicial scrutiny to reaffirmation agreements. The court further stated:

The debtor's fresh start is no less impaired when she pays a lump sum out of non-estate property in which she makes a number of smaller payments over an extended period of time of non-estate property.¹²

The court summarily rejected the contention that jurisdiction was absent because of the lack of a "case or controversy" arising out of a voluntarily redemption. To this end, the court cited §105 and its broad jurisdiction to "ensure compliance with the Code during the administration of the case."¹³ Finally, Sears argued that requiring debtors to file motions to redeem would discourage the redemption alternative. Making something of a "best interest of debtors" argument, Sears pointed out that creditors would prefer drawn-out reaffirmation agreements, with the attendant collection of interest payments.

The court was not convinced that creditors would abandon pursuit of redemptions, in view of redemption advantages, such as lump-sum payments and the reduced risk of default over time. Moreover, the judicial review involved in a redemption involves a substantially less burdensome process than that encountered in connection with a reaffirmation agreement. Ultimately, Sears was required to refund the redemption payment to Mrs. Spivey.

In re White

One week after Spivey, Judge Conrad issued his decision in In re White.¹⁴ In this case, counsel for Sears were asked to seek modification of a general order or local rule dealing with redemption, which had been recently adopted by the bankruptcy court for the District of Vermont.

General Order 98-01 was adopted as a result of the increased filing of redemption agreements in that district. The court noted the increased frequency of Memorandum of Redemption filed in favor of, or involving, Sears. The general order provides:

The court has experienced an increase in the volume of motions to approve redemption agreements. The sketchy pleadings often make it impossible to determine whether the redemption agreements are authorized by law.¹⁵ Accordingly, to conserve judicial resources and to assure compliance with the law, it is hereby ordered as follows:

1. The signature of a debtor on a redemption agreement shall be deemed to authorize the creditor to file a Joint Motion for Approval.
2. The Motion to Approve a Redemption Agreement must include:

   (a) A copy of the Redemption Agreement.
   (b) A copy of the instruments creating and perfecting the security interest.
   (c) A complete description of the property including original purchase price, date of purchase, amount paid, amount still due and any other necessary information upon which the court may make a determination as to the appropriateness of the requested action.

3. All motions for approval of agreements to redeem property for payments totalling $1,000 or more in principal, interest and charges shall be set for hearing. Attendance by creditor's counsel is mandatory.
4. All other motions for approval may be submitted to the court for ex parte determination. The court shall have discretion to set the matter for hearing and require attendance by the creditor, creditor's counsel, debtor's counsel and/or the debtor.

In this case, the debtor filed chapter 7 on Aug. 4. On Nov. 17, Sears filed a Memorandum of Redemption in which the debtor agreed to redeem a refrigerator and a washer for $624.17. The Memorandum of Redemption did not comply with the general order and was noticed for a hearing. Similar to its posture in the preceding cases, Sears asserted that it had no statutory duty to submit its Memoranda of Redemption to the court, the general order conflicted with §722 and that the court lacked jurisdiction to entertain the validity of these agreements.

The court was quick to highlight the specter of Sears's past misdeeds in obtaining reaffirmation agreements from its debtor customers. It then proceeded to sharply criticize Sears for its "intentional, material and highly irrational [omission]"¹⁶ of the Lopez case in its argument that no authority existed for the proposition that a debtor and creditor must file a redemption agreement. The court continued its comments:

Our own research revealed Lopez. We feel misled by Sears' actions. It seems little has been learned from the reaffirmation fiasco. Counsel would have been better off arguing against the rationale set forth in Lopez rather than attempting to bury its head, and ours, in the sand.¹⁷

Returning to the substance of Sears's arguments, the court joined the courts in Lopez and Spivey in finding that judicial scrutiny did not interfere with the parties' right to redeem, providing the redemption proceeded according to the requirements of §722.¹⁸ Rule 6008 was also cited in support of the mandatory nature of judicial review.¹⁹ Consistent with the holdings in Lopez and Spivey, Judge Conrad noted that nothing in either §722 or Rule 6008 required the court to adopt consensual evaluations. Moreover, the court observed that "a debtor often lacks the requisite leverage to bargain for a proper redemption price."²⁰

The court also expressed Sears's concern about the utilization about of a "replacement value" in the consensual agreements. Although the court stopped short of ruling on the correct means of determining a redemption value, it engaged in a lengthy discussion of the In re Donnelly²¹ line of cases that peg redemption values at something closer to a repossession than replacement value.

