# In Re Lair

> United States Bankruptcy Court, M.D. Louisiana · June 21, 1999 · 235 B.R. 1

URL: https://www.frixlaw.com/law-library/cases/1856480

## Case

- **Full name:** In Re Charles R. LAIR, Sharon W. Lair, Debtors
- **Court:** United States Bankruptcy Court, M.D. Louisiana
- **Decided:** June 21, 1999
- **Citations:** 235 B.R. 1; 1999 Bankr. LEXIS 736; 1999 WL 427483
- **Precedential status:** Published
- **Opinion:** Opinion by Phillips
- **Judges:** Louis M. Phillips
- **Cited by:** 15 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1856480

## How later opinions describe it (automated extraction)

- stating that "surrender” means nothing other than choosing not to utilize the bankruptcy alternatives of reaffirmation, redemption or exemption and avoidance
- stating that "surrender” means nothing other than choosing not to utilize the bankruptcy alternatives of *350 reaffirmation, redemption or exemption and avoidance

## Opinion text

RULING
LOUIS M. PHILLIPS, Bankruptcy Judge.
Should this court, after re-opening this case, approve the Lairs’ home mortgage reaffirmation agreement with Hibernia National Bank (“Hibernia”) where (i) the Lairs have maintained, and continue to maintain, current status on the loan; (ii) neither the note nor mortgage instrument contain bankruptcy default clauses; (iii) the Lairs’ timely filed Statement of Intention indicates an intent to reaffirm; and, (iv) the reaffirmation agreement — confect-ed post-discharge and after the case was closed — is not executed timely?
1
The formulation of this question from the facts before us compels us to stumble, fumble, slide, stride, and/or plunge into, and hopefully navigate our way through, the precipices, tar-pits, rapids, and sloughs that comprise the span of jurisprudence about 11 U.S.C. § 521 (2) (West 1993).
2
For the reasons that follow (which supple
*5
ment a previous oral ruling of the court), we conclude, in light of the particular facts of this proceeding, that approval of the reaffirmation agreement should be denied. Along the way to our ultimate ruling, we have attempted to weave a viable analysis of what § 521(2) both means to and requires of debtors within the Fifth Circuit, in light of
Johnson v. Sun Fin. Co., Inc. (In re Johnson).
3
While we, of course, are “guided” by a wealth of case law and writing, we find ourselves, at the end of our trip, rather alone in our analytic approach, probably because of its simple-mindedness.
INTRODUCTORY OVERVIEW
We are here, poised on a particular factual situation, which yields up § 521(2) of the Code as the nut to be cracked.
4
The debtors have at all times maintained current status on their home loan. The debtors (with help of counsel) and the lender (probably without the help of counsel) have been, it appears, consistent partners in an agreement that the home mortgage debt would be reaffirmed. However, the trustee administering the debtors’ estate operated under a time-frame that resulted in the Lairs’ case being closed upon the entry of discharge (the trustee having filed a Report of No Distribution, determining that there were not assets worthy of administration), before the reaffirmation agreement was executed.
So, the case was closed and there was no reaffirmation agreement, notwithstanding the parties’ collective intent. We are not certain as to the factual particulars, but it appears as though the lender obtained a lawyer who advised that without a reaffirmation agreement, the debt might be in default, or that the entire obligation could not be enforced if there was a default down the road, or (maybe) that a large national lender was going to be unable to maintain the debt on its internal books as a discharged (therefore in rem) debt for purposes of enforcement of its lien rights in the event of future default so that the debtors’ discharge was doubtless going to be violated by the lender in treating this home loan (post-discharge) just like any other home loan. Possibly, even, the lawyer advised the lender that the debtors’ failure to comply with the debtors’ own Statement of Intentions could be a ground for claiming default, but that the intelligent move would be to let the bankruptcy judge say so before going off to foreclose in state court.
Maybe some of this, maybe none. But we know that something was communicated to the Lairs’ attorney, who subsequently moved this court to reopen the case for the purpose of allowing the belated reaffirmation agreement (negotiated with the attorney’s assistance) to be filed, and therefore deemed approved, or ratified, or something.
It was at such a hearing that the evidence established: (i) as of the commencement of this case the debtors were current with the mortgage company; (ii) the debtors have been paying and the lender has been accepting the monthly payments
*6
post-petition so that at hearing the mortgage debt was current; and (iii) that the mortgage loan documents (both debt and security) contained no bankruptcy default clause
5
(the Lairs personify the First Circuit’s “extraordinarily rare debtor”).
6
In light of these facts, and our understanding of the law applicable, this court concluded that the agreement would not be approved or ratified.
7
We have determined that because of the confluence of the case being closed (and therefore the property subject to the home loan mortgage having been abandoned by operation of law
8
), the debtors paying and creditor accepting payments during the course of the bankruptcy case, and the absence of a bankruptcy default clause within either mortgage or note, there is no basis in the law of the state of Louisiana upon which the creditor can rely to enforce the security interest in, to, and upon the property. Because this personal obligation has been discharged, and because we cannot figure any basis under state law that would cause the Lairs to lose their home in a mortgage enforcement proceeding, it is not in the best interest of the debtors to reaffirm. Ultimate debt-free ownership of the property appears possible if the note is paid off according to its terms. Subsequent default under the note will trigger the right of the creditor to enforce the security interest upon the property but will not subject the debtors to personal liability.
To get to the question of whether state law provided a basis for post-discharge
*7
enforcement of rights absent a bankruptcy default clause, assuming the maintenance of current status, we had to answer the following question: Does bankruptcy law give an independent basis for enforcement of security rights post-discharge and post-abandonment of the property to the debtors by § 554(c), though the debt in this case is not reaffirmed? Through the following opinion, we offer our answer: “No.”
We wish to make as clear as we can, that in so concluding, we must also ask whether bankruptcy law provides a preemptive right to “retain” or to “reinstate” the loan. To this question we also answer, “No.” We do not propose that the debtors have a federal right to “retain” property because of a provision of the Code or a federal rule of equity “designed” to actualize the conceptual and policy underpinnings of the bankruptcy process. Our conclusion is grounded in our interpretation of § 521(2), and our understanding of the relative places of state law and federal law within the bankruptcy process. The Lairs have by inaction chosen to rely upon (or simply have found themselves relying upon) state law rights as opposed to the express Bankruptcy Code' alternatives offered by § 521(2), because of the full administration of the property (by non-administration), which resulted in the return of the property to them pursuant to § 554(c) of the Code. We conclude that this is where the Lairs find themselves because their state law rights under the contracts (note and mortgage) and their ownership interest in the property have passed through bankruptcy unaffected. Note: We do not say that it was necessary for their state law rights under these contracts to so pass through; only, that in this case, they have.
To get to the conclusion that the debtors have retained their pre-bankruptcy state law rights in the agreements and to the property, we must address the question whether, by failing to perform their stated intention, the debtors have in fact “surrendered” the property (as the term is used in § 521(2)(A)), and whether “surrender” of the property operates to provide the creditor with rights in addition to those provided under the state law governing the contracts at issue. The debtors have not used any of the bankruptcy alternatives proposed by the words of § 521(2). They have not sought to avoid the mortgage lien under § 522 (which was not available under the provisions of § 522); they have not attempted to redeem the property under § 722 (which was not available under the provisions of § 722); and they did not properly effectuate reaffirmation under § 524(c). Though we will get into this later in some detail, we mention here that the three delineated alternatives are the only express statutory alternatives referred to in § 521(2), available to individual debtors within the bankruptcy process, as methods of “retaining” property that is collateral for consumer debt. For the moment we put aside discussion of the statutory alternatives available to parties other than the debtor — for example, the trustee and the creditor — though mention should (we guess) be made here that they are numerous (stay relief under § 362, disposition under § 725, sale or lease under § 363, abandonment under § 554(b) if the creditor can act quickly enough). It suffices on this score to point out that neither the creditor nor the trustee utilized any Bankruptcy Code right or power, while the property burdened by the security interest was property of the bankruptcy estate. The only Bankruptcy Code rights that ultimately came into effect, then, as regards the Lairs’ home and the creditor’s lien rights, were the automatic stay (which served no purpose as the debtors ignored the stay as it applied to this debt and this property) and abandonment by operation of law under § 554(c), (which, through express federal statutory provision effectuates the abandonment or transfer of the property from the bankruptcy estate back to the debtors).
9
*8
We put a few words into the creditor’s mouth at this point. “What about ‘surrender’? That word is used in § 521(2)! Because the debtors did not use any of the expressly provided bankruptcy means of ‘retaining’ property, should not the creditor be entitled to some rights under the Bankruptcy Code, under or because of the use of the word ‘surrender’ in § 521?”
Good question (proven so by the extent to which courts are perplexed in coming up with an answer). However, as we hope to show, the creditor in this case and the debtors, for that matter, are, presently, firmly footed in the post-discharge, post-bankruptcy world of “surrender,” as a result of the de facto “surrender” during the bankruptcy case, because of the Lairs’ failure to effectuate their stated choice. In fact, both have “surrendered” as we interpret the word, because neither, as of the end moment of the bankruptcy case had exercised the federal rights or actions provided for in the Code. (We no not mean to imply that “surrender” applies to the creditor.)
10
The debtors, in effect, by failing to perform their intentions, surrendered their rights to use the express bankruptcy alternatives provided for in § 521(2) as regards the property, and in so doing, surrendered to the full range of consequences of trustee administration of the property. The creditor, by accepting payments timely made, and by waiving its right to stay relief under § 362(d) and any other possible disposition(s) by the trustee while the property was property of the estate, (in effect) surrendered its right to use the Bankruptcy Code rights afforded it and consequently finds itself under the dictates of state law. It is clear also that the bankruptcy process itself, by operation of its own terms, fully dealt with (administered) the property, ultimately sending it back to where it came from — to the debtors and the non-bankruptcy world — so that the rights and obligations concerning it (the property itself only, because the discharge does generate a lingering federal effect) can subsequently be sorted out. In other words, the bankruptcy process, once interested in the property (and the related claim of lien rights) because the property was property of the bankruptcy estate, is interested no longer. The property has been fully dealt with by the trustee; the property was in fact surrendered to the trustee by the debtors.
In other words, we have tried to figure out what the term “surrender” means as used within § 521(2). We think insufficient attention has been paid to the word and its meaning. We do not really know why; it seems obvious to us that the word “surrender” is one of the primary keys to unlocking the whole falderal over § 521(2), because (as we shall see), “surrender” along with “retention,” are the only actions or rights referred to in § 521 that are not defined or specifically created/provided for by a Bankruptcy Code section. We do have a hunch as to why courts have not addressed the word head-on. Our hunch is that everyone assumes the meaning. We submit that this internalized assumption (we say “internalized” because it is rarely expressed, but when it is, our hunch is proven correct) is uniformly held by the adherents to all of the disparate lines of analysis. We also submit that this assumed meaning within the caselaw is wrong.
