BAPCPA Outline: Part II, Sections A & B -- The Hanging Paragraph: Section 1325(a)(*) -- The "Car Loan Protection" Provision: The Law of Intended and Unintended Consequences
This fourth post of the BAPCPA Consumer Bankruptcy Outline for cases decided between June 1, 2005 and May 31, 2006 addresses the so-called "hanging paragraph" at the end of Section 1325(a), a good example of how BAPCPA could have used a few good proofreadings before being finalized. Even though the "hanging paragraph" follows subparagraph Section 1325(a)(9), its real consequence relates to Section 1325(a)(5), and is generally understood as preventing a "cram-down" of an auto lender's secured claim at less than the full amount of the lender's claim -- regardless of the car's true value (which is almost always less than the claim amount) -- if the loan was made within 910 days of the debtor's filing of the case. The "hanging paragraph" (see pdf at pp.170-71) is perhaps the greatest proof that auto lenders are BAPCPA's big winners. It provides:
For the purpose of paragraph [1325(a)](5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [period] preceding the date of the filing of the petition, and the collateral for the debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for the debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.
Part II of my BAPCPA consumer outline that follows addresses the "law of intended consequences" (i.e., as the auto lobby intended, no bifurcation of the auto lender's secured claim into secured and unsecured parts based on the value of the collateral) and the "law of unintended consequences" (i.e., as the auto lobby likely didn't intend, other features of the loan -- such as interest at the contract rate -- may stripped from the loan in a "cram down" of the secured auto lender). Another unintended consequence, as provided in Ezell (see section II.B.3 below), is that chapter 13 debtors who surrender their cars may have no obligation to the auto lender at all (even if the value of the car is less than the amount owing on the loan) on the theory that the lender can’t assert an unsecured deficiency claim on surrendered collateral, but rather must accept the car back in full satisfaction of its claim against the debtor.
Interestingly, given the number of 0% or very low interest rate auto loans made in recent years, the "unintended consequence" of a court's not requiring the contract rate to be applied in a cram-down may actually favor non-subprime auto lenders as to whom, under Till, a "market" rate of interest that is substantially higher than the low interest rate associated with the original loan may be ordered. Subprime auto lenders, however, would be expected to lose out if the Till rate of interest is applied because the interest rates associated with such subprime loans typically exceed the interest rate that would be applied under Till.
In the outline below, "910 cars" refer to cars purchased by the debtor within 910 days of the filing and secured by a purchase money security interest in the car. A "910 creditor" is the lender holding such a "910 claim."
1. Creditor’s claim protected from modification by treating it as fully secured in chapter 13 plan. Debtors who plan to retain their 910 car must pay the full amount of the loan. Section 1325(a)(9) prevents strip down of secured claims on 910 cars. “To conclude otherwise would be inconsistent with the terms of the statute and the legislative history of the statute, sparse as it is.” Section also does not require creditor to be secured “only” by vehicle. Thus, section applies even if creditor's claim was also secured by service contract bought by debtors. In re Johnson, 337 B.R. 269 (Bankr. M.D.N.C. 2006) (Waldrep, J.).
2. Debtor amends strip-down post-BAPCPA plan to treat the entire 910 claim as unsecured, stating that Section 506 does not apply to the hanging paragraph. Court declares claim of 910 auto lender as fully secured, stating: “Given the overall structure of the Bankruptcy Code and legislative history, which indicates that Congress did not intend to disfavor the class of secured creditors subject to the flush language of Section 1325(a), BAPCPA prevents strip-downs under Section 1325(a), and 910 creditors must be repaid in full through a chapter 13 plan if the debtors wish to retain the collateral securing the claim." In re Turner (Bankr. D.S.C. 2006).
3. Based on a Section 1325(a) provision indicating that bifurcation of undersecured claims does not apply to cramdown of chapter 13 plan of 910 lender, Court would not confirm plan providing for bifurcation and cramdown of 910 lender's claim, even if the lender didn't timely object to such treatment in the plan. 910 lender's objection sustained. In re Montgomery, No. 06-50043 (Bankr. E.D. Ky. 2006) (Howard, J.).
