Judge Easterbrook Doesn't Get Hung Up by the Hanging Paragraph of "the 2005 Act"

As noted in the section of my BAPCPA outline of one year ago entitled "The Hanging Paragraph: Section 1325(a)(*) -- The "Car Loan Protection" Provision: The Law of Intended and Unintended Consequences, a pesky little decision by Judge (and former Army captain) Richard Stair, Jr. in In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006), caught the attention of auto lenders because it held, for the first time, that an auto lender in a chapter 13 case must accept a surrendered car in full satisfaction of its claim (thus denying the lender its state law right to a deficiency for any shortfall).

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).  Remarkably, the paragraph hung there through BAPCPA's enactment without change.  Now one may wonder why an obvious grammatical faux-pas like a "hanging paragraph" went uncorrected for seven years, but it's hard to attribute the error to sloppy last-minute drafting.

The minority view among bankruptcy courts regarding the auto lender's claim against a surrendering debtor in a chapter 13 case was best articulated in my view by Nevada's Judge Bruce A. Markell (a philosophical wizard who is one of the bankruptcy bench's most capable Code constructionists) in In re Trejos, 352 B.R. 249 (Bankr. D. Nev. 2006), a case that I've wanted to discuss for almost a year now.  In it, Judge Markell ultimately concluded that Ezell was wrongly decided.  Still, as he said, "the basics of how to interpret statutory text such as the hanging paragraph are not unduly complicated, but (as always) the devil is in the details."  [NB: (Judge Easterbrook, concurring.)]

In analyzing the "hanging paragraph," Judge Markell starts with "plain meaning" (as required by Ron Pair), considers the context (as the textualist approach of Justice Scalia and Harvard's Professor John Manning mandates), seeks additional clues in bankruptcy's slang (or "gibberish"), but above all "[will] not condone ... the imputation of a congressional purpose based on materials that cannot or do not reflect a unitary congressional purpose, followed by the use of that purpose to definitively construe straightforward text."  Id. at 258.  Judge Markell concludes:

Textualists will look at background and legislative history when a fair reading of the statute does not answer the particular question at hand or, in plain English, when the statute is ambiguous.  This assumes, of course, that it makes semantic sense to impute a single intent to a multimember body such as Congress. Modern textualists tend to deny this imputation.  (See, e.g., Frank H. Easterbrook, Text, History, and Structure in Statutory Interpretation, 17 Harv. J.L. & Pub. Policy 61, 68 (1994) ("Intent is elusive for a natural person, fictive for a collective body.")

The last word has yet to be written on when, and how, external sources such as legislative history, earlier statutory enactments, and even background judicial opinions can be used or are useful in statutory construction.  As a result, when first presented with a tough question of statutory interpretation, almost every lawyer or judge will latch on to anything that might illuminate the meaning of the words Congress chose, much like a drowning man will grasp for anything floating that might work as a life preserver.  This is not per se harmful; simply consulting potentially irrelevant materials doesn't disqualify a judge-or anyone else for that matter-from being able ultimately to properly construe the statute.  Id.

Finally, Judge Markell concedes, "even after all such consultations, the statutory language may stubbornly refuse to yield a canonical meaning.  Academics might be able to defer or hedge the question at this point, but judges have an obligation to apply the statute before them.  There is a duty to make sense of the statute to the extent that is possible, and to give it an interpretation consistent at least with its semantic sense, if not consistent with some well-articulated purpose."  Id. at 258-59.

In the end, Judge Markell applies a textualist construction to highlight the fallacy behind the reasoning of Collier's and the "majority" courts, concluding:

Looking at the hanging paragraph as a textualist would, there are significant structural and precedential reasons as to why a proper reading of that paragraph does not deprive claims covered by it of their status as secured claims under chapter 13.  The primary argument against such status is that Section 506 now does not apply, and thus secured status cannot trace back to that statute. But that position assumes Section 506 is the sole source of a claim's secured status.  It is not....  Construing Section 506 to be the exclusive source of a claim's status as an allowed secured claim would also be at odds with how the Supreme Court has read that term....


