In re Long

• Decision Date: 04 March 2008
• Docket Number: No. 06-6252.,06-6252.
• Citation: 519 F.3d 288
• Parties: In re Robert Harris LONG and Ginger Denise Long, Debtors. AmeriCredit Financial Services, Inc., Creditor-Appellant, v. Robert Harris Long and Ginger Denise Long, Debtors-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

519 F.3d 288

In re Robert Harris LONG and Ginger Denise Long, Debtors AmeriCredit Financial Services, Inc., Creditor-Appellant, v. Robert Harris Long and Ginger Denise Long, Debtors-Appellees.

No. 06-6252.

United States Court of Appeals, Sixth Circuit.

Argued: October 23, 2007.

Decided and Filed: March 4, 2008.

ARGUED:

Stephen P. Hale, Hale, Dewey & Knight, Memphis, Tennessee, for Appellant. John P. Newton, Jr., Mayer & Newton, Knoxville, Tennessee, for Appellees.

ON BRIEF:

Stephen P. Hale, Hale, Dewey & Knight, Memphis, Tennessee, Holly N. Knight, Hale, Dewey & Knight, Nashville, Tennessee, for Appellant. John P. Newton, Jr., Richard M. Mayer, Brent S. Snyder, Mayer & Newton, Knoxville, Tennessee, for Appellees. Tara A. Twomey, San Jose, California, Richardo I. Kilpatrick, Kilpatrick & Associates, Auburn Hills, Michigan, Joseph R. Prochaska, Williams & Prochaska, Nashville, Tennessee, for Amici Curiae.

Before: MERRITT and CLAY, Circuit Judges; COX, District Judge.^*

MERRITT, J., delivered the opinion of the court. COX, D.J. (pp. 299-301), delivered a separate opinion concurring in the judgment. CLAY, J. (p. 301), delivered a separate dissenting opinion.

OPINION

MERRITT, Circuit Judge.

This consumer bankruptcy, Chapter 13 case arises because the debtor bought a car under a typical financing arrangement in which the lender retained a lien or mortgage on the car as security for payment of the outstanding loan that enabled the debtor to buy the car. The debtor proposed to surrender the car to the finance company as part of the Chapter 13 plan. The value of the car was less than the outstanding debt. Due to a glitch or gap in a recent revision of the Bankruptcy Code intended to benefit creditors, the law is now silent on what happens to the remaining indebtedness in the surrender-of-the-car situation. The bankruptcy court below held that the congressional mistake in drafting the revision means that the remaining indebtedness is completely wiped out. We believe the gap should be filled and the Congressional mistake corrected. The law previously governing this situation should be restored until Congress can correct its mistake and fill in the gap.

I. The Issue to be Decided

The gap in the law is caused by a newly-formed inconsistency between §§ 1325(a) and 506 of the Bankruptcy Code. Congress simply overlooked providing for what happens in Chapter 13, consumer bankruptcy cases when the debtor surrenders the car to the lender instead of retaining the car and paying off the loan.

In the twelve-month period ending September 2007, there were 310,802 Chapter 13 bankruptcies. In many of these, there were secured loans for automobiles or trucks and other personal property for the bankruptcy courts and Chapter 13 trustees to deal with. Some courts have addressed the gap in the law by adopting a remedy based on state law remedies of foreclosure, repossession, sale at auction and adjudication to determine the deficiency that arises from the fact that the collateral is usually worth less than the remaining debt. These several state law contractual, foreclosure and judicial remedies vary widely from state to state.

By a mistake in drafting, the 2005 revision of the Bankruptcy Code does not provide for the situation in which a Chapter 13 debtor proposes to surrender the collateral to the creditor holding the lien, or purchase-money mortgage or other security interest. As Chief Judge Easterbrook recently wrote for the Seventh Circuit in an Illinois Chapter 13 case similar to the one before us:

Bankruptcy judges across the nation have divided over the effect of the unnumbered hanging paragraph that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added to § 1325(a) of the Bankruptcy Code, 11 U.S.C. § 1325(a). Section 1325, part of Chapter 13, specifies the circumstances under which a consumer's plan of repayment can be confirmed. The hanging paragraph says that, for the purpose of a Chapter 13 plan, § 506 of the code, 11 U.S.C. § 506, does not apply to certain secured loans.

