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In re Northington

United States Court of Appeals, Eleventh Circuit

December 11, 2017

JONATHAN NORTHINGTON, Defendant- Appellee. TITLE MAX, Plaintiff-Appellant, In re: GUSTAVIUS A. WILBER, Debtor. TITLE MAX, Plaintiff-Appellant,
GUSTAVIUS A. WILBER, Defendant- Appellee.

         Appeals from the United States District Court for the Middle District of Georgia D.C. Docket Nos. 4:16-cv-00174-CDL, 4:16-cv-00172-CDL, Bkcy Nos. 4:15-bkc-40962-JTL, 4:15-bkc-40877-JTL

          Before WILSON and NEWSOM, Circuit Judges and MORENO, [*] District Judge.

          NEWSOM, Circuit Judge

         This case requires us to assess the interplay between the United States Bankruptcy Code and a Georgia statute that defines state-law property rights. For its part, the Code describes a bankruptcy estate as including "all legal or equitable interests of the debtor in property as of the commencement of the case, " 11 U.S.C. § 541(a)(1), and goes on to provide, as relevant here, that a Chapter 13 plan can "modify the rights of holders of secured claims" on property in the estate, id. § 1322(b)(2). Meanwhile, Georgia's "pawn" law states that any "pledged"-i.e., pawned-item that is not "redeemed" within a statutorily prescribed grace period "shall be automatically forfeited to the pawnbroker by operation of [law], and any ownership interest of the pledgor … shall be automatically extinguished in the pledged item." Ga. Code Ann. § 44-14-403(b)(3).

         So how do these provisions interact? Very briefly, here's the deal: The debtor in this case entered into a pawn transaction in which he pledged his car in exchange for a loan, defaulted on the loan by failing to repay it on time, and then, shortly before the expiration of the redemption period-during which he could pay off his debt (with interest) and thereby regain title to his car-filed a Chapter 13 bankruptcy petition. Even though the Bankruptcy Code extended the debtor's state-law grace period an additional 60 days, he still failed to redeem the car. All agree that because the debtor filed for bankruptcy before the grace period lapsed, the car and the associated right of redemption initially became part of the bankruptcy estate pursuant to Section 541(a)(1). But this case presents the following interesting question: Did the filing of the bankruptcy petition necessarily freeze those assets in the estate just as they were, such that at confirmation the pawnbroker remained a mere "holder[] of [a] secured claim" whose "rights" the bankruptcy court could "modify" under Section 1322(b)(2)- here, by extending the repayment schedule? Or instead, even after the petition's filing, did Georgia's pawn statute continue to operate in the background, so to speak, such that upon the expiration of the redemption period, the car was "automatically forfeited to the pawnbroker by operation of [law]" and thus ceased to be property of the estate, leaving no bankruptcy-based "claim" or "right" to be "modif[ied]"?

         Mindful of the deference owed to state-law definitions and regulations of property rights-even in this heavily "federal" area of law-we hold that the Bankruptcy Code did not forestall the "automatic[]" operation of Georgia's pawn statute, that the car dropped out of the bankruptcy estate (and vested in the pawnbroker) when the prescribed redemption period lapsed, and, accordingly, that with respect to the car, Section 1322(b)(2) had no field of operation. Simply put, following the expiration of the grace period, the pawnbroker didn't have a mere "claim" on the debtor's car-it had the car itself.


         On September 2, 2015, Gustavius Wilber and TitleMax entered into a pawn transaction under Georgia law, see Ga. Code Ann. § 44-14-403, in which Wilber exchanged the certificate of title on his 2006 Dodge Charger for a $4, 400 cash advance.[1] Because pawn transactions are nonrecourse loans, Wilber had no firm obligation to repay the advance or to redeem the Charger; rather, if Wilber failed to pay off the loan with interest, TitleMax simply took the car. See Ga. Code Ann. § 44-14-403. Wilber's pawn transaction matured on October 2, 2015, by which point he had to repay his loan in order to regain title to his car.

