March 10, 2008
6th Circuit Resolves Hanging Paragraph Issue - Not!
Americredit Financial Services v. Long (In re Long) ---- F.3d ----, 2008 WL 564798 (6th Cir. Mar. 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.
Merritt wrote the “majority opinion,” Cox a concurring opinion and Clay a dissenting opinion.
The chapter 13 debtor proposed the surrender of a “910 vehicle” in full satisfaction of the debt owed to Americredit. The bankruptcy court affirmed the plan.
Citing In re Wright, 492 F.3d 829, 830 (7th Cir. 2007), the opinion said, “we agree with the Seventh Circuit that the bankruptcy courts should not simply allow the debtor to surrender the car and then wipe out the deficiency, as the bankruptcy court in the instant case ruled.” The opinion went on to say however that the reasoning in Wright that state law provided the secured creditor’s rights was faulty. “A uniform national rule should be adopted and substituted for the widely varying procedural and substantive foreclosure, repossession and deficiency judgment rules provided by the 50 states.” The opinion says that “a claim cannot be an ‘allowed secured claim’ for purposes of § 1325(a)(5) without first coming through the §506 gateway. Consequently, we decline to read the hanging paragraph to use state law or some unknown, federal law to create an allowed secured claim.” “Because section 506 was applicable to the surrender of collateral before the 2005 amendments, and makes the situation incoherent if no longer applicable, we believe the best solution is to regard section 506 as continuing to apply to surrender cases.” “Because we are unable to find any legislative history that suggests that Congress intended to eliminate all deficiency claims upon surrender of the collateral and because we conclude that a literal interpretation of the statute would create an unintended and illogical result, we decline to adopt a literal interpretation of the statute.”
The opinion concluded, “We hold that claims subject to the hanging paragraph where the debtor elects to surrender the collateral pursuant to § 1325(a)(5)(C) will be governed and adjudicated the same as they were before the 2005 amendments.”
The concurring opinion by District Judge Cox says, “Under its clear terms, for purposes of § 1325(a)(5), § 506 does not apply to claims falling within the definition set forth in the hanging paragraph, otherwise referred to as 910 claims.” “§506 is not the source for a deficiency claim when collateral is surrendered. Section 506 is not applicable to surrender of collateral because once the collateral is surrendered, the estate no longer has an interest in the property.” Therefore Butner applies and the secured creditor has the rights given to it under state law.
The one paragraph dissent concludes with, “The lead opinion would require us not simply to construe an ambiguity in the statute, but actually to rewrite the statute. I would be reluctant to do so because Congress has had two years since the enactment of the statute to correct any problems that it sees with the statute and has not seen fit to do so. I would affirm based upon the well reasoned opinion of the bankruptcy court.”
Comment: This is just what we need - circuit courts deciding "uniform national rules." This 1 - 1 - 1 opinion may be reviewed en banc especially since the concurring judge is a District Court Judge and not a Cirucit Court of Appeals Judge. JH
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