Amicus Curiae Brief — Textron Funding Corp. v. Bessette, 121 S. Ct. 2016 (2001) (No. 00-1454)

In the

Supreme Court of the United States

TEXTRON FUNDING CORP. ET AL.,

Petitioners,

We

CHERYL BESSETTE,

Respondent.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the First Circuit

BRIEF OF AMICUS CURIA NEW ENGLAND LEGAL

FOUNDATION IN SUPPORT OF PETITIONER

Counsel for Amicus Curiz MICHAEL E. MALAMUT,

Counsel of Record

New England Legal Foundation

150 Lincoln Street

Boston, MA 02111

Telephone: (617) 695-3660

Facsimile: (617) 695-3656

No. 00 - 1454

In the

Supreme Court of the United States

TEXTRON FUNDING CORP. ET AL.,

Petitioners,

V.

CHERYL BESSETTE,

Respondent.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the First Circuit

MOTION OF AMICUS CURIAE NEW ENGLAND LEGAL

FOUNDATION FOR LEAVE TO FILE BRIEF IN SUPPORT OF

PETITIONER

Counsel for Amicus Curia MICHAEL E. MALAMUT,

Counsel of Record

New England Legal Foundation

150 Lincoln Street

Boston, MA 02111

Telephone: (617) 695-3660

Facsimile: (617) 695-3656

Pursuant to Supreme Court Rule 37.2, counsel for

Amicus Curiae, who is employed by the New England Legal

Foundation, have attempted to secure written consent for the

filing of the attached Brief Amicus Curiae from counsel for the

Petitioners and Respondents. Although counsel for Petitioners

granted such consent, counsel for Respondents withheld it.

Accordingly, counsel for Amicus Curiae hereby moves this

Court for leave to file the Brief Amicus Curiae which is

submitted herewith. Amicus makes this motion on the

following grounds:

Amicus curiz New England Legal Foundation (“NELF”),

a non-profit, public interest law firm, was incorporated in

1977. Its membership consists of individuals, businesses, and

others who believe in promoting balanced economic growth

for New England, protecting the free enterprise system, and

defending economic rights. NELF’s more than 130 members

and supporters include a cross-section of large and small

businesses from all parts of New England and the United

States. NELF has regularly appeared in state and federal court,

as party or counsel, in cases raising issues of general economic

significance to the business community. See, e.g., Palazzolo v.

Rhode Island, No. 99-2047 (U.S. argued February 26, 2001);

Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000);

UNUM Life Ins. Co. v. Ward, 526 U.S. 358 (1999); Lockheed Corp.

v. Spink, 517 U.S. 882 (1996); BMW v. Gore, 517 U.S. 559 (1996);

Estados Unidos Mexicanos v. DeCoster, 229 F.3d 332 (1st Cir.

2000); Reich v. Southern New England Telecommunications Corp.,

121 F.3d 58 (2d Cir. 1997); Georgine v. Amchem Products, Inc., 83

F.3d 610 (3d Cir. 1996); Conservation Law Foundation v.

Department of the Air Force, 79 F.3d 1250 (ist Cir. 1996);

Preseault v. United States, 66 F.3d 1167 (Fed. Cir. 1995); B.F.

Goodrich Co. v. Murtha, 958 F.2d 1192 (2d Cir. 1992). NELF

served as amicus curiz supporting the position of Petitioner in

this matter at the Court of Appeals for the First Circuit below.

Amicus seeks to bring to the Court's attention its views,

and those of its supporters, concerning the effect of the

decision below on the availability of secured financing at

reasonable rates to consumers. In addition, NELF’s members

are affected by the business climate, which is strongly affected

by the ability of retail businesses to sell goods subject to

secured interests. Furthermore, some of NELF’s members are

directly interested in the issue of consumer credit financing

because they are involved in lending to consumers, in

manufacturing consumer products, and in selling goods at

retail. A healthy retail sales climate is a mark of a vital and

vibrant economy. For those reasons, and because the ready

availability of secure consumer credit fuels a thriving

economy, NELF’s members are concerned about the issues

presented this case. If the opinion of the Court of Appeals

below is not reversed, the availability of consumer finance on

reasonable terms may be reduced and the interest rates for

secured consumer transactions increased. Amicus believes that

this brief may provide an additional perspective which may

aid the Court in determining whether to grant the petition for

a writ of certiorari.

