Court Gives Tips on Making Reaffirmation Agreement Statements "Clear and Conspicuous"
by Sam Ott
In an April 9, 2002 decision in the case of American General Finance, Inc. v. Bassett, the Ninth Circuit United States Court of Appeals ruled on the enforceability of a reaffirmation agreement that allegedly contained language that did not meet the "clear and conspicuous" test.
The debtor financed the purchase of household furniture with the finance company. The debtor filed a voluntary Chapter 7 bankruptcy petition and entered into a reaffirmation agreement with the financing company regarding the furniture. When the debtor stopped making payments pursuant to the agreement, the finance company sent letters to the debtor seeking payment. The debtor then petitioned the Bankruptcy Court to reopen the bankruptcy case contending the reaffirmation agreement was unenforceable and the collection letters were illegal. The debtor contended that the agreement was unenforceable because it failed to comply with 11 U.S.C. 524(c)(2)(A), which requires a "clear and conspicuous" statement that "advises the debtor that the agreement may be rescinded at any time prior to discharge or within sixty days after such agreement is filed with the court". The debtor acknowledged that such a statement was found in the agreement, but argued that it was not "clear and conspicuous".
The right-to-rescind text in question:
contained three sentences;
was printed in non-bold lower case type;
was followed by text in bolded all capital letters
The Bankruptcy Appellate Panel held that the statement was not "conspicuous" because it was in lower case and near a sentence that was in capital letters.
The Bankruptcy Appellate Panel therefore held that the the reaffirmation agreement was unenforceable and the actions of the finance company violated the debtor's discharge. The finance company appealed to the 9th Circuit.
The 9th Circuit Court of Appeals noted the bankruptcy code does not define the phrase "clear and conspicuous" and courts often look to definition found the section 1-201(10) of the Uniform Commercial Code which states that a term or clause if conspicuous when it is written so that a reasonable person against whom it is to operate ought to have noticed it.
The 9th Circuit Court of Appeals reversed the decision of the Bankruptcy Appellate Panel and held that capital letters and formatting are important but do not justify a holding that the statement was not clear and conspicuous. According to the 9th Circuit court, the test is the likelihood that a reasonable person would actually see a term in an agreement. Thus, it was entirely possible for text to be conspicuous without being in capitals. The Court also noted that brevity promotes conspicuousness and the text was only three sentences in length.
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