         Wilber failed to repay the loan by its maturity date. Georgia law, though, gives a defaulting debtor in a motor-vehicle pawn transaction a 30-day grace period during which he can redeem his car. See id. § 44-14-403(b)(1). Here, on October 30, just before his redemption period was set to expire on November 2, Wilber-still in possession of the Charger[2]-filed a petition for relief under Chapter 13 of the United States Bankruptcy Code. Wilber simultaneously filed his Chapter 13 plan, which listed TitleMax as a creditor holding a secured claim on the Charger. Pursuant to 11 U.S.C. § 108(b), the Bankruptcy Code extended Wilber's state-law grace period an additional 60 days from the date of his petition, giving him until December 29 to redeem the car.

         The extended expiration date came and went with no redemption. On January 8, 2016, before the bankruptcy court held a confirmation hearing on Wilber's proposed plan, TitleMax filed a motion for relief from the Code's automatic-stay provision, 11 U.S.C. § 362(a), so that it could recover the Charger, which Wilber still had in his possession. In the motion, TitleMax contended that Wilber's bankruptcy estate no longer included the car because Wilber had failed to redeem it within the extended grace period.

         The bankruptcy court conducted confirmation hearings on January 21 and February 2, and then on February 9-with TitleMax's motion for relief from the stay still pending-entered an order confirming Wilber's Chapter 13 plan. The confirmed plan treated TitleMax as a creditor on a $5, 036 debt secured by a claim on the Charger, and provided for repayment of the pawn loan at a 5% interest rate in installments of $175 per month.

         Following confirmation, the parties continued to litigate TitleMax's earlier-filed motion for relief from the automatic stay, and on April 29, 2016, the bankruptcy court entered a final order denying that motion. Rejecting TitleMax's arguments, the court held (1) that the Charger and the redemption right were property of Wilber's bankruptcy estate, and remained so even after the expiration of the Code-extended grace period, and accordingly (2) that TitleMax didn't own the car itself, but rather continued to hold only a secured "claim" on it, which gave rise to repayment "rights" that could be "modif[ied]" under Section 1322(b)(2). In re Wilber, 551 B.R. 542, 544-47 (Bankr. M.D. Ga. 2016). The bankruptcy court separately (and alternatively) concluded that under 11 U.S.C. § 1327(a) and "[t]he doctrine of res judicata, " the order confirming Wilber's Chapter 13 plan precluded any relief for TitleMax, which the court said had "slept on its rights by not timely objecting" to confirmation. Id. at 547-48.

         The district court affirmed the bankruptcy court's decision on the merits, without addressing the "res judicata" issue. In particular, the district court "agree[d] with the bankruptcy court's conclusion" that "because the vehicle[ was] part of the debtor['s] estate[] when the debtor[] filed [his] Chapter 13 petition[], Title Max held [a] secured claim[] in the vehicle[] that could be modified under 11 U.S.C. § 1322(b)(2)." Title Max v. Northington, 559 B.R. 542, 545 (M.D. Ga. 2016).

         TitleMax timely appealed to this Court, challenging the district court's affirmance of the order denying its motion for relief from the automatic stay. Title Max's appeal presents questions of law, which we review de novo. See In re Paschen, 296 F.3d 1203, 1205 (11th Cir. 2002) (internal citations omitted).


         Before jumping into the merits, we must first address the bankruptcy court's alternative (but logically antecedent) holding that TitleMax's challenge is procedurally barred on "res judicata" grounds.

         The bankruptcy court held that TitleMax "slept on its rights" by "fail[ing] to timely object to confirmation" of Wilber's proposed Chapter 13 plan. 551 B.R. at 548. Accordingly, the court held that its confirmation order was conclusive under 11 U.S.C. § 1327(a)-which generally binds a debtor and his creditors to the terms of a confirmed plan-and "[t]he doctrine of res judicata." 551 B.R. at 548.

