In re Trejos

• Decision Date: 25 September 2006
• Docket Number: No. BK-S-06-10231-LBR.,BK-S-06-10231-LBR.
• Citation: 352 B.R. 249
• Parties: In re Gerardo A. TREJOS, Jr., and Christina A. Trejos, Debtors.
• Court: U.S. Bankruptcy Court — District of Nevada

Page 249

352 B.R. 249

In re Gerardo A. TREJOS, Jr., and Christina A. Trejos, Debtors.

No. BK-S-06-10231-LBR.

United States Bankruptcy Court, D. Nevada.

September 25, 2006.

COPYRIGHT MATERIAL OMITTED

Christopher Patrick Burke, Las Vegas, NV, for Debtor.

Michael W. Chen, Esq., Las Vegas, NV, for VW Credit, Inc.

Rick A. Yarnall, Las Vegas, NV, for trustee.

OPINION CONFIRMING DEBTOR'S PLAN

BRUCE A. MARKELL, Bankruptcy Judge.

I. lNTRODUCTION

Gerardo and Christina Trejos bought a used 2002 Volkswagen Passat from Desert Volkswagen on July 5, 2005.¹ The purchase price was $18,701.40, which included $995 for an extended warranty. Desert Volkswagen agreed to finance the purchase, after a $1,000 down payment, at 13.35% over 60 months. The monthly payment was set at $408.16.

Gerardo drove the car off the lot, and sometime thereafter, Desert Volkswagen assigned the Trejos' contract to VW Credit, Inc. Before filing his bankruptcy case, Gerardo apparently made his monthly payments to VW Credit, although his testimony was that he thought he was paying Desert Volkswagen. Regardless, when Gerardo and Christine Trejos filed bankruptcy on February 21, 2006, they owed $18,802.38 on the contract, and VW Credit filed a proof of claim in that amount.

The Trejos' plan seeks to pay 100% to all creditors. With respect to VW Credit's claim, however, the plan proposes to bifurcate the total claim into a secured claim of $12,525 (the stipulated value of the car) and an unsecured claim of $6,277.38. It then proposes to pay the secured claim over the life of the plan with interest at 8.0%, which is one-half of a percentage point above the applicable prime rate as stipulated by the parties.

VW Credit objects, and claims that provisions in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)² preclude the proposed treatment. VW Credit asserts that its claim may not be bifurcated, and that any payment over time must be at the contract rate of 13.35%.

II. CONFIRMATION WITHOUT VW CREDIT'S CONSENT

The debtors seek to confirm the plan without VW Credit's consent. They may do this, but only within the requirements of Section 1325(a)(5)(B). That section provides, in relevant part, that a plan shall be confirmed if:

(5) with respect to each allowed secured claim provided for by the plan — ....

(B) (i) the plan provides that

(I) the holder of such claim retain the lien securing such claim until the earlier of —

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328 ... [and]

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim ....

11 U.S.C. § 1325(a)(5).

Here, the debtors propose to leave the lien on the car, thereby complying with Section 1325(a)(5)(B)(i). They then propose to satisfy Section 1325(a)(5)(B)(ii) with monthly payments to VW Credit based on a value of $12,525 and an annual, simple interest rate of 8.0%. That stream of payments, the debtors contend, will satisfy Section 1325(a)(5)(B)'s requirement that they provide VW Credit with "property" — that is, the monthly payments — "on account of such claim" — that is, for application to VW Credit's claim that is secured by a security interest in the debtors' car — of a "value, as of the effective date of the plan ... not less than the allowed amount of such claim." Put another way, debtors contend that their proposed stream of payments will, over the life of their plan, have a present value of $12,525.

III. BARCPA AND THE "HANGING PARAGRAPH"

Had this case been filed before October 17, 2005, debtors' proposed treatment would not have raised any objection. For cases such as debtors' that were filed after that date, however, debtors' proposed treatment raises serious concerns. These concerns stem from the following statutory text, added by Section 306(b) of BAPCPA.³

For purposes of paragraph (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 [sic ] preceding the date of the filing of the petition, and the collateral for that 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 that debt consists of any other thing of value, if the debt was incurred during the 1-year A period preceding that filing.