In re Wright, 492 F.3d 829, 830 (7th Cir. 2007).

In the absence of any clear bankruptcy law covering how to handle the surrender of cars and other collateral, we agree with the Seventh Circuit that the bankruptcy courts should not simply allow the debtor to surrender the car and then wipe out the deficiency, as the bankruptcy court in the instant case ruled. Wiping out the deficiency altogether undermines reasonable obligations created by the contract between the parties. These contractual obligations are referred to in our Constitution, see U.S. CONST. art. I, § 10, cl. 1, and normally should be enforced as a part of the Rule of Law based on concepts of freedom of contract and private property. But we do question the wisdom of the Seventh Circuit and our concurring colleague that the resulting deficiency judgment in bankruptcy should depend entirely on the vagaries of state laws as to foreclosure, repossession, sale and judicial remedy. By the adoption of § 506 and § 1325, Congress has demonstrated an intent to federalize and make uniform the treatment of purchase-money mortgages in bankruptcy. A uniform national rule should be adopted and substituted for the widely varying procedural and substantive foreclosure, repossession and deficiency judgment rules provided by the 50 states.

II. Analysis of Sections 506(a) and 1325(a) of the 2005 Revision of the Bankruptcy Code

Section 506(a)(1) and (2), as amended, which defines for bankruptcy the nature of the secured creditor's claim, reads in relevant part:

(a)(1) An allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property . . .

(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.

11 U.S.C. § 506 (2007). After establishing the "allowed secured claim" in § 506(a), section 1325(a) then provides for one of three treatments "with respect to each allowed secured claim provided for by the plan," as set out below.¹ First, the holder of the claim can accept the debtor's proposed plan under § 1325(a)(5)(A). If the creditor does not accept the plan, the debtor can either retain the collateral subject to the requirements in § 1325(a)(5)(B), or surrender the collateral pursuant to § 1325(a)(5)(C). Prior to the 2005 revision, 11 U.S.C. §§ 506(a) and 1322(b)(2)² operated to enable Chapter 13 debtors to bifurcate claims into secured and unsecured portions.

What has caused the confusion and incoherence in the law is known as the unnumbered "hanging paragraph" or "anti-cramdown paragraph" that Congress inserted immediately following section 1325(a):

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 period preceding that filing.

Courts use different terms to talk about the hanging paragraph because the provision does not have an alphanumeric designation. See In re Carver, 338 B.R. 521, 523 (Bankr.S.D.Ga.2006), which explains two of the errors arising from negligent drafting of the revision:

The reader immediately notices two problems. First, the provision "has no alphanumeric designation and merely dangles at the end of § 1325(a). There is no way to cite to this provision other than its proximity to other citable provisions." Dianne C. Kerns, Cram-a-lot: The Quest Continues, 24-Nov. Am. Bankr.Inst. J. 10, 10 (2005). In addition, the provision is "missing an operable word. The first sentence refers to `the 910-day [period] preceding the date of the filing of the petition. . . .'" Id. Without the addition of "period," the provision makes little sense and could be read to apply only to debts of the type described that were incurred exactly 910 days — no more, no less — prior to the petition date. These two problems are mere shadows of the larger interpretation difficulties this provision presents.

(internal citation omitted). Not only must words be added to make any sense of the paragraph, but the literal meaning of the paragraph must be altered to deal with debtors who surrender the collateral instead of retaining it. (Our concurring colleague seems to be the only observer who finds no gap, mistake or incongruity in connection with the surrender of collateral under sections 506(a) and 1525.)

The bankruptcy court found and neither party disputes that all of the requirements set forth in the hanging paragraph are met in this case. Specifically, (1) the debtors purchased a car within the 910-day period set forth in the statute, (2) AmeriCredit holds a purchase money security interest in the car, and (3) the car was acquired for the debtors' personal use. Creditors falling under this paragraph are commonly...