By: Robert J. Guidotti
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in Dumont v. Ford Motor Credit Company (In re Dumont),[1] the Ninth Circuit reversed the rule established in McClellan Fed. Credit Union v. Parker (In re Parker)[2] by holding that the implied right of ride-through is no longer available to chapter 7 debtors who do not attempt to reaffirm debts on secured personal property. In this case, the debtor-plaintiff, Dumont, entered into a secured loan agreement with the creditor-defendant, Ford, for the purchase of a personal automobile. Three years after entering into the agreement, Dumont filed a petition for chapter 7 relief.[3]
The purchase agreement between Dumont and Ford contained an “ipso facto” clause that stated that Dumont would be in default if she filed for bankruptcy.[4] While ipso facto clauses are valid under state law, section 365(e)(1)(B) nullifies these clauses so long as the secured property is included in the bankruptcy estate.[5] To include secured property in the estate, section 521 requires a debtor to file a statement of intentions with the bankruptcy court.[6]
Dumont timely filed a section 521 statement regarding the automobile and indicated in the statement that she intended to have the contract “ride through” the bankruptcy.[7] In ride-through, the secured property becomes part of the estate such that the debtor’s delinquent prepetition debt on the secured property is discharged, yet the debtor continues to make the remaining payments on the loan pursuant to the terms of the original contract as if the bankruptcy had never occurred.[8] If the debtor stops making payments or otherwise defaults under the agreement, then the creditor may take action under state contract law to reclaim the property but may not bring a deficiency judgment against the debtor.[9]
Ford requested that Dumont reaffirm the agreement instead of riding through the bankruptcy.[10] A debtor reaffirms a debt when she “promises to repay a prepetition debt that would otherwise be discharged at the conclusion of bankruptcy.”[11] Dumont denied Ford’s request because ride-through provided her the ability keep the automobile and still receive a discharge on her prepetition debt.[12] Three months after Dumont received a discharge, Ford repossessed Dumont’s car, without notice, pursuant to the ipso facto clause in the original contract.[13]
Dumont reopened her bankruptcy case and claimed that Ford had no right to enforce the ipso facto clause because it was nullified upon Dumont filing her statement of intentions.[14] Dumont cited In re Parker,[15] where the court allowed ride-through on a secured contract so long as the debtor filed a timely statement of intentions regarding the secured property.[16] In response, Ford argued that In re Parker is no longer good law because of the 2005 amendments to sections 362 and 521.[17]
According to Ford, section 521(a)(2)(c) now subjects the debtor in chapter 7 proceedings to a new requirement under 362(h)(1)(A), which requires every individual chapter 7 debtor not only to file a statement of intentions regarding secured property, but also to indicate the debtor’s intent to either “surrender, redeem, reaffirm, or assume [the] unexpired lease[s]” of property.[18] Failure to indicate such intent as per the specifically enumerated options in 362(h)(1)(A) removes the property from the estate.[19] Ford argued that according to section 521(d), nothing in the Code limits the rights of the creditor to pursue state law contract rights when the property is not part of the estate.[20] Ford claimed that because Dumont failed to indicate her desire to perform one of the specified options listed under 362(h)(1)(A), the automobile was removed from the estate and therefore Ford could pursue its right afforded by the ipso facto clause to terminate the agreement under state law.
The bankruptcy court and the Bankruptcy Appellate Panel agreed with Ford.[21] The Ninth Circuit Court of Appeals affirmed, expressly reversing In re Parker.[22] The Court of Appeals made plain that debtors in chapter 7 proceedings are no longer able to maintain secured property and avoid liability for pre-petition debt when the debtor makes no effort to reaffirm the debt pursuant to the revised sections 362 and 521. Ride-through is no longer an option and so these debtors who would otherwise be in default under state contract law must choose from the options expressly listed under 362(h)(1)(A) if they wish to maintain possession of their secured property in bankruptcy.
[1] 581 F.3d 1104 (9th Cir. 2009).
[2] 139 F.3d 668 (9th Cir. 1998).
[3] In re Dumont, 581 F.3d at 1107.
[4] Id.
[5] 11 U.S.C. § 365(e)(1)(B) (2006) (“Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract or lease that is conditioned on . . . the commencement of a case under this title . . . .”).
[6] 11 U.S.C. § 521(a)(2)(A) (“[T]he debtor shall file with the clerk a statement of his intention with respect to the retention or surrender of such property . . . .”); see In re Dumont, 581 F.3d at 1108.
[7] In re Dumont, 581 F.3d at 1107.
[8] Id. at 1108. (explaining popularity of ride-through being founded upon chapter 7 debtors’ difficulty in securing alternative lines of credit after bankruptcy and creditors’ willingness to discharge past debts in order to secure payment for “underwater” loans while still maintaining contract rights to repossess should debtor default on contract after discharge).
[9] Id.
[10] Id. at 1107.
[11] Black’s Law Dictionary 1291 (8th ed. 2004).
[12] In re Dumont, 581 F.3d at 1108.
[13] Id. at 1107.
[14] Id. at 1108.
[15] 139 F.3d 668 (9th Cir. 1998).
[16] In re Parker, 139 F.3d at 673 (“[T]he only mandatory act is the filing of the statement of intention, which the debtor ’shall’ file.”); see In re Dumont, 581 F.3d at 1113.
[17] See In re Dumont, 581 F.3d at 1112.
[18] In re Dumont, 581 F.3d at 1114 (explaining use of “‘either . . . or’ disjunction has always meant that one of the listed alternatives must be satisfied . . .”); see 11 U.S.C. § 362(h)(1)(A).
[19] § 362(h)(1)(A) (stating failure to indicate one of exhaustive options terminates stay in regards to secured property).
[20] § 521(d) (stating nothing in Bankruptcy Code will limit rights of creditor to pursue contract and state law rights in event debtor fails comply with section 362(h)).
[21] In re Dumont, 581 F.3d at 1109.
[22] Id. at 1119.
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