In re Kenney, Case No. 06-71975-A (Bankr. E.D.Va. 5/10/2007)
| Decision Date | 10 May 2007 |
| Docket Number | Case No. 07-70359-A.,Case No. 06-71975-A. |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | IN RE: JENNIFER L. KENNEY, Chapter 13, Debtor, IN RE: DAVID M. BYRUM,<SMALL><SUP>1</SUP></SMALL> Chapter 13, Debtor. |
These matters are before the Court on two creditors' Objections to Confirmation of each of the debtors', Jennifer L. Kenney ("Kenney") and David M. Byrum ("Byrum") (collectively known as "Debtors") Chapter 13 Plans. The issue in both cases is identical and is purely one of law; specifically, does the "hanging paragraph"2 amended to § 1325 in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") allow the Debtors to surrender their vehicles to the Creditors, Tidewater Finance Company ("TFC") and Hyundai Motor Finance Company ("HMFC") (collectively known as "Creditors"), in full satisfaction of the amounts owed to the Creditors' even though the Debtors owe more money than the vehicles are worth. The Court must determine whether the hanging paragraph applies to all three subsections of § 1325(a)(5) of the Bankruptcy Code ("Code"), including surrender as suggested by the Debtors, which would deprive the Creditors of any deficiency claims after the sales of the vehicles, or, as the Creditors argue, whether the hanging paragraph only prevents bifurcation of a "910 claim"3 when a debtor retains a vehicle, thus allowing the Creditors their deficiency claims. This is a core proceeding over which this Court has jurisdiction under 28 U.S.C. §§ 157(b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
The pertinent facts in these cases are not in dispute and are virtually identical.
Debtor Kenney purchased a 2003 Chevrolet Impala on September 29, 2006, for her personal use and financed that purchase through Calvary Cars and Service, which later assigned its note to TFC. She filed her bankruptcy petition on December 19, 2006, less than 910 days after purchasing the vehicle, and filed her Amended Plan on February 1, 2007, in which she stated that she was surrendering the vehicle in full satisfaction of TFC's claim. On March 6, 2007, TFC filed the instant Objection to Confirmation to the Amended Plan.4 On April 12, 2007, TFC filed its original Proof of Claim listing the total amount of secured debt as $12,341.84, but on April 19, 2007, it amended that claim to change the status of the debt to unsecured and show the total amount of debt reduced to $5,271.34.5
Similarly, Debtor Byrum purchased a 2005 Kia Sedona on March 22, 2005, for his personal use and financed that purchase through HMFC. He filed his bankruptcy petition on February 22, 2007, less than 910 days after purchasing the vehicle, and filed his Plan on March 8, 2007, in which he stated that he was surrendering the vehicle in full satisfaction of HMFC's claim. On March 9, 2007, HMFC filed an original Proof of Claim listing the total amount of the secured claim as $20,755.61. HMFC then filed its instant Objection to Confirmation on April 13, 2007, based on the treatment of its claim under the plan.6
The Creditors arguments against applying the hanging paragraph to § 1325(a)(5)(C) are numerous. First, they argue that the hanging paragraph is ambiguous and/or produces anomalous results that require the Court to look past its plain language to Congress' intent in order to decipher its meaning. They argue that even though the hanging paragraph says it applies to § 1325(a)(5) that the Court should not read it in a vacuum, but instead give effect to the intent of Congress which was to elevate the rights of secured "910" creditors. The Creditors contend that applying the hanging paragraph to the surrendered collateral and allowing the surrender of the vehicles in full satisfaction of the claims when the value of the surrendered collateral would not fully satisfy the outstanding liens, would be contrary to that intent. They cite the legislative history as evidence that Congress only meant to heighten secured creditors' protection and as such could not have possibly meant to change recourse debt into non-recourse debt.
