Does your bankruptcy filing stop a pawnbroker from disposing your pawned property? Specifically, can you keep the pawned property by paying the loan secured by that property over time through your Chapter 13 payment plan, in spite of California state law that would otherwise allow the pawnbroker to dispose of the property?
Yes, to both questions, at least under certain circumstances, according to the recent Ninth Circuit Bankruptcy Appellate Panel decision, Schnitzel, Inc. dba R&J Jewelry & Loan v. Sorensen (In re Sorensen), 586 B.R. 327.
WHAT STOPS A PAWNBROKER FROM SELLING YOUR PAWNED PROPERTY?
The same crucial part of bankruptcy law that immediately stops a vehicle repossession or wage garnishment when you file a bankruptcy case also stops a pawnbroker from selling your property. That law is referred to as the "automatic stay."
Specifically for purposes of pawned property, your bankruptcy filing stops:
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
. . .
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title[.]
Section 362(a)(3), (5), and (6) of the U.S. Bankruptcy Code.
Assuming that whatever you pawned is still your property at the time you file bankruptcy, the pawnbroker can't take and sell or dispose of it. Doing so would be an "act . . . to exercise control over" it, "enforce" a "lien" against it, and "to collect, assess, or recover a claim" against you.
So, the pawnbroker would be in violation of the automatic stay. It could be ordered to pay your damages and attorney fees, and possibly even punitive damages. Section 362(k) of the Bankruptcy Code.
WHAT DETERMINES WHETHER THE PAWNED PROPERTY IS STILL MINE?
That is a key question. The automatic stay only protects the property if it is still yours at the time you file your bankruptcy case. Note that the subsections about the automatic stay quoted above prohibit a creditor from taking action against "property of the estate" or "property of the debtor." Your bankruptcy "estate" is essentially everything you own at the time you file your case. So the pawned property is protected only if it continues to be yours and has not legally become the pawnbroker's as of the moment of your bankruptcy filing.
What determines whether property you've given to the pawnbroker is still yours for bankruptcy purposes?
This is exactly the question that was addressed in a recent opinion by the Ninth Circuit Bankruptcy Appellate Panel in Schnitzel, Inc. dba R&J Jewelry & Loan v. Sorensen (In re Sorensen) 586 B.R. 327 (2018). This ruling found the answer in a combination of federal bankruptcy law and California state law.
WHAT DO THE BANKRUPTCY STATUTES SAY ABOUT WHO OWNS PAWNED PROPERTY?
A specific bankruptcy statute directly addresses this question. Section 541 of the U.S. Bankruptcy Code is titled "Property of the estate." It lays out what property
is included, and
thus protected, in a bankruptcy case, and what is not. One specific category of property that
is not included is pawned property that has transferred into the pawnbroker's ownership as of the time the customer files bankruptcy. The statute says that the pawned property is no longer the debtor's, and thus no longer the "property of the estate" if, as of the time he or she files bankruptcy:
the debtor . . . [has not] exercised any right to redeem provided under the contract or State law, in a timely manner as provided under State law and section 108(b) . . . .
The Ninth Circuit Bankruptcy Appellate Panel dug into what this language means in the recent Sorensen case cited above.
HOW DID THE SORENSEN COURT OPINION APPLY THIS STATUTE?
The question about when precisely pawned property is no longer a debtor's property was apparently one never addressed by an appellate court in the Ninth Circuit. (The Ninth Circuit covers all the far Western states including California.)
Sydney Sorensen filed a Chapter 13 case in Northern California. Her bankruptcy judge ruled that her pawned property—some jewelry—was property of her bankruptcy estate and thus was hers to protect. After the pawnbroker, R&J, appealed, the Bankruptcy Appellate Panel ("BAP") agreed with and upheld the bankruptcy court's ruling.
The BAP opinion's reasoning was as follows:
1. When Ms. Sorensen filed for bankruptcy protection, her interest in the jewelry became part of the bankruptcy estate.
2. Under California law, § 541(b)(8) does not automatically exclude pawned property from the bankruptcy estate without notice to the pawnor.
3. The statutory redemption notice was void because R&J failed to seek relief from stay.
Overall, under the facts of this case the pawnbroker "did not validly terminate Ms. Sorensen's right to redeem the [jewelry]." So the pawned jewelry did not fit the statutory language that carves out what pawned property is not protected property of the bankruptcy estate.
WHAT WERE THE FACTS IN THIS CASE SHOWING THAT THE PROPERTY WAS THE DEBTOR'S AT FILING?
Ms. Sorensen filed her Chapter 13 bankruptcy case after she had pledged her jewelry to R&J but before the pawn loans' termination date. (There were 5 separate loans.) At the time of her filing, her bankruptcy estate included "rights that a debtor retains in her pawned property." So at her filing "her estate included her right to redeem the property."
THEN WHAT HAPPENED AFTER THE BANKRUPTCY FILING? HOW DOES CALIFORNIA LAW APPLY TO THE FACTS HERE ABOUT NOTICE TO THE DEBTOR?
California law applies because the Bankruptcy Code cited above says you determine whether "the debtor . . . [has or has not] exercised any right to redeem provided under the contract or State law, in a timely manner as provided under State law . . . ." §541(b)(8)(C).