11
*9
We think, expressed or not, that the courts who have dealt with § 521(2) are set on the notion (along a spectrum running between queasy certainty and gleeful certainty, depending upon whether the debtor and debtor’s fresh start are the good guys or the creditor and its need for recompense due to the unnatural insertion of the interruptive bankruptcy process upon the sanctity of its state law rights are the good guys), that “surrender” imposes a bankruptcy, or federal, downside upon the debtor and a concomitant upside for the creditor, affecting the post-bankruptcy rights of both parties. We think differently-
We think bankruptcy does affect state law rights, and that in connection with consumer debts secured by liens upon property, bankruptcy gives parties rights not available under state law. We think § 521(2) is perhaps poorly constructed but is not ambiguous. (Actually, the more we have thought about this, the more we are not even sure the statute is poorly constructed, though it is flawed in its directive that trustees oversee the performance of intentions.) We think that a debtor is called upon to make one of two basic choices by § 521(2):(i) to retain the property serving as collateral for the debt through the use of bankruptcy-afforded alternatives; or, (ii) to surrender the right to use these bankruptcy-afforded alternatives as the means of retaining the property. If the former be the choice, then the debtor should “check” the alternative (out of the three provided by the statute) that is applicable, because the three stated methods are the only alternatives available (to retain by use of the Bankruptcy Code). If the latter be the choice, the debtor should “check” “surrender.” If “surrender” is “checked” the bankruptcy world is on notice that the Bankruptcy Code will not be used, that the debtor “surrenders” the property of the estate to the estate to be dealt with as the trustee sees fit. However, there is only this particular diminution of rights intended or suffered. “Surrender” does not mean that the debtor surrenders the property to the creditor, because the debtor does not have the option to surrender property of the estate to a creditor. “Surrender” does not meant that the debtor has legally rolled over and died regarding residual state law rights (under the contracts, regarding the right to state law due process, etc.), or even certain federal law rights (again, the right to federal Constitutional due process), that might be applicable after the close of the bankruptcy process because of the terms of the bankruptcy process itself (particularly § 554(c)).
We submit that while our analysis of the meaning of “surrender” might, at first blush, be hard to swallow (advising the client, say, in the position of the Lairs, that they should trustingly “check” the “surrender” box though they want to keep their house does seem slightly incongruous and probably would have been bad advice, as we attempt to show later). However, if our notion is correct (and is seen as correct), positive things (that we can think of) seem possible: first, no more published opinions on § 521(2).
12
Second,
all parties
will actually know what their options are and will be forced to make a real choice. Third, the relationship between state and federal law will be properly aligned (as we see it), during and after the bankruptcy case, regarding the rights, obligations, and property dealt with by § 521(2).
ANALYSIS
(A) The Statute, 11 U.S.C. § 521 (2). What does it say?
The section reads, in its entirety, as follows:
§ 521. Debtor’s duties
The debtor shall:
(2) if an individual debtor’s schedule of assets and liabilities includes consumer debts which are secured by property of the estate:
*10
(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, the debtor shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property;
(B) within forty-five days after the filing of a notice of intent under this section, or within such additional time as the court, for cause, within such forty-five day period fixes, the debt- or shall perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph; and
(C) nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor’s or the trustee’s rights with regard to such property under this title[J
Because of the almost laughable extent of uncertainty concerning § 521(2) — and the fact that this uncertainty seems to be on the rise at a rate determined precisely by the number of cases published on the subject
13
— we are tempted to take a page out of one of the U.S. Supreme Court statutory “interpretation” efforts, and declare that, because courts disagree on the meaning, the statute must be ambiguous.
14
However, because we are in the Fifth Circuit, we are covered by the interpretation of that court, as espoused in
Johnson,
that the language of § 521(2) is unambiguous and is to be interpreted according to its plain meaning.
15
“Plain meaning” does not mean “simple to understand.” Several courts have used a “plain meaning” analysis to reach diametrically opposed interpretations of § 521(2). Further, no approach, “plain meaning” or otherwise, has interpreted the statute quite like we do. We have learned much from the various approaches to what § 521(2) means and what it does. To set our analysis we think it necessary first to provide an overview of the various ways courts have read the statute.
(B) The Interpretative Approaches, Delineating the Camps
The slew of judicial and scholarly publication on the meaning of § 521(2) provides something for everyone, interpretative authority for almost every predisposition and interpretative bent. One line of authority — to which the Fifth Circuit subscribes — interprets that section according
*11
to its purported “plain meaning.”
16
The statute, says this camp, plainly requires the choosing of either: (i) surrender; or, (ii) retention by reaffirmation, retention by redemption, or retention by exemption and lien avoidance; and the subsequent performance of the choice.
Another line of analysis interprets the same language to allow the debtor to choose either to surrender or retain the property. If the debtor chooses one of the particular methods of “retention” (reaffirmation, redemption, or exemption and lien avoidance), thereby making the choice applicable, the debtor can choose the particular method of “retention” made applicable by the debtor having chosen it. By virtue of this rather circular approach to statutory interpretation, this second line of courts concludes that if none of the particular methods of “retention” are chosen, none are “applicable” (and therefore are not to be chosen, we guess because none were chosen), and the debtor can therefore simply retain the collateral by a means of the debtor’s own fashioning (with help from the courts). This retention right usually takes the form of a federal rule of law or equity or something, pursuant to which the debtor is allowed to maintain possession of the collateral while paying for it (surmising upon judicial economic analysis, that the creditor should be happy with the judicially promulgated rule).
17
Because this method of retention is allowed notwithstanding the existence of a bankruptcy default clause within the agreements, this camp is often referred to as the “reinstatement” camp, sometimes the “fourth alternative” camp (retention to be fashioned judicially after years of litigation is a fourth alternative (congressionally intended, we might add) to retention by reaffirmation, retention by redemption, and retention by exemption and lien avoidance). Surprisingly, or not so surprisingly, some “fourth alternative” courts purportedly rely on a “plain meaning” of the statute as well.
Finally, there is a third line of authority that can be described as “the statute as read and as interpreted is hard to understand so we will deem it absurd and treat it purely as a notice provision” camp. This line of analysis holds that § 521(2)(C) pre
*12
serves all of the debtors’ rights, notwithstanding the apparent directives contained within § 521(2)(A) and (B).
18
Because the effect of this analysis is for § 521(C) to “cancel out” § 521(A) and (B), we refer to this line of analysis as the “nihilist” camp.
But the authority thus far published does not assuage the thrust of one camp— the “I want to know what the definition of ‘surrender’ is” camp. We are confused by the lack of a definition of “surrender” and remain convinced of its necessity. The question here, is it not, is whether state law, e.g., the parties contract, is preempted by § 521(2) in such a way as to prevent post-bankruptcy reliance on that contract? While “fourth alternative” courts answer this question in the affirmative, by conjuring a right of “retention” which necessitates the invalidation of a portion of those contracts, the “nihilist” courts answer the same question in the negative, by reading § 521(2)(A) and (B) into nullity so that the provisions can preempt nothing because they do nothing. And what do the “plain meaning” courts have to say? The importance of this question to a Fifth Circuit court is obvious.
We frankly are not certain what the Fifth Circuit component of this line of authority says, except that it denounces the “fourth alternative” camp’s fashioning of a federal rule of post-bankruptcy retention. What we know is that certain of the “plain meaning” courts have fashioned their own federal rule of equity in response to the federal “reinstatement” rule, one that grants to the creditor a federal counterpoint to the right of reinstatement. Through our analysis, we have determined that at least the Fifth Circuit, in
Johnson,
did not do this; however, the havoc wreaked by being seen as having done this has been problematic. As we mentioned earlier, all strands of “thought” assume a meaning of surrender, and what is more, may well assume (or be seen to assume) a federalization of the term which cuts off a debtor’s state law rights post-bankruptcy and provides to the creditor the benefit of this Bankruptcy Code — inspired forfeiture. We think the assumed meaning of “surrender” is that if surrender is “chosen,” the debtor loses all rights in, to and upon the property, to the creditor.
19
It is this assumed meaning that underlies the fourth alternative fashioning of a federal rule to offset the harshness of this meaning of surrender, which has fostered the plain meaning reaction to the federal rule of retention, which has fostered the nihilist reduction of the statute to rubble. Before any more fostering, we propose to offer a suggestion that § 521(2) contains no federal overlay other than that specifically (and plainly) mentioned, and that “surrender” means nothing other than choosing not to utilize the bankruptcy alternatives of reaffirmation, redemption or exemption and avoidance. We propose that the “surrender” referred to in § 521(2)(A) is the same “surrender” referred to in § 521(4), and that the choice of “surrender” is nothing more than the choice (by foregoing the right to use the bankruptcy options to retain the property which can only be accomplished if the property is excluded, somehow, from the estate) to abide by the requirement that property of the estate be “surrendered” to the trustee. If “surrender” means what
*13
we think it means, then the choice of “surrender” has no post-bankruptcy consequences if, after completion of the bankruptcy process, the property is deemed fully administered by means of operation-of-law abandonment pursuant to § 554(e). “Surrender,” if thereafter the property be abandoned back to the debtor pursuant to § 554(c), does not affect a debtor’s state law rights under the lien or as owner of the property. Because the Bankruptcy Code, properly read, does not expressly preempt state law rights post-bankruptcy (except the right to personal liability), we submit that courts that have fashioned an “equitable” preemption of rights (favoring either party) have violated the directive of the United States Supreme Court and have improperly injected themselves into a legislative arena whereby they seek to foster particular social objectives.
We start with a background discussion of the relationship between state and federal bankruptcy law, and of the jurisprudential progenitors of the present confused state of the law of § 521(2).
(C) OUR APPROACH
(1) The
Butner
Framework And Its Application Prior To § 521(2)
To answer the preemption question one must have a proper understanding of the relationship between the bankruptcy code and state law. From
Butner v. United States
20
we get the overarching directive from the Supreme Court — in admittedly general, rough-cut terms — concerning the relationship between state law and bankruptcy law as far as property rights are concerned.
The actual issue in
Butner
is worth recapitulating. Mr. Butner was second mortgagee of a piece of mineral-producing real property. During an arrangement proceeding, an agent had administered the property under the direction of the bankruptcy court, which had ordered that the rents collected “be applied to tax obligations, payments on the first mortgage, fire insurance premiums, and interest and principal on the second mortgage.”
21
The arrangement did not work out and the debtor was subsequently adjudicated bankrupt under Chapter 7 of the Bankruptcy Act. The agent was terminated at the inception of the bankruptcy trusteeship. The bankruptcy trustee picked up the administration of the property, but, rather than effectuate pay-down on the mortgage debts, was required to retain the rents subject to further order of the bankruptcy court. Mr. Butner subsequently purchased the property, -with the recited sales price being paid by means of credit against the second mortgage debt owed to him. After the sale, Butner moved the bankruptcy court for an order recognizing a security interest, in his favor, upon the accumulated rents held by the trustee (in an amount slightly less than the balance remaining owed to him after the credit bid).
22
The bankruptcy court denied the request, deeming Butner’s remaining claim a general unsecured claim. The district court reversed, observing that while under North Carolina law an owner of mortgaged real property was entitled to the rents until dispossessed by an action to enforce the mortgage, the agent appointed in the arrangement constituted a surrogate for a state law receiver and evidenced sufficient dispossession. The Court of Appeals reversed the district court. It agreed that the agent had constituted a surrogate receiver but that the termination of the arrangement effectively returned possession to the surrogate debtor (the estate). “Because petitioner had made no request during the bankruptcy for a sequestration of rents or for the appointment of a receiver, petitioner had not, in the court’s view, taken the kind of action North Carolina
*14
law required to give the mortgagee a security interest in the rents collected after the bankruptcy adjudication.”
23
The Supreme Court granted certiorari, it said, to “resolve a conflict ... concerning the proper approach to a dispute of this kind.”
24
According to the court, the conflict involved a dispute over the applicability of state law to resolution of the question.
The courts in the latter group regard the question whether a security interest in property extends to rents and profits derived from the property as one that should be resolved by reference to state law. In a few States, sometimes referred to as “title States,” the mortgagee is automatically entitled to possession of the property, and to a secured interest in the rents. In most States, the mortgagee’s rights to rents is dependent upon his taking actual or constructive possession of the property by means of a foreclosure, the appointment of a receiver for his benefit, or some similar legal proceeding. Because the applicable law varies from State to State, the results in federal bankruptcy proceedings will also vary under the approach taken by most of the Circuits.
25
As described by the court, the minority view of the “title states” was that notwithstanding state law that would require possession before a mortgagee would be entitled to rents, a mortgagee should be automatically entitled to a security interest in rents without taking any action whatsoever in the bankruptcy case to obtain possession or recognition. This conclusion was grounded in the following reasoning. “[S]ince the bankruptcy court has the power to deprive the mortgagee of his state-law remedy, equity requires that the right to rents not be dependent on state-court action that may be precluded by federal law.”
