Insolvency court grants respite if debtors fail to redeem pledged collateral in property pledges | Hudson Cook, LLP

Secured creditors must always be aware of their rights in consumer bankruptcy cases. Details, which may seem technical or insignificant, can mean the difference between a secured and unsecured liability of a creditor, a rejection of a claim, or a release of collateral from the bankruptcy estate into the hands of the creditor that enables the creditor to face his financial loss reduce.

In a recent case brought by the US Middle District Alabama Bankruptcy Court, a secured creditor was able to protect their collateral in two bankruptcy proceedings in which their mortgage customers were unable to redeem their pledged vehicles in the required time. This enabled the secured creditor to exempt himself from the automatic suspension and exercise rights against the collateral, resulting in a better financial result for the creditor.

As always, the technical details for the creditor were important to the end result. Donna Thompson and Kisha Daniel have completed property collateral transactions and multiple renewals with TitleMax of Alabama, Inc. Each customer provided TitleMax with the title deed for their vehicle, and these title certificates identified TitleMax as the first and only pledgee.

Each customer then sought protection under Chapter 13 of the US Bankruptcy Act and stated their intention to repay TitleMax through its Chapter 13 plan. TitleMax appealed the confirmation of both Chapter 13 plans, requesting the court to grant automatic suspension exemption for both debtors ‘vehicles, claiming that the vehicles were not owned by the debtors’ bankruptcy estate and were not subject to automatic suspension. TitleMax argued that the debtors had not withdrawn their vehicles within the time allowed under Alabama law and the Bankruptcy Code and that the court should grant TitleMax an exemption from automatic suspension in respect of both vehicles.

The debtors alleged, among other things, that their transactions were invalid under Alabama law because TitleMax did not acquire endorsed ownership certificates and keys of the vehicles in connection with the transactions, as they claimed was under the Alabama Pawnshop Act for TitleMax required to establish “ownership” of the vehicles. The court disagreed with the debtors, stating that TitleMax’s possession of the title deeds of the vehicles designating it as a pledgee was sufficient to establish a “pawnshop” under the Pawn Shop Act.

The court then examined the critical question of whether each debtor’s bankruptcy estate still had residual shares in the debtor’s vehicle and found that it did not, as each debtor failed to repay their shares in the vehicle within the set deadline. Specifically, under the Alabama Pawn Shop Act, a debtor can redeem pledged collateral within the time allowed on the pawn ticket. To the extent that the debtor files for bankruptcy while the Alabama Statute is on the repayment period, Section 108 (b) of the Bankruptcy Act extends that repayment period for an additional 60 days from the date the debtor files their claim. If either the vehicle or the debtor’s right to redeem the pledged vehicle was owned by the debtor’s bankruptcy estate, TitleMax may not be eligible for an automatic suspension waiver.

Thompson renewed her pawn shop a couple of times and filed for bankruptcy before her last pawn ticket was due. Their filing extended the repayment date under the Bankruptcy Act to 60 days after they filed for bankruptcy. However, because Thompson failed to pay TitleMax and repurchase their vehicle during that additional 60-day period, the court found that the repayment deadline had expired, so Thompson’s repayment right was no longer part of their bankruptcy estate. Daniel’s repayment deadline under her pawn ticket expired before she filed for bankruptcy, so neither her repayment right nor the vehicle became part of her bankruptcy estate.

If the debtors did not redeem their vehicles in a timely manner, their stake in the pledged vehicles would forfeit TitleMax under Alabama law. Since the debtors had no existing repayment right and no continuing interest in the vehicles, the court found that TitleMax could freely exercise its rights to the pledged vehicles and granted its request for exemption from the automatic suspension in Thompson’s case, confirming the termination of the automatic Stay in Daniel’s case.

In re Thompson, 2019 banker. LEXIS 3328 (Bankr. MD Ala. October 24, 2019).

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