The Creditors also argue that reading the hanging paragraph to apply to surrendered collateral will lead to anomalous results by allowing arbitrary treatment of deficiency claims. They argue that if a 910 creditor, whose claim is treated as unsecured in the plan, obtains relief, repossesses and sells the vehicle before confirmation of the plan, then that creditor has an unsecured deficiency claim. However, if that same creditor does not obtain relief promptly it may be forced to take possession of the vehicle in full satisfaction of its claim. The creditors argue that this is a windfall to the debtor, which the Supreme Court prohibited in Butner v. U.S., 440 U.S. 48, 99 S. Ct. 914, 918 (1979). They also argue that, hypothetically, such an application of the hanging paragraph would allow a debtor to surrender a vehicle that had been wrecked and declared a total loss in full satisfaction of the debt it secured.
Additionally, the Creditors argue that the debtors' position is a major change from the practice under the previous Code, which is discouraged. Dewsnup v. Timm, 502 U.S. 410, 419-20, 112 S. Ct. 773, 779 (1992).
Secondly, the creditors argue that § 506 has never been used in bankruptcy to determine a deficiency claim once a vehicle has been surrendered and sold. They argue that state law controls determination of the deficiency amount, as it always has by subtracting the amount that was obtained from the sale of the vehicle from the total amount due under the contract. Thus, since § 506, pre-BAPCPA, was only used to determine the value of claims of collateral that a debtor was retaining, the addition of the hanging paragraph was only meant to affect retained collateral. They argue that the flaw in the majority's position, which they concede is contrary to the view they urge on the Court, is that it finds § 506 defines "allowed secured claim," which the Creditors argue it does not according to Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773 (1992).
Similarly, the Creditors also argue that the hanging paragraph does not apply in the instant cases because § 506 only deals with collateral in which the bankruptcy estate has an interest. They suggest that once the collateral has been surrendered that the estate no longer has any interest in that property.
Finally, the creditors argue that applying the hanging paragraph to surrendered collateral means that unsecured creditors of the same class would be treated differently under the plan, a violation of § 1322(b)(3).7 The Creditors state that they are receiving a 0% distribution on their unsecured claims while the other unsecured creditors are receiving at least some payment under the plan.
Basically, the Creditors argue that the hanging paragraph should always be read to provide heightened protection to 910 secured creditors, as that was the intent of Congress. They also urge this Court to follow the basic reasons underlying the entire bankruptcy system, the "rehabilitation of individual debtors and equitable treatment of creditors," In re Trejos, 352 B.R. 249, 262 (Bankr. D. Nev. 2006), which they contend can only be correctly served by not applying the hanging paragraph to surrendered collateral and allowing them their unsecured deficiency claims.
The Debtors argue that the hanging paragraph is not ambiguous; therefore, under the Plain Meaning Rule8 the Court must apply it as it is written. They state that by its terms the hanging paragraph applies to § 1325(a)(5), which includes both (5)(B) and (5)(C) of that section. They urge this Court to follow the majority of the courts, and most specifically, In re Osborn, No. 06-6061WM2007 Bankr. Lexis 497 (BAP 8th Cir. Feb. 23, 2007), that have ruled on this issue and find that the hanging paragraph prevents bifurcation of 910 claims regardless of whether the debtor retains or surrenders the property.
The Debtors further contend that because the surrender of the vehicles fully satisfies the Creditors' claims, they have no unsecured claims; therefore, there is no violation of § 1322(b)(3).
Section 1325(a)9 of the Code delineates the requirements for confirmation of a Chapter 13 plan. A plan's proposed treatment of a secured claim can be confirmed if one of the following provisions is met. First, the plan can provide that the debtor and secured creditor agree on how the claim will be paid. Id. at § 1325(a)(5)(A). Secondly, the plan can provide that the debtor will keep the collateral securing the claim and that the creditor retains the lien until either the debt is repaid under the plan or until the debtor receives a discharge, which ever occurs first. Id. at § 1325(a)(5)(B)(i). If the debtor chooses this option, he must pay adequate protection payments to the secured creditor, the total of which must not be less than the allowed amount of the claim as of the effective date of the plan. Id. at § 1325(a)(5)(B)(ii) & (iii). Finally, the plan can provide that the debtor will surrender the secured collateral to the creditor holding the lien. Id. at § 1325(a)(5)(C).
Congress amended § 1325(a) of the Code by adding an unnumbered paragraph after § 1325(a)(9), which states:
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...
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