Memphis Bank & Trust Co. v. Whitman

Decision Date17 December 1982
Docket NumberNo. 81-5393,81-5393
Parties7 Collier Bankr.Cas.2d 727, 9 Bankr.Ct.Dec. 1140, Bankr. L. Rep. P 68,901, Bankr. L. Rep. P 68,946 MEMPHIS BANK & TRUST COMPANY, Plaintiff-Appellant, v. Linda Gail WHITMAN, Defendant-Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

Gary L. Jewel, Allen Gardner, Memphis, Tenn., for plaintiff-appellant.

Sidney Feuerstein, Memphis, Tenn., for defendant-appellee.

Before MERRITT, Circuit Judge, BROWN, Senior Circuit Judge, and PRATT, * District Judge.

MERRITT, Circuit Judge.

This secured claim case arises under the newly revised Chapter 13 of the Bankruptcy Code which sets out principles for courts to follow in composing the debts of distressed wage earners. It is a case of first impression under the new Code. The "confused state of the law concerning the treatment of secured claims" caused major problems under the old Chapter XIII, 5 Collier on Bankruptcy Sec. 1325.01[E] at 1325-14 (1982), and led to a radical revision of the treatment of wage earner plans in the new Code. We first explain the legal framework in which the case arises and then deal with the facts and applicable law.

I. THE STATUTORY CONCEPT UNDERLYING TREATMENT OF SECURED CLAIMS

Chapter 13 of the new Code is considerably more helpful to debtors than either the old Chapter XIII or the old or new straight bankruptcy provisions under Chapter 7. See Epstein, Chapter 13: Its Operation, Its Statutory Requirements as to Payment to and Classification of Unsecured Claims, and its Advantages, 20 WASHBURN L.J. 1 (1980). Creditors no longer have to agree to the Chapter 13 plan; it is court imposed. Business debtors are eligible to file now. Creditors may not file an involuntary proceeding as in Chapter 7 cases. Creditors are not necessarily entitled to full but delayed payment as under the old Chapter XIII but only to an amount equal to what they would have received in a straight bankruptcy. The stay and retention of property provisions are more protective than Chapter 7; and Chapter 13 also provides more favorable treatment of liens, defaults and taxes than Chapter 7.

On the question of discharge, under section 1328(a) of the new Chapter 13, the only debts excepted from discharge are alimony and child support, claims not included in the plan and certain long-term obligations voluntarily excepted from the plan. Thus except for alimony and child support the nine exceptions to discharge, including fraud, applicable to Chapter 7 are not applicable to Chapter 13. A debtor who obtains credit by fraud or other dishonesty receives a discharge under Chapter 13 but not under Chapter 7.

The concept behind the treatment of secured claims under the new Chapter 13 is fairly simple. The total claim of the secured creditor which is to be allowed is divided into two parts, the secured portion of the claim and the unsecured portion. These two are called in section 1325 the "allowed secured claim" and the "allowed unsecured claim." 1 The secured portion of the total claim represents the present value of the collateral and the unsecured portion is the remainder, i.e., the amount the allowed claim exceeds the value of the collateral. The House Report on the new Code explains the reason for this division:

Most often in a consumer case, a secured creditor has a security interest in property that is virtually worthless to anyone but the debtor. The creditor obtains a security interest in all of the debtor's furniture, clothes, cooking utensils, and other personal effects. These items have little or no resale value. They do, however, have a high replacement cost. The mere threat of repossession operates as pressure on the debtor to repay the secured creditor more than he would receive were he actually to repossess and sell the goods.

Current chapter XIII does little to recognize the differences between the true value of the goods and their value as leverage. Proposed chapter 13 instead views the secured creditor debtor relationship as a financial relationship, and not one where extraneous, non-financial pressures would enter. The bill requires the court to value the secured creditor's interest. To the extent of the value of the security interest, he is treated as having a secured claim, entitled to be paid in full under the plan, unless, of course, he accepts less than full payment. To the extent that his claim against the debtor exceeds the value of his collateral, he is treated as having an unsecured claim, and he will receive payment along with all other general unsecured creditors.

H.R. No. 95-595, 95th Cong., 2nd Sess. 1,124, reprinted in [1978] U.S.Code Cong. & Ad.News 179, 301.