Wherefore, NELF respectfully requests that this Court

grant Amicus Curiae leave to file the attached brief in support

of the Petition for a Writ of Certiorari.

Respectfully submitted,

MICHAEL E.. MALAMUT

Counsel of Record

New England Legal Foundation

150 Lincoln Street

Boston, MA 02111

Telephone: (617) 695-3660

Facsimile: (617) 695-3656

Dated: April 18, 2001

QUESTIONS PRESENTED

Is the remedy of a debtor, represented by counsel, who

fully pays reaffirmed debt so as to retain the collateral,

but nevertheless alleges injury from the collection of a

discharged debt because of the failure to comply with

the statutory requirements for an enforceable

reaffirmation agreement, a contempt proceeding before

the bankruptcy court that issued the discharge or does

Section 105 of the Bankruptcy Code create a

substantive implied cause of action for damages, which

may be brought as a putative class action in any federal

court where the creditor may be served?

eee

TABLE OF CONTENTS

QUESTIONS PRESENTED ...........0scccccecscecseceeece i

TABLE OF CONTENTS 2.5 ccc ccccccccssccccectuascecasun ii

TAGER CU ANITIIIIITUNS ooo ccc asc nccce casesncscvenssees iii

DNTEREST OP AMMICI CURIE 2. oc cc cccccccecessescness eens 1

GATMAGICT OF THE CADE occ cc cccvcccaswcccsncestesscas 3

GUBAMARY OF AMGUBGET .o. cc ci ccccccsessvccccestscns 3

ADRES oo. kik.c kon ches ic thes Rive hee 3

I. THIS CASE INVOLVES AN IMPORTANT QUESTION

OF UNSETTLED FEDERAL LAW THAT SHOULD BE

Rennes Gt THUGS occ vevceen sn eseseuriseces 3

Il. THE COURT OF APPEALS FAILED TO TAKE INTO

ACCOUNT ADVERSE PUBLIC POLICY

néctcsikkadddetss adipsia 10

COONMCEAIIIN io ve kbd a Sadek ceesscdsnansaedpeuscnereces 13

TABLE OF AUTHORITIES

CASES

Arnhold v. Kyrus,

Rs by Ff to 8 rrr rrr 6

Bessette v. Avco Financial Services,

230 F.3d 439 (1st Cir. 2000) ........... 3, 4, 6, 7,9, 10, 11

Cox v. Zale Delware, Inc.,

239 F.3d 910 (7th Cir. 2001) ............. 4,5, 6, 7,8, 10

In re Briggs,

143 B.R. 438 (Bankr. E.D. Mich. 1992) ................ 5

In re Carlos,

rai DUG f Ret. fe &. ee 6

In re Edwards,

Bo f Uy, le || re rey 12

In re Grinnell,

170 B.R. 495 (Bankr. D.R.I. 1994) .................... 7

In re Izzo,

EGF GR. 1 CE. EA, SOD <b cccececucdcssscauns 7

In re Kamps,

217 B.R. 836 (Bankr. C.D. Cal. 1998) ................. 6

In re Newsome,

3 B.R. 626 (Bankr. W.D. Va. 1980) ................... 6

Pertuso v. Ford Motor Cred. Co., No. 98-CV-70551-DT, 1998

LEXIS 21191 (E.D. Mich. Dec. 30, 1998), aff'd,

ae Fe Gar GEE: GU 0.64.6 caagnuntssavnsssaces 6

Pertuso v. Ford Motor Cred. Co.,

233 F.3d 417 (6th Cir. 2000) ............... 4,5, 6,9, 10

STATUTES

BR UGA. BORD oc cccccescccenssbadhaawennees 3, 4,7,9, 11

SCRIBE ob ouoisickta cease 11

11 U.S.C. § 521 (2) (C) ... 2. cccccccccccccccccccccces 12

BD USC. GSB 2. ccccccccccccccccccccecess dcccsssous 4

11 USC. SBE... cccccccccccccccccccccccecces 8,11

