MEMORANDUM OPINION AND ORDER DENYING MOTION FOR RECONSIDERATION
STANLEY B. BERNSTEIN, Bankruptcy Judge.
A hearing on the application to reaffirm the indebtedness to General Motors Acceptance Corporation (GMAC) was held on April 9, 1984. The application was denied at that hearing; a written order was entered on April 23, 1984. This motion followed.
The debtor filed a Chapter 7 petition on January 7, 1984. On March 8, 1984, an application to reaffirm the indebtedness owed to GMAC was filed by the debtor. Under this Court's standard procedures, the application was accompanied by a verified "information sheet" which contains information critical to this Court's exercising its statutory duty to determine whether the requested reaffirmation will pose a hardship upon the debtor and her family and whether that reaffirmation is in the debtor's best interests. 11 U.S.C. § 524(c).
This debtor's information sheet revealed that she is not married and supports two teenaged daughters. She is not working and collects $771.00 a month in unemployment compensation; she also receives $150.00 a month from rental income. She also revealed that she is making a monthly house payment of $259.00 a month.
The debtor sought to reaffirm the indebtedness owed on her 1980 Cadillac Coup de Ville. The present value of the automobile was listed as $9,175.00 and the remaining balance was stated as $7,956.37. The monthly payment is $345.93.
The Court sent a notice of hearing to the debtor after its preliminary evaluation that the house payment and car payment left insufficient income for the debtor to support herself and her children, and as such, the reaffirmation might very well pose an undue hardship upon the debtor's family.
The hearing raised even more doubt on whether the reaffirmation was in the best interest of the debtor. The debtor's counsel stated that the debtor's daughters are employed and "lend income to the family and basically support themselves." (Tr. at 2). He did admit that the debtor "does lend support to them," thus the children are not self-sufficient. Id. at 3. He also stated that the debtor's house payments "are much lower [than revealed on the information sheet], because her mother pays rent and lives at the house." Id. No testimony was presented concerning the daughters' incomes or the extent to which they are able to support themselves or contribute to family income, nor was there any testimony on the amount of rent paid by the debtor's mother. The debtor stated that she wished to keep this particular vehicle because it is "reliable." GMAC admitted that the debtor is current (and has been) on all payments to GMAC.
The creditor stated that the car is not presently in danger of repossession, but that absent reaffirmation, "GMAC might make the business determination that the risk outweighs the benefit, and repossess the car." Id. at 5.
Upon hearing the above described testimony and argument, the Court asked the parties how this reaffirmation could be in the best interests of the debtor where there has been no default in the payments, there
The Court denied approval of the reaffirmation agreement, finding that the debtor's present exposure is limited and that the reaffirmation was, in fact, intended to protect GMAC's possible exposure in the future. In the event of depreciation of the collateral or the debtor's inability to make future payments, it would be more advantageous for the debtor to retain the option to surrender the vehicle without any personal liability. The Court cautioned debtor's counsel to explain to the debtor that she has no obligation to reaffirm secured indebtedness; it was doubtful from her remarks at the hearing that this debtor understood her rights in this case.
The Court issued a written order following this hearing to state to the parties and their counsel the reasons for denying the reaffirmation. In its application for rehearing GMAC has alleged that this Court made statements from the bench and in its written order which are factually and legally incorrect. GMAC further alleged that the notice of hearing did not state that the best interests of the debtor would be at issue, but rather limited the Court's concern to the potential hardship upon the debtor's family posed by the potential reaffirmation. As such, the creditor contends that the "surprise" introduction of the former issue resulted in counsel's presentation of argument in an unorganized fashion.
Local District Court Rule 17(k), which is adopted by reference in Local Bankruptcy Rule 3, states in pertinent part:
No oral argument to such motions is allowed unless directed by the Court.
GMAC contends that the discussion of the best interests of the debtor was a surprise at the previous hearing, apparently maintaining that the Court's ruling on that issue was a "palpable defect" because the issue was not before the Court "either expressly or by reasonable implication," and this should be reconsidered by the Court. This conclusion by the creditor appears to result from its purported reliance on the notice of hearing issued by the Court which stated, "[t]he Court is concerned that the debtor cannot afford to reaffirm this debt in light of her unemployed status, the amount of the monthly payments, and continue to be able to properly provide for herself and her two minor children."
The response to this position by GMAC is twofold. Section 524(c) of the Code states in pertinent part:
11 U.S.C. § 524(c).
Any application to reaffirm a consumer debt thus must meet its burden of proof
These facts make it logically impossible to separate the concepts of undue hardship from best interest. The debtor seeks to reaffirm an obligation to pay $345 a month to GMAC for a period in which she may have no regular income other than the reported $150 a month from rental income. Despite the employment of her daughters, the debtor admitted that the children are not self-sufficient. The Court cannot blind itself to the fact that regardless of whether the debtor's daughters work, the debtor is under a legal duty to support her children until they reach the age of eighteen. M.C.L.A. § 722.3. Thus the debtor failed to meet either criterion statutorily required for reaffirmation. In view of these dispositive considerations, there is no need to consider any further allegations of error on the part of the Court, with the exception of the Sixth Circuit's opinion discussed in Part II of this opinion.