Section 1325(a)(5)(B) seems to require the Bankruptcy Court to assess interest on the secured claim for the present value of the collateral (if it is not to be paid immediately) in order not to dilute the value of that claim through delay in payment. In effect the law requires the creditor to make a new loan in the amount of the value of the collateral rather than repossess it, and the creditor is entitled to interest on his loan. 2

II. THE FACTS OF THE INSTANT CASE

The instant case involves an automobile loan in the principal amount of $5,659, which was to have been paid over 42 months at $233 per month, making a total debt of $9,799, consisting of interest at 21% in the amount of $2,922 and insurance and other charges of $1,217. Having made no payments under the contract, the debtor, a divorced woman with three children, filed a Chapter 13 complaint two months after incurring the debt. The judge found that although the debtor "puffed" her income somewhat on her loan application, the basic reason for her default was a reduction in wages. He declined to find that she acted dishonestly in securing the loan. She filed a payment plan asking to reduce the monthly payment on the automobile from $233 to $157 and to extend the time to 60 months. The judge at the confirmation hearing found that her conduct in securing the loan and immediately filing under Chapter 13 for a reduction in payments made the proposed plan lack good faith. He indicated he would approve a plan that continued monthly payments at $233 until the contract debt was paid in full, and the debtor amended her plan to embody this proposal.

The Bankruptcy Court then wrote an opinion in which it apparently changed its mind. The reasons for the change are not clear. At one point in its written opinion, in line with its statements at the confirmation hearing, the Court indicates that it is confirming a plan paying 100% of the Bank's claim. At another point in the written opinion the plan seems to contemplate a secured claim for the present value of the collateral, $4,800, plus an unsecured claim for the difference in this figure and the total contract price, plus 10% interest on the secured claim. The general thrust of the opinion seems to be to require full payment under the original contract. Yet at the end of its opinion the Court orders payment of a secured claim of $4,800 (the value of the collateral), plus interest on this amount at a 10% rate, plus an unsecured claim of $2,171.74, a figure that omits any contract interest. The Court states that it is subtracting the contract interest because under Chapter 13 contract interest stops upon the filing of the petition. The District Court affirmed.

III. THE APPROPRIATE PROCEDURE TO FOLLOW IN A SECURED CLAIM CASE

Although there are as yet few court of appeals and district court cases touching on the new Chapter 13, there are already many bankruptcy court cases. A reading of those cases suggests a composite set of procedures followed implicitly by most bankruptcy courts in secured claim cases:

1. Determine the present value of the collateral under the secured claim provisions of 1325.

2. Determine the amount allowable under applicable law to the creditor by virtue of the debtor's default including unpaid principal, finance charges, interest earned prior to filing but unpaid, etc.

3. Subtract the amount of the secured claim determined in Step 1 from the amount calculated in Step 2. This represents the unsecured claim.

4. Determine the appropriate interest rate to be applied the the secured claim, as more fully discussed below. Add the secured claim and the interest to be paid.

5. Determine based on the debtor's ability to pay and his conduct how much of the "allowed unsecured claim" should be paid, provided this amount is not less than the value the creditor would receive in straight bankruptcy.

6. Determine whether the debtor's proposed plan, based on his ability to pay and conduct, is reasonable and in good faith.

7. Confirm, deny confirmation or suggest modifications in the plan depending on the outcome of step 6.

This procedure seems to fit well with the statutory framework and statutory purpose in Chapter 13 cases. It eliminates the confusion under the old law and had the Bankruptcy Court followed it, we would not have the present confusion about what it intended to do in this case. We reverse and remand the case to the Bankruptcy Court with instructions to follow this procedure.

IV. INTEREST RATE TO BE ALLOWED ON SECURED CLAIM

Rather than tying the interest rate to an arbitrary ten per cent rate, the Bankruptcy Court's solution, or some other arbitrary rate, we hold that in the absence of special circumstances bankruptcy courts should use the current market rate of interest used for similar loans in the region. Bankruptcy courts are generally familiar with the current conventional rates on various types of consumer loans. And where parties dispute the question, proof can easily be adduced.

The reason we do not use an arbitrary rate is that such a rate may vary widely from the current...

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