In Hall v. Ford Motor Credit Co., Inc., — P.3d —-, 2011 WL 1601167 (Kan. 2011), the Kansas Supreme Court affirmed the propriety of a post-bankruptcy vehicle repossession when the vehicle was significantly impaired for reasons other than non-payment.
In a consumer credit transaction, the debtor’s filing of a bankruptcy petition does not automatically create a substantial impairment to the prospect of payment, performance, or realization of collateral, so as to permit the creditor to enforce a contractual default provision based solely upon the bankruptcy filing. After a federal bankruptcy court’s automatic stay of other proceedings has been lifted with respect to the debtor’s property which is securing a consumer credit installment obligation, the question of whether the creditor can establish an enforceable default which will permit the creditor to repossess the collateral is a question of state law. In a consumer credit installment note transaction, a significant impairment under K.S.A. 16a–5–109(2) may be created by the debtor’s actions and inactions which endanger the prospect of a continuing relationship with the creditor, even though the debtor may be current on the note payments. A variety of factors may be considered by the district court in determining whether a significant impairment under K.S.A. 16a–5–109(2) exists. The factors applicable in each case may vary, and the appellate courts have not established a comprehensive list of factors to be considered or a bright-line rule for making the determination.
Moreover, the developing bankruptcy law does not advance Hall’s argument that we should ignore or minimize the fact that he refused to reaffirm his debt in the bankruptcy proceeding. When a debtor files a Chapter 7 bankruptcy and possesses a vehicle which is securing a purchase money loan, the bankruptcy code provides the debtor with three options: (1) relinquish possession of the vehicle; (2) redeem the vehicle by paying off the loan; or (3) reaffirm the debt and remain personally liable to the creditor following the discharge in bankruptcy. See 342 Bankr.at 344. As explained in In re Rowe, Lowry “sanctioned the use of the ‘fourth option’ whereby a Debtor who at the time of filing was current on a debt secured by personal property could retain the property without either redeeming or reaffirming the debt.” 342 Bankr.at 344. However, subsequent to the Brock and Lowry decisions, the bankruptcy code was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which effectively eliminated the “fourth option.” “BAPCPA now provides consequences for failure to redeem or reaffirm when a debtor is current on payments. They are termination of the stay and removal of the collateral from property of the estate, with the creditor’s remedies upon expiration of the stay being those provided by state law.” 342 Bankr.at 351. The fact that the bankruptcy code has strengthened the sanction for failing to comply with the mandate that the debtor redeem or reaffirm the debt in order to retain possession of the collateral counsels against ignoring the debtor’s refusal to reaffirm the debt when considering whether the prospect of payment, performance, or realization of collateral is significantly impaired. ¶ What the current bankruptcy code makes crystal clear is that the question of whether Ford Credit can repossess Hall’s truck, following the lifting of the federal bankruptcy court’s stay because of Hall’s failure to relinquish, redeem, or reaffirm, is governed by Kansas law.
The Supreme Court explained further:
In this case, there were more factors shown and relied upon by the district court. Specifically, Hall did not respond to Ford Credit’s request for a reaffirmation of the debt in the bankruptcy proceedings. Instead, he proceeded to obtain a discharge of his personal liability on the note which carried an outstanding balance substantially in excess of the value of the collateral securing the note. After his bankruptcy discharge, Hall retained the possession, control, and enjoyment of the collateral, but Ford Credit was enjoined from contacting Hall about paying that portion of the debt which exceeded the value of the truck. See 11 U.S.C. § 524(a)(2) (2006) (discharge operates as an injunction against an act to collect, recover, or offset any discharged debt as a personal liability of the debtor). ¶ Hall argues that Ford Credit’s fears of significant impairment are only anticipatory in nature. He points to the fact that, since his discharge, he has performed all of his contractual obligations, and, at trial, he testified under oath that he intends to continue to faithfully perform under the contract. However, as noted, the bankruptcy code mandates a procedure for a debtor who wants to keep the secured personal property and continue to faithfully perform under the security agreement, i.e., the debtor can reaffirm the debt. Hall does not explain why his current self-serving statement of intent should trump his refusal to formalize his commitment to full contract performance through a reaffirmation of the debt. Under Hall’s “trust-what-I-say-today” method of reaffirmation, Ford Credit must accept the additional risk that Hall might change his mind at any time and unilaterally decide to terminate any part or all of his contract performance. Hall, on the other hand, has been relieved of all personal liability and is subject to no additional sanction for failing to fulfill his precatory assurance of performance. ¶ If Hall chooses to terminate performance, Ford Credit will be left to salvage whatever it can from the truck in whatever condition it might be at the time. In that vein, the truck’s value in relation to the remaining balance on the contract is an important factor. A creditor would be justified in believing that a debtor would ordinarily not gratuitously pay more for a vehicle than it is worth. Accordingly, the pros-pect of debtor’s continued performance would be significantly impaired as a matter of economic reality where the note is substantially undercollaterized.