Cite as: Keith M. Lundin, Lundin On Chapter 13, § 67.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Consistent with congressional intent that the codebtor stay protects debtors and only incidentally protects the nonfiling codebtor, 11 U.S.C. § 1301(c)(1) mandates that the court grant relief from the stay “to the extent that—as between the debtor and the [codebtor] . . . such [codebtor] received the consideration for the claim.” When the debtor received the consideration and no value can be traced to the nonfiling codebtor, the creditor is not entitled to relief under § 1301(c)(1).1 If the debtor and a codebtor borrowed $1,000 and each received $500, the creditor should be granted relief under § 1301(c)(1) to collect $500 from the codebtor. If the codebtor received the entire consideration, then the creditor is entitled to relief to collect the entire claim from the codebtor.2 Even when the plan proposes to pay the debt in full, if part of the original consideration went to the codebtor, the creditor is entitled to collect that portion from the codebtor without waiting for payments through the plan. This is so even though the creditor would not be entitled to relief from the codebtor stay under § 1301(c)(2).3
It is often difficult for the creditor to prove its case under § 1301(c)(1), especially when the nonfiling codebtor is a spouse or family member. It has been held that relief under § 1301(c)(1) is available only when the codebtor was the exclusive recipient of the original consideration: a former spouse is protected if the debtor and the former spouse received the original consideration jointly.4 In a community property state, the fictions of state law include that a nonfiling spouse “benefited” from any loan to the filing spouse. However, it does not follow that the nonfiling spouse “received the consideration” and is not protected by the codebtor stay.5 There is legislative history to support the view that the codebtor stay extends to a nonfiling spouse when the debtor is ultimately liable for the underlying debt, notwithstanding that by contract or state law, the nonfiling spouse shared in the benefits, profits or income derived from a borrowing.6
When a parent and child jointly sign a note to purchase a car and the child drives the car and makes payments on the note, it is not simple to determine who is the principal obligor, who is the codebtor and who received what consideration. If the child uses the car and receives the benefit of the loan, it can be argued that the creditor is entitled to relief from the codebtor stay under § 1301(c)(1) in the parent’s Chapter 13 case. The debtor will argue that the original loan proceeds were received by the parent for purposes of § 1301(c)(1) and were subsequently used for the benefit of the (codebtor) child.
A three-party transaction is even more difficult to fit into § 1301(c)(1). In the example above, assume that the debtor and the debtor’s nonfiling spouse are both obligated on a loan, the proceeds of which bought a car that is used (and paid for) by their child. As between the debtor and the debtor’s nonfiling spouse, who “received the consideration”? The truth is that both received the consideration, and each was equally benefited by the subsequent gift to their child.
There are many situations in which the debtor and the codebtor share in the receipt of the consideration and neither can be said to have benefited more or less. Section 1301(a) has as its predicate that the underlying debt is a “consumer debt.”7 The definition of consumer debt is a debt “incurred by an individual primarily for a personal, family or household purpose.”8 It will almost always be true whenever a husband and wife jointly incur a consumer debt that the proceeds will have benefited both. If the codebtor stay has any real meaning with respect to protection of a nonfiling codebtor spouse, something more must be proved for entitlement to relief under § 1301(c)(1) than simply that the nonfiling spouse shared in the benefits of the underlying debt.
The phrase “as between the debtor and the [codebtor]” in § 1301(c)(1) can reasonably be interpreted to require relief from the stay only when the codebtor received the consideration to the exclusion of the debtor. When the debtor and nonfiling codebtor shared all of the consideration, § 1301(c)(1) should not entitle the creditor to relief from the codebtor stay. When the debtor and the codebtor split the consideration and the codebtor received part, § 1301(c)(1) would entitle the creditor to relief from the codebtor stay “to the extent” of that part.
1 In re Zersen, 189 B.R. 732, 741 (Bankr. W.D. Wis. 1995) (“In this case, the Zersens and the Hills are clearly jointly obligated on the loan. . . . The Hills did not receive any of the consideration for the loan; the debtors did. The money was deposited directly into the debtors’ account. Therefore, there is no basis for finding that the debtors were actually the co-debtors. Even if the Hills were the ‘primary obligors,’ an assertion which is not borne out by the evidence, there is still no basis for precluding them from benefitting from § 1301 and the debtors’ plan. The co-debtor stay protects those who are ‘liable on such debt with the debtor,’ . . . and as the debtors received the loan proceeds the Hills are co-debtors within the meaning of that section.”); In re Johnson, 6 B.R. 12 (Bankr. W.D.N.Y. 1980).