Because of its odd placement in the statute as enacted,⁴ this text has no clear home in Section 1325(a), and thus has been referred to as the "hanging paragraph," which is the designation this opinion will use.⁵

Among other things, the hanging paragraph treats certain cars differently by exempting them from Section 506 of the Bankruptcy Code. Before Congress added the hanging paragraph, Section 506(a) allowed debtors to split an otherwise unitary secured claim into two claims — a secured claim equal to the value of the collateral, and an unsecured claim for the balance, if any. In chapter 13, the creditor then received, over time, the full value of the secured claim (that is, the value of the car), and an unsecured claim for the balance. The effect of this is that the undersecured creditor's deficiency claim received the same percentage recovery as all other unsecured claims. This overall treatment mirrored what the creditor would have received had the debtor not filed; absent bankruptcy, the creditor could repossess and foreclose on the car, and then sue the debtor for the deficiency.

A. The Issues

Resolution of this case requires parsing the hanging paragraph to answer at least two questions: Does the hanging paragraph remove certain purchase-money claims from the status of allowed secured claims; and second, if it does not, does the purchase-money status of such a claim pass to assignees of the creditor who originally provided the debtor with value?

1. Does Section 506 Apply in This Case?

With respect to the first question, debtors have questioned the effect of the language in the hanging paragraph that states that "section 506 shall not apply to a claim described in that paragraph," presumably a reference to paragraph (5) of Section 1325(a). Just what this effect is turns out to be a thorny question of statutory interpretation, upon which many, many bankruptcy judges have already given their views.⁶ The number and diversity of these opinions reflects that the hanging paragraph is a poorly drafted provision in peccant legislation. Making practical sense of this provision, like trying to make sense of much of BAPCPA, requires bankruptcy judges to adopt the approach of the White Queen, and believe in "as many as six impossible things before breakfast." LEWIS CARROLL, ALICE'S ADVENTURES IN WONDERLAND & THROUGH THE LOOKING GLASS, ch.5, at 157 (Bantam Classic ed.1981) (1865 & 1871).⁷

2. The Process of Statutory Interpretation

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. Unlike the statute examined in In, re Kane, 336 B.R. 477 (Bankr.D.Nev.2006), the language of the hanging paragraph has no obvious errors of reference or sense, making inapplicable both the absurdity doctrine and those cases regarding scriveners' errors. Id., at 485-87. Moreover, its history and its purpose are both far from clear, see Whitford, supra, at 43-45, making any construction that requires exact determination of that purpose somewhat problematical. Add to this mix the stark reality that the implications of a straightforward reading of the hanging paragraph are significant: For certain purchase-money loans, it would preclude application of an elemental and bedrock principle of bankruptcy law — Section 506's treatment of secured claims — in the narrow but historically important area of car loans in chapter 13.

a. Plain Meaning

Do the words of the hanging paragraph effect this type of change? When faced with the task of construing a statute, the presumption is that the accepted and plain meaning of the words is what Congress intended. As the Supreme Court has said:

The starting point in discerning congressional intent ... is the existing statutory text ... and not the predecessor statutes. It is well established that "when the statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms."

Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1323, 157 L.Ed.2d 1024 (2004), quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (internal quotation marks omitted), in turn quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290(1989), in turn quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917). See also San Jose Christian Coll. v. City of Morgan Hill, 360 F.3d 1024, 1034 (9th Cir.2004) ("Where a statute fails to define a key term, this court's `duty, in matters of statutory construction, is to give effect to the intent of Congress.'"), quoting A-Z Int'l v. Phillips, 323 F.3d 1141, 1148 (9th Cir.2003).

b. Textualism and Context

In determining the appropriate sense, investigation into ways in which the Bankruptcy Code uses the same or similar words is appropriate, especially when that usage comports with common usage. Rousey v. Jacoway, 544 U.S. 320, 326-27, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005) (looking at use of "on account of" in provisions of the Bankruptcy Code other than the one at issue). This contextual approach to interpreting federal statutes was recently summarized by a leading academic textualist, Professor John F. Manning of Harvard Law School:

In contrast with their...