26
As we all know, the court disagreed with the minority view. Though, of course, we start with perhaps the most often quoted citation of any Supreme Court bankruptcy decision, “[pjroperty interests are created and defined by state law,” the opinion does not end there.
27
The court recognizes the power of Congress to preempt state law on any issue within the constitutional authority granted to establish “uniform laws on the subject of bankruptcies throughout the United States.”
28
However, the court cites, for example,
Sturges v.
Crowninshield,
29
for the proposition that though state law that conflicts with laws of Congress on bankruptcies are suspended, “... state laws are thus suspended only to the extent of actual conflict with the system provided by the Bankruptcy Act of Congress.”
30
Therefore, regarding the general framework for examining the propriety of establishing a federal rule of equity to supplant state law, the court says, “Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”
31
The minority rule of equity granting automatic title to (or security interest in) rents to a mortgagee at the inception of a bankruptcy case is characterized as the adoption of “... a uniform federal approach to the question of the mortgagee’s interest in rents and profits because of their perception of the demands of equity.
*15
32
However (and we think this -is important), though the equity power is important, “... undefined considerations of equity provide no basis for adoption of a uniform federal rule affording mortgagees an automatic interest in the rents as soon as the mortgagor is declared bankrupt.”
33
A rule of equity, such as had been fashioned, was deemed by the court to be unnecessary. While state law remedies are (in fact) suspended, the answer, says the court, is not an equitable rule effecting a transfer of title to property not subject to a security interest at the inception of a case. Rather the bankruptcy court should fashion a proceeding-specific remedy “... to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have had under state law if no bankruptcy had ensued.”
34
Now, we have worked hard on understanding the court’s summation, .for at first blush it appears to us completely wrong. We quote quite a bit:
The rule of the Third and Seventh Circuits, at least in some circumstances, affords the mortgagee rights that are not his as a matter of state law. The rule we adopt avoids this inequity because it looks to state law to define the security interest of the mortgagee. At the same time, our decision avoids the opposite inequity of depriving a mortgagee of his state-law security interest when bankruptcy intervenes. For while it is argued that bankruptcy may impair or delay the mortgagee’s exercise of his right to foreclosure, and thus his acquisition of a security interest in rents according to the law of many States, a bankruptcy judge familiar with local practice should be able to avoid this potential loss by sequestering rents or authorizing immediate state-law foreelo-sures. Even though a federal judge may temporarily delay entry of such an order, the loss of rents to the mortgagee normally should be no greater than if he had been proceeding in a state court: for if there is a reason that persuades a federal judge to delay, presumably the same reason would also persuade a state judge to withhold foreclosure temporarily. The essential point is that in a properly administered scheme in which the basic federal rule is that state law governs, the primary reason why any holder of a mortgage may fail to collect rent immediately after default must stem from state law.
35
What is the court saying here? Surely there are bankruptcy reasons not to allow collection of rents under a foreclosure of a valid mortgage (e.g. the creditor is over-secured and there is equity for the estate). Surely the court is not saying that unless there is a state law problem with your security interest, the right to obtain possession and therefore the rents must be granted.
36
No, it is not. The court is delineating the creditor’s interest that must be protected within the bankruptcy process. We now (since Butner) have become sophisticated, and talk in terms of adequate protection, of the necessity of protecting the value of the creditor’s property rights (interests) created by the collateral interest in the debtor’s property. What the court is doing, it seems, without specifically articulating it, is espousing the recognition that a mortgagee’s interest in the real property derives a certain component of its value from rents, and that the value of the overall interest cannot be diminished by the bankruptcy process just because Congress had the power to supplant state law (substantive and procedural) by virtue of
*16
the bankruptcy power, unless Congress has actually done so. Because of this, and in light of the recognition that all actions in time take time, the court distinguishes the diminution of value that is inherent in the necessity of effectuating state law procedures from the ability of a bankruptcy court to cause diminution purely upon the existence of federal power.
The court is not suggesting that a bankruptcy court must allow sequestration of rents in a fashion that mimics the state law time-line, nor is- it suggesting that equity in property cannot be salvaged for the estate. In fact, if the rents are surplusage, given the relationship between the indebtedness and the value of the property securing payment of the debt, the mortgagee never needs the rents (we recognize this is rarely the case) and therefore is not hurt by a bankruptcy-imposed prohibition upon enforcement of the security interest.
37
However, if there is no statutory reason to deprive parties of their state law rights (and recall that by this we are talking about the property interest or right itself, or its value), or to grant rights not afforded by state law, “undefined considerations if equity” do not establish a ground for so doing.
One more point. The court seemed preoccupied with the question of whether Mr. Butner should be granted rights not afforded by state law simply because of bankruptcy. However, the concern can be seen from another angle. For every grant of right not provided for by state law to one party to a contract, there is likely to be a corresponding taking away of a right from the other party, again in a manner not provided for by state law. The effect of the court’s decision is certainly recognition of this equation. If Butner is granted an automatic interest in the rents, though not entitled to such under state law, is not the debtor, or the debtor’s estate, losing state law rights that state law does not provide to be lost? The answer is “yes.” And, what right is lost? The right to remain in possession until state (or federal) procedural vehicles are utilized to dispossess the owner (which must provide the process that is due), and while in possession to enjoy the entitlement to the rents.
Because the court is saying that there is nothing inherent in the bankruptcy process that provides the equitable basis to grant Butner additional state law rights, so it is also saying that there is nothing inherent in the bankruptcy process that provides the equitable basis for depriving the debtor of the debtor’s (or estate’s) version of the same state law rights. Not that bankruptcy statutory law cannot do this. However, without the express statutory law so doing, the equity power does not allow it to be done on the basis of “undefined considerations of equity.”
In Mr. Butner’s case, the Court recognizes that without taking action in the bankruptcy court, Mr. Butner is forestalled from using state law mechanisms for enforcing his interest in rents. What should he have done? It seems that he should have done more to protect himself. But, he did nothing. The court is faced with a creditor whose inaction outside bankruptcy would have generated exactly the same result as happened inside bankruptcy. The debtor (here the debtor’s estate) would continue to collect the rents until dispossessed by Butner’s enforcement action. Because bankruptcy (absent statutory directive) cannot harm your property rights as a secured creditor (understanding that “harm” means “hurt,” not merely “hinder” without actual and nega
*17
tive consequences to the value of the security interest) for “bankruptcy reasons,” the secured creditor need not receive additional rights “for bankruptcy reasons.” Similarly, as the debtor (or debtor’s estate), absent statutory directive, cannot enjoy state law rights not afforded under the law granting the rights, to the actual detriment of or harm to the property interest of the creditor,
38
neither does the debtor (or debtor’s estate) lose rights granted under state law, absent statutory directive, “for bankruptcy reasons.”
The
Butner
Court, then, overturns the “rule of equity” courts and rejects their observation as to the necessity of providing federal rules of equity designed to vary (add to and delete) state law rights where express bankruptcy law does not provide for variance. The court affirms the Court of Appeals, which recognized the automatic stay-imposed prospect of frustration of enforcement of security interests and recognized, also, the availability (through the bankruptcy process) of obtaining relief either to utilize or mimic state law process necessary to the enforcement of the particular interest at hand. Because Butner took no action, both the Court of Appeals and the Supreme Court saw his request for relief (entitlement to the rents) to be a request for bankruptcy-inspired grant of rights without a bankruptcy basis, because bankruptcy did not cause the problem of the debtor (or debtor’s estate) having continued to collect the rents.
Outside of bankruptcy the debtor would have continued to collect the rents until Butner took possession of the property and would have had unfettered use of the funds. Because there is no bankruptcy reason (or state law reason) for a result different than Butner would have obtained under state law, Butner loses the rents.
Bankruptcy caused Butner to lose nothing that he had the right to obtain under
*18
state law, at least concerning the value of his security interest. Inherent in the right to obtain protection of one’s interest is the right to do nothing to obtain protection. The “do nothing” approach was Butner’s chosen path, and as a consequence, the Supreme Court provided him with just what he would have received (on account of his security interest in the real property) had he chosen to do nothing under non-bankruptcy law. That is, nothing. In so doing, the court rejects the expansive notion that it is the business of federal judicial power to utilize undefined considerations of equity to enact general rules granting parties in bankruptcy cases rights in property that are neither provided for by statute, or necessary to the statutory process as a result of holes within the statutory process. In fact, the “equity rule” courts had it backwards. Because the processes of bankruptcy CAN (or have the power to) affect state law property interests adversely, the equitable administration of the bankruptcy court should entail that that court “take whatever steps are necessary to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have under state law if no bankruptcy had ensued.”
39
This directive (as interpreted through our discussion of the Code provisions providing for and requiring adequate protection) is still good law, and informs our continued analysis concerning § 521(2). To use undefined considerations of equity to grant or to take away (change) rights in property dealt with by state law in the non-bankruptcy world in situations where there is no express statutory basis for doing so runs afoul of
Butner
and without warrant inserts the federal judicial power into the legislative arena.
The proper balance between federal and state law is aptly demonstrated by pre- § 521(2) “collateral rights” jurisprudence that we refer to as “the redemption cases.”
GMAC v. Stewart (In re Stewart)
40
is illustrative. The debtor in
Stewart
was delinquent in payments under his contract and sought to redeem the fair market value of his property in installments. The
Stewart
court concluded that redemption by installments was not contemplated by § 722 because installment redemption ignored the time value of money and was inconsistent with early case closure.
41
This situation was repeated in several cases over the next two years, usually with the same result.
42
In each of these cases the debtor sought modification of the underlying contract through redemption, i.e., to “cram-down” value, lower the rate of interest, make up missed payments or to escape a
*19
bankruptcy default clause. The analytical ground of the debtor in these cases is twofold: (i) Section 722 can be interpreted to allow redemption in installments; and, (ii) Alternatively, as a matter of equitable based bankruptcy policy (say, the furtherance of the debtor’s fresh start, or some other meaningless phraseology), the courts should grant the debtor installment redemption as a bankruptcy-based modification of the harsh and unfriendly state law requirement of redemption of the property by payment of the claim in full. These early cases, for the most part, clearly require the proper use of a federal retention remedy if the debtor wishes to avoid state law foreclosure or the threat of state law foreclosure, and, we think, properly decline to legislate an equitable overlay onto debt- or/creditor relations in the post-bankruptcy world regarding state law redemption rights.
The final two “redemption cases” cited
above—
Whatley
43
and
Schweitzer
44
—are noteworthy because they deal with debtors that are similar to the debtors found in most of the subsequent § 521(2) cases, current on payments but in default pursuant to bankruptcy default clauses. The creditor in
Whatley,
BancOhio National Bank, had a stated policy of never allowing the reaffirmation of an installment contract. BancOhio sought abandonment of the fully encumbered asset from the estate. The debtor sought to compel a reaffirmation of the debt or, alternatively, to label the contract executory, thereby invalidating the bankruptcy default clause pursuant to § 365(e).
45
The debtor’s brief changed the reaffirmation issue to redemption in installments. Citing
Stewart, Zimmerman, Miller,
and
Crusetumer,
the
Whatley
court had little trouble denying the debtors such a “redemption-reaffirmation” right.
46
The court relied upon the definition of “executory” espoused by Professor Vern Countryman, in deciding that BancOhio had insufficient performance due for the transaction to be termed “executo-ry.”
47
The court then granted the debtor 10 days to redeem the vehicle by a lump-sum payment and noted that, otherwise, the property would be abandoned from the estate.
48
*20
The creditor in
Schweitzer
sought the “surrender” of its collateral, unless the debtor was willing to redeem (in lump-sum) or reaffirm the entire indebtedness. The debtor sought to cram-down the value of the collateral and redeem that amount in installments equal to his monthly contractual payment.