Finally, the court addressed the argument that it lacked jurisdiction to oversee the disposition of redeemable property because once exempted or abandoned, it was no longer property of the estate. The court bristled at the notion that Sears or any other creditor would have the authority to determine whether redemption agreements "meet statutory muster."²²

In the end, the court's analysis comes down to the convincing rationale that it is obligated to assure the satisfaction of the underlying requirements of §722, including whether 1) the claim is allowed under §502; 2) the redemption amount comports with the statutory allowed price under §506(a); 3) the goods sought to be redeemed are redeemable under the Code; and 4) the creditor is, in fact, secured, and if so, whether the security interest attaches to redeemable goods.²³

It seems highly unlikely that Sears or any other creditor would pursue the use of consensual, non-judicial redemption agreements any further. In those jurisdictions where a debtor is not required to either reaffirm or redeem personal or household goods absent a pre-petition, non-bankruptcy default,²⁴ reaffirmations and redemptions are difficult for debtor's counsel to justify. However, the majority of circuits that have considered the issue are now requiring reaffirmation, redemption or surrender of such property in chapter 7.²⁵ In these jurisdictions, redemption agreements are a consideration in a great number of consumer cases. Strict compliance with §722 and Rule 6008 and seeking judicial approval appear to provide the best prospect for assuring the validity and enforceability of a consensual redemption agreement.

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Footnotes

¹ See In re Latanowich, 207 B.R. 326 (Bankr. D. Mass. 1997); Connelly v. Sears Roebuck & Co., 222 B.R. 181 (Bankr. D. Mass. 1998). Return to article

²224 B.R. 439 (Bankr. C.D. Cal. 1998). Return to article

³ Id. at 441. Return to article

⁴ But, see, In re Jewell, 232 B.R. 904 (Bankr. E.D. Texas 1999), in which the court overruled Sears's objection to a debtor's redemption motion prior to the lapse of the referenced deadlines, finding that it would be inequitable to require the debtor to await the expiration of such deadlines before allowing him to pursue redemption. Return to article

⁵ In re King, 75 B.R. 287 (Bankr. S.D. Ohio 1987); In re Pierce, 5 B.R. 346 (Bankr. D. Neb. 1980); Accord, In re Henderson, 235 B.R. 425 (Bankr. S.D. Ill. 1999). Return to article

⁶ Id. at 144. Return to article

⁷ 230 B.R. 484 (Bankr. E.D.N.Y. 1999). Return to article

⁸ Id. at 486. Return to article

⁹ Id. Return to article

¹⁰ See Id. at 486-488. It is noteworthy that the value employed in this and all memoranda of redemption is the "replacement value" of the property. Return to article

¹¹ Id. at 490. Return to article

¹² Id. Return to article

¹³ Id. Return to article

¹⁴ 231 B.R. 551 (Bankr. D. Vt. 1999). Return to article

¹⁵ 11 U.S.C. §722; Federal Rules of Bankruptcy Procedure 6008. Return to article

¹⁶ Id. at 553. Return to article

¹⁷ Id. Return to article

¹⁸ Id. at 554. Return to article

¹⁹ Id. at 554-555. Return to article

²⁰ Id. at 556. Return to article

²¹ 217 B.R. 1004 (Bankr. S.D. Ohio 1998). Return to article

²² Id. Footnote 13 goes on to say, "in fact, we would be reluctant to defer to any interpretations of statute offered by Sears, especially due to its penchant for omitting applicable case law in making such interpretations." Return to article

²³ Id. at 556. Return to article

²⁴ In re Belanger, 962 F.2d 345 (4th Cir. 1992); In re Parker, 139 F.3d 668 (9th Cir. 1998), Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir. 1989). Return to article

²⁵ In re Burr, 160 F.3d 843 (1st Cir. 1998); In re Johnson, 89 F.3d 1512 (5th Cir. 1996); In re Bell, 700 F.2d 1053 (6th Cir. 1983); In re Edwards, 901 F.2d 1383 (7th Cir. 1990); In re Taylor, 3 F.3d 1512 (11th Cir. 1993). Return to article