11 U.S.C. § S26. (C) (2)... 0... ncccccccccccccccccccccesces +

19 USC. BSBA DED «2 - ccccccccccccccccccccessececs 4,7

Pub. L. No. 98-353, 98 Stat. 354 (1984) ............00055: 8

Pub. L. No. 103-394, 108 Stat. 4108 (1994) ............... 4

RULES

ke tN er eer Pree rr rer CT crt 4,9

OTHER AUTHORITIES

S. REP. NO. 96-65 (1983) .........ccccccccccccceccces 8, 11

NATIONAL BANKRUPTCY REV. COMM’N, BANKRUPTCY:

THE NEXT TWENTY TEARS (1997) .........-+-++- 4,8,12

Karen Gross, Perceptions and Misperceptions of

Reaffirmation Agreements, 102 COM. L.J. 339 (1997) ..... 6

Elixzabeth Warren, A principled Approach to Consumer

Bankruptcy, 71 AMMERICAN BANKR. L.J. 483 (1997) ..... 8

Michael P. Alley, Comment, Redemption,

Reaffirmation, Exemption, and Retention in

Chapter 7 Bankruptcy: Extinction Looms Near for

the Free Ride, 47 KAN. L. REV. 683 (1999) ...........-- 12

iv

No. 00 - 1454

In the

Supreme Court of the United States

TEXTRON FUNDING CORP. ET AL.,

Petitioners,

Vv.

CHERYL BESSETTE,

Respondent.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the First Circuit

BRIEF OF AMICUS CURL£ NEW ENGLAND LEGAL

FOUNDATION IN SUPPORT OF PETITIONER

INTEREST OF AMICUS CURLE

Amicus curiz New England Legal Foundation (“NELF”), a

non-profit, public interest law firm, was incorporated in 1977."

Its membership consists of individuals, businesses, and others

who believe in promoting balanced economic growth for New

England, protecting the free enterprise system, and defending

economic rights. NELF’s more than 130 members and

supporters include a cross-section of large and small

businesses from all parts of New England and the United

States. NELF has regularly appeared in state and federal court,

as party or counsel, in cases raising issues of general economic

significance to the business community. See, e.g., Palazzolo v.

Rhode Island, No. 99-2047 (U.S. argued February 26, 2001);

1 Pursuant to Supreme Court Rule 37.6, counsel for amicus states that

counsel for neither Petitioner nor Respondent authored the

accompanying brief in whole or in part and no person or entity other

than amicus made a monetary contribution to the preparation or

submission of the brief.

Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000);

UNUM Life Ins. Co. v. Ward, 526 U.S. 358 (1999); Lockheed Corp.

v. Spink, 517 U.S. 882 (1996); BMW v. Gore, 517 U.S. 559 (1996);

Estados Unidos Mexicanos v. DeCoster, 229 F.3d 232 (1st Cir.

2000); Reich v. Southern New England Telecommunications Corp.,

121 F.3d 58 (2d Cir. 1997); Georgine v. Amchem Products, Inc., 83

F.3d 610 (3d Cir. 1996); Conservation Law Foundation v.

Department of the Air Force, 79 F.3d 1250 (1st Cir. 1996); Preseault

v. United States, 66 F.3d 1167 (Fed. Cir. 1995); B.F. Goodrich Co.

v. Murtha, 958 F.2d 1192 (2d Cir. 1992). NELF served as amicus

curiz supporting the position of Petitioner in this matter at the

Court of Appeals for the First Circuit below.