The California Financial Code provides that when pawned property is not redeemed by the end of the loan period, the pawnbroker must give notice of the termination of the loan and give a 10-day redemption period. Only then does the pawnbroker become the full owner of the property. Cal. Fin. Code §21201(d) and (f).
As the Sorensen opinion states, "[i]n other words, the right to redeem pawned property under California law does not expire until ten days after the pawnbroker gives proper notice to the pledgor."
586 B.R. 327, 333.
The pawnbroker argued that it did give proper notice. About 3 months after Ms. Sorensen filed her bankruptcy case the pawn loans' termination date passed, R&J gave a 10-day notice of right of redemption, and Ms. Sorensen did not pay the loans during those 10 days.
SO WHY DID THE PAWNBROKER NOT GET OWNERSHIP OF THE PAWNED PROPERTY?
The bankruptcy court ruled, and the BAP agreed, that the pawnbroker's 10-day notice was void, invalid, because it violated the automatic stay.
Recall the discussion early in this blog post about the automatic stay stopping a pawnbroker from taking your pawned property once you file a bankruptcy case. This also applied to the pawnbroker's subsequent 10-day notice. As the BAP stated:
R&J's issuance of the ten-day notice was an act "to exercise control over property of the estate[,]" to "enforce a lien [that] . . . secures a claim[,]" and "to collect, assess, or recover a claim against the debtor[.]" It thus violated [the automatic stay of] § 362(a). "Actions taken in violation of the automatic stay are void." Because the ten-day notice was void ab initio, R & J did not satisfy the notice requirement in California Financial Code section 21201(d).
Accordingly, the ten-day redemption period never began to run under subsection (d), Ms. Sorensen's redemption right was never extinguished, R&J never took title to the jewelry under subsection (f), and § 541(b)(8) did not remove the jewelry from the estate.
586 B.R. 327, 334 (footnotes and court citation excluded).
IS THERE ANYTHING ELSE WORTH KNOWING ABOUT SORENSEN?
Yes, Ms. Sorensen raised a separate interesting argument. Her Chapter 13 payment plan showed R&J as a secured creditor, and proposed to pay R&J $50 per month on each of the five pawn loans. R&J raised no objections to this proposed plan, which was confirmed—legally approved—by the bankruptcy court. The court subsequently ruled that R&J was therefore bound by the terms of the court-approved plan.
Generally, a creditor which fails to object to a proposed plan after getting appropriate notice of it is bound by its terms. Early in this case the Chapter 13 trustee raised an issue about whether the debtor had given appropriate notice of the original plan to R&J. Ms. Sorensen then filed an amended plan which did satisfy the concern about proper notice. 586 B.R. 327, 336.
On appeal the BAP did not believe it needed to address this separate argument of Ms. Sorensen about R&J being bound by the terms of the unobjected-to amended plan. The BAP said it didn't need to get into this "because we are affirming the [bankruptcy court's] decision on another, independently sufficient grounds"—the one about the violation of the automatic stay discussed above. 586 B.R. 327, 329, n.2.
WHAT ARE THE LESSONS OF SORENSON?
1. When you file bankruptcy the right to redeem your pawned property that exists at that moment is part of your bankruptcy estate and can be protected. This assumes that—as in Sorensen—you still have that right, under your contract and under California law, at the time of your bankruptcy filing.
2. A pawnbroker cannot take any action after you file bankruptcy to extinguish your right to redeem the pawned property, without first seeking and getting permission from the bankruptcy court. Doing so would be a violation of the automatic stay and would expose the pawnbroker to financial penalties. Interestingly, the "sale of pledged property [in violation of the prescribed procedure] is a misdemeanor" under California's pawnbroker statute. Cal. Fin. Code §21201(g).
3. That California statutory procedure includes a 10-day notice to the debtor. There is no automatic expiration of the debtor's right to redeem as there is in certain other state's statutes. In these other states the pawnbroker does not need to take any action for the right to redeem to expire. But under California law the pawnbroker does need to act, and the automatic stay prevents it from doing so without permission. R&J complained that this differential "result is unfair and inappropriate." The BAP replied that "this is neither wrong nor even unusual" because [p]roperty interests are created and defined by state law" "[u]nless some federal interest requires a different result." 586 B.R. 327, 336. The lesson: California law requires the pawnbroker to take steps to extinguish redemption rights; other state laws may not and therefore redemption rights there may not require the pawnbroker to ask for relief from the automatic stay before those rights disappear.
4. As the bankruptcy court said in this case, had R&J filed a motion for relief from the automatic stay, it "likely would have been granted in view of Section 541(b)(8). And it would have allowed R&J to send the notice required by California law." 586 B.R. 327, 331. That would have allowed R&J to end Ms. Sorensen's redemption rights, assuming she did not pay the obligation are required by the pawn contract. However, this would also have given the parties the opportunity to negotiate a mutually agreeable repayment schedule. That is often the practical result of requiring a creditor to file a motion for relief from stay—it creates a pause so the debtor and creditor can see if they can agree.
5. In Sorensen the appellate court did not address the effect of a pawnbroker's failure to object to a Chapter 13 payment plan that proposes to pay the pawn loan in installments. This
may be a separate basis for requiring the pawnbroker to accept extended payments and the eventual return of the pawned property. To be realistic, a pawnbroker in this situation likely would object to a plan, although it may not mind getting the loan paid (in part or in full, depending on the circumstances) over time.