Brief Update: Second Circuit Affirms Decision Permitting Debtor to Retain Collateral Without Reaffirmation or Redemption

The United States Court of Appeals for the Second Circuit again addressed the issue of whether section 521(2) of the Bankruptcy Code permits a chapter 7 debtor to retain property securing a consumer debt without either redeeming the property (making a lump-sum payment to the creditor in an amount equal to the value of the lien on the property) or reaffirming the debt secured by the property (accepting personal liability for the payment of an otherwise dischargeable debt). The Second Circuit followed its prior decision in Capital Communications Federal Credit Union v. Boodrow (In re Boodrow), holding that a debtor who is not in default on the underlying loan agreement may retain the property securing a consumer debt without redeeming or reaffirming the debt as long as the debtor remains current on its payments and complies with the other applicable provisions of the underlying documents.

The Second Circuit explained in its recent decision that it is bound by the decision of a prior Second Circuit panel unless it is overruled, implicitly or expressly, by the United States Supreme Court or the Second Circuit sitting en banc (i.e., the entire court of the Second Circuit, rather than a panel consisting of several of its members). Moreover, the Second Circuit imposed double appellate costs upon the appellant/bank for asking the court to reconsider its decision in Boodrow "in light of the fact that BankBoston seeks a remedy that we have made clear this Court cannot provide, and because we have entertained and denied this very request for relief made by BankBoston in a prior case" (after the decision in Boodrow).

The issue of whether a debtor is limited to the options of redemption or reaffirmation has divided the circuit courts of appeals. The Fourth, Ninth, and Tenth Circuits have adopted the same position as the Second Circuit, while the First, Fifth, Seventh, and Eleventh Circuits have held that a debtor is limited to the options of redemption or reaffirmation. The bankruptcy reform legislation currently pending in Congress, consistent with the recommendation of the National Bankruptcy Review Commission, would limit debtors to choosing either redemption or reaffirmation if they wish to retain property securing consumer debt.

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BankBoston, N.A. v. Sokolowski (In re Sokolowski), No. 99-5048(L), 99-5054(XAP), 2000 WL 248663 (2d Cir. Mar. 6, 2000). See the October 1997 issue of Bankruptcy Bulletin at 8 for a more detailed discussion of the Second Circuit's decision in Capital Communications Fed. Credit Union v. Boodrow (In re Boodrow), 126 F.3d 43 (2d Cir. 1997), cert. denied, 522 U.S. 1117, 118 S. Ct. 1055, 14