Amicus seeks to bring to the Court's attention its views, and

those of its supporters, concerning the effect of the decision

below on the availability of secured financing at reasonable

rates to consumers. In addition, NELF’s members are affected

by the business climate, which is strongly affected by the

ability of retail businesses to sell goods subject to secured

interests. Furthermore, some of NELF’s members are directly

interested in the issue of consumer credit financing because

they are involved in lending to consumers, in manufacturing

consumer products, and in selling goods at retail. A healthy

retail sales climate is a mark of a vital and vibrant economy.

For those reasons, and because the ready availability of secure

consumer credit fuels a thriving economy, NELF’s members

are concerned about the issues presented this case. If the

opinion of the Court of Appeals below is not reversed, the

availability of consumer finance on reasonable terms may be

reduced and the interest rates for secured consumer

transactions increased. Amicus believes that this brief may

provide an additional perspective which may aid the Court iri

determining whether to grant the petition for a writ of

certiorari.

CR ghee Nm TO,

STATEMENT OF THE CASE

Amicus adopts the Statement of the Case contained in the

Brief of the Petitioners, Avco Financial Services, Inc., et al.,

now known as Textron Funding Corp. et al. (“Avco’).

SUMMARY OF ARGUMENT

Amicus argues that neither the Court of Appeals for the

Seventh Circuit nor the Court of Appeals for the Sixth Circuit,

both of which have addressed the issue of the appropriate

remedy for violations of reaffirmation filing procedures, have

found a substantive remedy for such violations in 11 U.S.C. §

105 (“Section 105”). The decision of the Court of Appeals for

the First Circuit, finding a substantive remedy in Section 105

in the case below, is therefore at variance with the decisions of

the majority of the Courts of Appeals that have dealt with this

issue. (pp. 3-10). Amicus further contends that public policy

militates against a substantive remedy for reaffirmation filing

violations. A substantive remedy would encourage bankrupt

debtors to attempt to retain secured collateral without

payment, causing disruption to the secured credit system that

allows for lower consumer interest rates. (pp. 10-12).

ARGUMENT

I. THIS CASE INVOLVES AN IMPORTANT QUESTION OF

UNSETTLED FEDERAL LAW THAT SHOULD BE RESOLVED BY

THIS COURT.

This Court should grant the petition for certiorari to the

Court of Appeals for the First Circuit to review of the decision

below, Bessette v. Avco Financial Services, 230 F.3d 439 (1st Cir.

2000). Amicus NELF supports and adheres to the position of

Petitioner Avco on the substantive and procedural issues

raised in its Petition for Writ of Certiorari. In addition, NELF

contends that a review of the facts of this case, considered in

light of common sense and ordinary business experience,

underscores the inappropriateness of a substantive remedy

a

eins

‘

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t

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;

under 11 U.S.C. § 105 for failure to file reaffirmation

agreements. In light of the conflict among the circuits

regarding the remedy for unfiled reaffirmation agreements

and the extent to which this issue is a nationwide concern to

many large-scale creditors, this case qualifies for Supreme

Court review. SUP. CT. R. 10 (a) (certiorari warranted when “a

United States court of appeals has entered a decision in conflict

with the decision of another United States court of appeals on

the same important matter . . . .”). Compare Bessette with Cox v.

Zale Delaware, Inc., 239 F.3d 910 (7th Cir. 2001), and Pertuso v.

Ford Motor Cred. Co., 233 F.3d 417 (6th Cir. 2000).

Respondent Cheryl Bessette (“Bessette”) purchased a

bedroom set from Cardi’s Furniture on December 26, 1994,

with a secured loan from Petitioner Avco. Petition at 2. The

original amount of the loan was $2015.66 at 21% interest. App...

at 118. Only nine months later, Bessette signed a reaffirmation

agreement for $1500.00 at only 12% interest, 9% lower than the

original loan amount. App. at 124. The reaffirmation

agreement included language indicating that Bessette could

rescind the reaffirmation agreement within 60 days and was

signed by her attorney. App. at 124-25. The agreement did

- not, however, contain a statement indicating that Bessette was

not required to reaffirm.’ Id. The agreement was not filed

with the court as required by 11 U.S.C. § 524 (“Section 524”).