         In the particular circumstances of this case, we cannot agree that TitleMax impermissibly "slept on its rights" and thus forfeited its ability to raise the argument that it presents on appeal. The decision that the bankruptcy court cited for support, In re Young, 281 B.R. 74 (Bankr. S.D. Ala. 2001), provides a useful (and stark) contrast. As in this case, the debtor in Young failed to redeem property that it had pledged to a pawnbroker. And as in this case, the bankruptcy court held a hearing on the debtor's proposed Chapter 13 plan-which listed the pawnbroker as the creditor on the pawn debt-and later entered an order confirming the plan. The pawnbroker in Young, however, did absolutely nothing to preserve its argument that it had rightful title to the pawned property. It didn't "participate in the confirmation [hearing], " nor did it in any way contest the plan's consummation; rather, following confirmation, the pawnbroker simply set out, unilaterally, to sell the pawned property, prompting the debtor to file a motion to enforce the automatic stay. See id. at 76, 80.

         Here, by contrast, even before the bankruptcy court held a confirmation hearing, and thus by definition before it entered any confirmation order, TitleMax filed a written motion in which it contended-just as it does here-that at the moment Wilber failed to redeem the Charger pursuant to Georgia's pawn statute, the car ceased to be property of the bankruptcy estate. TitleMax then appeared at the hearing, and later filed post-hearing briefs, to reiterate its position. When the bankruptcy court later denied its motion for relief from the automatic stay, thereby bringing the bankruptcy proceeding to a close, TitleMax appealed directly to the district court and then, following that court's affirmance, directly to this Court.

         Our dissenting colleague, who would affirm on res-judicata grounds, is of course quite right to say that TitleMax had "to take some action" in order to preserve its position that the car dropped out of the estate upon the expiration of the redemption period. Dissenting Op. at 30 n.2. The question is precisely what form that "action" had to take. The dissent repeatedly protests that TitleMax didn't formally "object" to the confirmation of Wilber's Chapter 13 plan. See, e.g., Dissenting Op. at 29, 30, 31, 32, 33, 36, 37, 38, 39. That's true-no one denies it, and TitleMax freely admits it.[3] We hold, though, that on the unique facts of this case, TitleMax was not required to file an "Objection"-styled as such-but rather adequately preserved its position through its pre-confirmation motion for relief from the automatic stay, which it briefed and argued to the bankruptcy court.

         First, as a practical matter, there is no substantive difference between the styled-as-such "Objection" that the dissent would seemingly require and the motion for relief that TitleMax actually filed. As Wilber's counsel candidly acknowledged at oral argument, "the body of [TitleMax's motion] was exactly what they needed for an objection to confirmation." Oral Arg. Tr. at 20:38. "They could've changed the title" of the pleading, he said, "and not had to change anything else other than the request for the relief." Id. The parties thus agree that TitleMax put the substance of its position-namely, that the Charger ceased to be estate property when the redemption period lapsed-squarely before the bankruptcy court.[4]

         Second, as a legal matter, in the circumstances presented here, TitleMax didn't need to file a styled-as-such "Objection" in order to preserve its position that the Charger ceased to be estate property upon the expiration of the redemption period; rather, that argument was adequately teed up (just as TitleMax presented it) in a motion for relief from the stay. Cf. In re Boyd, 11 F.3d 59, 60 (5th Cir. 1994) (holding that even where a Chapter 13 plan was confirmed without a formal objection, a creditor's motion for relief from the stay adequately preserved its argument that disputed property was not properly part of the bankruptcy estate).[5] TitleMax filed its motion pre-confirmation, making exactly the same argument and seeking exactly the same relief that it does here. When the bankruptcy court rejected its argument and denied its motion, TitleMax took an appeal directly to the district court and then, following that court's affirmance, came straight to this Court.[6]

         We hold that in the particular (and peculiar) factual and procedural posture in which this case arises, TitleMax did enough to preserve its position. We turn, then, to an evaluation of the merits.


