SLG Obtains Significant Appellate Decision on Rights of Bankruptcy Judges to Review Reaffirmation Agreements

Posted on SLG website June 30, 2011. Updated 10.11, after passage of SB 458 (See footnote).

CLIENT ALERT: June 29, 2011
TO: All SLG Clients and Affiliates
SUBECT: SLG Obtains Favorable Appellate Decision on Reaffirmation Agreements.

Case Background: Many lenders file reaffirmation agreements in bankruptcy court, only to find that the judge independently sets a hearing and “throws them out”. This happens in both real and personal property cases.

It is most troubling in auto cases, as the primary motivation appears to be to allow the debtors to “ride through” without retaining personal liability on the loan. Many lenders will not repossess on a current loan and therefore lose the added benefit of requiring that the debtors remain personally liable via reaffirmation.

In real property cases, reaffirmation can benefit the creditor later on in the event of a short sale (may allow negotiations with third parties for contribution to short sale, as an alternative to foreclosure)[1] or if the lender becomes a sold out junior lienor).

The case of Bay Fed. Credit Union v. Ong (In re Ong), 2011 Bankr. LEXIS 3223 (B.A.P. 9th Cir. June 29, 2011), changes things dramatically for credit unions and generally assists all lenders.

Specific Holding and Implications of the ruling:

A.For Credit Unions: The case holds that a bankruptcy court cannot review a reaffirmation agreement to determine if there is an undue hardship on the debtor, when the agreement is between a credit union and its members and is properly certified by the member/debtor’s counsel, and is properly and timely filed with the court (See 11 U.S.C. §524 (m)(2). Therefore, the bankruptcy court has no further authority to set a hearing and make a further inquiry (under11 U.S.C. § 524(d)) to determine whether the reaffirmation agreement is in the debtor’s best interests.

B.For All Lenders: The case holds that where there is no presumption of undue hardship, and a reaffirmation agreement is properly certified by the Debtor’s counsel and filed with the court, the bankruptcy court cannot set a hearing and independently review the agreement to determine if it is in the debtor’s best interests. under 11 U.S.C. § 524(d). A review by the bankruptcy court to determine if a reaffirmation agreement is in the debtor’s best interests can only occur where there is a presumption of hardship (again not applicable to properly filed and certified credit union agreements) and the debtor is not represented by an attorney (See 11 U.S.C. § 524(c )(6)).

C.Limitations: The only instance where a bankruptcy court can review an attorney certified reaffirmation agreement where there is no undue hardship shown is in an exceptional case where the certification is improper or insufficient and would violate Rule 9011.

This is the first known ruling on this issue in the 9th Circuit. This case should be cited in instances where a reaffirmation agreement is filed under the specified conditions mentioned above and the bankruptcy judge improperly seeks to review and deny it.

For more information about the case email: [email protected]

[1]  Note: The impact of SB 458 (amending CCP 580) on short sales.  No longer a right  for lender to  assert ongoing personal obligation of borrower after short sale.