In re Pruitt

• Decision Date: 24 February 2009
• Docket Number: No. 08-30164 (ASD).,08-30164 (ASD).
• Citation: 401 B.R. 546
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Jennifer L. PRUITT, Debtor.

401 B.R. 546

In re Jennifer L. PRUITT, Debtor.

No. 08-30164 (ASD).

United States Bankruptcy Court, D. Connecticut.

February 24, 2009.

COPYRIGHT MATERIAL OMITTED

Kenneth E. Lenz, The Lenz Law Firm, Orange, CT, for Debtor.

MEMORANDUM OF DECISION ON OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN

ALBERT S. DABROWSKI, Chief Judge.

I. INTRODUCTION

The Debtor's Chapter 13 Plan is before the Court for confirmation. That plan (the "Debtor's Plan") proposes, inter alia, to surrender a certain motor vehicle to its purchase-money lender in full satisfaction of the claims of that lender. Due to this provision, the Debtor's Plan was met with strenuous objection from the lender. The resulting dispute raises legal issues precipitated by the so-called "hanging paragraph" of United States Bankruptcy Code Section 1325(a). Those issues have divided a growing number of courts. For the reasons that follow, this Court allies itself with those courts that have found a full-satisfaction vehicle surrender to be an appropriate element of a Chapter 13 plan. Accordingly, the Debtor's Plan will be confirmed.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant matter by virtue of 28 U.S.C. § 1334(b). This Court derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a), (b)(1), and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(L).

III. FACTUAL BACKGROUND

A. On January 18, 2008 (the "Petition Date"), Jennifer L. Pruitt (the "Debtor") commenced this Chapter 13 bankruptcy case through the filing of a petition in this Court. On that same day the Debtor filed all required Statements and Schedules, as well as the proposed Debtor's Plan.

B. The Debtor's Schedule B—"Personal Property"—lists a 2003 Mitsubishi Eclipse automobile (the "Vehicle"), to which the Debtor assigned a value of $10,690.00.

C. The Vehicle was purchased by the Debtor from County Line Mitsubishi in Middlebury, Connecticut, pursuant to a Retail Installment Contract and Security Agreement ("Loan & Security Agreement") on September 15, 2007. Under the terms of the Loan & Security Agreement, the Debtor financed a total of $18,029.82. Also on September 15, 2007, County Line Mitsubishi assigned its rights in the Loan & Security Agreement to TD Banknorth, N.A. ("Banknorth").

D. On her Schedule D—"Creditors Holding Secured Claims"—the Debtor lists Banknorth as holding a claim secured by the Vehicle. That claim is stated in the gross amount of $15,761.00, of which $5,071.00 is scheduled as an "unsecured portion".

E. The Debtor's Plan proposes, inter alia, that (i) the Debtor will make monthly payments to the Chapter 13 Trustee in the amount $150.00 for a period of 36 months; (ii) creditors holding unsecured claims will be paid not less than 26% of the allowed amount of such claims; and (iii) with respect to the claim of Banknorth, the Debtor "is to surrender [the Vehicle] in full satisfaction of any claim by said creditor."

F. On January 23, 2008, Banknorth filed a Proof of Claim (Proof of Claim No. 1) (the "Proof"). In Box No. 1 of the Proof, Banknorth stated the gross amount of its claim as $15,833.02, as of the Petition Date. In Box No. 4 of the Proof, Banknorth noted that its claim was secured by a lien on the Vehicle, which it claimed had a value of $8,400.00. Nonetheless, Banknorth stated that the entire amount of its Claim was secured, and left empty the line reserved for "Amount Unsecured".

G. On January 29, 2008, Banknorth objected to confirmation of the Debtor's Plan on the basis of the proposed treatment of its claim (Doc. ID. No. 20).

H. Also on January 29, 2008, Banknorth filed a motion pursuant to Bankruptcy Code Section 362(d) seeking relief from the automatic stay of Section 362(a) (Doc. I.D. No. 18) (hereafter, the "Stay Relief Motion") to enable it to obtain possession and dispose of the Vehicle. Among the grounds stated by Banknorth for relief from stay was the Debtor's expressed intention to surrender the Vehicle. The Debtor did not oppose the Stay Relief Motion, and by order dated March 5, 2008 (Doc. I.D. No. 25) this Court granted relief from the automatic stay to Banknorth "for the purposes of allowing [it] ... to exercise its rights to satisfy its lien in accordance with the [Loan & Security Agreement]".

