Leif Clark on Reaffirmations: Six Short Clark Opinions on Reaffirmation and What They Mean

Leif Clark is one of the most prolific judges on the bankruptcy bench today. His opinions are generally both scholarly and entertaining to read. However, one adjective which is not usually applied to his opinions is short. Therefore, it is worthy of note that in the past year, Judge Clark his written no fewer than six opinions denying approval of reaffirmation agreements and giving guidance to the parties with regard to the unreaffirmed debt, none of which is longer than three pages.

One line of cases involves Texas home equity loans. In re Brown, No. 08-53373-C (Bankr. W.D. Tex. 4/3/09); In re Porras, No. 07-31488-C (Bankr. W.D. Tex. 3/27/08). As noted by Judge Clark, reaffirmation of a home equity loan is a contradiction in terms, since the Texas Constitution requires home equity loans to be made on a nonrecourse basis.

The subject of the agreement is a home equity loan. Such loans are non-recourse loans, as a matter of Texas law. There is thus no personal liability on the part of the debtor to USAA Federal Savings Bank. USAA's remedies prior to this bankruptcy being filed were limited to recourse to the property in the event of nonpayment and failure to cure. The bankruptcy changed nothing with regard to the nature of this liability. The debtor's discharge has no impact at all on USAA's claim because discharge only affects the debtor's personal liability on a debt, and the debtor never had any personal liability on this debt, even outside bankruptcy. With nothing to discharge, there should be nothing to reaffirm either.

Yet USAA now wants a reaffirmation agreement from the debtor anyway. Why? To what end? Surely not because USAA fears that without such an agreement, its efforts to enforce this debt might contravene the discharge injunction. That is a red herring, if ever there was one. Enforcement of a nonrecourse debt never violates the discharge, as a matter of law.

In re Brown.

Several additional cases concern the situation where the debtors request approval of a reaffirmation but the court denies it for reasons including undue hardship, reconsideration by the debtors and untimeliness. In re Gamboa, No. 08-52028-C (Bankr. W.D. Tex. 1/7/09); In re Davidson, No. 08-51818-C (Bankr. W.D. Tex. 11/21/08); In re Self, No. 08-52687-C (Bankr. W.D. Tex. 11/21/08); In re Morales, No. 07-31453-C (Bankr. W.D. Tex. 3/27/08). In these cases, the Court denied the reaffirmation, but explained where this decision left the parties.

Notwithstanding such denial, the court finds and concludes that the creditor holds a valid and enforceable in rem claim. The creditor is accordingly expressly authorized and permitted to enforce the obligation of the debtors to the creditor as an in rem obligation, such enforcement to include the right to notify the debtor of payments that are or are to become due, the right to demand payment when such payments are not made (either in full or in part), the right to threaten resort to in rem remedies in the event of non-payment, the right to accelerate the indebtedness, the right to give notice of foreclosure sale, and the right to conduct and complete such foreclosure sale, so long as all of the foregoing are conducted in accordance with applicable non-bankruptcy law. None of the foregoing shall ever constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Further the creditor is authorized and permitted to communicate with the debtor regarding the status of the account, either orally or in writing, and the debtors are authorized and permitted to obtain information from the creditor, either orally or in writing, regarding the status of the account. The creditor is authorized and permitted to afford the debtors the same services with respect to this account as they would enjoy had there been no bankruptcy, including as applicable internet access to the account, the use of electronic funds transfers as a means of payment, the right to receive regular billing statements, and regular escrow updates. The provision of all such services shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

Further, the creditor is authorized and permitted to renegotiate the terms of the indebtedness with the debtors (provided that such renegotiated indebtedness shall remain as an in rem liability of the debtors), to provide payoff amounts for the purposes of any refinancing with a third party, or for purposes of a sale of the underlying property. The provision of any of the foregoing shall never constitute a violation of the discharge injunction entered in this case pursuant to section 524(a) of title 11.

In re Gamboa.

What is happening here? While these brief opinions may never find their way into the published case reports, they show the court taking an active interest in the welfare of the debtors appearing before it. Not all reaffirmation agreements should be approved. The Code prohibits the Bankruptcy Court from approving an agreement where it would constitute an undue hardship or it is not timely submitted. However, rather than simply denying the agreements and leaving the parties to figure out the consequences, Judge Clark has spelled out what it means to have an ongoing in rem obligation. While his missives may constitute advisory opinions, they are useful in that they may reassure lenders that it is okay to continue to communicate with their borrowers. More importantly, they undermine a lender's ability to retaliate against a debtor who has not reaffirmed a debt by freezing them out post-discharge.

This issue recently came up in one of my cases. A debtor had received his discharge some five years earlier. The lender changed servicers around the time of the discharge and no reaffirmation agreement was ever tendered to the debtors. The debtors continued to make their payments and ultimately refinanced the debt. When they sought to purchase a new property, the underwriters for the prospective lender could not understand how a debtor had continued to make payments on a discharged debt. As a result, they did not want to credit that payment history. I was able to provide an explanation of how bankruptcy works with a copy of the Gamboa opinion to show that I was not just making it up. Hopefully, the underwriters will read and comprehend the opinion.