49
The
Schweitzer
court denied the request to redeem in installments, following the analysis of the previously discussed and cited courts.
50
The court then moved to a more “fundamental question.” Did the debtor, current on his contract payments, need to effect such a remedy, or could the debtor ignore his own filing and continue in possession of the collateral? Chrysler’s first argument was that the presence of reaffirmation and redemption in the code raised a negative inference as to the right of the debtor to continued possession absent the exercise'
of
one of these federal remedies. The court rejected this argument, reasoning that because the Code allows redemption and reaffirmation does not mean that the Code mandates, as a matter of federal law, that a debtor use one or the other to continue in possession post-bankruptcy.
Chrysler also suggested that the Court’s denial of redemption in installments implicitly mandated the use of one of the two specified federal retention choices (redemption, by payment if full, or reaffirmation). To this argument the court responded in Butneresque fashion: “the rights and duties of the parties are to be determined, in the first instance, from their contract.” The court continued:
How much is owed; when is it due; who has the right to possession; what constitutes a default; how is it cured; what are the remedies? These are matters which, with due regard for law and rule, presumably have been agreed upon by and between the parties. Accordingly, the threshold inquiry must be: to what have the parties agreed? Then if it has been determined that the debtor’s rights and duties under the contract are properly inconsistent with his continued possession conditioned only on his un-consented to maintenance of the payment schedule, it would follow that the debtor, if he wishes to maintain such possession, must avail himself of an appropriate Code remedy exercised in the appropriate manner. However, if no provision of the contract properly gives the secured party the right to possession of the collateral or to change the contract payment schedule then, under the circumstances of the case, the debt- or’s continued possession by means of such payments is hardly a forced installment redemption, but rather is simply the contracted for performance.
51
The court then moved forward to examine the efficacy of the bankruptcy default clause, within the context of a secured debt relationship, after bankruptcy. Noting several provisions relating to the abeyance of such clauses — §§ 363(c)(1), 365(b)(2), (c), and (f)(3), and 541(c) — the court held that there was no statutory authority for invalidating bankruptcy default clauses once “the asset is no longer part of the bankruptcy estate.”
52
Although the court held that it was possible to refuse such a clause for equitable reasons, i.e., the debt- or could not survive without the vehicle and the secured creditor unreasonable refused to reaffirm, the court found no such reason to do so in this case and directed the debtor to effectuate one of the code-
*21
based alternatives if they wished to avoid state law foreclosure.
53
Closing out this string of “redemption cases” are two decisions that are well-known to students of § 521(2) jurispru
dence
—GMAC
v. Bell (In re Bell)
and
Riggs Nat’l. Bank of Washington, D.C. v. Perry (In re Perry).
54
The debtors in both of these cases, as in
Schweitzer
and
Whatley,
were current on their payments but in default pursuant to bankruptcy default clauses. In both cases the debtors sought to redeem in installments, or in the alternative, for an order from the court directing that they be allowed to continue making monthly payments under their state law contracts, without reaffirmation (or redemption under § 722).
The Sixth Circuit in
Bell
dispatched the debtor’s installment redemption argument, and denied the request.
55
More interesting for our purposes, the debtors also argued that because the property had been abandoned, the collateral had reverted back to the debtors, and that the debtors’ right to keep possession (by maintaining payments) should be governed by the parties’ state law contract (notwithstanding the bankruptcy default clause, the debtors characterized themselves as “current”).
The court disagreed with the debtors, on the ground that the debtors’ analysis of the effect of abandonment was incorrect and that bankruptcy law, in combination with the state law contract as issue, determined the debtors’ rights in the collateral post-bankruptcy. According to the court, “it [had] been recognized” that the effect of abandonment was merely to allow the debtor more time to confect a redemption or reaffirmation. Cited for this “recognition” is the following passage from
In re Cruseturner:
Accordingly, Section 362(a)(5) grants the debtor time to enforce rights in his property given him under Sections 722 and 524(c). The effect of Section 362(a)(5) is to provide the debtor with separate protection of his property. This enables him to exercise his right to redeem either by acquiring refinancing or by otherwise gathering the necessary funds, or to negotiate a reaffirmation. Unless earlier relief is requested by the creditor, the creditor may not repossess property, despite any abandonment by the trustee, until one of the three acts specified in Section 362(c)(2) occurs.... The application of Section 362 to exempt property and abandoned property is coextensive with the redemption right given in Section 722, for this right extends to exempt property as well as to non-exempt property which may be abandoned by the trustee. Likewise, the stay will cover property which may be the subject of reaffirmation agreements.
56
We read the
Crusetumer
passage as a straightforward exposition of the interrelationship between stay relief and abandonment, setting out nothing more earth-shattering than that a debtor’s interest in property (if any) is protected by the automatic stay until the automatic stay is lifted, either by court order (after motion) or operation of law — the occurrence the discharge (§ 362(c)(2)(C)) or the case closure (§ 362(c)(2)(A)). Abandonment of property from the estate does not, in and of itself (without discharge), grant the
*22
creditor the right to enforce a security interest. It also seems clear to us that the
Crusetumer
court had no quarrel with the notion that upon abandonment, the property reverts from the estate to the debtor. The debtors in
Crusetumer
sought authorization to redeem collateral in installments by paying the fair market value of the property. The court denied their request based solely on the redemption statute but clarified to the parties that the automatic stay continued in effect after the trustee’s abandonment, allowing the debt- or time to effect redemption or reaffirmation, i.e., the trustee’s abandonment did not lift the stay. The
Crusetumer
court noted that “when the trustee abandons property, the property stands as if no bankruptcy had been filed and the debtor enjoys the same claim to it and interest in it as he held previous to the filing of the bankruptcy.”
57
With this .statement we are in general agreement, with a couple of qualifying observations. First, the court in
Crusetumer
did not deal with the fact or effect of a bankruptcy default clause in the security agreement; such a clause would have required the court to acknowledge that the return to pre-bankruptcy status was burdened by the fact of bankruptcy, to the extent that state law and a state court would enforce such -a default mechanism. Second, we do not see the court as obviating the fact of discharge, as it expressly limits its remarks to “the property.”
However, the
Bell
court does some interesting interpretative things. Rather than understanding abandonment as the mechanism by which property is jettisoned from the estate (back to the debt- or), and the provisions of § 362 as the mechanism by which the debtor’s interest in property is protected from abandonment until discharge, we think the
Bell
court (misreading Crusetumer) decided that abandonment was the method of obtaining a “latency” or “figuring out” period, during which either redemption or reaffirmation could be confected.
This seems strange to us, but we think we are correct about what the court said. We remain uncertain as to what the court did (through this juncture of the opinion), but we try to capture it. The debtors want reversion back to state law rights (not really, we don’t think, due to the bankruptcy default clause). The court declines this option because abandonment only provides a respite within which debtors can decide to redeem or reaffirm. Now, the trick part. What is
Bell
saying happens if the debtor does not redeem or reaffirm?
One of two things, it seems. Either that (i) the property continues to be owned by the estate; or (ii) the property has reverted to the debtors, but the former contract is preempted by the federal necessity of reaffirmation or redemption. We think this second alternative is closer to the answer. We think
Bell
takes the straightforward
Crusetumer
theory and, after a couple of turns, creates the following federal construct. Bankruptcy provides the automatic stay to protect one’s right to redeem or reaffirm, and abandonment provides a grace period during which the debtor replaces the estate as owner, protected by the stay. This period represents the ultimate bankruptcy effect, for the debtor’s interest in property during post-abandonment period, is not different from (in fact is synonymous with) the estate’s interest pre-abandonment. The provisions
*23
of the stay protect the debtor, who now has something to protect.
Before abandonment, recall, the debtor is protected by the stay, but, as regards the property subject to the lien (assuming it is non-exempt), who cares? The property is property of the estate, over which the debtor has no legal authority.
58
Seen in this light we can make some sense out of
Bell’s
rather impractical bankruptcy world view. Creditors will not ask for stay relief; property will be abandoned before discharge, during which the debtor will be protected by the stay and owe no duty to the estate, regarding the property. During this time the debtor gets reacquainted with the property within the context of his new financial world- — the world of the fresh start. Is the property as well-fitting with the debtor as the debtor remembers, or does the motor knock and air conditioner not work? What do the monthly bills look like now that the debtor is clear? Can money enough be obtained (family members, post-bankruptcy credit, etc.) to redeem? Is it worthwhile to explore reaffirmation? Meanwhile, the debtor owns and possesses the property protected as though the debtor was bankruptcy trustee of it. A good deal; according to
Bell,
the purpose of abandonment.
59
But this doesn’t answer the question of what happens if the debtor does not choose redemption or reaffirmation. We think
Bell
blows down the straw person it has constructed through its view of the function and purpose of abandonment. If abandonment functions to provide the grace period (by means of protection through the automatic stay) during which the debtor decides whether to choose to redeem or reaffirm, abandonment is the method of implementing these statutory alternatives. If the grace period to choose is what you get from abandonment, there are NO OTHER ALTERNATIVES if the specific alternatives are rejected. Within our linguistic context we would describe this process, or state of affairs, as the debtor’s rights under the contract having been preempted by the redemption and reaffirmation alternatives implemented through the “grace” of abandonment. Now, we can say these words but cannot conceptualize the outcome. Does the debt- or, then, have no rights? Does the creditor own the property (by operation of law)? If the creditor does not own the property, who does — the debtor? If the debtor owns the property, how has the debtor come to own the property? If the debtor has come to own the property because of the preexisting ownership interest, how so? Wouldn’t it be through the mechanism of abandonment? If the debt- or has come to own the property, how can we describe the creditor’s rights? What interest does the creditor have? A security interest? Under what law can the creditor claim a security interest in the property owned by the debtor (who owns under state law)? Is it the same law that was the basis of the pre-bankruptcy security interest? If so, does state law say anything about the debtor’s rights under their particular security interest? Does the debtor retain federal constitutional protee
*24
tion afforded owners of property such as those historically recognized?
60
Bell
doesn’t know, because the
Bell
conclusion, that bankruptcy law specifically does not allow the debtor to retain state law contract rights, does not offer an answer to the question, “Then, what happens?”
However,
Bell,
in fact, sees this, and in that admitting it, understands that it has to figure a way out of its interpretative morass. Alternatively, says the court, the debtors are arguably no longer the “primary possessor” due to their default under the bankruptcy default clause (as, we guess, it would be interpreted under the state law applicable to the contract?). The logic here is that the debtors must be the “primary possessor” in order to “get back” their property through abandonment.
Further, a serious issue exists as to whether the debtors held the primary possessory interest in the Van upon abandonment. The security agreement authorized GMAC to immediately repossess the Van upon the filing of a bankruptcy petition (bankruptcy clause). While this bankruptcy clause was initially inoperative under § 11 U.S.C. 541(c)(1), and the Van had become property of the estate under § 11 U.S.C. 544 irrespective of such clause, the § 541(c) prohibition against such a bankruptcy clause has been held inoperable once the asset has been abandoned from the estate. Accordingly, the bankruptcy clause became effective upon abandonment, the debtors were in default of the security agreement and therefore no longer entitled to the primary possesso-ry interest in the Van. Further, a discharge of the debtor’s personal liability on the security agreement through bankruptcy constructively vitiated Paragraph 6 of the security agreement which provides that “buyer shall be liable for a deficiency.” Negation of the creditor’s right to seek personal liability precipitated a default so as to empower GMAC with the primary possessory right to the Van.