4. BAPCPA provision dealing with bifurcation of undersecured claims does not apply to cramdown of Chapter 13 plan over undersecured 910 creditor's objection. Thus, cramdown of the plan requires payment of 910 creditor the full value of vehicle securing its claim. Since enactment, majority of courts interpreting the hanging paragraph hold that it precludes a Chapter 13 debtor from using § 506 to cram down a 910-day vehicle. Were this Court to adopt the reasoning in Carver, Section 1325(a)(5) would be rendered completely inapplicable to 910-day vehicle claims. In re Montoya, 341 B.R. 41 (Bankr. D. Utah 2006) (Boulden, J.).
5. The Hanging Paragraph does not make § 1325(a)(5) inapplicable to certain secured claims. Even though the Hanging Paragraph makes § 506 inapplicable to certain secured claims, it does not mean that claims covered by the Hanging Paragraph are no longer secured. As the Hanging Paragraph does not strip otherwise secured claims of their secured status, § 1325(a)(5) continues to apply to those claims. In re Shaw, 341 B.R. 543 (Bankr. M.D.N.C. 2006) (Carruthers, J.).
1. While chapter 13 debtor in cramdown of 910 creditor had to pay the full amount of the secured claim without regard to the value of the cars that are the collateral, the debtor did not have to pay cramdown interest at the contract rate. Instead, it could pay at the “prime-plus” formula rate established by the Local Rules and by Till. In re Robinson, 338 B.R. 70 (Bankr. W.D. Mo. 2006) (Federman, J.).
2. State law controls issue of whether creditor has purchase-money security interest in chapter 13 debtor's car for purposes of Section 1325(a)(5), which prevents bifurcation of the 910 creditor's claim. Here, the secured claim of a creditor that did not hold purchase-money security interest in the debtor's car under state law could be bifurcated into secured and unsecured portions by the chapter 13 plan. Under Alabama law, “purchase-money security interest” secures the money used to acquire the collateral and nothing else. Because the entire debt was not incurred as all or part of vehicle's purchase price, but rather represented money advanced for purchase of the car plus four separate future cash advances, the car secured more than debt for money used to acquire it, and hence the creditor's security interest lost its purchase-money character. In re Horn, 338 B.R. 110 (Bankr. M.D. Ala. 2006) (Williams, J.).
3. Debtors that surrender their cars pay nothing because lenders can’t assert an unsecured deficiency claim on surrendered collateral. The lender must accept the car in full satisfaction of its claim. In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006) (Stair, J.).
4. Court notes that although this section “proscribes the application of Section 506 to the facts of the present case, the Amendment does not preclude the applicability of Section 1322(b)(2), which affords a debtor the ability to modify a secured claim (other than a secured claim secured by the debtor’s principal residence); specifically, the ability to change the interest rate, change the number of payments, and change the amount of payments.” Court refuses under this section, however, to hold that 910 creditor is not fully secured. In re Parish, 2006 WL 1679710 (Bankr. M.D. Fla. 2006) (Funk, J.).
5. BAPCPA provision prohibiting application of Section 506 whenever chapter 13 debtor seeks to cramdown the claim of a 910 creditor did not simply prohibit bifurcation of such claims. It also foreclosed treatment of claims of such 910 lender as secured claims in context of cramdown of Chapter 13 plan. In essence, a 910-day vehicle claim is neither an unsecured claim nor an allowed secured claim. In re Carver, 338 B.R. 521 (Bankr. M.D. Ga. 2006) (Walker, J.). Court states:
a. "Using § 1111(b) as a guide, with the understanding that Congress did not intend to use the hanging paragraph to punish 910 claim holders, the Court concludes as follows: In a Chapter 13 plan, a 910 claim must receive the greater of (1) the full amount of the claim without interest; or (2) the amount the creditor would receive if the claim were bifurcated and crammed down (i.e., secured portion paid with interest and unsecured portion paid pro rata)."
