District Court (Mich.) Reverses Bankruptcy Court’s Rejection of Auto Finance Company’s Re-affirmation Agreement and Bankruptcy Court’s Imposition of Judicially Created “Ride-through”

In Ford Motor Credit Company v. Hall, No. 16-13333, 2017 WL 3084373 (D. Mich. July 20, 2017), Judge Borman found that the bankruptcy court exceeded its authority by sua sponte rejecting an auto finance company’s negotiated reaffirmation agreement and, instead, imposing conditions on the finance company that resembled a judicially created “ride-through”.

Appellant challenges the Bankruptcy Court “Order Disapproving Reaffirmation Agreement But Providing Debtor With Other Relief.” Appellant contends that the Bankruptcy Court “abused its discretion in several ways: First by imposing an injunction on Appellant when none was sought; second, when Appellant was not notified that an injunction was to be issued against it; and third, when no evidence in support of an injunction was considered or even requested by the court….” (Appellant’s Br. at 12, Pg ID 29.) Appellant concluded that the Bankruptcy Court did not notice up the injunction issue for consideration that would have permitted it to proceed with the findings and conclusions that it is required to make before awarding injunctive relief. Appellant’s argument has merit. The Bankruptcy Court exceeded its authority when it sua sponte and without notice imposed an injunction against Appellant in the August 29, 2016 Order. . .  The Court also finds error in the Bankruptcy Court’s determination that the reaffirmation agreement imposed undue hardship on Appellees. . . .To the extent that the Bankruptcy Court made its determination independently of any statutory presumption of undue hardship, that determination fails. The Bankruptcy Court appears to have disregarded the Appellees’ representations as to their financial status in the proposed reaffirmation agreement, and also in their responses to the Bankruptcy Court at the hearing again establishing that their net monthly income exceeded their car payments. In view of this, the Court finds that the Bankruptcy Court did not establish that the proposed reaffirmation agreement imposed undue hardship on Appellees.  On a broader level, Appellant aptly points out that the “Other Relief” awarded to Appellees by the Bankruptcy Court resembles a “ride-through” (or “pay and drive”), a judicially-created remedy by which some bankruptcy courts would permit debtors with personal property securing a portion of their debt to retain the property after bankruptcy without having to choose one of the statutorily provided options of redeeming the property or entering into a reaffirmation agreement with their creditors. See In re Dumont, 581 F.3d 1104, 1108–09 (9th Cir. 2009) (summarizing the use of and controversy over the “ride-through” remedy).  The transcript of the August 25, 2016 hearing on the reaffirmation agreement strongly suggests that the Bankruptcy Court was creating a ride-through:  “THE COURT:…There’s a middle ground I’m allowed to permit and that is the following. I can decide that I won’t allow the reaffirmation of the debt, but I can [enter] an order that says that you could keep the car without the reaffirmation unless and until you default and they’re entitled to take the car back by reason of the contractual relationships or state law. That’s a middle ground I sometimes order in cases where I’m concerned about whether or not there is a financial hardship….You will receive shortly in the mail from me an order as to whether or not I’m going to reaffirm the debt or not reaffirm it, but indicate some other relief that I give you to enable you to keep the car.”  (In re Hall, Case No. 16-bk-50148, ECF No. 36, Transcript of August 25, 2016 Hearing at 12.)  Certain United States Courts of Appeal that have addressed the issue have held that Congress eliminated the “ride-through” when it enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), Pub.L. No. 109–8, 119 Stat. 23, in 2005. See, e.g., In re Jones, 591 F.3d 308, 310–12 (4th Cir. 2010) (analyzing various provisions added to the United States Bankruptcy Code by BAPCPA and concluding that they eliminated the “ride-through” option permitted in some circuits prior to BAPCPA); Dumont, 581 F.3d at 1112–18 (9th Cir.) (same). This Court recognizes that some District Court and Bankruptcy Court decisions have approved a “ride-through” option. See, e.g., In re Baker, 400 B.R. 136, 139 (D. Del. 2009); Coastal Fed. Credit Union v. Hardiman, 398 B.R. 161 (E.D.N.C. 2008). This Court rejects that option because it was specifically rejected by Congress in 2005.  Appellant argues that the Bankruptcy Court overstepped its authority in this case in sua sponte rewriting the contract between the parties, and issuing an injunction without notice. This Court agrees with Appellant. The error necessitates reversal and remand.