61
What is the
Bell
court doing here? It looks like it is offering an extension of its improbable analysis of abandonment. However, something else may be going on. Remember the debtors? They had argued the entitlement to either redemption under § 722 in installments or, alternatively, the right to reversion to state law rights under the contract, and an order of the bankruptcy court directing that they be entitled to maintain payments notwithstanding a bankruptcy default clause. Did the debtors really want reversion to state law rights? Or, did the debtors want reversion to state law rights somehow modified by the fact of bankruptcy and the requested order? Probably the latter, through nobody seems to be discussing the state law issue.
If the default clauses referred to by the
Bell
court were effective under the applicable state law, the debtors did not want state law to control their rights post-discharge. The debtors then, were fudging. The actual request could have been described as a request for an order directing that as a consequence of bankruptcy, the debtors had obtained additional state
*25
law rights through abandonment and discharge, and that the court could and should direct that the debtors retained all rights under the contracts plus the concomitant expansion of rights that resulted from the bankruptcy-caused limitation of the actionable events of default. Of course, what this means is that the creditor retains only the rights contained within the rewritten contract, and is now (for some reason) not entitled to rely upon the very state law rights upon which the debtors suggest that they themselves have the right to rely.
Bell
gets the ultimate answer right. These debtors obtain no additional rights post-bankruptcy because of the workings of the process through to discharge. However, the failure to see through the debtors’ transparently phony position causes the reams of feeble reactionary argument and statutory interpretation contained within the opinion. The default clause is analyzed as a counterpart to the court’s understanding of abandonment, with which the default clause acts to direct the property (we guess) to the creditor as “primary possessor.”
What is going on here, an exposition of the federal common law of “primary possession?” Or, does abandonment somehow act to federalize state law to decide the question? Now, the court is analytically solid when in its description of the process by which a bankruptcy default clause is suspended at the inception of the case and comes out of suspense upon stay relief. However, with all the talk about abandonment and primary possessor rights as though the concepts are related, the court fails to see that it need only rule that there is no extra state law right afforded the debtors by their discharge, that does away with the bankruptcy default clause.
Once that step has been taken, no others need be. “Motion Denied,” would have sufficed to send the parties back to state-law-land, where the default clauses pointed out by the court could be interpreted and (if enforceable) enforced, by the state courts.
What conceivably happened, however, is that the court, in denying extra rights than those expressly provided by state law under the contracts to the debtors (who chose not to utilize the federal alternatives), gave the creditor who chose to fore-go obtaining stay relief (one of the express federal remedies offered by the Code) extra rights that could not have been obtained if the creditor had gotten stay relief (and the right to enforce its security interest under state law in a state court, which would have generated a ruling on the bankruptcy default clause under state law). In other words, the debtors were asking that the court create an incentive for not choosing either redemption or reaffirmation, by adopting a federal rule of equity that preempts state law bankruptcy default clauses in security interests and promissory notes. All the court had to say, under
Butner
(and the Code), was “No.” Not seeing this, the court went to the other extreme along the debtor/creditor spectrum, and provided the creditor, through the adoption of the federal rule of primary possession-hood, the perverse incentive not to obtain stay relief to utilize state law contract provisions as ground for enforcing the security interest. This is exactly what
Butner
tells us courts cannot do, because it is adding to the rights afforded under state law though there be no federal law so requiring, merely because of the happenstance of bankruptcy. This judicial fiat insures that the creditor who does nothing in a bankruptcy case is treated better than one who uses the bankruptcy procedural mechanisms (stay relief, as the court in
Butner
directed that Butner should have done) to obtain the use of state law rights of enforcement. Mr. But-ner now gets his title to rents because of the filing of the bankruptcy case. This is wrong.
The creditor in Perry
62
also sought relief from the stay to enforce its bankruptcy
*26
default clause in a mortgage contract, arguing, in effect, that the bankruptcy default clause primed the automatic stay, and precluded the estate or the debtor from exercising any authority or control over the property. The court denied relief, citing
Crusetumer
for the proposition that the bankruptcy default clause was invalid during the pendency of the automatic stay.
An alternative theory of Riggs postulates that to maintain possession of the collateral, a Chapter 7 petitioner must either reaffirm ... or redeem the collateral .... Although another Federal Circuit Court
[Bell]
has concluded that a debtor may not retain possession of collateral after filing under Chapter 7 absent reaffirmation or lump-sum redemption ... we do not reach the issue of whether these provisions are mandatory or elective. Rather, we only observe that the section 362(a) stay continues to run until discharge is granted or denied, and that Perry has the option of exercising his right to reaffirm or redeem until the expiration of that stay....
63
The concurring opinion makes it clear that the holding only applied to the period of time
in
which the stay was effective, and that the creditor was free to pursue its state law remedy post-bankruptcy:
One further thing needs mentioning. Our holding that the due on bankruptcy clause in the security agreement is not enforceable extends, of course, only to enforcement proceedings in bankruptcy and not as to its ultimate validity which will have to be determined under state law. The stay presently in force under § 362(a)(5) remains in force only “until the earliest of — (A) the time the case is closed; (B) the time the case is dismissed; and [obviously meaning or] (C) the time a discharge is granted or denied.” At such time, then, the existing stay will terminate and the bank will be left free to foreclose its lien.... In any proceedings which may result under Maryland law to foreclose the lien of the security instrument at issue in this case, the parties will be able to have determined the validity of the due on bankruptcy clause.
64
Remember
Butner
? Mr. Butner suggested that he have automatic entitlement to rents due to the fact of bankruptcy because of the impediment generated by the automatic stay. The creditor in
Perry,
reacting to the debtors’ implausible request, seeks to take Mr. Butner’s argument a step further. The argument is that the state law default clause provides an immediate ground for stay relief, without consideration of the debtors’ right to § 722 redemption, the prospect of reaffirmation, or (if applicable, we think) the right to exemption and lien avoidance. Taken to its logical extent, the creditor’s argument would entail the creditor prevailing over a trustee seeking to sell the property for the equity (if any), and would have the practical effect of overriding § 541(c)(1). The creditor is arguing that state law rights preempt the specific Bankruptcy Code provisions that intersect with the particular state law rights. This is an argument specifically done in by the court in
Butner.
Perry
is oft cited for the proposition that the debtor can retain collateral absent redemption or reaffirmation, and that bankruptcy default clauses are invalid as a matter of law.
65
But
PeiTy
holds, we think, only that a creditor is precluded by § 362 from acting upon a default while the stay is effective, and that the fact of a bankruptcy default clause is not, in and of itself, ground for obtaining relief
from
the automatic stay. Further, in light of our understanding of the scope of the holding in
*27
Perry,
we think the opinion stands for the proposition that once the stay is terminated, the parties are left to sort out their rights to the collateral under their state law contracts according to state law, assuming no redemption, reaffirmation, or exemption and lien avoidance.
Thus, on the eve of the enactment of § 521(2), with possible exception of
Bell
(depending on how that case is viewed), the debtor either redeemed, reaffirmed, or operated pursuant to her state law contract. Debtors were not allowed to “federalize” their state law contract by remaining current, nor did debtors sacrifice any and all rights they possessed prior to bankruptcy if they did not exercise a federal remedy.
(2) Our Analysis of the Three Interpretative Camps
Section 521(2), quoted above, became effective in 1988 and quickly became the “battleground” for disputes over collateral. The eight circuit opinions that have issued are evenly split between the “fourth alternative” and the “plain meaning” rules. The most recent § 521(2) decision rejects both the “fourth alternative” and “nihilist” camps for that of the “plain meaning.” We move forward to examine the three theories beginning with the “fourth alternative.”
(a) The “Fourth Alternative” Camp
The first circuit opinion to issue on § 521(2) was
Lowry Federal Credit Union v. West (In re West).
66
The Wests financed a vehicle through their federal credit union (Lowry). According to the terms of the financing agreement the Wests were required to stay current in their payments and to maintain insurance on the collateral — both of which they did. The financing agreement contained a default clause, operational when “something happens which significantly reduces the credit union’s ability to realize on any property you have given as collateral.” According to the district court opinion the default clause also contained a bankruptcy default clause:
Default — You will be in default if you do not make a payment of the amount required when it is due. You will be in default if you die,
file for bankruptcy,
or become insolvent, that is, unable to pay your obligations when they become due. You will be in default if your ability to pay what you owe or to perform your other obligations under this Plan is significantly reduced. You will also be in default if something happens which significantly reduces the credit union’s ability to realize on any property you have given as security.
67
Relying on the non-bankruptcy default clause, Lowry threatened foreclosure if the Wests did not reaffirm or redeem. The Wests sought declaratory and injunctive relief in the bankruptcy court. The bankruptcy court concluded that the debtors’ discharge in bankruptcy did not create a default under the non-bankruptcy default clause and either ignored, forgot, or assumed invalid the bankruptcy default clause. Evidently the creditor relied on the loss of a possible deficiency judgment as the grounds for “something happening.”
68
The district court affirmed along the same rationale.
69
The Tenth Circuit began by examining what it considered the “mandatory” language of § 521(2)(A) and (B), stating that such an interpretation was obvious:
To escape the mandatory language of the section, debtors argue the “if applicable” phrase gives a debtor some form of option. We are unpersuaded by that argument because it is inconsistent with the plain meaning of the statute. -The words “if appropriate” are 'gratuitous and do not affect the mandatory duties
*28
prescribed by the statute. The plain English of the section requires every debtor in possession of collateral to make an election whether to retain or relinquish that property. If the debtor decides to retain, the debtor is required to elect whether to redeem or reaffirm. The section also requires the choice be effected within 45 days no matter whether the decision is to retain or relinquish. No other meaning can be gained from the precise terms of the statute, and nothing suggests the debtor can simply elect to retain the property and ignore the other duties required by § 521(2).
70
Thus, the Tenth Circuit is the first of several court to interpret § 521(2) as:
[T]he debtor shall file ... a statement of his intention with respect to the surrender or retention of such property, and, if applicable [to the surrender or retention of such property], specifying that the debtor intends to [exempt, redeem, or reaffirm the property].
But the court was more concerned with enforcement of these requirements, as section 521(2) did not bestow upon the creditor any remedy to ensure its enforcement (that power was granted upon the Chapter 7 trustee):
71
“In short, there is a gap between the trustee’s duty to obtain compliance and the trustee’s power to enforce that duty because Congress provided neither a penalty for a debtor’s failure to comply with § 521(2) nor a specific remedy for a creditor as a consequence of such a failure.”
72
We find the next portion of the
West
decision so vexing that we quote the paragraph in full.
The next question is whether 11 U.S.C. § 521 must be read to limit a debtor’s right to retain possession of collateral to redemption or reaffirmation. While a debtor may redeem property, subject to 11 U.S.C. § 722 , or reaffirm a debt, subject to 11 U.S.C. § 524 (c)(4), nothing within the Code makes either course exclusive. We, therefore, cannot conclude the bankruptcy court acted without jurisdiction in this case.
73
Having previously thought that this step in the court’s analysis was decided upon their “obvious reading” of § 521(A), we can only suppose that they arrive at this conclusion due to the lack of available remedy to enforce the requirements of § 521(B).
The court ruled that the discharge did not violate the non-bankruptcy default clause. The court was careful to point out that it was not invalidating
ipso facto
clauses, only ruling that this one was not in default. The court concluded by affirming the lower court’s injunction and declaratory judgment that the debtors could retain possession of their vehicle so long as they were not in default.
In sum, although we regard as mandatory the provisions of Code § 521(b), we do not believe those provisions make redemption or reaffirmation the exclusive means by which a bankruptcy court can allow a debtor to retain secured property. When the state of the evidence indicates neither the debtor nor the creditor would be prejudiced, a bankruptcy court may allow retention conditioned upon performance of the duties of the security agreement as a condition of retention.
74
How this can be justified in light of the obvious bankruptcy default clause we are not sure. In ignoring, or invalidating, the obvious
ipso facto
clause, the
West
court mutates the
Pe'iry
decision and creates exactly the type of federal “rule of equity” — -a “fourth alternative” — prohibited by
Butner.
