Credit unions hail reaffirm ruling in U.S. appeals Maine case; case tackles controversial reaffirmation issues in bankruptcies

<p>PORTLAND, Me. – Credit unions in New England and elsewhere are hailing a U.S. Court of Appeals ruling on debt reaffirmation as giving new support for bankruptcy policies long in existence at CUs. The March 26 ruling by a three-judge appellate panel in Boston on a Chapter 7 bankruptcy filing at Katahdin Federal Credit Union of Millinocket, Me. upholds the practice of CUs linking reaffirmation of unsecured debt with secured debt, according to CU attorneys involved in the case. The case, Jamo vs. Katahdin, first litigated in Maine bankruptcy courts in 1999 drew national interest, with CUNA and the Maine League of Credit Unions filing amicus briefs before the Boston federal appellate panel. “This is a significant victory for credit unions,” declared George J. Marcus, a Portland attorney who represented the Maine League and CUNA. “Credit unions and other lenders can tie reaffirmation of mortgages without fear of being sanctioned.” The case, which is not likely to be appealed to the U.S. Supreme Court, centered on a married couple filing of Chapter 7 bankruptcy with the couple reaffirming their $37,000 home mortgage with Katahdin. The couple, however, also had $23,700 of unsecured debts at the CU. Initially, KFCU proposed a reaffirmation that would have transformed the unsecured debt into secured debt via a second mortgage on the debtors’ home, thereby cutting their payments in half. Although the debtors agreed, their attorney refused to certify the reaffirmation agreement. “They then threatened the credit union with a lawsuit seeking damages for violation of the automatic stay unless the credit union agreed,” said a prepared statement on the March 26 decision from Katahdin. The CU “refused to back down from its policy,” noted the statement. The original bankruptcy filing was on March 19, 1999, and a year later the debtors sued the CU “for violating the automatic stay based on the credit union’s `all or nothing’ reaffirmation policy.” The Bankruptcy Court in Portland sided with the couple that the CU’s policy was a “per se violation of the automatic stay,” and it ruled that the CU had “threatened the debtors with foreclosure which rose to the level of coercion and also resulted in violation of the stay.” On Sept. 26, 2000 the Bankruptcy Court imposed $10,000 in sanctions against Katahdin for attorneys fees. It also enjoined the CU to reaffirm only the secured obligation. After a Bankruptcy Appellate Panel in May 2001 reaffirmed the lower court’s ruling, Katahdin appealed to the U.S. Circuit Court in Boston. The appellate panel in reversing the lower courts held that the CU’s “all or nothing” policy did not violate the stay, and furthermore the CU had not coerced the debtors and communication with the debtors was “benign.” Daniel Cummings, a partner in the Portland firm of Norman, Hanson and DeTroy, which represented Katahdin, said the court’s ruling shows that “bankruptcy law does not prohibit an all or nothing reaffirmation policy.” Marcus, the League/CUNA attorney, noted that other appeals courts have skirted the reaffirmation issue, but the Boston panel chose to take on the topic more directly. In its ruling, the court took note of that fact by stating “to some extent we write on a pristine page: no federal court of appeals has spoken to the issue.” The Appellate Court ruled that lower courts “lacked the power to modify the proposed reaffirmation arrangement” or to “compel the credit union to enter into a judicially-crafted reaffirmation agreement.” In its formal statement, Katahdin noted that it “prides itself on being a community credit union with a long history of service excellence to its members.” The $65 million Kathadin offered to restructure the Jamos’ multiple debts “on very generous terms as part of reaffirmation.” The decision “paves the way for credit unions throughout the First Circuit to enforce their policies of reaffirming debt only I all debt is reaffirmed. This policy and bankruptcy strategy is in keeping with the larger and more universally applied credit union policy that denies continuing credit union privileges to those members causing the credit union a loss.” The president and CEO of Katahdin, Donald Casko, told Credit Union Times, “It is significant to us that the court upheld our collection policy that if a member wants to reaffirm an account, he can’t pick and choose.” “What happened with us is that bankruptcy filers would reaffirm mortgages and blow off everything else,” said Casko. -</p> <p>[email protected]</p>