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Wyoming Supreme Court Rules Borrowers Must Continue Paying Loan After Collateral Sold - Wallace v. Pinnacle Bank

May 17, 2012

Vincent Howard and our Claremont consumer bankruptcy attorneys frequently advise people who are going into bankruptcy about their obligations before and after filing. While bankruptcy can provide some much-needed relief from heavy debts, not to mention an immediate stop to calls from creditors, it doesn't stop all obligations in their tracks. Rather, obligations are sorted out according to the bankruptcy code and, if applicable, the debtors' plan. This can lead to seemingly unfair results sometimes, as a Wyoming couple found in Wallace v. Pinnacle Bank - Wyoming. Earl and Nawana Wallace took out a loan in order to buy a car for their son and his wife, who ultimately went into bankruptcy. The car was sold by the bankruptcy trustee, so the elder Wallaces stopped making loan payments, prompting a successful lawsuit from Pinnacle.

The Senior Wallaces, as they were called by the court, took out the loan in their own names and agreed to make the payments over five years. The collateral, however, was the vehicle, which was titled to the Junior Wallaces. They signed a third-party agreement pledging the vehicle, but had no personal obligations on the loan. The day after the loan went through, the Junior Wallaces filed for Chapter 7 bankruptcy and listed the car as personal property. The bankruptcy trustee eventually requested and got a release of the lien so he could sell the car for the benefit of the estate; the Junior Wallaces withdrew an objection. The Senior Wallaces stopped paying the loan 11 months after taking it out, prompting a lawsuit in state court from Pinnacle. The Wyoming trial court ultimately granted summary judgment to Pinnacle, finding that "the failure of the collateral was not the failure of the underlying note."

The Senior Wallaces appealed to the Wyoming Supreme Court, arguing that their obligation to pay was extinguished when the vehicle was lost to the bankruptcy estate. They first argued that Pinnacle failed to mitigate its own damages when it negligently released the lien on a vehicle that the Junior Wallaces did not own or even possess. However, the high court ruled, Pinnacle had no duty to protect the vehicle from seizure. Indeed, it noted that there were no damages to mitigate at the time, since payments were current then. The Senior Wallaces next argued that by releasing the lien, Pinnacle frustrated the purpose of the loan and thus excused them from making payments. However, the Wyoming high court found that the doctrine of commercial frustration did not apply, because the collateral provision in the loan agreement was never meant to protect the Senior Wallaces - it protected Pinnacle. Nor did they lack consideration, since they did receive the car. Finally, the court rejected arguments that Pinnacle is not a real party in interest and that the claim was barred by the Uniform Commercial Code.

Vincent Howard and our Seal Beach personal bankruptcy lawyers would have preferred a different outcome for the Senior Wallaces, who were guilty of nothing more than trusting their son to behave responsibly. But as this case shows, courts are generally willing to enforce contracts even when the contract clearly no longer benefits one side. In mortgages, this is far less common because most people aren't lucky enough to have a house paid for by someone else; when a home borrower loses his or her home, that's often the collateral in lieu of full repayment. One exception is when a bank pursues a deficiency judgment, which is the balance of the loan due after the home is sold at foreclosure or a short sale, and the proceeds applied to the remaining home debt. Here in California, not everyone is subject to deficiency judgments; they are more likely with refinances, HELOCs and second mortgages. The services of our Pico Rivera individual bankruptcy attorneys include advice to clients in this position about their options for avoiding a claim or heading one off early.

If you're overwhelmed by your debt and by nasty phone calls from debt collectors, and you'd like to talk to an experienced attorney about a bankruptcy, call Vincent Howard and the team at Howard Law, P.C. For a consultation, you can reach us through our website or call 1-800-872-5925.

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