It has never failed to amaze me how much some creditors are willing to spend to make their point over what is a relatively small amount of money just to be proven that they are wrong. More astonishing is that the arguments made in their defense are typically outside of any legal argument. Typically the message is that they stole the money fair and square, which really does not make a great argument. The answer is that the defense comes from arrogance that the lender is not constrained by the Bankruptcy Code, and that is never a great position to take.
The fight in this case is entitled In re Janice B. Meadows, Case No. 06-30887 (Bankr. S.D. Ohio 1/7/2008), in which Bankruptcy Judge Guy R. Humphrey of the Southern District of Ohio reasons us through some of the conventional arguments that we have bought into in the past from the payday loan industry for some time.
The Bankruptcy's Court decision is now on appeal, which might ultimately be a mistake for the payday lender because ultimately Judge Humphrey's decision seems to follow legal construction and the existing case law exactly. In short, it is a well reasoned case.
The case involved the debtor Janice B. Meadows who filed a Chapter 13 on April 16, 2006. Prior to filing bankruptcy, on April 9, 2008, she took out a payday loan from Buckeye Check Cashing, Inc, d/b/a CheckSmart. In return for the loan Ms. Meadows provided CheckSmart a post-dated check in the amount of $460.00, which she agreed to cover by April 23, 2006. The interest rate on the loan was a noise bleed amount of 391.07%. Notice of the bankruptcy was mailed out by the Court on April 22, 2006 and on April 23, 2006 CheckSmart presented the check for payment and was paid its $460.00 from Ms. Meadow's bank account. It is pretty clear that CheckSmart did not have notice of the bankruptcy before presenting the check.
The Court noted a good deal of bungling by the bankruptcy attorney as to getting notice and a demand to CheckSmart concerning the bankruptcy, in getting the amount of money taken in his demand wrong, and in serving the motion seeking contempt and damages. However, after the smoke cleared as to these incidents it was clear that CheckSmart had notice of the bankruptcy if not the demand for turnover and did not agree to perform without conditions in returning the $460.00.
Only after CheckSmart received the stay violation filed did it undertake to return the funds, but it only agreed to do so on the condition that Ms. Meadows sign a document releasing CheckSmart from all liability. That apparently was a mistake because the party in control of property of the bankruptcy estate is obligated to "deliver" the property immediately and without condition.
All parties conceded that the check was a negotiable instrument the presentment of which could not have violated the automatic stay provisions of 11 U.S.C. § 362(a) by virtue of the exception contained in 11 U.S.C. § 362(b)(11). However, Ms. Meadows legal counsel argued that although this is true that CheckSmart did violate 11 U.S.C. § 362(a)(3), and other sub-provisions, when it failed to return the funds, as property of the bankruptcy estate, without condition.
CheckSmart argued that agreeing to return the funds conditioned upon a release absolved it from any willful stay violation. The Court dismisses this argument pretty much out of hand.
The main argument made by CheckSmart, and the subject of the appeal, is that 11 U.S.C. § 362(b)(11) exempts the money taken from the account as being property of the bankruptcy estate, and thus exempts the it from violating the automatic stay by holding the funds.
The Court's analysis is exact. It states that 11 U.S.C. § 541(a) creates a bankruptcy estate and there is nothing in this provision or § 362(b)(11) that excludes the $460.00 as property of the bankruptcy estate. The presentment occurred after the filing of the bankruptcy and the courts have adopted the date of honor as the date of presentment of the check and not when it was written.
The Court also found that there is nothing in the "plain and unambiguous language" of 11 U.S.C. § 362(b)(11) that suggest that a creditor is authorized to transfer property of the bankruptcy estate and that retention of estate property is a violation of 11 U.S.C. § 362(a)(3), among other like provisions. Citing another case the Court found, "The language and wording of 11 U.S.C. § 362(b)(11) ... states only that a creditor may present a negotiable instrument post-petition and not violate the automatic stay".
Since most courts and jurisdictions have ruled that withholding property of the bankruptcy estate constitutes an exercise of control over property of the estate, the such retention constitutes a violation of 11 U.S.C. § 362(a)(3).
The Court also found that CheckSmart's legal theory would render 11 U.S.C. § 549 concerning post-petition transaction superfluous, and found nothing wrong with § 549 and § 3629a)(3) overlapping given that § 549 simply provides a Chapter 7 trustee the ability to protect creditors from unauthorized post-petition transfers made by a debtor of estate property. Such transfers by a debtor are recoverable. However, this transfer was not made by the debtor or with the debtor's consent.
The Court found that the offer to return the funds upon the signing of a general release to be contrary to to law because the delivery of property of the estate is unconditional. The Court found that when CheckSmart discovered it had violated the stay it had a duty to the property of the estate, and it did not do so, and to require the debtor to institute an adversary proceeding to retrieve the limited funds would result in the unnecessary dissipation of estate assets incurred in the costs of pursuit of the funds and unjustifiably shifts the burden on obtaining estate property to the estate.
The Court did not punish CheckSmart other than order the $460.00 to be returned unconditionally and to pay the reasonable attorneys' fees of the debtor's attorney in dealing with this matter. CheckSmart seeks an appeal. In that the Sixth Circuit BAP has already ruled in one case contrary to CheckSmart's position, and given the reasoning by the Bankruptcy Court in this case, the appeal might not be fruitful, and might open the flood gates to suits against payday lenders in that this activity happens repeatedly.
Comments