App. at 95. Bessette retained, and apparently continued to use,

2 In 1994, Section 524 (c) (2) was again amended by adding a

requirement that reaffirmation agreements include a statement

advising the debtor that the agreement is not required. Pub. L. No.

103-394, 108 Stat. 4108 (1994). The National Bankruptcy Review

Commission, however, denigrated the value of the mandated

language, referring to it as “boilerplate.” NATIONAL BANKRUPTCY

REV. COMM’N, BANKRUPTCY: THE NEXT TWENTY YEARS 151 (1997)

(indicating that this new requirement was a “modest change[] to the

boilerplate disclosure requirements” (emphasis added)). Bessette’s

attorney signed a declaration indicating that he had informed her

fully of her rights as required by Section 524 (c) (3). App. at 125.

4

the bedroom set.

The division among the circuits regarding the legal

implications of this scenario appears to rest largely on the

attitude of the respective courts towards participants in this

typical reaffirmation situation. NELF contends that the Court

of Appeals for the Seventh Circuit more accurately captures

the reality of the typical reaffirmation:

[T]he debtor . . . represented by counsel when he

signed the reaffirmation agreement, made the

payments called for by the agreement voluntarily. He

wanted to hold on to the property that he would have

lost had the creditor repossessed the property to

enforce its lien in it .... The violation of section 524 (c)

was thus technical, trivial, and arguably, indeed, condoned

and hence no violation at all, and certainly not the sort

of thing that would warrant a proceeding for

contempt.

Cox, 239 F.3d at 915 (emphasis added). See Pertuso, 233 F.3d at

424-25.

The Court of Appeals for the First Circuit, on the other

hand, apparently views the conduct of a creditor that fails to

3 [The debtors] were represented by an attorney, . . . had

previously stated their intent to reaffirm the debt, ... the

reaffirmation agreement was reasonable on its face, and ...

[the creditor] was not guilty of harassment. If the [debtors]

were interested in knowing whether the agreement had

been filed, it would have been simple enough for them or

their attorney to find out. Viewed as a whole, the facts

alleged . . . simply do not evince conduct that is “contrary to what

a reasonable person would consider to be fair under the

circumstances.”

Pertuso, 233 F.3d at 424-25 (citations omitted) (emphasis added), quoting

In re Briggs, 143 B.R. 438, 453 (Bankr. E.D. Mich. 1992).

a iii

file a reaffirmation agreement signed by debtor’s counsel as a

serious violation of consumer protection: “This appeal

involves the wrongful, and supposedly common, practice by

certain creditors of coercing naive and inexperienced debtors

into reaffirming debt that has been properly discharged in

bankruptcy.” Bessette, 230 F.3d at 442. Despite the outraged

introduction by the First Circuit, dispassionate review of the

circumstances of Bessette, Cox, and Pertuso reveals that in each

case: (1) there was, in fact, no discussion in the appellate

opinion of coercion of the debtor; (2) the debtors were

represented by counsel, who were charged with advising their

supposedly “naive and inexperienced” clients in order to

overcome these alleged deficiencies; and (3) the debtors

retained the collateral.

Moreover, in reality, to the extent that the filing of

reaffirmation agreements approved by debtors’ counsel may

have been intended to protect debtors, in the flood of filings

and burgeoning bankruptcy caseloads, such agreements

tended to receive no review or at most pro forma review.‘ Prior

4 It is, in fact, not at all clear that the obligation to file the reaffirmation

agreement rests with the creditor. Section 524 (c) (3) is silent as to who

is to file. It t has long been accepted that only the debtor has the right

to apply for approval of a reaffirmation agreement. Arnhold v. Kyrus,

851 F.2d 738, 742 (4th Cir. 1988); In re Pertuso, No. 98-CV-70551-DT, 1998

U.S. Dist. LEXIS 21191, at *8-9 (E.D. Mich. Dec. 30, 1998) (“In fact, a

messenger can file the agreement for both sides. Neither party should

be penalized for failing to file the agreement.”), aff'd, 233 F.3d 417 (6th

Cir. 2000); In re Kamps, 217 B.R. 836, 843-44 (Bankr. C.D. Cal. 1998); In

re Carlos, 215 B.R. 52, 61 (Bankr. C.D. Cal. 1997); In re Newsome, 3 B.R.

