In Venture Bank v. Lapides, 800 F.3d 442 (8th Cir. 2015), the Eighth Circuit found that a bank could not recover from its borrower and, in fact, had violated the post-discharge injunction by relying on change in terms agreements which were ineffective to reaffirm a debt discharged in the borrower’s Chapter 7 bankruptcy.

Venture Bank’s problems resulted from its failure to obtain a valid reaffirmation agreement during the borrower’s Chapter 7 case, and instead obtained two separate change in terms agreements which the borrower signed after receiving his discharge. The chronology of events includes the following: Lapides had a loan from Venture secured by a 3rd position mortgage on Lapides’s home. The loan was evidenced by a promissory note dated June 30, 2009. On August 11, 2009, Lapides filed for Chapter 7 bankruptcy protection in the Bankruptcy Court for the District of Minnesota. During the bankruptcy case, Venture and Lapides discussed Venture refinancing all of Lapides’s debt and the parties even drafted and signed a Debt-Reaffirmation Agreement. However, Lapides’s bankruptcy counsel never signed the reaffirmation agreement nor did the parties file or obtain the bankruptcy court’s approval of the reaffirmation agreement. On November 16, 2009, Lapides received his discharge of personal debts. At that point, Venture still had a 3rd-position lien on Lapides’s residence, but Venture could not seek personal recovery from Lapides on the debt.

On May 9, 2010, and again on November 9, 2010, Lapides signed change in terms agreements with Venture which purported to extend the maturity date of the Venture loan. In addition to extending the maturity date, the agreements included the borrower’s unconditional promise to repay the debt (which had been discharged). The agreements also required Lapides to make regular monthly payments to be applied toward the debt. Venture told Lapides that the change in terms agreements and the payments were necessary if Venture was going to continue to consider a potential refinance of all of Lapides’s debts. Between June 2010 and May 2011 Lapides made 12 payments. Venture never refinanced the debts.

In May 2011, Lapides ceased making payments. Venture sued Lapides in July 2011 seeking to foreclose on the 3rd-position mortgage and seeking a declaration that the change in terms agreements were valid and enforceable. Lapides removed the case to bankruptcy court and counterclaimed for damages for violating the discharge injunction.

The bankruptcy court concluded that the change in terms agreements were not enforceable because they did not satisfy the Bankruptcy Code nor were they enforceable under Minnesota contract law. The bankruptcy court further found that all of Lapides’s post-discharge payments were made involuntarily and that, as such, Venture violated the discharge injunction. The bankruptcy court awarded Lapides damages including a refund of all payments made plus payment of Lapides’s attorneys’ fees. Venture appealed to the Eighth Circuit.

On appeal, the Eighth Circuit concluded that the bankruptcy court had erred in its ruling, but that the error occurred in even considering whether the change in terms agreements were enforceable under state law. According to the Eighth Circuit, the only way to reaffirm a debt was through a reaffirmation agreement satisfying all the requirements of 11 U.S.C. § 524(c) filed with and approved by the bankruptcy court. Because the change in terms agreements did not satisfy § 524(c) and were not approved by the bankruptcy court, they were invalid without considering whether they were enforceable under applicable non-bankruptcy law. The Eighth Circuit affirmed the bankruptcy court’s finding that Lapides had made the post-discharge payment involuntarily. The trial record contained ample evidence of pressure and inducement exerted upon Lapides including “dangling” the prospect of Venture possibly refinancing his debts if he made payments, and numerous emails from Venture stating that payments were due and requesting additional payments of principal and interest. Thus, the bankruptcy court’s holdings, including the damage award to Lapides for violating the discharge injunction, were upheld.

This case provides several warnings for lenders who deal with Chapter 7 debtors. Primarily, the important lesson is that if the lender wants to have a borrower reaffirm its debt during a Chapter 7 case, it must get the borrower’s agreement prior to discharge and then file and obtain approval of a reaffirmation agreement that meets the requirements of § 524(c). Agreements which might be enforceable under state law are insufficient. Second, if a lender does not obtain a valid reaffirmation agreement, a borrower may make voluntary payments, post-discharge, in order to avoid having the lender foreclose on any collateral securing the debt, but the lender cannot demand payment nor request additional payments of principal and interest. Third, if the borrower does not reaffirm the debt, at the point the lender becomes able to foreclose on collateral, the lender may not seek a personal judgment against the borrower. Instead, the recovery is limited to collateral securing the loan. Should a lender fail to abide by any of these restrictions, that lender may be liable for damages based on violating the discharge injunction, which can carry an award of attorneys’ fees to the borrower.

Best practices for lenders who have borrowers file Chapter 7 include (1) determining early in the case whether a reaffirmation is possible; (2) if reaffirming, work with a bankruptcy attorney to verify the agreement meets the requirements of the Bankruptcy Code; (3) if no reaffirmation, clearly document for the loan file that the personal liability has been discharged and the recovery is limited to the collateral; and (4) work to ensure that dunning notices and collections letters are halted and no communications are being sent to the borrower demanding payment.