I. On April 10, 2008, this Court held a hearing on confirmation of the Debtor's Plan (the "Hearing") and agreed to take the matter "on the papers" after April 21, 2008.¹

IV. DISCUSSION

A. Background of the Question at Bar.

This contested matter presents the question of whether a Chapter 13 debtor may confirm a bankruptcy plan that proposes to surrender a motor vehicle that collateralizes a "purchase money" debt that arose within the 910 days preceding the filing of the debtor's bankruptcy petition (a "910-Vehicle Claim") in full satisfaction of the entire 910-Vehicle Claim, despite the fact that the amount of the 910-Vehicle Claim exceeds the value of the subject vehicle? In this case it is undisputed (i) that Banknorth's claim is a 910-Vehicle Claim; (ii) that Banknorth's 910-Vehicle Claim exceeds the value of the Vehicle; and (iii) that the Debtor has the right to treat Banknorth's allowed secured claim by surrendering the Vehicle through the Debtor's Plan. The contest in this matter, however, is over the narrow question of whether the Debtor's Plan must also provide treatment of any unsecured "deficiency" claim that Banknorth might possess by virtue of applicable non-bankruptcy law (hereafter, "State Law"),² or whether surrender alone suffices to satisfy Banknorth's entire claim under federal bankruptcy law.

Resolution of this question turns largely on one's interpretation of the effect of the so-called "hanging paragraph" of Code Section 1325(a) (hereafter, the "Hanging Paragraph")—designated by some legal authorities as Subsection 1325(a)(*)³— which was engrafted into the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). There appears to be general agreement among judicial authorities that the Hanging Paragraph constitutes a poor example of legislative draftsmanship, see, e.g., AmeriCredit Fin. Services, Inc. v. Long (In re Long), 519 F.3d 288, 292-93 (6th Cir.2008); In re Carver, 338 B.R. 521, 523 (Bankr.S.D.Ga.2006), and courts have reached differing conclusions concerning the effect of that provision on Chapter 13 plans that propose to surrender a vehicle that is the subject of a 910-Vehicle Claim (hereafter, a "910-Vehicle"). The early majority view among bankruptcy courts was that the Hanging Paragraph enabled confirmation of a Chapter 13 plan that included a full-satisfaction surrender of a 910-Vehicle, i.e. they held that an under-collateralized 910-Vehicle Claimant's entire claim could be fully satisfied by vehicle surrender under Code Section 1325(a)(5)(C), and thus the creditor was not entitled to separate treatment of an unsecured "deficiency" claim that arguably might otherwise be available through the operation of Code Section 506 or State Law. See, e.g., In re Pinti, 363 B.R. 369 (Bankr.S.D.N.Y.2007); In re Moon, 359 B.R. 329, 333 (Bankr.N.D.Ala.2007); In re Ezell, 338 B.R. 330 (Bankr.E.D.Tenn.2006) (collectively, the "Full Satisfaction Courts"). Conversely, a growing number of courts, including nearly all of the Circuit Courts of Appeal yet to address the issue, have held that an under collateralized 910-Vehicle Claimant is entitled to plan treatment of an unsecured "deficiency" claim determined under State Law, despite the debtor's surrender of a 910-Vehicle. See, e.g., Tidewater Fin. Co. v. Kenney (In re Kenney), 531 F.3d 312 (4th Cir.2008); In re Ballard, 526 F.3d 634 (10th Cir.2008); Capital One Auto Fin. v. Osborn (In re Osborn), 515 F.3d 817 (8th Cir.2008); In re Wright, 492 F.3d 829 (7th Cir.2007); cf. Long, supra (holding that upon surrender, a 910-Vehicle Claimant is entitled to treatment of an unsecured deficiency claim determined under bankruptcy law, rather than State Law) (collectively, the "Deficiency Courts").

This Court, having fully considered the opinions of both the Full Satisfaction and Deficiency Courts, and having undertaken an independent analysis of the import of the Hanging Paragraph, determines, inter alia, that a Full Satisfaction construction of Section 1325(a)(5) and (a)(*), although not without difficulty, is more consistent with constitutional tenets of federal legislative jurisdiction and the overall structure and purposes of the Nation's bankruptcy system; whereas, the Deficiency Courts' approach fails to give proper regard to the primacy of federal law and the plenary nature of federal bankruptcy law over the characterization of claims for the purposes of Chapter 13 bankruptcy cases.

B. General Claims Jurisprudence under the Bankruptcy Code.

In order for this Court's opinion to be fully appreciated, it must be understood in the larger context of the federal bankruptcy law's general design for the allowance and characterization of secured and unsecured claims in bankruptcy cases, with particular emphasis upon the proper relationship between bankruptcy law and State Law in those determinations.

1. The authority of Congress under the Bankruptcy Clause.

The Bankruptcy Clause of the United States Constitution provides Congress with authority to establish "uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const., art. I, § 8, cl. 4 (emphasis supplied). From the earliest constructions of the Bankruptcy Clause, the power of Congress thereunder was seen as "unlimited and supreme". Sturges v. Crowninshield, 4 Wheat. 122, 17 U.S. 122, 192, 4 L.Ed. 529 (1819). While "unlimited" may overstate the force of the Bankruptcy Clause in relation to other constitutional constraints, see, e.g., U.S. Const., Art....