Cite as: Keith M. Lundin, Lundin On Chapter 13, § 138.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
Occasionally, Chapter 13 debtors have defenses to claims based on a creditor’s failure to comply with state recording statutes or other provisions of applicable commercial law. For example, when state law requires a creditor to give notice to the debtor before disposing of repossessed collateral, the failure to give adequate notice may defeat the creditor’s deficiency claim in a Chapter 13 case.1 When state law requires a creditor to dispose of collateral after repossession in a commercially reasonable manner, the creditor’s failure to conduct a proper sale bars or limits a deficiency claim.2
Defects in a security instrument or in perfection of a lien often give rise to an avoidance action in a Chapter 13 case3 but occasionally can supply the debtor with an objection to allowance of a claim.4 One Chapter 13 debtor successfully challenged a car repairperson’s claim on the ground that the claim for $30 a day for storage charges was unconscionable.5 Another Chapter 13 debtor successfully defeated an unsecured claim holder’s calculation of the payoff for an installment loan, convincing the bankruptcy court that the traditional “Rule of 78” overcharged the debtor for unmatured interest.6
1 In re Gerber, 51 B.R. 526 (Bankr. D. Neb. 1985). Accord In re Downing, 286 B.R. 900 (Bankr. W.D. Mo. 2002) (Because notice of sale was deficient under Missouri Uniform Commercial Code, car lender’s deficiency claim was disallowed.). But see In re Phelps, 186 B.R. 655 (Bankr. E.D. Va. 1995) (Objection to deficiency claim of a creditor who sold boat at a private sale is overruled; notice of the private sale was sufficient under state law.).
2 Williams v. Regency Fin. Corp., 309 F.3d 1045 (8th Cir. 2002) (Chapter 13 debtor is entitled to a jury trial with respect to the commercial reasonableness of disposition of car by a “repossession churning mill.”); Kelaidis v. Community First Nat’l Bank (In re Kelaidis), 276 B.R. 266 (B.A.P. 10th Cir. 2002) (Commercially unreasonable sale of restaurant’s property disallows claim based on debtor’s guaranty of restaurant’s debt.); Stedman v. Webb (In re Stedman), 264 B.R. 298, 303 (Bankr. W.D.N.Y. 2001) (Secured creditor can have an allowable deficiency notwithstanding a commercially unreasonable prepetition sale because “if asked to consider the question, the highest court of New York would rule that even upon a commercially unreasonable sale of collateral, a secured creditor may recover a deficiency, subject to offset for such damages resulting from the commercial unreasonableness of its methodology for sale of the collateral.”); In re Britt, 78 B.R. 514 (Bankr. S.D. Ohio 1987) (Court denies claim for deficiency of balance after creditor failed to comply with notice of sale requirements of state law and creditor failed to establish a reasonable minimum bid requirement for sale of repossessed automobile. Court found that bank’s procedure for disposing of cars “does not have an inherent guarantee of an active bidding market.”); In re Winer, 39 B.R. 504 (Bankr. S.D.N.Y. 1984).
3 See § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances, § 50.4 Avoidance Powers after BAPCPA, § 50.5 Preferences after BAPCPA, § 50.6 Fraudulent Transfers after BAPCPA and § 53.12 Avoidance and Recovery Powers.
4 See, e.g., In re Beck, 248 B.R. 229 (Bankr. W.D.N.Y. 2000) (Sears National Bank has a perfected purchase money security interest in merchandise based on the debtor’s signature on a sales draft. Purchase money security interest is no longer prohibited by the New York Retail Installment Sales Act.); In re Bosak, 242 B.R. 400 (Bankr. N.D. Ohio 1999) (Agricultural lien under Ohio law was still valid because the two-year life expectancy of the lien was tolled during the debtors’ prior bankruptcy.); In re Gibson, 234 B.R. 776 (Bankr. N.D. Cal. 1999) (Illinois choice of law provision in contract is effective, but Illinois law would not enforce dragnet clause buried in a complicated paragraph on the back of the second loan agreement printed in difficult-to-read type and not called to the debtor’s attention.); In re Dukes, 213 B.R. 202 (Bankr. S.D. Ga. 1997) (On trustee’s objection, car lender is unsecured because employee mistakenly released its lien, and trustee can defeat unperfected security interest under § 544. That the debtor traded the car after release of lien does not give rise to equitable defenses.); In re Reese, 194 B.R. 782 (Bankr. D. Md. 1996) (Although debtors lack standing to bring § 544 action to avoid unperfected security interest in home improvements, debtors prove that neither home improvement contractor nor bank has security interests in roof and vinyl windows that were incorporated into residences. Bank is unsecured claim holder with respect to financing of improvements.). See also Mealey v. Vercellini (In re Mealey), 189 B.R. 20 (Bankr. D.N.H. 1995) (Complaint to void lien is dismissed because debtors cited no authority for proposition that mortgage company was required to foreclose rather than allow tax sale.).
5 Northrup v. Ben Thompson Enters. (In re Northrup), 220 B.R. 855 (Bankr. E.D. Pa. 1998) (Repairperson’s claim for $30 per day for storage of debtor’s car is unconscionable, and repairperson is allowed a quantum meruit claim of $3 per day instead.).
6 In re McMurray, 218 B.R. 867 (Bankr. E.D. Tenn. 1998).