         The district court explained its decision on the merits in two parts. Initially, the court observed, "when [Wilber] filed [his] Chapter 13 petition[], the vehicle[ was] part of [his] bankruptcy estate[] and Title Max held [a] secured claim[]" in it. 559 B.R. at 546. Accordingly, the court concluded, because the Bankruptcy Code provides in 11 U.S.C. § 1322(b)(2) that "a Chapter 13 plan may 'modify the rights of holders of secured claims' … the bankruptcy court was authorized to modify Title Max's claim[] as it did …." Id. The district court skipped an important step-a mistake that our dissenting colleague largely repeats-and it is that step on which this appeal largely turns.

         In order to hold (as the district court did) that Wilber's Chapter 13 plan could modify TitleMax's rights, it would be necessary not only to conclude (as the district court did) that the Charger initially became part of Wilber's bankruptcy estate with the filing of his petition, but also to find (as the district court did not) that it remained in the estate even after the expiration of the prescribed redemption period. We agree with the district court that the Charger entered Wilber's estate, but we hold that it dropped out-pursuant to the "automatic[]" operation of Georgia's pawn statute-when the grace period lapsed.


         We can make quick work of the first issue. Section 541 of the Bankruptcy Code specifies the property interests that constitute the bankruptcy estate. 11 U.S.C. § 541. In relevant part, Section 541 states that a debtor's estate comprises "all legal or equitable interests of the debtor in property as of the commencement of the case." Id. at (a)(1). As used in Section 541(a)(1), the term "commencement" means the date on which the debtor filed his bankruptcy petition. See 5 Collier on Bankruptcy ¶ 541.02 (16th ed. 2017).

         TitleMax concedes, and the parties thus agree, that "on October 30, 2015- the date he filed his bankruptcy petition-Wilber retained property interests in the Charger that became 'property of the estate' under 11 U.S.C. § 541." Br. of Appellant at 10. In particular, the parties agree that the car, which remained in Wilber's possession, as well as the associated right to redeem it-which at that time had not yet expired-entered the estate with the filing of his petition. Id. at 8 (referring to the "right to possess" and the "right to redeem" as "property interests related to the Charger that … entered the bankruptcy estate").

         That all seems right to us. The Supreme Court has observed that "§ 541(a)(1)'s scope is broad, " United States v. Whiting Pools, 462 U.S. 198, 204 (1983), and existing precedent supports the parties' shared view that both the Charger and the right of redemption became estate assets upon the filing of Wilber's bankruptcy petition. See In re Lewis, 137 F.3d 1280, 1284 (11th Cir. 1998) (stating that a debtor's "statutory right of redemption in the automobile became 'property of the estate' under 11 U.S.C. § 541(a)(1) at the commencement of the case"); In re Moore, 448 B.R. 93, 100 (Bankr. N.D.Ga. 2011) (finding that debtors' vehicles entered the estate where, as here, the debtors "had possession of the pawned vehicles at the time of the bankruptcy filing and the grace periods for their redemptions had not yet expired").

         But-and it's a big but-contrary to the district court's (implicit) determination, finding that the car and the redemption right were initially made part of Wilber's bankruptcy estate doesn't end the inquiry. The controlling question isn't whether Wilber's property interests in the Charger entered the bankruptcy estate in the first instance-they did-but rather whether, despite the expiration of the prescribed grace period, those assets remained in the estate at the time of confirmation, such that TitleMax's rights in them could be "modif[ied]" under Section 1322(b)(2). That is the issue to which we now turn.