b. "The Court recognizes that this rule is awkward and cumbersome, but it has been fashioned to ensure that 910 claims are not punished under the new law. Of course, nothing prevents a debtor from proposing better treatment for a creditor with a 910 claim than required by the rule, just as nothing prevents such a creditor from accepting less than the rule requires. Bankruptcy practitioners should not lose sight of the fact that the process of plan confirmation involves give and take among debtors and creditors. In a case such as this, for example, the creditor likely would receive several thousand dollars more with cram down treatment due to payment of interest even if it received no distributions on its de minimus unsecured claim. Still, the debtor retains some leverage, such as his ability to surrender the collateral-especially when its value is substantially less than the claim. If nothing else, these circumstances offer creditors an opportunity to negotiate a payment accommodation that transcends any particular case and is reflected in the overall relationship between debtors and creditors."
c. "Before concluding, it is worth mentioning that this rule may open the door to questions regarding the valuation of collateral on 910 claims because such value is necessary to make the calculation required by the rule. The debtor can set a value in his schedules and in the Chapter 13 plan. However, that will not necessarily end the inquiry. Creditors also are free to indicate a value on their proof of claim forms. If the debtor's plan is silent as to valuation, there is no reason the Court cannot rely on the proof of claim if it is fully completed." In re Carver, 338 B.R. 521 (Bankr. M.D. Ga. 2006) (Walker, J.).
6. Court overrules fully secured creditor's objection to chapter 13 plan modifying the interest rate paid on the claim using Till. While post-BAPCPA debtors can't strip down undersecured purchase money liens, they may reduce per Till the interest rate paid on the secured claims. The plan called for the auto lender to get 7.75% interest, compared with the 17.9% rate in the contract. The Court rejected the lender's argument that Till applies only to cramdown plans and that since it was receiving full payment, Till didn't apply. Court ruled that Till, while interpreted in the context of a strip down, is broader and applies to all cramdowns (i.e., whenever the plan is "confirmed over the objection of the secured creditor irrespective of the value of its collateral in relation to the amount of its claim"). Nothing in the hanging paragraph prevents the debtor from modifying other contractual rights, such as the interest rate. In re Wright, 338 B.R. 917 (Bankr. M.D. Ala. 2006) (Williams, J.).
7. The debtor has three choices: surrender the vehicle; provide treatment acceptable to the 910 creditor; or retain the car and provide the 910 creditor with a stream of payments. Each of the debtors has selected to retain the vehicle and therefore must provide the 910 creditor with a retained lien and a stream of monthly payments equal to present value, in equal monthly amounts, and sufficient to provide adequate protection. In re Fleming, 339 B.R. 716 (Bankr. E.D. Mo. 2006) (Schermer, J. & Surratt-States, J).
a. Court states: "Prior to BAPCPA, a debtor need only provide a secured creditor with lien retention and present value in order to retain its collateral under a Chapter 13 plan. BAPCPA expanded the lien retention requirement to specify the duration of the lien retention and to expressly state that the lien would remain in effect if the debtor failed to complete the plan. 11 U.S.C. § 1325(a)(5)(B)(i). BAPCPA added the requirements that periodic payments be in equal monthly amounts and that the payments be in an amount sufficient to provide adequate protection to the secured creditor. 11 U.S.C. § 1325(a)(5)(B)(iii). BAPCPA made no changes to the language requiring that the secured creditor receive the present value of its claim. 11 U.S.C. § 1325(a)(5)(B)(ii). BAPCPA made an additional change to Section 1325 of the Bankruptcy Code applicable to the Car Creditors. At the end of subsection (a)(9) of Section 1325, BAPCPA added [the hanging paragraph]…. The Court must next address what impact, if any, the 910 Day Car Language [i.e., the hanging paragraph] has on the permissible treatment of the Car Creditor's secured claim in the Chapter 13 plan."
b. Court disagrees with car creditors that the "910 Language" changes the present value requirement of Section 1325(a)(5)(B)(ii). Court states that the 910 Language only renders Section 506 inapplicable to the claims and prohibits bifurcation and discounting the claim to present value. Till still controls what interest rate is required to ensure present value under Section 1325(a)(5)(B)(ii).
c. The 910 Language has no impact on the requirement to pay present value. Till still controls what interest rate is required to ensure present value under Section 1325(a)(5)(B)(ii).
