GEORGETOWN, Del. – The United States Court of Appeals for the Third Circuit Court refused to rule on the merits of a precedent-setting bankruptcy case involving Delaware State Police Federal Credit Union. The case of Price v. Delaware State Police FCU is precedent setting in the Third Circuit and involves the statutory disposition of a debtor’s collateral in a Chapter 7 bankruptcy, the Delaware Credit Union League reported. The credit union’s President/CEO Steve Cimo expressed frustrations on dealing with a bankruptcy code that allows debtors to determine their own collateral disposition regardless of what statute allows, simply because they stay current on their loans. He wrote to a letter to Sen. Thomas Carper (D-Del.) about his frustrations because Carper is considered a strong proponent of bankruptcy abuse reform. At issue was whether a Chapter 7 debtor can keep property pledged as collateral for a secured loan simply by continuing to make regular payments. The debtors filed a petition for relief under Chapter 7 on December 11, 200l. Along with their petition, they filed a `Statement of Intention with Respect to Secured Debt,’ indicating that they intended to continue regular payments to the credit union on two secured auto loans and retain the vehicles. The credit union’s position was that section 521(2)(A) of the Bankruptcy Code allows only four options for a debtor: surrender the collateral; purchase the collateral in a lump sum; reaffirm the loan; or claim a recognized exemption. On June 25, 2002, the United States Bankruptcy Court for the District of Delaware found in the credit union’s favor, and an appeal was filed by the Debtor to the United States District Court. On April 1, 2003, the United States District Court for the District of Delaware also found in our favor, and again an appeal was filed by the debtors. On January 12, 2004, the case was argued before a three judge panel that concluded the provisions of section 521(2)(A) do not prevent non-defaulting debtors from retaining secured property by keeping current on their loans, reversing the decisions of the Bankruptcy and District Courts. The Third Circuit Court concluded that section 521(2)(A) is a notice provision which does not restrict debtors from retaining collateral while staying current on their loans. “I believe this decision could lead to other possible options where a debtor can elect preferential treatment to selected creditors,” Cimo wrote to Carper.” It would now appear that, in the Third Circuit, a debtor’s counsel is free to craft whatever remedy to this situation the mind can conceive including the contravention of current bankruptcy statutes.” Cimo said this issue has been decided in eight other circuit courts with four concluding the debtor is limited by the options enumerated in 521(2)(A), and four to the contrary. “One of the most interesting developments in this case is that the debtors paid the loans in full prior to the hearing before the Third Circuit, and their attorney continued to pursue the appeal even thought the debtors no longer had a financial stake in the case,” Cimo wrote. The credit union’s board of directors agreed to pursue the case as far as necessary because of the financial impact an adverse decision would have on credit unions and other financial institutions in the Third Circuit. This specific issue of debtor’s rights to collateral under the United States Bankruptcy Code is evenly split among the eight circuit courts making up the United States Court of Appeals. The Court ultimately refused to rule on the merits of the case because the debtor’s loans had been paid in full prior to the case reaching the Third Circuit. It also declined to address the statutory inconsistency that was the basis of the appeal. The credit union incurred legal costs of $24,000 in pursuit of their rights over collateral as a lending institution. [email protected]

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