Law School Case Brief
In re Schwalb - 347 B.R. 726 (Bankr. D. Nev. 2006)
Pawnbrokers are bailees of personal property held as collateral for loans. If the loan is not paid--or, in the argot of pawnbroking, if the pawn is not redeemed--then the pawnbroker sells the goods held, and keeps the proceeds; the debtor is not liable for any deficiency, and the pawnbroker is not accountable for any surplus. As a result, a true pawn requires a pledge, and a pledge requires delivery of the collateral to the pawnbroker.
While attachment may make the security interest enforceable against the debtor, more is needed when the debtor is a debtor in bankruptcy. What is required in the later case is that the security interest be good against the world. The process by which such validity is obtained is referred to in U.C.C. art. 9 as perfection.
Debtor Michelle Schwalb’s father and partner obtained two loans from Pioneer Loan & Jewelry as contribution to the business of Ms. Scwalb’s partner, offering the Debtor's Infiniti QX4 Sport Utility Vehicle and a 2002 Cadillac Escalade as collateral. Pioneer advanced $4,000 against possession of the certificate of title for the vehicle, and the Debtor signed a document referred to by the parties as a pawn ticket. According to the pawn ticket, if a borrower (or bailee) did not "redeem" the pawn and pay the loan within the 120 days, the bailee will forfeit all right and interest in the pawned property to Pioneer, the pawnbroker, who shall hereby acquire an absolute title in the property. When the Debtor did not repay either loan, Pioneer took both certificates of title to the Nevada Department of Motor Vehicles. Pioneer requested that the DMV reissue the certificates of title without any mention of the Debtor, and listing Pioneer as the sole owner. DMV complied. Pioneer then filed a state court lawsuit apparently alleging conversion and seeking recovery of both vehicles, which had remained in Schwalb's, the Debtor's possession. Schwarb filed for bankruptcy and argued that Pioneer was not a secured creditor and thus, was barred from participating in her case as an unsecured creditor. Her initial proposal was to pay Pioneer nothing under her bankruptcy plan. If Pioneer was found to be a secured creditor despite her objection, she proposed to pay these two secured claims full over the life of the plan, together with 10% simple interest. The terms of the pawn ticket provided for an annual interest rate of approximately 120%, which the original loan amount had more than doubled.
Was Pioneer a secured creditor that was entitled to act upon the offered collateral properties upon the nonpayment of the loans?
The Court held that Pioneer had a security interest on the vehicles and its contracted loans were secured. First, the Court determined that the forfeiture provisions of the pawn ticket were unenforceable for it was required by law that a notice should be first sent to the Debtor before any disposition. In consideration of the unenforceability of the forfeiture provisions, Schwalb was the owner of the vehicles. Pioneer lost its ownership claims upon the vehicles. However, the Court resolved that Pioneer was a secured creditor. According to the Court, for a U.C.C. art. 9 security interest to be enforceable, it had to attach. Because each pawn ticket adequately described collateral covered, the Debtor's signature completed the requirements of U.C.C. § 9-203(b)(3)(A). Pioneer became perfected no later than the time it received a new certificate of title showing it as a lienholder. Finally, the Court determined that Pioneer had a claim of $2,000 on the Infiniti loan, and a claim of $14,600 on the Cadillac loan. Each claim was fully secured. The Court ordered the Debtor to amend her bankruptcy plan consistent with the opinion of the Court, subject to its confirmation.
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