October 3, 2007
9th Circuit BAP Rules on the "Hanging Paragraph"
This seems to me to be a pretty accurate analysis on the effect on the secured claim when the debtor returns a "910" vehicle.
Wells Fargo v. Rodriguez (In re Rodriguez) ---- B.R. ---- (9th Cir. BAP August, 2007)
Issue: When the debtor surrenders a “910” vehicle as part of a chapter 13 plan, does that end the secured creditor’s right to a deficiency?
Judge Paul Snyder (Seattle)
Montali, Dunn, Jaroslovsky
Opinion by Montali
The chapter 13 debtor filed a plan offering to pay unsecured creditors in full. It provided that a “910” vehicle would be returned to WFB in full satisfaction of any claim of WFB. WFB filed a proof of claim seeking a deficiency and an objection to the plan. The parties did not dispute that the “hanging paragraph” applied to this case. The bankruptcy court ruled for the debtor and confirmed the plan.
The BAP reversed. Section 1325(a)(5) provides that 506 (a) doesn’t apply to 910 claims. As to treatment of 910 claims, the debtor can make a deal with the creditor, pay the claim in full, or, return the vehicle. As to returning the vehicle, Congress presumably provided that 506 would not apply because 506(a)(2) limits the deficiency to the total claim less “replacement value.” Thus when the vehicle is returned, the deficiency is the total claim less the actual resale price, or presumably a higher amount.
The opinion quotes Travelers, “’we generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed” under section 502’. Wells Fargo’s deficiency claim, if any, will come from state law after it disposes of the Aztec.” If there is to be no deficiency, that must come from Section 502(b). The opinion says that once the vehicle is surrendered, 506 doesn’t apply and never did. The estate has no further interest in the vehicle. “The real question is whether Congress intended that, in return for protection from cramdown, 910 creditors who recover surrendered 910 vehicles have lost their right to a deficiency claim.” “Congress may have intended that when a 910 vehicle is not surrendered the secured creditor gets an unfairly large share of the pot but when the 910 vehicle is surrendered it gets none of the pot, thereby resulting in rough fairness between divergent creditor interests. If this was the intent of Congress, it was not expressed clearly enough for us to ignore the effect of section 502.”
Note: In accord In re Wilson, 2007 WL 2405284 (10th Cir.BAP-Kan.). Opposite result in In re Vanduyn, 2007 WL 2484089 (Bkrtcy.M.D.Fla., Judge Paskay).
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