626, 628-29 (Bankr. W.D. Va. 1980). The Kamps court strongly advises

creditors to file reaffirmation agreements, but the court makes it clear

that burden of ensuring the approval of the reaffirmation lies primarily

with the debtor. In re Kamps, 217 B.R. at 844. See Karen Gross,

Perceptions and Misperception of Reaffirmation Agreements, 102 Com. L.J.

339, 341 n.14 (1997). When the burden of filing the reaffirmation

agreement at least arguably lies primarily with the debtor and the

to 1996, the Rhode Island Bankruptcy Court did not even

cursorily review the terms of reaffirmation agreements

approved by debtor’s counsel. In re Grinnell, 170 B.R. 495, 496

(Bankr. D.R.I. 1994). Subsequently, the same court held that,

although Section 524 (c) (3) “eliminated the requirement of

court approval as to agreements containing attorney

affidavits,” it would thereafter internally review attorney

approved reaffirmations. In re Izzo, 197 B.R. 11, 12 & n.2

(Bankr. D.R.I. 1996). Thus, while Bessette’s reaffirmation, if

filed, might have received a cursory review by the bankruptcy

court, from the information in the record there is no reason to

believe that the court would have had any reason to question

an attorney-approved agreement based on a secured interest

in substantial furniture with a lower interest rate-than the

original loan. See App. at 124.

By finding a cause of action in 11 U.S.C. § 105 for this

alleged harm to debtors, the Bessette court pushes Section 105

beyond its plain meaning as a source of procedural (not

substantive) remedies and ignores the true nature of this case,

as explained in Cox:

[The debtor’s] lawyer could have advised him that, the

debt having been discharged, [the debtor] didn’t have

to keep paying [the creditor]}—though the consequence

of not paying might be that [the creditor] would

repossess the [collateral]. [The creditor] might not be

able to enforce [the debtor’s] agreement to pay it...,

but it could enforce its security interest, which the

order of discharge had not touched. ... [T]he stakes

in this case are negative—that [the debtor] would be

worse off if he won than if he lost—since if he can get

debtor is represented by counsel, it seems harsh to characterize the

creditor that relies on the reaffirmation agreement as “coercing [a] naive

and inexperienced debtor[]” as the Bessette court would have it. 230 F.3d

at 442.

his [post-discharge payment] back, [the creditor] can

get the [collateral] back, together with the rental value

of the [collateral] during the period since{the creditor],

by signing the debt-reaffirmation agreement, forwent

its right to repossess it.

Cox, 239 F.3d at 915-16.

Cox recognizes the practical implications of the typical

straightforward reaffirmation agreement and the relatively pro

forma nature of reaffirmation review, especially when debtors

are represented by counsel. While the reaffirmation

procedures originally enacted in 1978 had required a discharge

hearing in every case (regardless of whether the debtor was

represented by counsel), they proved unduly costly and

burdensome. See S. REP. NO. 98-65 at 59-60 (1983). The

process for debtors represented by counsel, such as Bessette,

was therefore streamlined by the 1984 Bankruptcy

Amendments and Federal Judgeship Act, which allowed

reaffirmation agreements by debtors represented by counsel to

be approved without a hearing if a detailed affidavit of counsel

was filed. Pub. L. No. 98-353, 98 Stat. 354 (1984); NATIONAL

BANKRUPTCY REV. COMM’N, BANKRUPTCY: THE NEXT TWENTY

YEARS 151 (1997); S. REP. NO. 98-65 at 59-60 (1983) (“[T]he new

section is designed to encourage the prompt execution of good

faith reaffirmation agreements by eliminating the cumbersome

and unnecessary prior approval procedures which inhibited debtors

and creditors from consummating mutually acceptable debt

retirement arrangements.” (emphasis added)).

