The debtor entered into a series of loan contracts with the creditors. The debtor allegedly pledged his property as collateral for the loans. The debtor failed to pay taxes on the property, and the school district sued in state court to recover taxes owed (the “state tax matter”). The creditors filed a petition to quiet title in the state tax matter. Shortly thereafter, the debtor filed for chapter 7 bankruptcy relief, listing the property as his exempted homestead and the creditors as unsecured creditors. The bankruptcy court eventually granted a discharge to the debtor and notice of the discharge was served on the creditors. However, even after the notice, the creditors filed a motion seeking a default judgment in the state tax matter. The debtor again notified the creditors of the bankruptcy discharge and that the motion for default judgment violated the discharge order. Regardless, the creditors obtained a default judgment in the state tax matter and shortly after placed locks on the property and posted the default judgment. The debtor then initiated an adversary proceeding in the bankruptcy case, alleging that the creditors’ state default judgment violated the discharge order. The bankruptcy court found that the creditors violated the discharge order because the creditors “held only an unsecured claim,” because the liens were not perfected. The bankruptcy court held the creditors in civil contempt for violation of the discharge order and awarded damages and attorneys’ fees to the debtor. The bankruptcy court also awarded the debtor title to the property. The creditors appealed, and the district court affirmed the bankruptcy court’s decision. The creditors then appealed to the Fifth Circuit.
In Wyly v. Eichor (In re Eichor), No. 24-20238, 2025 WL 619168, 2025 U.S. App. LEXIS 4511 (5th Cir. Feb. 26, 2025) (opinion not yet released for publication), the Fifth Circuit again affirmed the lower courts. The creditors relied on two arguments, neither of which persuaded the Fifth Circuit. The creditors first argued that the debtor’s “discharge order did not contain clear and specific language prohibiting the [creditors] from seeking a declaratory judgment in the state tax matter that they had title to the property in question.” The Fifth Circuit found that the discharge order expressly “discharge[d] the debtor from all debts that arose before the date of the order for relief under this chapter.” Under a heading titled “Creditors Cannot Collect Discharged Debts” the order stated that “creditors cannot sue.” However, there was an exception that stated, “a creditor with a lien may enforce a claim against the debtors’ property subject to that lien unless the lien was avoided or eliminated.” But the bankruptcy court concluded that the loans qualified as debts that were not properly secured; therefore, the creditors could not collect on the debts. Second, the creditors argued “they had an objectively reasonable basis for believing they owned the property, such that their conduct did not support a contempt holding.” The creditors argued that under their agreements with the debtor, they did not just loan the debtor money, “but actually bought the pledged property.” The creditors stated that all three contracts held “sales agreement” labels. But the Fifth Circuit disagreed, because it made “little sense for the parties to have ‘sold’ and ‘bought’ the same property three times, in fairly quick succession, for an ever-evolving price.” Therefore, the bankruptcy court acted within its bounds when it ruled these contracts to be personal loans. The court held that the debtor’s discharge order covered these personal loans, and the bankruptcy court did not err in holding the creditors in contempt and ordering the relief it did. The Fifth Circuit also stated that even if the agreements were sales contracts, the Texas Constitution would render “any condition of defeasance” in the improperly recorded contracts void. Tex. Const. art. XVI, § 50(c). A condition of defeasance is one that would permit the seller to “reclaim title to the property conveyed after the loan is repaid,” which the creditors purported that the contracts did. In re Perry, 345 F.3d 303, 313 (5th Cir. 2003). These purchase agreements, therefore, did not comply with either the Texas Constitution or Texas property law, and the court did not find the creditors’ belief to the contrary objectively reasonable. Therefore, the Fifth Circuit affirmed the trial court’s decision.
By Olivia Lewis [email protected]
Edited By Taylor O’Brien [email protected]
Edited By Kristin Meurer [email protected]
Edited By Hayden Mariott [email protected]