In In re Henderson, 2013 WL 3356128 (Bkrtcy.D.Nev. 2013), the Nevada Bankruptcy Court found the ipso facto clause in the standard form automobile RISC did not allow repossession merely due to the filing of bankruptcy and, accordingly, rejected debtors’ reaffirmation of their automobile RISCs as not being in the debtors’ best interests under Nevada law.
A creditor’s right to repossession is controlled by nonbankruptcy law. “[T]he disposition of the debtor’s assets is generally left to state law … The parties contract, in conjunction with state law, determines when a debtor has defaulted on an automobile loan.” Dumont v. Ford Motor Credit Co. (In re Dumont), 581 F.3d 1104, 1114–15 (9th Cir.2009), aff’g, 383 B.R. 481, 488–89 (B.A.P. 9th Cir.2008). This is normally controlled by a state’s adoption of Article 9 of the Uniform Commercial Code, which does not specify what actions or conditions are defaults. Rather, it allows debtors and creditors to define conditions leading to default in their security agreement. U.C.C. § 9–601, cmt. 3 (“[T]his Article leaves to the agreement of the parties the circumstances givening rise to a default.”) As default is necessary to a lender’s right to repossess, U.C.C. § 9–601(a), the conditions defining default are critical. ¶ Nevada law, however, has recently changed the background laws. For vehicle sale contracts, Nevada’s retail installment law now states: Notwithstanding the provisions of any contract to the contrary, default on the part of the buyer is only enforceable to the extent that:  The buyer fails to make a payment as required by the agreement; or  The prospect of payment, performance or realization of collateral is significantly impaired. The burden of establishing the prospect of significant impairment is on the seller. ¶ NEV.REV.STAT. § 97.304 (2011) (emphasis added). This statute became effective on October 1, 2011 and applies only to purchases made after that date. This statute renders provisions such as ipso facto clauses unenforceable unless the fact of the bankruptcy itself amounts to a significant impairment of the prospect of payment, performance, or realization of collateral. The question here is whether the filing of a bankruptcy meets this test. ¶ While the Bankruptcy Code does not limit or prevent the operation of ipso facto provisions that place the debtor in default for filing for bankruptcy, 11 U.S.C. § 521(d) (2012), the Code’s non-rejection of such provisions does not override state laws that reg-ulate them. In re Dumont, 383 B.R. at 488–89 (“Where otherwise enforceable, ipso facto default provisions may now be used by creditors to repossess, … [but s]ome state consumer protection statutes prevent a creditor from repossessing when there is no payment default. These … statutes have the potential to make [Section 521(d) ] meaningless if repossession is barred by state law when a debtor’s payments are current.”). . . .The Nevada Supreme Court has not interpreted “significant impairment” under NEV.REV.STAT. § 97.304, but other courts addressing this precise issue under UCCC § 5.109 (and its state corollaries) have all agreed that filing a bankruptcy petition is not a significant impairment. In re Koufos, 2010 WL 4638408 at *2 (Bankr.D.Mass.2010); In re Visnicky, 401 B.R. 61, 66–67 (Bankr.D.R.I.2009); In re Schmidt, 397 B.R. 481, 485 (Bankr.W.D.Mo.2008); In re Riggs, 2006 WL 2990218 at *3 (Bankr.W.D.Mo.2006); In re Steinhaus, 349 B.R. 694, 710–11 (Bankr.D.Idaho 2006); In re Rowe, 342 B.R. 341, 351 (Bankr.D.Kan.2006); Hall v. Ford Motor Credit Co. LLC, 254 P.3d 526, 533, 292 Kan. 176, 185–86 (2011); see In re Timmons, 2012 WL 4435522 at *6 (Bankr.D.Kan.2012). . . .Creditors will have a difficult time establishing that a bankruptcy filing is a significant impairment because “the bankruptcy case usually results in the discharge of debts which the debtor would otherwise be obligated to service.” In re Riggs, 2006 WL 2990218 at *3 (citing In re Rowe, 342 B.R. at 350). This court believes the Nevada Supreme Court would agree that the mere filing of a bankruptcy petition is not a significant impairment under NEV.REV.STAT. § 97.304, especially in light of debtors’ expected increase in available funds post-discharge. ¶ In light of the unenforceability of ipso facto clauses in auto sales contracts under NEV.REV.STAT. § 97.304, the next issue is whether approving a reaffirmation agreement that reaffirms an auto purchase debt incurred after October 1, 2011 can be in a debtor’s best interest under Section 524(c)(6)(A)(ii). The answer is no. Without reaffirmation, the unsecured portion of a claim would be discharged and the debtor could maintain possession and use of the vehicle so long as she keeps current on payments, or otherwise does not default in a way that “substantially impairs” a lender’s collateral, such as by letting any required insurance lapse. An approved reaffirmation agreement would not improve the debtor’s ability to possess or use the vehicle, nor would it alter the scope of events that constitute default. Yet, it would exclude the entire amount of the creditor’s claim (the secured and unsecured portions) from discharge. In short, if approved, the debtor would face the same risk of repossession yet would also retain personal liability for the unsecured portion of the debt. Approving a reaffirmation agreement in this context is certainly not in a debtor’s best interest. 