In Venture Bank v. Lapides, 800 F.3d 442 (8th Cir. 2015) the Eighth Circuit addressed the validity of post-discharge “Change in Terms Agreements” between a bank and a borrower. Lapides, as president of a seafood import business, secured a line of credit from Venture Bank, and as collateral gave Venture Bank a third mortgage on the Lapides’ home. After Lapides filed for Chapter 7 bankruptcy, he met with Venture Bank and agreed that the Lapides would continue to pay on the third mortgage after the discharge so that Venture Bank would not foreclose on the mortgage.
After the bankruptcy discharge, Lapides and Venture Bank entered into two Change in Terms Agreements which reflected the terms agreed to at the pre-discharge meeting between Venture Bank and Lapides. Under the Change in Terms agreements Lapides would make payments to Venture Bank on the existing mortgage to establish his credit to induce Venture Bank to later allow Lapides to refinance the mortgage . Lapides made payments under the Change in Terms agreements for twelve months, and Venture Bank continued to remind him when payments were due. When Venture Bank continued to not refinance the mortgage, Lapides ceased making payments. Venture Bank then filed suit against Lapides for failure to make payments under the Change in Terms Agreement and sought to foreclose on the third mortgage. Lapides counterclaimed on grounds that Venture Bank’s efforts to collect payments after the bankruptcy discharge violated the discharge injunction imposed by 11 U.S.C. § 524(a)(2). Both parties filed cross motions for summary judgment.
The district court ruled in Lapides favor, dismissed Venture Bank’s claims, and awarded Lapides damages in the form of the return of all payments made under the Change in Terms Agreements and attorney fees. Venture Bank appealed. The Eighth circuit noted that in order to be enforceable the Change in Terms Agreement had to either meet the requirements of a reaffirmation agreement under 11 U.S.C. § 524(c) or must contain all of the essential elements of a contract under state law. The parties admitted that the Change in Terms agreement did not comply with 11 U.S.C. § 524(c). To be a valid contract, the Change in Terms Agreements needed to have consideration (value exchanged by each side) and mutual assent. The court noted that the payments by Lapides were not made in return for a definite promise to refinance, but rather were demanded by Venture Bank to continue the refinancing negotiations. Further, the court noted that a secured creditor’s post-discharge forbearance from foreclosing on a pre-discharge debt is not sufficient consideration to make an agreement to pay the pre-discharge debt a valid contract. Therefore the Eighth Circuit affirmed the district court’s ruling in Lapides favor. The lesson from this case is that a lender must provide new consideration if the lender wants to renew and enforce a pre-discharge obligation, and that an agreement to accept payments in return for considering refinancing does not constitute consideration.