The debtor receives new “equita
*29
ble rights” and the creditor loses prior contractual rights.
The debtors in
Home Owners Funding Corp. of Am. v. Belanger (In re Belanger)
75
filed a Statement of Intention indicating that they wished to retain their mobile home but did not indicate a method of retention. The Belangers were current on their payments and no bankruptcy default clause was introduced at trial.
76
The mortgage company sought to compel the Belangers’ reaffirmation, redemption, or surrender. Both the bankruptcy
77
and district
78
courts ruled in favor of the Be-langers.
The Fourth Circuit began its analysis by criticizing an earlier
decision
—In
re Edwards
79
—for its reliance on
Bell,
which the Fourth Circuit considered to be in conflict with its pre- § 521(2)
Perry
decision. The
Edwards
court interprets
Bell
as holding that a debtor may not redeem in installments and that a bankruptcy default clause defeats the debtor’s possessory interest (in favor of a possessing — or repossessing — interest on the part of the creditor). According to the
Belanger
court, the Fourth Circuit had previously held, in
Perry,
that “default-on-filing clause[s]” are unenforceable so long as the automatic stay is pending. Therefore, the court concludes that
Edwards,
because it relies upon precedent that is in conflict with Fourth Circuit precedent, cannot be followed in the Fourth Circuit. Because the stay remains in effect until lifted, either by operation of law or court order, even if abandonment has been ordered,
Perry
conflicts with
Bell.
The court secondly suggests that the interpretation by the
Edwards
court of § 521(2)(A) renders “if applicable” superfluous. The court argues that if the statute is rewritten by deleting the “if applicable” language (i.e. “the debtor shall file ... a statement of his intention with respect to the retention or surrender of such property, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property”), it is apparent that no meaning is attributed to “if applicable” by the
Ed-ivards
court.
80
Collier’s interpretation of § 521(2)(A) complies with the canon that courts should give effect, if possible, to every word in a statute. The phrase “if applicable” is redundant if, contrary to Collier and the district court, the options given to the debtor are considered to be exclusive. If this were so, § 521(2)(A) would have simply provided: “and specifying that such property is claimed as exempt, that the debtor intends to redeem such, or that the debtor intends to reaffirm debts secured by such property.” The fact that the statutory options are stated in the disjunctive shows that the words “if applicable” are unnecessary under a construction of the statute that makes the options exclusive. But if the phrase “if applicable” is given effect, it plays an important role. As Collier points out, the debtor must specify a choice of the options if applicable. But if these options are not applicable, the debtor need not specify them.
81
As pointed out in our discussion of
West,
the
West
court characterizes the “if appli
*30
cable” phrase as “gratuitous,” but is not bothered by this conclusion (probably because it knew that in only a few paragraphs it was going to render the entire statute gratuitous). The
Belanger
court’s interpretation of § 521(2)(A) breaks the statute down to read:
[T]he debtor shall file ... a statement of his intention with respect to the surrender or retention of such property, and, if [exemption, redemption or reaffirmation are] applicable, specifying that the debt- or intends to [exempt, redeem, or reaffirm the property].
Most courts interpret
Belanger
as the classic “fourth alternative” decision, allowing retention of collateral post-bankruptcy so long as the debtor is current. This result suffers from the same “federal rule of equity” as is found in West
82
In
Capital Communications Fed. Credit Union v. Boodrow (In re
Boodrow),
83
the debtor’s credit union sought stay relief because the debtor had not performed his stated intention (reaffirmation). The debt- or was disabled but his disability insurance was paying the vehicle note. The bankruptcy court adopted the statutory interpretation of
In re Belanger,
and refused to attribute an “injury in fact” to the debtor’s failure to reaffirm for the purposes of § 362.
84
The bankruptcy judge carefully limited his ruling, by means of the final paragraph, by pointing out the short duration of the stay and that the creditor was free to seek enforcement of his bankruptcy default clause once the protection of the stay was gone:
In any event, a secured creditor’s substantive rights are not prejudiced by continuance of the stay in a Chapter 7 case. Although a secured creditor may not repossess collateral absent an order terminating the stay under Code § 362(d), the stay (as it applies to property of the estate) terminates by operation of law upon the closing of the Chapter 7 case or sooner if the property is affirmatively abandoned by the trustee. Nationally, the average time between the commencement of a Chapter 7 case and its closing (see Code § 350(a)) is 4.8 months. During the pendency of the stay the secured creditor is entitled to receive proof of adequate insurance and timely payments required under the loan documents. Upon closing of the case or abandonment of the collateral the stay terminates and the secured creditor’s substantive in rem rights remain intact. Therefore even where there has been no prejudice to the secured creditor shown, the stay will terminate, at the latest, on the average of 4.8 months later when the case is closed.
4
Thus, while the filing of a Chapter 7 petition may be an event of default under the prepetition loan documents, a “technical” default does not constitute “cause” under Code § 362(d)(1) warranting termination of the stay. In the instant case no other grounds exist justifying termination of the stay in view of the fact that Capital concedes that, as of the petition date, it enjoyed a ten percent equity cushion, that is, the value of the vehicle exceeded the debt to Capital secured thereby. Accordingly, Capital’s interest in the ve-
*31
hide is adequately protected pursuant to Code § 862(d)(1).
On appeal the credit union argued that non-compliance with § 521(2) was cause to lift the stay. The debtor argued that he could retain and pay according to the underlying contract and that the credit union alleged no affirmative harm to justify lifting the stay.
86
Noting the varying resolution of the “if applicable” language, the
Boodrow
court found the statute to be ambiguous. Resorting to the legislative history, the court found § 521(2) to be a notice provision, and, in light of the policy concerns underlying the debtors “fresh start,” held that the debtor was not limited to the three alternatives stated in the statute.
87
We pause to point out the vagueness, even vapidness, of the oft-mentioned “policy considerations underlying the debtors’ fresh start.” What are they? What, even, does the statement mean? We have a Code. The Code provides for a discharge. The Code provides the effect of a discharge. Why are courts so willing to muse about the “policy concerns” underlying the debtor’s fresh start? Aren’t the “policy concerns” (whatever that means) subsumed by, contained within, and reflected by the statute? Meaningless phrases. Meaningless phrases.
The Second Circuit seems to depart from the limited holding of the bankruptcy court, defining the “remedy” judicially fashioned in terms of “reinstatement” which the court defines as follows:
To qualify for reinstatement, debtors cannot be in default, except for technical defaults such as bankruptcy default clause defaults, and must pay the entire debt in accordance with the contract. This right is called reinstatement because it prevents foreclosure and reinstates the contract.
88
Now, let us break this down. Despite our search, we have found no reference to a right of reinstatement (or, and you can even say this with a western movie twang while looking out toward a glorious sunset, a “right-called reinstatement”), within the Bankruptcy Code. Nor have we found any within the legislative history to which courts such as those in the
Boodrow
claim are so quick to resort. The court, in fact, manufactures a “remedy” in the form of a newly vested “right.” Because there is no such thing as a right to reinstatement to be found in the Code, such a judicially-created right must have a definition. So, the redactor of the right makes up the definition, which, once made up, gives substance to the right (the right must exist because it has a definition). Of course, what is a right, even if defined, without a proper name? So (it must be Tuesday), sayeth the court, “The right is called ‘reinstatement’.” The name is a good name because of the good work it does — “it prevents foreclosure and reinstates the contract.”
What could be more offensive to the
Butner
directive? This federal court, operating rogue-like outside the statutory realm, posits as the basis for this flagrantly legislative act the “undefined consideration of equity” only described as policy considerations underlying the debtors’ fresh start. Upon this unarticulated equitable consideration (or concern), we have a federally created rule of equity that is given flesh, bones, a name, a function and
*32
a broad-ranging (post-bankruptcy) effect. The federal rule is the right of reinstatement that operates (any only operates) outside the realm of the bankruptcy estate and case.
Now, as might be obvious, we have a couple of concerns about
Boodrow.
First, does the debtor who is “only” in technical default have a right of reinstatement if there is equity in the property available for the estate?
Second. By the way, what is “only a technical default”? Is the requirement to maintain insurance at all times, covering the creditor’s interest a technical obligation? Where would one look to do research on the federal law of technical default as that term applies to state law contracts?
Third. Suppose the creditor determines, after the bankruptcy case is closed (property is abandoned, etc.) that there has been a default that is not a “technical” one. How does the debtor answer the state law lawsuit by which the creditor seeks to enforce the security interest? (i) with a notice of removal because there is federal question jurisdiction due to the federal right of reinstatement? (ii) with a notice of removal because there is bankruptcy court jurisdiction due to the bankruptcy-related federal right of reinstatement so that this is actually a claim arising under the Bankruptcy Code? (iii) with an injunction complaint in bankruptcy court because of the jurisdiction vested by the federal rule of reinstatement? (iv) with a pleading in state court suggesting that the creditor’s lien claim has been modified by the federal rule of reinstatement and that the action must be determined by the state court under the federal laws of reinstatement and technical default?
Fourth. We are not fans of the Supreme Court’s
Dewsnup
opinion,
89
but how can the underlying premise of
Dewsnup,
which we articulate as something like liens upon property not affirmatively administered in a Chapter 7 case pass through bankruptcy unaffected, be maintained by the
Boodrow
court. The
Dewsnup
court forbade the use of what we think is a rather obvious Bankruptcy Code provision for the purpose of affording a debtor (as opposed to the estate) relief
from
the state law effects of a lien. Why? Because the Bankruptcy Code should not be interpreted to allow the modification of a state law lien due to strong policy that favors liens passing through bankruptcy unaffected. We think
Boodrow,
which manufactures the right of reinstatement modification of (or affect over) the creditor’s lien rights contravenes not only the
Butner
directive, but also the (more specific to lien rights) directive of
Dewsnup.
Fifth. Does the debtor even need the protection afforded by the fashioning of the federal rule of equity? Arguably not. What about a Chapter 13 case? We must assume the
Boodrow
debtor would have qualified for Chapter 13 (we have few facts on this), but we allow ourselves this assumption. Would Chapter 13 have allowed the
Boodrow
debtor to do what he wanted to do (have the note paid according to its terms by the disability policy while he keeps the car)? YES. Does Chapter 13 act to deprive this debtor of a discharge? NO. Does Chapter 13 impose upon this debtor obligations more onerous than Chapter 7? Let us assume “yes,” that the debtor has a source of income that would require higher repayment to unsecured debt than would occur through Chapter 7. It seems likely that the
Boodrow
debtor seeks Chapter 7 because of the hope that the car creditor will be paid by the disability policy, and that any post-petition income will be the debtors’, not subject to the scrutiny of the trustee. This is the only reasonable conclusion to draw, because if the debtor only receives enough to live on, there would be no required payments to unsecured creditors because there would be no disposable income (unless there is a liquidation value, but the liquidation value
*33
presumably goes to the creditors in Chapter 7). We are well aware of the prohibition against involuntary Chapter 13 cases. But does this prohibition mean that there are no adverse consequences that befall a debtor who chooses Chapter 7 relief over Chapter 13? NO. The
Boodrow
court is in fact creating this federal rule of equity to provide a Chapter 7 debtor (who chose Chapter 7 relief over Chapter 13) with the same right to retain the vehicle while payments are made by the insurance as would have been available under Chapter 13 of the Code. The right of reinstatement, then, is fashioned by the court, in fact, as a reward for choosing Chapter 7 over Chapter 13, wherein, had it been chosen, the very relief fashioned, is available.
90
We think this act to be indefensible.
The fourth alternative camp develops this alternative from rather disparate strands of analysis. Section 521(2)(A) is plainly read to require a particular choice among the alternatives set forth, if the debtor elects to retain, but these choices are not exclusive, due to the court’s power to authorize a rule of retention.
{West).