III. Bell Reconsidered
GMAC has also alleged that the Court held that there is no default justifying repossession of the debtor's car so long as she continues making payments. That is not true; this Court's prior written opinion addressed the issue raised by the Sixth Circuit's decision in General Motors Acceptance Corp. v. Bell, (In re Bell), 700 F.2d 1053 (6th Cir.1983) as that decision related to "bankruptcy clauses." Because of the importance of this issue, the Court will more fully address the impact of Bell here.
In Bell, the debtors sought to redeem their van by making installment payments to GMAC as the secured party. The trustee had abandoned any interest on the part of the debtor's estate in the van; the value of the van exceeded the remaining secured indebtedness. The creditor objected to the installment payments and sought to reclaim the van. The bankruptcy court allowed the installment redemption. GMAC v. Bell, 8 B.R. 549 (Bankr.E.D.Mich.1981). The district court reversed, holding that redemption and reaffirmation were exclusive remedies. GMAC v. Bell, 15 B.R. 859 (E.D.Mich.1981). In dicta, the district court agreed with the bankruptcy court in finding that GMAC could not rely upon the bankruptcy clause in the security agreement to repossess its collateral. Id. at 861.
On appeal, the Sixth Circuit affirmed the district court's decision. The issue before that appellate court was clearly framed:
700 F.2d at 1054. That was the only issue before that court.
In affirming the district court's decision, the Court of Appeals discussed the various options available to debtors who want to retain possession of secured property; that discussion included redemptions, reaffirmations, or conversion to Chapter 13. The only reference to the effect of so-called bankruptcy clauses was in response to an argument by debtors that they maintained the primary possessory interest in the vehicle:
Id. at 1058 (citation omitted).
Because the enforcement of the bankruptcy clause was not a primary issue before the Court, it is understandable that the Court did not explore fully the pertinent legislative history, nor the relationship between § 541(c) and other sections of the Code. The discussion was not crucial to the decision reached and did not affect the outcome of the case; the discussion of bankruptcy clauses was merely obiter dictum in Bell.
This Court does not believe that the Sixth Circuit intended that Bell be read as validating bankruptcy clauses. If that was its intention, the Court of Appeals arrived at that result only because the issue was inadequately presented. The effect of a bankruptcy clause upon a consumer debtor cannot be viewed in isolation; various provisions of the Code, its legislative history and its underlying policy must all be viewed collectively before Congress' intent can be determined.
The legislative history of the Bankruptcy Reform Act of 1978 reveals some very serious concerns recognized by Congress in consumer bankruptcy cases. The Report of the Commission on the Bankruptcy Laws of the United States, H.R.Doc. No. 93-137, 93d Cong., 1st Sess. (1973) noted several problem areas: exemptions, redemptions, reaffirmations, discriminatory treatment of debtors, the effect of discharges, as well as claims of nondischargeability. Id. at 169-78. The underlying theme of many of these concerns arose from the practices of creditors which thwarted the fresh start bankruptcy is intended to provide a debtor, either by coercing the payment of prepetition debt (such as through reaffirmation or circumvention of the discharge provisions), or by denying the debtor the use of basic necessities (such as through the enforcement of security interests in household goods). Discussion of several of these problems, more completely, are helpful in ascertaining the legislative intent with respect to the enforceability of bankruptcy clauses.
The Commission opposed reaffirmations entirely:
Id. at 177. See also statement of David H. Williams, Attorney, Division of Special Projects, Bureau of Consumer Protection, Federal Trade Commission, reprinted in H.R. No. 95-595, 95th Cong., 1st Sess., Appendix 1 at 166 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787 (Federal Trade Commission report on results of investigation of the consumer finance industry).
The original proposed code did not allow reaffirmations. The reason for that denial was aptly explained by Senator DeConcini during the debates:
1245 Cong.Rec. § 14718-45 (daily ed. Sept. 7, 1978) (Statement of Sen. DeConcini).
Congress finally compromised the dispute and § 524(c) resulted. Although reaffirmations are allowed, they are carefully scrutinized in consumer cases. The bankruptcy court must determine that the proposed agreement does not impose an undue hardship on the debtor or a dependent of the debtor and that the agreement is in the best interest of the debtor. 11 U.S.C. § 524(c)(4). The debtor is given thirty days to rescind any such agreement. The congressional
The debtor wants to keep her car in which GMAC has a security interest. Although she has never missed a payment, this Court has determined that a reaffirmation is not appropriate because it is neither in her best interest nor is the Court convinced that the agreement will not pose an undue hardship on her and her children.