         The parties have clearly joined issue on the question whether an asset that is initially made part of a bankruptcy estate must necessarily remain there, irrespective of the underlying state law that defines it-or whether, instead, the ordinary operation of that state law can (for reasons wholly separate from the bankruptcy) cause the asset to drop out of the estate. For its part, TitleMax insists that "[n]o principle of bankruptcy law requires that a debtor's bankruptcy estate be frozen in time where a debtor's state-law interest in property is divested after the date of filing." Br. of Appellant at 10. Wilber rejoins, precisely to the contrary, that "it is clear that the estate is in fact 'frozen in time' as of the filing of the case." Br. of Appellee at 5. The battle lines thus clearly drawn, we must decide whether the filing of a bankruptcy petition necessarily freezes the debtor's estate and thereby forestalls the operation of the state-law rules that define and regulate the property interests that comprise that estate.


         In assessing this question, we begin with an important stage-setting observation: Even in the uniquely "federal" bankruptcy context, "[p]roperty interests are created and defined by state law." Butner v. United States, 440 U.S. 48, 55 (1979); accord, e.g., Barnhill v. Johnson, 503 U.S. 393, 398 (1992) (observing that, as a general matter, "'property' and 'interests in property' are creatures of state law"). Particularly significant for present purposes, this Court has emphasized that although "whether an interest of the debtor[] is property of the estate is a federal question, " "the nature and existence of the debtor['s] right to property is determined by looking to state law." In re Thomas, 883 F.2d 991, 995 (11th Cir. 1989).

         Accordingly, analyzing a bankruptcy estate requires two tiers of inquiry, first into the assets of the estate, and then into the underlying property rights and interests that constitute each asset-first, that is, into the estate's contents, and then into the contents of the contents. The second, more granular inquiry-into the nature of a debtor's property interest in a particular estate asset-turns on state law. See Butner, 440 U.S. at 54 ("Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law."); In re Smith, 85 F.3d 1555, 1557 (11th Cir. 1996) ("The property rights of a debtor in a bankruptcy estate are defined by state law."); Norton Bankruptcy Law and Practice § 61.3 (3d ed. 2016) ("State law determines the existence, nature, and extent of any property interests a debtor may have.").

         With respect to the particular estate asset at issue here-Wilber's pawned Charger-the applicable state law is crystal clear: Under Georgia's pawn statute, "[p]ledged goods not redeemed within the grace period shall be automatically forfeited to the pawnbroker . . . and any ownership interest of the pledgor or seller shall automatically be extinguished as regards the pledged item." Ga. Code Ann. § 44-14-403(b)(3) (emphasis added). All agree that under Section 44-14-403(b)(3)'s plain terms, the expiration of the redemption period is conclusive-the debtor loses title to his pawned property, which vests immediately and by operation of law in the pawnbroker. Indeed, at oral argument, Wilber's counsel acknowledged that but for the bankruptcy "stepp[ing] in, " TitleMax "would have had th[e] car" and Wilber would have had "no recourse." Oral Arg. Tr. at 24:50. The question presented here is whether federal bankruptcy law changes all that, prevents the ordinary and "automatic" operation of Georgia's pawn statute, and prohibits title to the Charger from passing, as it otherwise would, from Wilber to TitleMax.[7]

         To be clear, we are not concerned here with congressional power; Congress has extensive authority in the bankruptcy arena-including the authority to supersede state property law. See U.S. Const. Art. I, § 8, cl. 4. Rather, the issue before us is whether Congress has in fact exercised that authority. In answering that question, we take our cue from the Supreme Court's decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). There, the Court considered the meaning of Section 548 of the Bankruptcy Code, which empowers a bankruptcy trustee to set aside "constructively fraudulent transfers, " including an insolvent debtor's sale of property, within one year before filing bankruptcy, for less than "reasonably equivalent value." 11 U.S.C. § 548(a)(2). The particular issue before the Court in BFP was whether the term "reasonably equivalent value" should be read to imply a "fair market value" benchmark-or whether, instead, the statutory term should be understood by reference to the underlying state law, such that the price fetched at a foreclosure ...

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