Opinion
Case No. 98-31268-T.
August 14, 2000.
David L. Meloy Suzanne M. Meloy Petersburg, Virginia, Debtors.
Graham T. Jennings, Jr., Esquire Powhatan, Virginia Counsel for debtors
James J. Burns, Esquire WILLIAMS, MULLEN, CLARK DOBBINS, P.C. Richmond, Virginia Counsel for Bank of McKenney.
MEMORANDUM OPINION (AMENDED)
Hearing was held June 21, 2000, on motion filed by debtors David L. Meloy and Suzanne M. Meloy against defendant Bank of McKenney requesting the court to enjoin the bank's collection efforts and to assess sanctions for the bank's allegedly willful violation of the discharge injunction. The relevant facts were stipulated by the parties.
At conclusion of the hearing the court ruled from the bench that debtors' motion for sanctions would be denied and took the request for injunction under advisement. For reasons stated in this opinion, the court will deny the injunction request because the debtors remain liable to the bank under a reaffirmation agreement.
Facts
On February 20, 1998, the debtors filed a chapter 11 bankruptcy case.
On April 16, 1999, the debtors and bank entered an agreement under which debtors reaffirmed their obligation for a deed of trust note held by the bank; the agreement complied with the reaffirmation requirements of 11 U.S.C. § 524(c).
On April 22, 1999, the court entered a consent order that modified the automatic stay under 11 U.S.C. § 362 and which specifically contemplated debtors' reaffirmation agreement with the bank. Debtors subsequently defaulted on the note payments required by the consent order, and on June 11, 1999, the bank foreclosed on the real property securing the note. After application of the proceeds of foreclosure to the balance due on the note, a deficiency balance remained outstanding to the bank.
On July 27, 1999, debtors converted their case from chapter 11 to chapter 7, and they received a chapter 7 discharge on October 29, 1999. Debtors never rescinded the reaffirmation agreement as allowed by § 524(c)(4).
By letter dated April 17, 2000, the bank demanded debtors pay the note deficiency balance in the amount of $10,387.33. In response, debtors filed the present motion asserting that the bank's deficiency claim was discharged in their chapter 7 and that the bank's attempt to collect the deficiency was a willful violation of the discharge injunction provided in § 524(a). The motion requests the court (i) to compel the defendant to cease any and all collection efforts against them or any of their property or estate, (ii) to impose sanctions, including punitive damages, and (iii) to grant debtors an award of attorney's fees and all other costs in the prosecution of this matter.
Position of the Parties
Debtors argue that the note balance was discharged under 11 U.S.C. § 348 and 727 and that the bank in attempting to collect violated the discharge injunction imposed by § 524(a). They reason that the deficiency balance was incurred under the reaffirmation agreement after the chapter 11 filing (postpetition) but before the chapter 7 conversion and that the reaffirmation agreement had no further effect due to their chapter 7 discharge.
The bank's position is that debtors reaffirmed a prepetition debt, and the reaffirmation agreement remains enforceable because debtors did not rescind it within the time prescribed by § 524(a)(4).
Discussion and Conclusions of Law
The court must consider whether debtors' obligation under a reaffirmation agreement executed during the chapter 11 case carries over and remains enforceable after the case is converted and debtors receive a chapter 7 discharge. The issue is novel, and the court has found no case law on point. The relevant code provisions are § 727(b), which provides a discharge of prepetition debts in chapter 7; § 524, which governs the effect of the discharge, including the effect of a reaffirmation agreement; and § 348, which governs the effect of case conversion.
In general, § 524(a) imposes an injunction against collection of debts discharged in bankruptcy. Notwithstanding this injunction, § 524(c) allows a debtor and creditor under specified conditions to enter a reaffirmation agreement under which debtor will remain liable for a debt notwithstanding the discharge. Thus, the discharge injunction does not apply to a debt reaffirmed in compliance with the statute.
Section 524(c)(4) gives a debtor a broad option to unilaterally rescind a reaffirmation agreement; all that is required is for debtor to give the creditor notice of rescission before the discharge is granted or within 60 days after the agreement is filed with the court, whichever is later.
Significantly, the reaffirmation provisions of § 524 are applicable to cases under all chapters of the Bankruptcy Code (excluding railroad reorganizations). See 11 U.S.C. § 103(a) 1161.
In this case, it is undisputed that during the chapter 11 case debtors and Bank of McKinney entered into a reaffirmation agreement that fully complied with the requirements of § 524(c) and that at no time have debtors acted to rescind the agreement.
Section 348(a) provides that an order of conversion results in an order for relief under the chapter converted to. With some exceptions, conversion does not change the dates of the filing of the petition, commencement of the case, or the order for relief.
Section 348(d) provides that a debt incurred post-petition in a chapter 11 case converted to a chapter 7 case is treated as prepetition and thus subject to discharge in the chapter 7.
As the court understands debtors' argument, the debt in question was incurred postpetition, by virtue of the reaffirmation agreement during the chapter 11 case; the debt was therefore subsequently discharged in the chapter 7 without regard to the reaffirmation.
Debtors' assertion that the chapter 11 reaffirmation effectively created an original debt that was discharged under § 348(d) in chapter 7 does not withstand scrutiny. The bankruptcy code does not treat a reaffirmed prepetition debt as anything other than a prepetition debt, which is ordinarily discharged except that the discharge injunction is inapplicable. The court finds nothing in the code supporting the view that a chapter 11 reaffirmation agreement becomes inoperable following conversion of the case to chapter 7. To the contrary, a plain reading of the statutory scheme supports the bank's position that the reaffirmation agreement remains in force. This is because under § 103(a) the reaffirmation provisions of § 524 apply in both chapter 11 and chapter 7 cases, and because neither § 348 nor § 727 suggest any other result.
In its memorandum of authorities, the bank draws an analogy between the present issue and the effect of conversion on the automatic stay. When an original automatic stay has been modified before conversion, the conversion does not reimpose the automatic stay in the converted case. See British Aviation Ins. Co. v. Menut, 873 F.2d 264, 267-68 (11th Cir. 1989) (holding a conversion order was not the filing of a petition as contemplated under the statute and did not trigger a new automatic stay); see also American Indus. Loan Ass'n v. Voron and Matson (In re Voron), 157 B.R. 251, 252 (Bankr.E.D.Va. 1993) (holding a chapter 13 order lifting stay is enforceable after conversion to chapter 7). While this is a less than perfect analogy, it does lend support to the court's view that absent contrary statutory authority an unrescinded reaffirmation agreement remains fully in effect following conversion.
Here, debtors had a simple remedy for their earlier reaffirmation: they could have rescinded it at any time before their chapter 7 discharge was granted. 11 U.S.C. § 524(c)(4).
Because they did not rescind, the court must find that debtors' reaffirmation agreement remains in effect, and the debt is not subject to the discharge injunction.
A separate order will be entered denying debtors' motions.
SIGNED this 14th day of August, 2000.