The Reporter for the National Bankruptcy Review

Commission acknowledged that, even after the 1984 reforms,

the reaffirmation procedures remain complex and

burdensome. Elizabeth Warren, A Principled Approach to

Consumer Bankruptcy, 71 AMERICAN BANKR. L.J. 483, 500-01

(1997). The purpose of the complexity of Section 524 (c),

however, is not to trip up creditors acting in good faith so that

debtors can retain collateralized goods without payment, as

8

appears to be urged by Bessette, but rather to balance carefully

debtors’ procedural protections with debtors’ desire to retain

collateralized goods.

This case and the Pertuso case, taken together, demonstrate

the importance of resolving the dispute among the circuits

concerning the rights of the parties when a reaffirmation

agreement is not filed. The debtors in Pertuso are Rhode Island

residents, as is the debtor in Bessette. The transactions in

question are similar, reaffirmations of secured debt (in Pertuso

a van, in Bessette a bedroom set) made with the advice of

counsel but never filed with the Bankruptcy Court, and both

cases were initiated with the intent of starting a class action to

capitalize on the failure of creditors to file reaffirmation

agreements. Because the creditor in Pertuso was

headquartered in Michigan, suit was brought there and

ultimately found meritless by the Court of Appeals for the

Sixth Circuit. Bessette was brought in the First Circuit, which

now holds that a remedy beyond traditional contempt can be

pursued for such violations based on 11 U.S.C. § 105—two

Rhode Island debtors, two vastly different results. See Pertuso,

933 F.3d at 424. Given the national nature of consumer finance

and the federal nature of bankruptcy, it is inevitable that,

unless this Court resolves the difference among the circuits,

failure-to-file-reaffirmation-agreement class actions will be

brought whenever possible within the First Circuit as Section

105 claims. The occasional and rare individual claimant

outside the First Circuit who mistakenly sues in another circuit

will be denied substantial relief, because the majority of other

circuits that have considered the issue hold that the remedy, if

any, is a contempt hearing in the court that supervised the

bankruptcy proceeding. On the other hand, other

debtors—who by fortuity borrowed from creditors sued by

well connected class action attorneys who file in the First

Circuit—will reap the benefits of class action suits and

settlements despite retaining their collateral. This is exactly

the type of situation that Supreme Court Rule 10 (a) addresses

9

in recognizing the importance of resolving inter-circuit

differences.

II. THE COURT OF APPEALS FAILED TO TAKE INTO ACCOUNT

ADVERSE PUBLIC POLICY IMPLICATIONS.

The only way that the Bessette court can fail to reach a

similar conclusion to that of Cox and Pertuso—that collecting on

an unfiled reaffirmation agreement when the debtor retains

the collateral is at most a technical violation—is to hypothesize

that debtors will typically be able to retain secured collateral

without any payment whatsoever.” Much secured debt is

undersecured. Cox, 239 F.3d at 912. In the individual case, it

is rarely worth the legal, transportation, and other

transactional costs to repossess secured collateral that can only

be resold at a discount as used goods. Therefore, in the

individual case, the debtor owning collateral subject to a

security interest might well gamble on keeping the collateral

without fear of repossession. A court inclined to this type of

analysis might feel that the creditor receives a windfall if the

debtor repays the debt: after all, in retrospect, the debtor might

have kept the collateral without making payments on the

reaffirmation agreement. Viewed with that jaundiced eye, it

may seem unfair to require debtors who retain secured

collateral to pay their secured debts post-discharge. Only seen

in this light does the Bessette opinion make any sense.

Looked at in the broader context, however, without the

benefit of retrospective hypotheticals, in many cases creditors

do repossess undersecured collateral, even when the costs of

doing so exceed any possible benefits to the creditor. The

reason for this is to uphold the validity of the secured debt

system. Secured debt allows consumers to purchase goods for

5 The Bessette court does not imply that the reaffirmation agreement itself

is any way unfair. In fact, the interest rate is significantly lower than on

the original loan agreement. App. at 118, 124.