d. Court rejects car creditors’ argument that the 910 Language protects their claims from any modification in a Chapter 13 plan under the "plain meaning" doctrine. Court rejects argument, noting that Congress wanted to prohibit any modification in treatment of a secured creditor in a Chapter 13 plan. "In Section 1322(b)(2) of the Bankruptcy Code, Congress expressly prohibits a debtor from modifying the rights of a creditor whose claim is secured only by a security interest in real property that is the debtor's principal residence. Had Congress wanted to provide such treatment to Car Creditors in BAPCPA, they could have done so by using the language they used to provide such treatment to home mortgagees. Congress did not. Congress did not add any language to Section 1322(b)(2) mentioning 910 Day Car Creditors nor did it include such language in Section 1325 where it created the special treatment for 910 Day Car Creditors."
e. "State law determines rights in property only to the extent such rights are not modified by the Bankruptcy Code. Section 1322(b)(2) of the Bankruptcy Code expressly permits modification of the Car Creditor's rights subject to the limitations set forth in Section 1325 of the Bankruptcy Code. The Car Creditors also argue that they should receive payment at the contract rate because Congress intended to create a safe-harbor for automobile lenders. Congress did create a safe-harbor for automobile lenders which protects them from the cram down of their claims to the value of the vehicle as of the bankruptcy petition date. The safe-harbor does not extend to provide automobile lenders post-petition interest at the contract rate… [Thus, a] creditor whose claim comes within the 910 Language … of Section 1325(a)(9) … is entitled to receive post-petition interest at a current rate determined by an adjustment from the prime rate based on the risk of nonpayment under Till. BAPCPA did not change nor overrule Till." In re Fleming, 339 B.R. 716 (Bankr. E.D. Mo. 2006) (Schermer, J. & Surratt-States, J).
8. While chapter 13 debtors could not cram down plan over 910 creditor unless the creditor was paid the full amount of its allowed secured claim over time with appropriate interest, the cramdown interest rate was governed not by terms of the parties' contract but by the formula approach of Till. DaimlerChrysler Financial Services Americas, LLC v. Brown (In re Brown), 339 B.R. 818 (Bankr. S.D. Ga. 2006) (Dalis, J.).
9. Provision of BAPCPA providing that section 506 does not apply whenever chapter 13 debtor seeks to cramdown its plan on a 910 creditor and thus does not prevent court from treating such claims as secured claims for chapter 13 cramdown purposes. Section merely rendered the § 506 definition of “secured” inapplicable in Chapter 13 cramdown context, thus requiring the court to resort to state law to determine whether the creditor’s claims were “secured.” In re DeSardi, 340 B.R. 790 (Bankr. S.D. Tex. 2006) (Isgur, J.).
10. Given Congress's knowledge of the Till decision and Congress's decision not to change to the applicable statutory language when enacting BAPCPA, Till remains good law and is the proper interest rate at which secured claims must be paid to meet the requirements of § 1325(a)(5)(B)(ii). The interest rate that satisfies the “present value” requirement of cramdown is governed not by contract terms, but by Till. In re Shaw, 341 B.R. 543 (Bankr. M.D.N.C. 2006) (Carruthers, J.).
11. "The Debtors' argument that [the 910 lender] does not have a secured claim because of the elimination of the application of section 506 to section 1325 has been rejected by most courts which have considered the issue…. The allowed secured claim does not bear any interest by the terms of the Retail Installment Sales Contract; therefore, the question is whether section 1325 requires that interest be paid if the contract itself does not call for the payment of interest…. Most courts agree that the amendments contained in BAPCPA did not overrule the Till decision, and that case is still binding precedent for establishing the proper interest rate even in cases where the creditor's debt is secured by a '910' vehicle." In re Scruggs, -- B.R. --, 2006 WL 1525852 (Bankr. E.D. Ark. 2006) (Mixon, J.).
[NB: Links are to Westlaw. Those who do not have access to Westlaw may contact me directly if they would like to view a particular case, though all federal courts maintain their own websites where judicial opinions may be accessed by the public free of charge (e.g., Bankr. N.D. Ill. - Judge Wedoff opinions). Because all the outline's case references identify the deciding judge, you should be able to find the opinions online with minimal effort.]
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