From this contextual and precedential analysis, it can be seen that doubt exists as to whether Section 506(a) provides the exclusive definition of allowed secured claims in chapter 13.  This doubt ripens into certainty when laid next to the undeniable fact that, as with absolute priority, there is also a constitutional dimension to secured claims.  Under the fifth amendment, no law can effect the taking of property without just compensation, and the Court has strongly indicated that the Bankruptcy Code is to be construed so as to preserve existing rights of secured creditors....  Against this background, it is evident that Section 506 cannot be read as the exclusive repository of secured status in chapter 13....  The consequence of this analysis is that there may be allowed "secured claims" in chapter 13 without resort to Section 506.

Having undertaken an analysis of the "hanging paragraph" by reference to the textualist theories of Judge Frank H. Easterbrook, Chief Judge of the 7th Circuit, Judge Markell had the rare opportunity to see theory and practice converge when Judge Easterbrook authored this week's 7th Circuit decision in In re Wright, 2007 WL 1892502 (7th Cir. 7/3/07) (pdf), the first by a federal circuit court interpreting the "hanging paragraph," and one that is likely to soon become the "new majority" view. 

Scott Riddle's excellent and timely post on his Georgia Bankruptcy Blog thankfully saved me from recounting the details of the opinion, but suffice it to say that Judge Easterbrook (along with Judges Wood and Manion) were baffled by the "majority" approach advanced by Ezell and its progeny.  To them, the majority ignored a bedrock principle of bankruptcy law, which Justice Alito most recently reiterated in Travelers v. PG&E (discussed here), that "[c]reditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code."  Travelers at p.6.  Simply put, Judge Easterbrook wrote, "[c]reditors don't need § 506 to create, allow, or recognize security interests, which rest on contracts (and the UCC) rather than federal law."  Wright at p.7.

Finally, I generally listen to all the 7th Circuit's commercial, bankruptcy, and constitutional oral arguments as they become available (RSS feeds here).  To me, they're the legal equivalent of an episode of Lost, pitting the hunter (i.e., the Court) against the hunted (i.e., the advocates), with the hunted advised to leave their script at the door because they are of little use in the chase.  As Scott noted in his post, the oral argument in Wright left little doubt from the outset as to what the outcome would be.  But it did leave us with this most memorable exchange (that adopts Professor Jean Braucher's preferred shorthand for the new legislation and--more importantly--provides an important bit of advice for those next arguing a BAPCPA issue before the 7th Circuit):

Counsel:   Section 506(a) pre-BAPCPA [pron: bap-see-pah] was intended to provide the debtor with the opportunity...


Judge Easterbrook:  I think we'd probably all be better off if you said "the 2005 Act."

Counsel:  Sure...

Judge Easterbrook:  The acronym is not a word in the English language, to the best of my knowledge.

Counsel:  Very well...

Judge Wood:  Although in your defense, it is widely used in the bankruptcy community.

Judge Easterbrook:  Well, the bankruptcy community can do in private anything it wants.

(Hearty laughter all around, counsel excluded)

Counsel:  Prior to the enactment of the Code in 2005, Section 506 ....

(Oral Arg. at 18:04 - 18:45.)

Happy hunting!

[7/8/07 UpdateBe sure to read this second post by Scott Riddle on the Georgia Bankruptcy Blog on the 10th Circuit's BAP opinion two days later that adopted a simple "plain meaning" analysis in disagreeing with Wright and following Ezell (though I think Judge Markell would say that "plain meaning" is just the "default entrance, not the mandatory exit," in any BAPCPA analysis).  And thanks also to the reader who posted the comment yesterday alerting us to the BAP decision and to Judges Waldron and Markell for permission to post their materials on principles of statutory construction and BAPCPA, which they delivered at last year's NCBJ conference.

© Steve Jakubowski 2007

Written By:John Turner On July 7, 2007 1:55 PM

Two days later the 10th Circuit BAP disagreed with the Wright opinion. See In re Quick, 2007 WL 1941749. The BAP was aware of Wright, which is cited in footnote 8.

Written By:David Gray Carlson On February 19, 2009 10:59 AM

Someone once told me that the notorious hanging paragraph was actually drafted by Scooter Libby in the late 1990's when he was working as an attorney retained by the auto industry. Any truth to this?

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