10

lower interest rates and, for those with marginal credit

histories, oftentimes to purchase needed household goods at

all. Like the tax system, the secured debt system will only

work if the majority of the participants voluntarily comply

with their obligations. Congress recognized that reality when

it established special protections for secured debt in

bankruptcy proceedings. See 11 U.S.C. § 521. Enforcement is

required to retain the integrity of the system, even if it may not

make financial sense in the particular case viewed

independently. If, following the implicit logic of Bessette,

debtors were encouraged to repudiate their secured debts and

hope that their creditors would not repossess, the trust

inherent in the secured debt system would collapse under the

sheer number of uncollectible secured claims. To the extent

that the protections of secured debt are thus whittled away

and secured debt begins to approximate more closely

unsecured debt, the benefits to debtors inherent in secured

debt—lower interest rates and _ increased credit

availability—will be diminished.

Thus, as a matter of public policy, harsh sanctions in the

form of a class action recovery under 11 U.S.C. § 105, with the

potential for punitive damages, would discourage creditors

from entering into reaffirmation agreements, thereby (1)

destroying the carefully constructed Congressional balance to

encourage good faith reaffirmation agreements, and (2)

making creditors less likely to enter into secured credit

agreements, with their considerable benefits to the typical

consumer. S. REP. No. 98-65 at 59-60 (1983). While Bessette

and the Bessette court apparently feel that a new substantive

cause of action for violations of the technical requirements of

Section 524 (c) will result in more abandonment of

collateralized goods to debtors, it might well result instead in

more repossessions of goods essential to debtors such as their

cars, vans, refrigerators, washing machines, jewelry, and

bedroom sets. A right of action under Section 105 would result

in a windfall to plaintiffs who would likely retain—without

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payment for use—their property, while doing little to effectuate

better compliance with reaffirmation requirements. Allowing

such litigation would likely increase the cost of financing

goods for all consumers,* and thus serve as a disincentive for

consumers contemplating purchases on credit, with an adverse

impact on the consumer-driven economy. An increase in

interest rates for secured purchases is more likely to harm

those of moderate means than an occasional violation of the

reaffirmation protections that may be readily vindicated

through traditional contempt proceedings if warranted.

All of Avco’s conduct, taken together, seems more like

sloppy bookkeeping than a deliberate policy of ignoring

important procedural safeguards in order to take advantage of

debtors like Bessette who were represented by counsel.

Bessette, however, aided by the decision below, seeks to take

advantage of these largely technical violations in order to

receive all the benefits of her bargain without paying any of

the costs. This basic unfairness and the adverse public policy

effects that flow from it counsel in favor of granting a writ of

certiorari in this case.

6 See In re Edwards, 901 F.2d 1383, 1386 (7th Cir.1990); Michael P.

Alley, Comment, Redemption, Reaffirmation, Exemption, and Retention

in Chapter 7 Bankruptcy: Extinction Looms Near for the Free Ride, 47

KAN. L. REV. 683, 733 & n.452 (1999) (*[S]ome proponents of the

inclusive position [on retention under Section 521 (2) (C)] suggest

that creditors should request larger downpayments or raise interest

rates to cover the risks of retention.” (emphasis added)). See

NATIONAL BANKRUPTCY REV. COMM’‘N, Recommendations for Reform

of Consumer Bankruptcy Law by Four Dissenting Commissioners at 37.

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CONCLUSION

For the reasons stated above, the petition for a writ of

certiorari should be granted.

Counsel for Amicus Curie

Dated: April 18, 2001

Respectfully submitted,

NEW ENGLAND LEGAL

FOUNDATION,

By its at ysrne) 2

Michael E. Melamut

Counsel of Record

New England Legal Foundation

150 Lincoln Street

Boston, MA 02111

Telephone: (617) 695-3660

Facsimile: (617) 695-3656

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