Section 521(2)(A) is plainly read to require the choice of one of the three alternatives, if the debtor seeks to retain the property, only if (by the choice itself) one of the three choices is applicable; the three alternatives are to be seen as partners of a fourth federal rule allowing retention by maintaining payments
{Belanger).
Section 521(2)(A) is ambiguous, is nothing but a notice provision, and because of policy considerations (yet not comprehended by the author of this opinion) is to be seen as (only) mentioning three (non-exclusive) alternative means of retention of property, but, also, establishes the basis for the extra statutory fashioning of the federal rule of the right of retention
{Boodrow).
Were we cruelly objective we would suggest that the development of a federal rule of retention (or right of reinstatement) from three mutually exclusive analytical grounds establishes the emptiness of the exercise and shows that the federal rule has been promulgated upon nothing more than the fact that the authors of the opinions could write words on paper. We prefer to put it another way. Regardless of the approach to statutory construction, the fourth alternative courts in no way rely upon statutory authority for the right of retention. Vague policy considerations, undefined equitable considerations, yes. Statutory authority, no.
The debtor in the final “fourth alternative” case,
McClellan Federal Credit Union v. Parker,
91
applied to the bankruptcy court for its approval of his proposed reaffirmation agreement. Noting that the debtor was current in payments under his contract, the bankruptcy court refused to ratify the reaffirmation, finding that the agreement was not in the debtor’s best interests because of the fourth alternative right to retain the property and continue making payments on the loan after discharge. The credit union promptly appealed to the Ninth Circuit BAP who declined the appeal finding that there was no standing. The Ninth Circuit found that there was standing and examined the merits.
92
The Ninth Circuit began its analysis by examining the jurisprudential camps. The court recognized the “nihilist” approach used by its own BAP in the case,
In re Mayton,
but considered the language of § 521(2)(A) to be susceptible to a “plain reading”:
Our interpretation of that language is that the only mandatory act is the filing
*34
of the statement of intention, which the debtor “shall” file. Then, “if applicable,” — that is, if the debtor plans to choose any of the three options listed later in the statute (claiming the property as exempt, redeeming the property, or reaffirming the debt) — the debtor must so specify in the statement of intention. The debtor’s other options remain available, as unambiguously stated in § 521(2)(C): “[N]othing in subpara-graph [ ](A) ... shall alter the debtor’s or the trustee’s rights with regard to such property under this title.”
93
Thus, the
Parker
court finds that the “plain meaning” of § 521(2)(A), and the protections afforded the debtor by § 521(2)(C), allow the debtors the federal right to retain their vehicle so long as they continue to make their contractual payments. In addition to those previously noted conceptual difficulties we have with the “fourth alternative” cases, we point out that this court misconstrues the “nihilist”based opinion of its
BAP
—In
re Mayton.
According to the Ninth Circuit “[r]elying on subparagraph (C) the BAP [in
Mayton
] thus reached the same result as the Second, Fourth, and Tenth Circuits.” Although we realize that we have not yet discussed the “nihilist” camp cases,
94
the approach has little in common, and is highly critical of, the “fourth alternative.” Under the “fourth alternative’s” “right of reinstatement” the creditor is not afforded the opportunity of state law foreclosure unless the debtor fall behind on payments. Under the “nihilist” theory, the parties are left to their state law rights after bankruptcy, but are not granted a federal right of reinstatement. It is easy to deduce from the refusal to ratify the reaffirmation agreement that
Parker
joins in the promulgation of the “reinstatement” rule of equity; otherwise it would have been necessary for the court to satisfy itself that the contract was not in default (no bankruptcy default clause, no cross-collaterali-zation clause with the unsecured debt), or refuse to allow the reaffirmation for other grounds.
We mention the
Parker
case not for its analytical content, but because it was decided. No other discussion appears, to us, warranted.
(b) The Plain Meaning Camp
The Seventh Circuit decision,
In Matter of Edwards,
dealt with a debtor who was current on her vehicle note during the bankruptcy case, evidenced an intention to reaffirm, but failed to execute a reaffirmation agreement before expiration of the time for performance under § 521(2)(B). The trustee filed a “no asset report” “and abandoned the secured collateral from the bankruptcy estate.”
95
Subsequently, Ms. Edwards amended the statement of intentions to suggest the intention to retain the collateral without reaffirmation. The lien-holder sought to compel the performance of her intention, as originally stated (to reaffirm). The bankruptcy and district courts refused to compel the reaffirmation, but ordered the debtor either to reaffirm or surrender the vehicle. Ms. Edwards appealed, contending that the three options delineated in § 521(2)(A), redemption, reaffirmation, or exemption and lien avoidance, were not the exclusive means of retention and that she could “reinstate” the loan by continuing her timely payments.
96
By way of introduction, the court offers its interpretation of § 521(2). The statute ... directs a debtor to file a statement of intention of his or her plans for keeping or relinquishing property abandoned from the estate or exempted from discharge. The Bankruptcy Code provides a debtor with three clear options in this regard. First, a debtor may choose to surrender the collateral to the
*35
creditor. If a debtor goes this route, the amount by which the debtor’s obligations exceed the value of the collateral, if any, will be discharged. If, on the other hand, a debtor chooses to retain possession of secured collateral, he or she may choose to reaffirm the debt and enter into a new agreement with the creditor for repayment, 11 U.S.C. § 524 (c), or the debtor may redeem the collateral by paying the creditor the amount of the secured claim or the fair market value of the collateral, whichever is less, 11 U.S.C. § 722 .
97
This explanation of both the bankruptcy process and § 521(2) sets up and informs our interpretation of what the court is getting at in posing the question it sees itself facing.
The question presented by this case is whether a debtor who files for relief under Chapter 7 ... must make the choice provided in § 521. Must the debtor, as a condition of retaining the property which secures an installment loan, either redeem it by paying for it lump-sum or expressly reaffirm the debt underlying the collateral — even though the debtor has performed, and continues to perform, all of the obligations of the installment loan?
98
The court points out that the case relied upon by the
debtor
—In
re Perry
—does not decide the issue of whether a debtor can retain property after the stay has been lifted or after discharge.
Perry,
says the court, only holds that bankruptcy default clauses are ineffective until the stay is lifted,
99
and does not address whether § 521(2) is exclusive (and mandatory) regarding property that has been abandoned (or “excepted from discharge”). Relying upon
In re Bell
and the text of § 521(2), the court concludes that the requirements of § 521(2) are mandatory and exclusive, and that a debtor who wishes to retain property after it has been abandoned must either redeem or reaffirm the debt.
In answer to this question, the Sixth Circuit has held that a debtor who wishes to retain secured property must redeem or reaffirm, and that redemption cannot be accomplished through installment payments. We think this conclusion is correct. The language of § 521 is mandatory (“The debtor shall ... ”). Moreover, the statute clearly contemplates performance — within a specified period of time' — of the alternatives outlined by it. (“The debtor shall ... perform his intention ... ”).
100
Thus, the Seventh Circuit finds that the debtor is limited to surrendering, reaffirming, redeeming, (or exempting) property subject to § 521(2). “Absent reaffirmation [or redemption, or exemption/avoidance] and after discharge in bankruptcy, ... Edwards would no longer be personally liable in case of default. The creditor’s only recourse in such a case would be to seek repossession of the collateral.”
101
Recall that § 521(2) was promulgated after the
Bell
decision. The
Edwards
court (unnecessarily, it seems, since it sees the statute as unambiguous) draws analytic solace from this fact, deriving a basic “slant” from the legislation on how the issue before it should be viewed.
The 1984 Consumer Finance Amendments to the Bankruptcy Code were intended,
inter alia,
to protect creditors from the risks of quickly depreciating assets and to keep credit costs from escalating because of the too-ready availability of discharge.... This leg
*36
islative purpose speaks strongly against permitting debtors to improve their position dramatically against secured creditors by relieving them of personal liability. When a debtor is relieved of personal liability on loans secured by collateral, the debtor has little or no incentive to insure or maintain the property in which a creditor retains a security interest. The value of the collateral may fall below the level of the loan, leaving the creditor undersecured and driving up future costs of credit.
102
(emphasis added).
Does the Seventh Circuit interpret § 521(2) to preempt state law on the question of whether, post-abandonment, the parties remain bound by the contracts and law applicable thereto? As we see it, yes. In a footnote, the court diverges from
Bell
on an important matter.
“Bell
also holds ‘default-upon-filing’ clauses to be enforceable against property that has been abandoned from a debtor’s estate. This additional holding has no bearing on our analysis as we are in no way predicating our conclusions on the enforceability of ‘default-upon-filing’ clauses.”
103
The court is not predicating its conclusion on the enforceability of default clauses because such clauses are rendered irrelevant by its analysis (it thinks). The irrelevance is grounded in the “exclusive” federal methods of retaining collateral after abandonment which, for policy reasons believes the court, necessitate the federalization of “surrender” to strip from the parties’ state law contracts the state law content.
It is clear that
Edwards
does away with state law as a residual bundle of rights to which the parties return post-abandonment if none of the federal retention mechanisms are chosen. It is also clear to us that the statute, itself, does not compel such a result. Why, then, does the Seventh Circuit end up where it does, enacting a federal rule preemption of state law where there is no conflict? One word— POLICY.
The policy considerations driving the Seventh Circuit emanate from the polar opposite end of the political spectrum as those driving the fourth alternative courts. The fourth alternative courts construct debtor-friendly equitable considerations to preempt state law rights to the detriment of creditors’ state law rights; the Seventh Circuit provides equitable solace to the downtrodden and put-upon creditors, which requires construction of equitable considerations denuding the debtor’s state law contract rights. Two questions. (1) How convincing is the Seventh Circuit’s version of rule promulgation upon equitable considerations? (2) How, even if the court could do what it says it is
doing,
would what it says it is doing work? We attempt to answer.
First of all, the court is startlingly (and almost embarrassingly) unconvincing. The “id” part of the analysis breaks through to reveal what is really going on. We see the court chagrined at the thought of the debtor improving its position “dramatically” against the secured creditors; we see the court offering its reactive aversion to the statutory construct (promulgated by Congress, the body with authority to pass laws) as the basis for its understanding of Congressional intent — Congress intended “to protect creditors from the risks of quickly depreciating assets and to keep credit costs from escalating because of the too-ready availability of discharge.”
104
Let us stop here a moment. Is stripping off state law rights a mechanism necessary to insure that a debtor’s position is not “dramatically” improved? No. What about the too-ready availability of discharge? Let’s see. Congress promulgates the Bankruptcy Code which contains the discharge and law relevant thereto (including
*37
who can get one and how). Is it reasonable to believe that Congress needed to protect its law from the effect of its law? Why did Congress not merely change the too-ready availability of discharge to a “not-so-ready availability of discharge” if there was a social problem caused by the legal fabric?
The short answer is that the complaint about the “too-ready availability of discharge” is a social complaint from the judicial branch, that has no place in an opinion purporting to decide a case or controversy. Further evidence of the social/political basis of the court’s opinion is the pseudo-scientific/economic analysis that underlies the political viewpoint. Social horrors occasioned by discharge include: (1) “the debtor has little or no incentive to insure or maintain the property on which the creditor maintains a security interest”; and (2) “the value of the collateral may fall below the level of the loan, leaving the creditor unsecured and driving up the future costs of credit.”
We question whether the court had evidence supporting the fact of this double feature horror movie, or whether the court simply knows these things. If there was evidence, it is not mentioned, and if the court just “knows” these things, we offer a couple of observations. First, why couldn’t the eredit/seeurity agreement contain a bankruptcy default clause and, as well, a requirement that insurance be maintained (which would give rise to an additional event of default)? Or did they? Second, is it not possible (probable) that the loan (we are in bankruptcy here, and the property has been abandoned) is already greater than the value of the collateral so that the state law state of affairs (pre-bank-ruptcy) was such that the collateral value would not cover the debt?