The creditor is fully secured, and thus reaffirmation will serve only to reinstate its remedy to seek personal liability against the debtor after discharge; the reaffirmation does not involve a situation in which the creditor requires some form of adequate protection. Absent the bankruptcy clause, this Court could deny the reaffirmation, the debtor could continue making her payments, and should she default in the future, GMAC could repossess the car and sell it under state law. The creditor would have exactly what the Code intends secured creditors to have—payment to the extent of the value of the collateral, and no recourse as to any deficiency.
The bankruptcy clause, if effective, drastically changes the bankruptcy court's consideration. If the reaffirmation is denied because of a determination that the debtor's financial situation may worsen, the debtor may face losing the car even though, despite being unemployed and insolvent, she has made every payment under the contract. Her only breach of that agreement is that she sought relief in this Court. The majority of courts faced with such a situation have denied enforcement of the bankruptcy clause. See Riggs National Bank of Washington v. Perry (In re Perry), 729 F.2d 982 (4th Cir.1984); First and Merchants National Bank v. Ballance (In re Ballance), 33 B.R. 89 (Bankr.E.D.Va.1983); General Motors Acceptance Corp. v. Rose (In re Rose), 21 B.R. 272 (Bankr.D.N.J.1982); Clotfelter v. Ciba-Geigy Corp. (In re Threewitt), 20 B.R. 434 (Bankr.D.Kan.1982).
Even where a court declines to find such clauses invalid as a matter of law, it does not find them presumptively valid. In Chrysler Credit Corp. v. Schweitzer (In re Schweitzer), 19 B.R. 860 (Bankr.E.D.N.Y. 1982), upon which the Sixth Circuit relied in Bell, the court said such provisions were enforceable "unless such clauses can be said to be offensive to the underlying goals and purposes of the Code (i.e. against public policy). . . ." Id. at 867. It is this Court's position that such clauses do frustrate those goals and purposes as set forth in the legislative history. Section 541(c)(1) includes within the bankruptcy estate any interest in property the debtor has notwithstanding any provision "that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title. . . ." 11 U.S.C. § 541(c)(1)(B). The accompanying Historical and Revision Notes state:
Notes of Committee on the Judiciary, S.Rep. 95-989, 95th Cong., 2d Sess. (1978), U.S.Code Cong. & Admin.News 1978, p. 5869. The language of the Committee is significant in that by including such property in the estate, the bankruptcy clause was invalidated, as opposed to being suspended
The enforcement of default upon bankruptcy clause would create a penalty upon individuals who seek the protection afforded by the Bankruptcy Code. In essence, such clauses are a form of discriminatory treatment the bankruptcy laws were intended to prohibit:
Report of the Commission on the Bankruptcy Laws of the United States, H.R.Doc. No. 93-137, 93d Cong., 1st Sess. 177 (1973).
This Court would urge the Sixth Circuit to reconsider its position on the enforceability of the bankruptcy clause in consumer bankruptcy cases in light of the legislative history of the Code. The tension between bankruptcy clauses and reaffirmations forces the bankruptcy court to become, in effect, an adverse party, for it is the bankruptcy court, and not the debtor nor creditor, who oppose the reaffirmation. Under these circumstances, there is no party to argue the position taken by the bankruptcy court should the matter be appealed. For that reason, this Court felt compelled to engage in this discourse even though its ruling here does not conclusively turn on the enforceability of GMAC's bankruptcy clause.
It appears that GMAC has failed to understand the basis of this Court's denial of the application for reaffirmation. It is simple. This Court has been presented with a Chapter 7 debtor who is unemployed, has minor children for whom she is legally responsible, and has a very low income (which will most likely cease to exist within the year). She seeks to reaffirm a debt on an expensive luxury automobile accompanied by extremely high payments.
There has been no adequate showing that these car payments do not impose an undue hardship on her family, nor has there been any showing that reaffirmation, which could expose the debtor to a deficiency judgment sometime in the future, is in her best interest. In light of this debtor's present financial situation—which may indeed worsen—this Court has determined that the risk of the future loss of this car through repossession and the imposition of a deficiency judgment is too great a risk to allow her to take. The Court would hope that this creditor would not declare a default and seek to repossess this vehicle until the debtor has failed to make payments when due. Nevertheless, that risk is preferable to the situation in which she becomes unable to make those payments, loses the car and still remains indebted to GMAC for any deficiency. In enacting the Bankruptcy Code, Congress has placed the responsibility for the balancing of risks upon the Bankruptcy Court. These determinations are frequently difficult and are in opposition to the desires of both the creditor and the debtor, but they must be made. The motion for consideration is DENIED.
IT IS SO ORDERED.
Black's Law Dictionary 967 (rev. 5th Ed.1979).