Pacific Capital Bancorp v. Schwass (In Re Schwass)
2007 Bankr. LEXIS 3932, 2007 WL 4191773, 378 B.R. 859 (2007)
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Rule of Law:
Under 11 U.S.C. § 521(a)(2)(B), a Chapter 7 debtor who states an intention to reaffirm a debt performs that intention by standing ready and willing to execute a reaffirmation agreement, as the statutory scheme places the obligation to prepare the reaffirmation agreement and accompanying disclosures on the secured creditor.
Facts:
- Mary Catherine Schwass (Debtor) borrowed money from Pacific Capital Bancorp dba Santa Barbara Bank & Trust (Movant) to purchase a 2001 Ford Explorer.
- Debtor granted Movant a security interest in the Vehicle to secure the repayment of the loan.
- Debtor filed a petition commencing a Chapter 7 bankruptcy case.
- Debtor timely filed a Statement of Intention with her petition, indicating her intent to reaffirm the obligation to Movant.
- Movant's counsel requested Debtor's counsel prepare the reaffirmation agreement.
- Debtor's counsel responded that Debtor had no obligation to prepare the agreement, but offered to do so for a fee payable by Movant.
- Movant's counsel replied that the responsibility lay with Debtor, creating a stalemate between the parties.
- No reaffirmation agreement was prepared or filed with the Court within the statutory timeframe.
Procedural Posture:
- On July 2, 2007, Mary Catherine Schwass (Debtor) filed a petition commencing a Chapter 7 bankruptcy case in the United States Bankruptcy Court for the Southern District of California.
- With her petition, Debtor filed a Statement of Intention indicating her intent to reaffirm her obligation to Pacific Capital Bancorp dba Santa Barbara Bank & Trust (Movant).
- After the statutory 30-day period following the first meeting of creditors elapsed without a reaffirmation agreement being filed, Movant filed a motion for relief from the automatic stay.
- A hearing was held on Movant's motion for relief from stay.
- The Bankruptcy Court took the matter under submission for decision.
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Issue:
Does a Chapter 7 debtor, who has timely filed a statement of intention to reaffirm a secured debt, fail to 'perform' that intention under 11 U.S.C. § 521(a)(2)(B) if the debtor does not prepare and file the reaffirmation agreement, thereby warranting relief from the automatic stay under 11 U.S.C. § 362(h)?
Opinions:
Majority - Peter W. Bowie, Chief Judge
No, a Chapter 7 debtor who has timely filed a statement of intention to reaffirm a secured debt does not fail to 'perform' that intention under 11 U.S.C. § 521(a)(2)(B) if the debtor does not prepare and file the reaffirmation agreement, and therefore relief from the automatic stay under 11 U.S.C. § 362(h) is not warranted. The court determined that the statutory scheme governing reaffirmation, specifically 11 U.S.C. §§ 524(c) and (k), places the obligation to prepare the reaffirmation agreement and the required disclosure statement on the secured creditor. Section 524(c)(2) mandates that the debtor receive disclosures described in subsection (k) at or before signing the agreement, which logically implies the disclosures come from the secured party. Furthermore, subsection (k) requires information, such as the total amount of debt including fees and costs, that is most readily supplied by the secured creditor. The language used in the disclosure statement, replete with phrases directed 'to the debtor,' also supports the conclusion that it is to be presented to the debtor, not prepared by the debtor for themselves. Since the secured creditor stands to benefit from the reaffirmation, it is reasonable for them to bear the burden of preparing the necessary documents. Therefore, a debtor fulfills their obligation to 'perform' by standing ready and willing to execute the agreement prepared by the secured creditor. Alternatively, the Movant's failure to provide an agreement could be construed as a refusal to agree to reaffirmation on original terms, also precluding relief from the stay under § 362(h)(B).
Analysis:
This case clarifies a significant procedural ambiguity in Chapter 7 bankruptcy proceedings by definitively assigning responsibility for preparing reaffirmation agreements. By placing this burden on the secured creditor, the court ensures that the party with the financial incentive and ready access to required loan information fulfills the administrative tasks. This ruling safeguards debtors from potential loss of property due to procedural stalemates or technical non-compliance, thereby promoting the fresh start principle. It also provides clear guidance for creditors, encouraging them to proactively prepare agreements if they wish to secure reaffirmation of debt and maintain their liens.
