On July 5, 2007, the Seventh Circuit held that the “hanging paragraph” of 11 U.S.C. §1325 meant that the secured creditor may assert a deficiency claim after the surrender and liquidation of a “910 vehicle.” This is generally known as the minority position (and the one followed in the ND Ga). See this post for the discussion of In re Wright, and also see Steve Jakubowski’s take at the Bankruptcy Litigation Blog.
It seems that on the same day, the 10th Circuit Bankruptcy Appellate Panel decided to go the other way, following the majority position that the surrender of the 910 vehicle constitutes full satisfaction of their claim. See In re Quick; In re Ballard, BAP No. 07-025, No. 07-026, 2007 Bankr. LEXIS 2175 (10th Cir. BAP June 5, 2007) (opinion not yet available on the court’s website).
The BAP initially concluded that §1325 was not ambiguous –
Chrysler urges this Court to adopt the minority position allowing under-secured creditors to assert unsecured claims for deficiencies resulting from sales of collateral. … However, such a holding would require this Court to first determine that the hanging paragraph is ambiguous, thereby necessitating an examination of legislative history. This we decline to do.
Although Chrysler asserts that the purpose behind enactment of the hanging paragraph must be examined in order to interpret it, the cases relied upon do not support its position. For example, in Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982)<!—->, the Court first acknowledged that “[t]here is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes,” and then noted that “in rare cases the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters, and those intentions must be controlling.” Id. at 571<!—-> (emphasis added; internal quotation marks omitted). Moreover, an unambiguous statute may not be “interpreted” to match a court’s determination of what Congress “meant” to say. Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234, 1243 (11th Cir. 2002)<!—->, cert. denied, 127 S. Ct. 1815 (2007)<!—->.
In this case, the language of the hanging paragraph is neither ambiguous, nor does literal application of its terms lead to a result that is demonstrably at odds with the apparent intentions of its drafters. Significantly, this Court is not persuaded that the sparse legislative history of the amendment of § 1325<!—-> supports Chrysler’s assertion that the hanging paragraph was enacted solely for the benefit of secured creditors. In any event, Congress easily could have specified that the hanging paragraph applies only to §1325(a)(5)(B), but it did not.
The Court then held as follows:
We therefore hold that the hanging paragraph unambiguously precludes application of 11 U.S.C. 506 to the entirety of §1325(a)(5) and no bifurcation of allowed secured claims may be effected in the exercise of any of a 910 debtor’s three options under §1325(a)(5). The effect of this elimination of bifurcation in 910 cases has been described as follows:
The effect of the hanging paragraph is that a debtor no longer has this bifurcation tool at his or her disposal. If a creditor files a secured claim relating to 910 property and that claim is allowed under § 502, the debtor must treat the claim as fully secured. In a sense, a fiction arises that the 910 collateral is worth the exact amount of the proof of claim. So when a debtor proposes to retain the collateral, the debtor must propose to pay the entire claim as filed. Likewise, where the debtor proposes to surrender the collateral, the fiction created by the hanging paragraph serves to render the secured claim completely satisfied.
In re Durham,361 B.R. 206, 209 (Bankr. D. Utah 2006) Thus, post-BAPCPA, 910 debtors may no longer retain collateral and cram down their loans, and 910 creditors may not recover deficiencies when collateral is surrendered.
The Court expressly declined the state law argument that the Seventh Circuit found persuasive in Wright (after the jump)-
Another argument Chrysler makes in support of bifurcation is that bifurcation of claims in surrender cases has always been based on state law and, therefore, elimination of the § 506(a) bifurcation process has no effect in such cases. This argument was rejected in In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006), as follows:
The argument that Pre-BAPCPA § 506(a) had no application to surrender under Pre-BAPCPA § 1325(a)(5)(C) is misplaced. Valuation of a creditor’s allowed secured claim under Pre-BAPCPA § 506(a) was determined in light of the purpose of the valuation and of the proposed disposition or use of such property. Upon surrender under Pre-BAPCPA § 1325(a)(5)(C), liquidation value was clearly the yardstick by which the allowed secured claim was determined, while, for cramdown purposes under Pre-BAPCPA § 1325(a)(5)(B), replacement value was the criteria.
Id. at 339-40 (citation, internal quotation marks, and footnote omitted). Thus, an “allowed unsecured claim comes into being not because of the sale pursuantto state law, but because, when § 506(a) is applied, the value of the collateral, whether determined by estimation for use under § 1325(a)(5)(B) or by surrender and eventual liquidation for use under § 1325(a)(5)(C), is less than the debt.” In re Osborn, 363 B.R. 72, 77 (8th Cir. BAP 2007).
Finally, the BAP rejected the lender’s Fifth Amendment argument –
Finally, Chrysler contends that the elimination of its “state law” deficiency claim is a taking in violation of the Fifth Amendment to the United States Constitution. However, a “secured creditor has two types of rights: the contractual right to obtain repayment of its debt with a fair rate of return in the form of interest payments and the property right the creditor has in the collateral that secures the debt. These two types of rights together constitute the ‘bundle of rights’ held by the secured creditor. Bankruptcy laws have long been construed to authorize the impairment of contractual obligations.” In re Nichols, 440 F.3d 850, 854 (6th Cir. 2006). Thus, “there is nothing inappropriate about bankruptcy laws affecting a creditor’s right to recover under state law” and creditors’ rights “are curtailed in many ways once a debtor files bankruptcy.” In re Brown, 346 B.R. 868, 876 (Bankr. N.D. Fla. 2006). In fact, pre-BAPCPA § 1325(a)(5)(B), which allowed debtors to retain collateral and reduce contractual claims that exceeded the statutorily defined “value” of collateral to unsecured deficiency claims, was just such an impairment of creditors’ rights. The current version of § 1325(a)(5), which restores those rights and imposes a lesser impairment in the case of collateral surrender is equally allowable.
As an aside, the BAP, in a footnote, addressed the theory that the BAPCPA amendments must be interpreted to benefit creditors, since it was creditors who lobbied for such changes –
Specifically, we do not agree that BAPCPA amendments that appear to benefit creditors must be interpreted in such a way as to benefit only creditors. In fact, many of the supposedly “pro-creditor” amendments appear reflective of the normal give and take of the legislative process. Thus, it may well be that elimination of deficiency claims was intended to offset, on behalf of 910 debtors, the benefit conferred upon secured 910 creditors by eliminating the cram down option. However, our determination of unambiguity eliminates the necessity of elucidating such an intent.
Steven Jakubowski also addresses this in the Bankruptcy Litigation Blog –
Somehow, between then and now, the holding in Ezell became the “majority” rule in the land, much to the sure chagrin of the auto lobby. After all, as brilliantly documented in a paper by Univ. of Wisconsin’s William Whitford entitled A History of the Automobile Lender Provisions of BAPCPA, the auto lobby drafted the “hanging paragraph” and had Michigan Senator Spencer Abraham introduce it in a 1998 amendment to the proposed legislation. (See Whitford, at pp. 34-36).