11 U.S.C. § 524(c)(6)(A)(ii) (2012); In re Carlos, 215 B.R. at 62; see In re Moustafi, 371 B.R. at 438. ¶ An objection exists that this result is contrary to Congress’ efforts to eliminate “ride through” in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), In re Dumont, 581 F.3d at 1109–10. Pre–BAPCPA, debtors could “ride-through,” or “pay and drive,” without entering into a reaffirmation agreement and still enjoy the protection of the automatic stay. Id.; see McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir.1998). BAPCPA requires debtors to enter into a reaffirmation agreement or suffer the termination of the automatic stay as to the relevant property. 11 U .S.C. § 362(h) (2012). ¶ After October 1, 2011, however, Nevada creditors can only repossess on a payment or other similar default (after moving for relief from stay or after entry of the discharge). Violation of an ipso facto clause is insufficient to justify repossession, as the debtor’s status as one who filed for bankruptcy relief does not affect collection or substantially impair collateral. In these situations, there can be no deficiency judgment because the bankruptcy discharge includes the unse-cured portion of the related claim. See Americredit Fin. Servs. v. Penrod (In re Penrod), 392 B.R. 835, 839–40 (B.A.P. 9th Cir.2008), aff’d, 611 F.3d 1158 (9th Cir.2010); In re Anderson, 348 B.R. 652, 661 (Bankr.D.Del.2006). ¶ One consequence of this change in law is that if the creditor legally repossesses the vehicle, the creditor’s recovery is limited to the value of the vehicle at the time of repossession, just as was the case with “ride through.” Justifying the approval of a reaffirmation agreement in this context would be quite difficult if not impossible. See id. at 1114 (“If ride-through existed, any lawyer who advised his client to make a reaffirmation offer on the original contract terms would be guilty of malpractice, and any bankruptcy judge who approved such a reaffirmation from a pro se litigant would be seriously derelict in his duties. For why would one ever choose reaffirmation on such terms and thus incur the risk of personal liability when one could safely achieve the same ends by ride-through?”). B. Application of Law to Facts. In the five bankruptcy cases at issue, the debtors entered into reaffirmation agreements of the kind specified in Section 524(c), and thus their vehicles remain in their respective bankruptcy estates and enjoy the protection of the automatic stay, at least until they receive their discharges. 11 U.S.C. § 362(h) (2012); In re Moustafi, 371 B.R. at 439. The remaining issue is whether the reaffirmation agreements should be approved under Section 524(c)(6)—a necessary inquiry because the debtors here all negotiated their reaffirmation agreements without the assistance of counsel. Id. § 524(c)(6). The debtors all purchased their vehicles after October 1, 2011. NEV.REV.STAT. § 97.304 thus applies. Accordingly, any defaults due to ipso facto clauses in their purchase agreements cannot serve as a basis for repossession—the mere status of filing bankruptcy does not substantially impair the lenders’ collection or collateral. NEV.REV.STAT. § 97.304 (2011); In re Schmidt, 397 B.R. at 485. Also, all debtors are current with their car payments and not otherwise in default under their purchase agreements. Were the court to approve the reaffirmation agreements, each debtor would become personally liable for the unsecured portions of their respective lender’s claim. If the court does not approve, then each debtor would not become liable for any deficiency, as such claim would be discharged. Yet in either case, so long as they maintain their payments and do not endanger the collateral, they can maintain possession and use of their vehicles. In short, there is no upside for the debtors in the reaffirmation agreements. There is only the downside of excluding unsecured debt from discharge. Consequently, the reaffirmation agreements are not in the debtors’ best interest. 11 U.S.C. § 524(c)(6)(A)(ii); In re Carlos, 215 B.R. at 62.