The chapter 7 debtor did not elect any of the options available for a purchase-money security interest in his car, to wit, redemption, reaffirmation, or surrender.
The holder of the Purchase Money Security Interest (“PMSI”) (Daimler/Chrysler) repossesed the car.
The co-owner of the car appealed from the court’s order permitting the repo.
The co-owner argued that he was entitled to keep possession of the vehicle if he remained current on the payments (i.e., a “ride-through”). But the debtor’s argument was based on pre-BAPCPA case law in the district.
Daimler/Chrysler argued that BAPCPA extinguished the ride-through as a debtor’s option, and that in the event the debtor fails to elect one of the options prescribed at 11 U.S.C. § 521(a)(6), the automatic stay is lifted as to the property, and the property is no longer property of the estate.
The court agreed, ruling that the creditor was entitled to act within its rights under state law.
The court then dealt with the applicability of state law.
The contract included an “ipso facto” clause providing that the debtor’s filing bankruptcy was a default of the contract.
The court acknowledged that as a general rule ipso facto clauses are not enforceable in bankruptcy, but that the Code provided an exception to that rule in the event of a debtor’s failure to elect one of the permitted options for a PMSI.
In other words, the creditor was free to act within its rights under state law.
The debtor then argued that under West Virginia law, in the event the consumer defaulted on a PMSI contract the creditor was required to give the consumer notice of his/her right to cure the default and continue with possession of the vehicle, and that in this case the creditor had failed to do so.
But the Appellate court held that the procedural obligation on a creditor to provide the notice was predicated on the ability of the consumer to cure the default, and that in this case the ipso facto clause was triggered by an event that could not be cured, to wit, the debtor’s filing of the bankruptcy.
Accordingly, the creditor was not required to send the notice, and the repossession was valid.
© KING BANKRUPTCY PRACTICE 2010