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February 18, 2008

8th Circuit Rules on the Hanging Paragraph

Capital One Auto Finance v. Osborn (In re Osborn)  ---- F.3d ----, 2008 WL 304750  (8th Cir. Feb. 2008)

Issue:   When the debtor surrenders a vehicle under Section 1325(a)(5)(C), is the surrender in full satisfaction of the debt or does the secured creditor continue to have a right to a deficiency?         

Holding:      The secured creditor continues to have the right to a deficiency.   

Appeal from the 8th Circuit BAP

The chapter 13 debtors proposed the surrender of a vehicle in full satisfaction of the debt owed to Capital One.  The plan proposed to pay 100% of unsecured claims.  Capital One objected.  The bankruptcy court ruled for the debtor saying that the hanging paragraph made Section 506 inapplicable.  It adopted the argument that since the secured claim cannot be bifurcated, it is therefore an “allowed secured claim” in full, and surrender satisfies the allowed secured claim.  The BAP affirmed. 

The 8th Circuit reversed.  “A Chapter 13 debtor has three options to deal with allowed secured claims of creditors: (1) obtain the creditor’s acceptance of the plan, (2) retain the collateral but make full payment of the creditor’s allowed secured claim, or (3) surrender the collateral to the creditor.”  Section 1325(a)(5).  “BAPCPA eliminated the cram down option for cars purchased less than 910 days before the Chapter 13 bankruptcy, by adding the hanging paragraph at the end of § 1325(a)(9).”  “By the plain language of the hanging paragraph, § 506 does not apply to a 910- claim.  Therefore, as with the retention option, the claim is considered secured because it is secured according to state law (citing Butner).”  “Unlike the retention option in § 1325(a)(5)(B), the surrender option in § 1325(a)(5)(C) does not speak to satisfaction of a claim.”  “The hanging paragraph has no effect on state-law rights.”

Note:  the 9th Circuit reached the same result in Rodriguez. 

February 18, 2008 in Other Circuit Briefs | Permalink


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Excellent summary.

Posted by: Robert | Mar 9, 2008 9:56:26 AM

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