August 1, 2007
Circuit Split: More on the Hanging Paragraph
As discussed in an earlier post, BAPCPA added a hanging paragraph to section 1325(a)(5), one which has caused consternation in the bench and bar. Recall that this hanging paragraph precludes a debtor from bifurcating a secured creditor's claim into secured and unsecured portions based on the value of the collateral when the collateral is a car purchased within 910-days of the filing. In July, the Seventh Circuit and a 10th Circuit Bankruptcy Appellate Panel (BAP) disagreed on whether the 910-days rule applies when the debtor surrenders the vehicle.
As a reminder, 1325(a) contains the chapter 13 confirmation requirements, and (a)(5) covers the plan's treatment of allowed secured claims. To obtain confirmation of the chapter 13 plan, the secured creditor must not object to the plan's treatment of the debt, or the debtor must propose to surrender the collateral, or cram down pursuant to section 506. BAPCPA, via the hanging paragraph, removes the latter option for 910-day car debt.
According to the Seventh Circuit in In re Wright, -- F.3d --, 2007 WL 1892502 (7th Cir. July 3, 2007), by surrendering the car to the secured creditor, the creditor received the market value of the collateral but retains the contract right to an unsecured deficiency claim. Judge Easterbrook, noting that that panel agrees with the minority position, reasoned that Article 9 of the UCC plus the law of contracts provides for a deficiency judgment unless the loan was non-recourse. See id. at *1. Simply because the hanging paragraph "takes away" a debtor's section 506 ability to bifurcate for purposes of cramdown, it does not follow that upon surrender, the entire claim is satisfied.
Citing Butner v. United States, 440 U.S. 48 (1979), Judge Easterbrook held that when section 506 does not apply, "[t]he fallback under Butner is the parties' contract (to the extent the deal is enforceable under state law), rather than non-recourse secured debt . . .or no security interest . . . .[governs]" Id. at *4.
It is notable the Seventh Circuit addressed this issue on direct appeal via 28 U.S.C. section 158 as a matter of public importance. Id. at *2. The National Association of Consumer Bankruptcy Attorneys filed an amicus brief advocating the opposite holding -- the position taken by the Tenth Circuit BAP in In re Quick, -- B.R. --, 2007 WL 194179 (10th Circuit BAP, July 5, 2007). Citing Wright, the BAP held that the hanging paragraph eliminates section 506 bifurcation for all 910-day claims, and therefore, the debtors' proposed surrender of the car fully satisfied the indebtedness to the secured lender. Id. at *4.
Reasoning that the hanging paragraph unambiguously precludes section 506 bifurcation to the entirety of 1325(a)(5), and not only to 1325(a)(5)(B), surrender fully satisfies the claim. Id. at *2.
The secured creditor, Daimlerchrysler, made an argument that the BAP's position constituted an unconstitutional taking. The BAP rejected this argument out of hand because "Bankruptcy laws have long been construed to authorize the impairment of contractual obligations." Id. at *3.
Thus, in the 7th Circuit (Wisconsin, Illinois and Indiana), surrender will not satisfy in full the secured creditor's claim, leaving the debtor with no car and an unsecured deficiency claim to be paid through the plan; in contrast, in the 10th Circuit (Wyoming, Colorado, Kansas, New Mexico, Utah and Oklahoma), the debtor can use surrender to satisfy the secured lender's claim in full.
For other circuits, see both Wright and Quick for citations to cases on this issue.