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Fair Credit Reporting: 18.5 Common Law Protection of Financial Information

In addition to statutes, common law may impose on banks an implied contractual duty to keep financial information concerning a depositor confidential.344 Explained one court, “[i]nviolate secrecy is one of the inherent and fundamental precepts of the relationship of the bank and its customers or depositors.”345 Accordingly, if the state recognizes a duty of confidentiality in its case law, the bank may be liable for all damages proximately caused by the bank’s wrongful disclosure of information.

Consumer Bankruptcy Law and Practice: 11.2.1.1 General Principles

Critical to an understanding of most of the provisions dealing with secured claims is a familiarity with a key concept in the Bankruptcy Code—the “allowed secured claim.” Although not defined in the definition section of the Code,4 the term is explained by section 506, which is applicable to cases under all chapters of the Code.5

Consumer Bankruptcy Law and Practice: 11.2.1.2 Limitations on Claim Bifurcation in Chapter 7

Unfortunately, the Supreme Court somewhat limited the application of the allowed secured claim concept in Dewsnup v. Timm.10 There, despite clear statutory language in Code section 506(d) stating that a lien securing a claim that is not an allowed secured claim is void,11 the Court held that a chapter 7 debtor could not have a lien declared void on the basis of that language, even though the lien did not secure a claim that was an allowed secured claim under section 506(a).

Consumer Bankruptcy Law and Practice: 11.2.1.3 Claim Bifurcation Alive and Well in Other Chapters

After Dewsnup, some creditors argued that the decision prevented the use of bankruptcy to void undersecured liens in other contexts than the one presented by that case, including chapter 13. Such arguments were not successful for a number of reasons. First, the Supreme Court made clear in Dewsnup that it was limiting its holding to when a chapter 7 debtor relied solely on section 506(d) to render a lien void.17 It therefore did not purport to affect the law in other chapters, such as chapter 12 and chapter 13.

Consumer Bankruptcy Law and Practice: 11.2.2.2.1 In general

The first issue that arises under section 506 is the date as of which value should be determined. Depending upon whether the property is increasing or decreasing in value, it may be in the debtor’s interest to argue for an earlier date or a later one, whichever will produce a lower value. Although there is little difference in most cases, the issue can be significant in cases of rapidly depreciating new automobiles, rapidly appreciating real estate, or property that has been damaged since the filing of the case.

Consumer Bankruptcy Law and Practice: 11.2.2.2.2 Statutory rules for some personal property

The 2005 amendments answered the valuation date question for some types of property. Section 506(a)(2) provides that the value of personal property generally should be determined as of the date of the petition, but then establishes a different rule for a subset of such property. The value of personal property acquired for personal, family, or household purposes is to be determined based upon what a retail merchant would charge for property of that kind considering its age and condition at the time value is determined.

Consumer Bankruptcy Law and Practice: 11.2.2.3.3 Property other than automobiles

With respect to household goods and other personal property without established industry guides to value, the problem of valuation is more difficult. The Rash decision’s rejection of retail value for automobiles should clearly prevent purchase price, even from a used furniture store, from becoming the standard. Again, the best guideline is probably the price that would be obtained on craigslist or eBay, at a flea market or an auction, or in the garage sale market populated by individual buyers and sellers.

Consumer Bankruptcy Law and Practice: 11.2.2.3.4 Computation of value

When there are prior liens on property ahead of the lien that is to be valued, the amount of those liens must first be subtracted to determine if there is value over and above the prior liens. If the prior liens equal or exceed the value of the property, then the allowed secured claim of a creditor with a lower priority lien is equal to zero.95 When making these calculations, debtor’s counsel should make certain to account for tax and municipal liens that take first priority position in most jurisdictions by statute.

Consumer Bankruptcy Law and Practice: 11.3.1 Overview

The first problem often faced by debtors with secured creditors is that of a creditor’s attempt in the bankruptcy court to exercise the rights it would otherwise have available to seize or foreclose on the collateral. These attempts may come in a number of forms.

Consumer Bankruptcy Law and Practice: 11.3.2 Reclamation of Property

A creditor may occasionally file a Complaint to Reclaim Property, sometimes known as a Complaint in Reclamation. Although the Code does not specifically provide for such a proceeding, it seems fairly clear that the expanded jurisdiction of the bankruptcy court would include jurisdiction over the assertion of any valid rights that the creditor might have, including a right to gain possession of the collateral. However, these rights are clearly limited by specific provisions contained in the Code.

Consumer Bankruptcy Law and Practice: 11.3.3 Abandonment of Property by the Trustee

Another tactic that is occasionally tried is to have the trustee abandon their interest in the property sought by the secured creditor. Under the previous Act, such abandonment left parties with interests in the property free to proceed outside of the bankruptcy court. A trustee may thus be asked by the creditor to voluntarily abandon the collateral, as the trustee may do under section 554(a), or the court may be requested by a creditor to order such abandonment under section 554(b).

Consumer Bankruptcy Law and Practice: 11.3.4 Disposition by the Trustee Under Section 725

Creditors on rare occasions also have sought to make use of section 725 of the Code, which allows the trustee to “dispose of” property. Although the legislative history is not very illuminating, it appears that the purpose of this section is merely to supplement the other powers of the trustee when none of them seem applicable, and perhaps to provide a statutory basis for some types of voluntary reclamations when there is no objection by the trustee.

Consumer Bankruptcy Law and Practice: 11.3.5 Holding of Cash Collateral by Creditors

A final and conceptually different way in which debtors may be deprived of certain property after bankruptcy, should also be mentioned. After filing a bankruptcy case, a debtor may suddenly find that a bank or credit union to which the debtor owes money refuses to allow withdrawals from the debtor’s bank or share account. This refusal occurs because the bank or credit union, if it has a right of setoff under section 553,125 is considered to be a holder of cash collateral.

Consumer Bankruptcy Law and Practice: 11.4.2.4.1 Introduction

Another related provision enacted in 2005 is section 521(a)(6). Like section 362(h), this provision does not apply if the debtor timely redeems or enters into a reaffirmation agreement, even if the reaffirmation is disapproved by the court.177 This provision offers greater relief to a creditor, but under much more limited circumstances. Section 521(a)(6) at first glance seems similar to section 362(h), but there are important differences.

Consumer Bankruptcy Law and Practice: 11.4.2.4.4 Rights of creditors and debtors when section 521(a)(6) applies

If the creditor has satisfied both conditions discussed above, however they are interpreted by the court, section 521(a)(6) changes the rights of creditors and debtors. First, section 521(a)(6) provides that an individual debtor shall “not retain possession” of the property if the debtor does not redeem or reaffirm within the stated time period.186 Second, the “creditor may take whatever action” as to the property as permitted by “applicable nonbankruptcy law.”

Consumer Bankruptcy Law and Practice: 11.4.2.5 Section 521(d)

Section 521(d) provides that if a debtor fails to take timely action as specified in section 521(a)(6) or section 362(h)(1) and (2), with respect to property as to which a creditor holds a security interest not otherwise avoidable under sections 522(f), 544, 545, 547, 548, or 549, nothing in title 11 shall limit the operation of an ipso facto clause in the credit agreement that makes bankruptcy or insolvency a default under the agreement. It contains similar language with respect to leases of personal property.

Consumer Bankruptcy Law and Practice: 11.4.2.6 Legislative History of the 2005 Amendments

Some of the courts that found a debtor had the right to retain collateral while making current payments noted that the legislative history supported their conclusions. In particular, they noted that nowhere in the legislative history of the original statement of intention provisions did Congress state that debtors had only the options of reaffirmation, redemption, or surrender.194