105
Third, are not all creditors who face an undersecured situation facing the prospect, that after foreclosure (under state law) and obtaining a consequential deficiency judgment (including foreclosure costs, attorney’s fees, etc.), the debtor will seek discharge of this personal liability? If we can be so bold as to venture into the realm of offering (crackpot) economic analysis, shouldn’t the general cost of credit have built into it the fact of the bankruptcy law, and doesn’t the particular credit agreement have built into it the risks of default (as can best be gotten at through the information obtained at the time of making the loan)? If so, then the driving up of the cost of credit is already done, the risks already factored in.
106
Again, though, the real problem facing the Seventh Circuit (as it is with the fourth, alternative courts), along with the statutory language which actually obviates the possibility that the court is correct, is
Butner.
The non-statutory policy “analysis” is in actuality an attempt to insure the necessity of fashioning an equitable rule upon 'a set of “policy considerations,” that while different from those used by the fourth alternative courts, are just as unnecessary and wrong. Regarding the fourth alternative argument put forth by the debtor, the court can “just say no.” (There is nothing in § 521(2) that offers the “right of reinstatement.”) To both parties the court could have said that because the property has been abandoned (and presumably discharge has been entered), the parties are left to state law rights, to be determined without the interference of the bankruptcy court (or any federal court without an independent basis of jurisdiction).
Butner
would be complied with. Neither party is
*38
hurt (recall that the creditor continued to accept payments after the bankruptcy case had been filed. Was this necessary? We think not.). The creditor has suffered, necessarily, only the delay to stay relief hearing, and possibly the wait until discharge and case closing, without prejudice to the right of requiring adequate protection (never seen in the Chapter 7 arena that we are aware of) or emergency relief if the collateral interest is clearly in danger (we do this all the time). The “considerations” offered by the Seventh Circuit are those emanating from its political and social perspective. But they are undefined (and probably do not rise to the level of equitable in nature), and therefore cannot, under
Butner,
stand as the basis for the promulgation of an equitable rule that state law rights must be eviscerated post-bankruptcy.
107
Finally, how does the thing the court has done actually work? Say the debtor chooses reaffirmation, but within the recission period rescinds the agreement? What happens then? Suppose the debtor chooses “surrender,” files the statement and the case is closed? What, in fact, happens? What, in fact, happens? What, in fact, happens? While we are at this, let’s make it a bit more complicated. The debtor keeps paying and the creditor keeps accepting the amount due under the note, in the face of the “surrender” choice. Has there been an act translative of title, from the debtor to the creditor arising from the surrender choice? If so, under what law (the federal bankruptcy law title transfer statutes? If so, where are they, please?)? Is it necessary for the creditor to make a claim in a court? If so, which one? And, what is the claim that is made? Does the debtor retain any interest in the property (that has been abandoned back to the debtor), and, if so, under what law? Or, has the debtor lost all interest (and, if so, what does the abandonment statute mean) so that the debtor is, post-abandonment, a thief? If the debtor has no interest in the property, can the creditor go to state court and ask for an injunction to compel the give-back of the creditor’s property? What is the law of the giveback (or, put another way, how does one research the state “give-back” law)?
Is the debtor is responsible for delivering the property to the creditor? By the way, does the debtor, whose name is on the automobile title (but who loses all interest in it) have an insurable interest in the property? Maybe all of these questions can be side-stepped by implying within the federal statute an obligation to turn over (deliver) the cars, VCR’s, stereos, boats, furniture, in each and every case where there is “surrender,” to the office of the Chapter 7 trustee so that the Chapter 7 trustee (who is closing, nationwide, and average of 98% of Chapter 7 cases without administering one stitch of property) can deliver it to each and every creditor holding collateral. Oh, by the way, does the trustee in this situation bear the risk of loss, so that the trustee is responsible for any damage to the (823) cars parked in the trustee’s parking lot (what if the trustee has no parking lot)?
It is getting pretty ridiculous here, but not, we think, because of our analysis. Clearly, trustees would revolt at the prospect of being the middle persons in this scrum.
So, let’s analyze the inner-workings of the debtor being liable for the delivery as a result of the federalized evisceration of state law contract rights. Same questions: (1) does the debtor deliver? (2) does the debtor bear the risk of loss? (3) What of the costs associated with transport, say, of a several-ton air conditioning unit — does the debtor bear the cost of disassembling and transportation? (4) Where is delivery to be made — to a regional resale lot of the creditor’s choosing, to the loan office, or to an equitably-arrived-at location that recognizes the interplay between the necessary loss by the debtor of any and all rights in,
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to, and upon the property abandoned to the debtor, and the financial fresh start? (5) Is the bankruptcy court the court that issues the directive as to where the property is to be delivered? If so, what factors are utilized to reach its equitable determination?
We do not know the answer to any of these questions, but can project, regarding the difficulty of trying to get to answers. Certainly (with respect to each item of collateral), the bankruptcy court would have to conduct a hearing during which it would have to weigh and analyze (and we can see it now) something to be described as “the various factors and intersecting policies with full recognition that though it might cost the debtor something, it should not be too much and though the creditor need suffer no cost, it might have to suffer some.” In furtherance of its equitable analysis, it would seem that the court would have to focus upon the type of property — is it big, little, weatherproof (or not), furniture, electronics, vehicles (running or not), transportable without assistance (or not).
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Would the court find a usable body of legal authority on the issue of whether, even in the case of the VCR (easily transportable, etc.), the debtor would have to make a special trip to deliver it or could drop it off during a grocery store run that would bring the debtor closest to the delivery point with the least inconvenience?
Now, we have said that trustees would revolt if called upon to effectuate the “distribution” of property that the Seventh Circuit thinks it has required. Realizing that the Seventh Circuit probably cares little about the bankruptcy courts’ perspective as to their job responsibility, is it rational to conclude that the same Congress that promulgated § 554(c) intended for the bankruptcy courts to be the traffic police, post-bankruptcy, for the distribution of personal property back to secured lenders so that secured lenders would not be subject to the same state law upon which the original contracts were confect-ed? NO. In light of
Butner,
of course, NO.
The Seventh Circuit did not think its way to the end of its pronouncement. Problematically, this seems to be a recurring consequence (recall the fourth alternative courts) of making (up) pronouncements.
Edwards
postulates a groundless equitable (federal) rule to fill the nonexistent holes in the statutory scheme as a reaction to the same exercise performed by the fourth alternative courts at the other end of the political/social spectrum. Neither hold water.
Taylor v. AGE Fed. Credit Union (In re Taylor)
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comes after
Edwards.
The debtors in
Taylor
sought to retain vehicles mortgaged to their credit union. The debtors were current on their monthly payments but were in default pursuant to a bankruptcy default clause in their financing agreement. Marking “retain” on their Statement of Intention, the debtors failed to specify a particular method of retention. The credit union and thereafter the trustee filed motions to compel the debtors’ compliance with § 521(2). “The bankruptcy court entered an order compelling the Taylors to enter into a reaffirmation agreement or redeem the property.”
110
The
Taylor
court interpreted the “plain meaning” of § 521(2)(A) as requiring an election of either redemption, reaffirmation, exemption or surrender and § 521(2)(B) as requiring the effectuation of that election within the allotted time period. The Court ordered the debtors to reaffirm, redeem, or surrender the property.
111
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The primary basis for the
Taylor
holding is its interpretation of “if applicable,” which, we think, makes sense. The terms “surrender or retention” are disjunctive. The list of federal options following “if applicable” are methods of “retention.” The court concludes, therefore, that “if applicable” modifies “surrender or retention,” i.e., the options are applicable to either “surrender or retention.” The question, then, is whether the federal choices are applicable to the initial, basic choice — to “surrender” or to “retain.”
Referring to the language preceding the phrase “if applicable,” it is clear when the options of redemption and reaffirmation would not be applicable. This language does not apply to a debtor’s surrender of the property; it therefore must apply to a debtor’s retention of property. If a debtor retains secured property, then the options of redemption and reaffirmation are applicable and the debtor is required to redeem or reaffirm.
112
In addition to its “clear reading” of § 521(2), the
Taylor
court also notes that “retention” does not satisfy the “performance” requirement of § 521(2)(B) because “retention” can not be completed within 45 days and does not need to be “performed”:
The plain language of section 521(2)(B), which requires a debtor, within forty-five days of the filing of the statement of intention, to “perform his intention with respect to such property ...” indicates that the debtor must perform some act with respect to the property within a specified period of time. An option to retain and keep current is not an act capable of performance within forty-five days. This option provides that the debtor’s performance not be concluded until the expiration of the contract, a period of time ordinarily beyond the forty-five day limit. Additionally, retention is not a duty that the debtor needs to “perform,” as the debtor already has possession of the property.
113
The court cites with approval the following passage from the bankruptcy court’s opinion:
‘... If Debtors intend on remaining current in their obligations under the contract, they may negotiate a reaffirmation agreement with the creditor. Allowing retention of the property without reaffirmation or redemption would be tantamount to forcing the creditor into a
de facto
reaffirmation agreement with no recourse against the debtor.... Furthermore, the debtors would have no incentive to keep the property in good condition or to continue making payments if the value of the collateral declined below the amount of the debt or was destroyed. Such an arrangement is contrary to the language of the Code.’
114
Following the bankruptcy court’s lead, the Eleventh Circuit pulls out a shameless old saw with which to pound (or, we guess, to carve up) the debtor:
Allowing a debtor to retain property without reaffirming or redeeming gives the debtor not a ‘fresh start’ but a ‘head start’ since the debtor effectively converts his secured obligation from recourse to nonrecourse with no downside risk for failing to maintain or insure the lender’s collateral.
115
Before we discuss
Taylor
further, it will be helpful to look at the district court opinion (which reversed the bankruptcy court and was) reversed by
Taylor.
116
According to the district court, the question before it “is whether § 521 provides that the debtor who wishes to retain encumbered property must redeem the property
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or reaffirm the obligation or may the debt- or simply retain and remain current on the existing contractual obligation.4”
117
In footnote 4 of its opinion the district court shows the distance between the analyses we are looking at and the one we, by this opinion, advance. According to the district court, “The surrender portion of § 521 is not at issue in this appeal and the court will not address it in this order.”
118
The reason the district court believes itself not to be involved with the surrender portion of § 521 is two-fold. First, the court, without saying so, believes “surrender” to mean lose ALL state law rights to and assume the responsibility of delivering up the property. Second, the court (rationally) extends the fourth alternative cases (which are embraced) to invalidate bankruptcy default clauses as a matter of (federal) law.
119
The statutory interpretation format used by the district court is that espoused by
Boodrow,
which allows the district court to conclude that the statute (§ 521(2)(A)) is ambiguous and therefore can be rewritten to include the fourth federal alternative.
We see the
Taylor
case as containing the essence of the problem inherent in the analyses that have preceded us. The surrender “part” of § 521 is not at issue in the district court, only the “retain” part. Because of this we get the issue discussed in terms of having to make up a fourth alternative (because no one would ever choose “surrender” without it) or requiring that retention can be exercised only through redemption, reaffirmation, or exemption/avoidance (because no one would choose these alternatives if there was a fourth, non-surrender alternative). The tension is between the political ends of the aforementioned spectrum, with each end trying to maintain the viability of its social preference through statutory interpretation. The funny thing is that the word “surrender” is effectively read out of the Code, certainly is read out as a viable, practical alternative. Who in their right mind would ever choose “surrender” when one could choose “reaffirmation,” sign the agreement and then “rescind it”?
A couple of additional observations about
Taylor.
It is clear that both the bankruptcy court and the Eleventh Circuit are disdainful of the prospect of a forced federal right of reinstatement (so are we). But is it necessary to be regaled about the prospect of debtors who, notwithstanding that they are current on their obligations and whose payments have been accepted by the creditor right along, yearn to embark upon unbridled

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1856480. Public record. Not legal advice.