2 See In re Mendy, Nos. Civ.A. 02-3651, 02-16708, 2003 WL 21488654, at *3 (E.D. La. June 20, 2003) (unpublished) (Bankruptcy court appropriately granted relief from the codebtor stay under § 1301(c)(1): “[T]here is no question that the loans were made by Regions directly to Mendy Properties and the limited liability company solely received the consideration for the obligations. Mendy Properties, not Cheryl Mendy, is the owner of the properties used to secure the collateral mortgage and collateral mortgage note. . . . In reality, Mendy, as debtor in the instant case, is the co-debtor in the transaction involving Regions and Mendy Properties.” District court does not mention that the limited liability company was not an individual for purposes of the codebtor stay.); In re Allen, 300 B.R. 105, 122 (Bankr. D.D.C.) (Mortgage holder is entitled to annulment of the codebtor stay to validate postpetition foreclosure sale when debtor acquired an interest in property from her son three days before petition in violation of due-on-transfer clause and son received consideration for the claim. “[W]hen grounds exist for annulment of the § 362(a) automatic stay, § 1301(c) may be used to annul the codebtor stay as well when it would have been lifted had relief been sought before foreclosure. The court, in any event, has the inherent power . . . under 11 U.S.C. § 105 to grant annulment of the stay in an abusive bankruptcy case when annulment of the automatic stay of § 362(a) is warranted.”), stay denied pending appeal, 300 B.R. 127 (Bankr. D.D.C. 2003); In re Ragin, 249 B.R. 118 (Bankr. D.S.C. 2000) (Based on undisputed evidence that the nonfiling codebtor received the loan proceeds and had use of the borrowed funds, relief from the codebtor stay is appropriate under § 1301(c)(1).). Accord Southern Discount Co. v. Kelley, 22 B.R. 150 (Bankr. M.D. Ala. 1982); In re Brown, 12 B.R. 885 (Bankr. N.D. Ga. 1981); In re O’Leary, 6 Bankr. Ct. Dec. (CRR) 12 (Bankr. W.D.N.Y. 1980).
3 In re Lamoreaux, 69 B.R. 301 (Bankr. M.D. Fla. 1987) (Notwithstanding absence of an “or” between § 1301(c)(1) and (c)(2), subsections should be read in the disjunctive.). Accord In re Rhodes, 85 B.R. 64 (Bankr. N.D. Ill. 1988). See § 88.1 [ Plan Does Not Pay Debt in Full ] § 67.2 Plan Does Not Pay Debt in Full.
4 In re Rhodes, 85 B.R. 64 (Bankr. N.D. Ill. 1988). Accord In re Motes, 166 B.R. 147, 149–150 (Bankr. E.D. Mo. 1994) (Relief from the codebtor stay under § 1301(c)(1) is not appropriate when husband and wife bought a mobile home together and both received the consideration. Debtor was estranged from his wife and involved in divorce proceedings. It appeared that the wife would be awarded the mobile home in the divorce. The bank with the lien on mobile home argued that it was entitled to relief from the codebtor stay to collect from the estranged wife because the wife would receive the consideration for the loan. “In this case, the Debtor and his Wife each received a portion of the consideration for the claim held by the Bank. . . . The House Report states that, ‘[t]he court must also grant relief to the extent that the debtor was really the co-debtor in the transaction. . . .’ H.R. Rep. No. 595, 95th Cong., 1st Sess. 426 (1977) (emphasis added). . . . However, Congressional Record Statements declare, ‘[s]ection 1301(c)(1) indicates that a basis for lifting the stay is that the debtor did not receive consideration for the claim by the creditor, or in other words, the debtor is really the “co-debtor.”’ 124 Cong. Rec. H1106 (September 28, 1978); S17423 (October 6, 1978); . . . . This Court . . . will lift the codebtor stay only in those situations where the debtor did not receive any consideration for the loan. In doing so, this Court is allegiant to the intended purpose of § 1301. Congress enacted the codebtor stay to protect Chapter 13 debtors from indirect pressure by creditors and any attempt to apportion the consideration between the debtor and the non-debtor necessarily results in the type of indirect pressure which Congress sought to prohibit.”); In re Zersen, 189 B.R. 732, 741 (Bankr. W.D. Wis. 1995) (In dicta, in a Chapter 13 case in which the debtor’s parents signed for a loan with the debtors, but the debtors received all the consideration, court suggests that relief from the codebtor stay under § 1301(c)(1) is available only where none of the consideration was received by the debtor. “[Section] 1301(c)(1) provides the creditor with relief from the stay to the extent that the nondebtor party received the consideration for the creditor’s claim. . . . Even under § 1301(c), however, the co-debtor stay should be lifted only in those situations where the debtor did not receive any of the consideration for the loan, as otherwise the indirect pressure to pay will still exist.”).
5 See In re Lopez Melendez, 145 B.R. 740, 743 (D.P.R. 1992) (Under the conjugal partnership law of Puerto Rico, debts and obligations contracted during a marriage are chargeable to community property and become community claims. “The trustee infers from this that in any community property jurisdiction a spouse cannot be a co-debtor because the non-debtor spouse will always benefit from any loan. However, in Puerto Rico, it is the conjugal partnership which receives the consideration from the loan, not debtor’s spouse in her personal capacity. To the extent that the non-debtor spouse is part of the conjugal partnership, she has benefitted, but she has not benefitted personally. . . . Therefore, she should be eligible for the stay provided by section 1301 for co-debtors, at least in her personal capacity.”).
6 See 124 Cong. Rec. H11,106 (daily ed. Sept. 28, 1978) (remarks of Congressman Edwards), S17,423 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini) (“[T]he standard of receiving consideration is a general rule, but where two co-debtors have agreed to share liabilities in a different manner than profits, it is the individual who does not ultimately bear the liability that is protected by the stay under § 1301.”).
7 See § 85.1 [ Consumer Debts Only ] § 65.2 Consumer Debts Only.
8 11 U.S.C. § 101(8).