In re Turkowitch, 06-22507-svk.

• Decision Date: 16 November 2006
• Docket Number: No. 06-22507-svk.,No. 06-24599-svk.,06-22507-svk.,06-24599-svk.
• Citation: 355 B.R. 120
• Parties: In re Joseph Michael TURKOWITCH and Carol Jean Turkowitch, Debtors. In re Steven Dean Austin, Sr. and Shannon Lee Austin, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

355 B.R. 120

In re Joseph Michael TURKOWITCH and Carol Jean Turkowitch, Debtors In re Steven Dean Austin, Sr. and Shannon Lee Austin, Debtors.

No. 06-22507-svk.

No. 06-24599-svk.

United States Bankruptcy Court, E.D. Wisconsin.

November 16, 2006.

Kristie A. Shepherd, The Law Offices of Peter Francis Geraci, Wauwatosa, WI, for Debtors.

James R. Stanek, Law Offices of Peter Francis Geraci, Wauwatosa, WI, for Debtors.

Memorandum Decision on Objections to Confirmation of the Debtors' Chapter 13 Plans

SUSAN V. KELLEY, Bankruptcy Judge.

The issue in these chapter 13 cases is whether the surrender of a car to a secured creditor satisfies the creditor's claim in full, precluding the creditor from asserting a deficiency claim. The controversy arises under an unnumbered paragraph in 11 U.S.C. § 1325(a) enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The so-called "hanging paragraph" has generated significant litigation and a number of judicial decisions, including one from the United States District Court for the Western District of Wisconsin, adopting the minority view on this issue. While the law is unsettled, the facts are not in dispute.

Joseph Turkowitch purchased a 2004 Ford Expedition on September 27, 2004, for a purchase price of $49,859.62. The sales contract provided that Turkowitch would pay the amount financed-$38,-256.48-to Ford Motor Credit Company ("Ford") in monthly installments of $531.34 over a period of 72 months. Turkowitch made sixteen of these monthly payments before filing bankruptcy on May 12, 2006. On the date of the chapter 13 petition, Turkowitch owed $29,785.04 to Ford according to the terms of the sales contract. The original chapter 13 plan provided that the Turkowitches would retain the vehicle and make monthly payments to Ford, but when the Turkowitches were unable to make the plan payments — the payment to Ford alone was $625 per month — they filed a modified plan and proposed to surrender the vehicle to Ford, in complete satisfaction of Ford's claim. Ford was paid all of the pre-confirmation adequate protection payments, and the Turkowitches surrendered the vehicle to Ford in August 2006.

Steven and Shannon Austin purchased a 2002 Nissan Pathfinder and financed it with Milwaukee Metropolitan Credit Union (MMCU) on May 3, 2005 under an installment sales contract. The Austins filed their chapter 13 petition on August 21, 2006, and filed their plan the same day. In their schedules, the Austins listed the Pathfinder as secured by a purchase money security interest in the amount of $20,171.00, of which $5,171.00 was unsecured. However, the Austins indicated in their plan that they would surrender the Pathfinder to Centrix Financial (the agent of MMCU) in full satisfaction of the secured claim. MMCU filed its secured proof of claim on September 8, 2006, in the amount of $20,875.23 with interest at 17.90%. On September 13, 2006, MMCU filed an Objection to Confirmation of the Austins' plan, stating that MMCU should be able to file an unsecured deficiency claim after the car was surrendered and sold. At the hearing on the Objection, the Court determined that the issue presented was the same issue as was already under advisement in the Turkowitch matter — namely, whether a debtor is allowed to surrender a vehicle in full satisfaction of a secured claim under 11 U.S.C. § 1325(a). Because the issues presented in these two cases are identical, and because the Debtors are represented by the same law firm, the Court consolidated the cases for purposes of deciding this issue.

Section 1325(a) of the Bankruptcy Code provides that the bankruptcy court shall confirm a chapter 13 plan if certain requirements are met. In particular, § 1325(a)(5) concerns the required treatment of secured claims under the plan. This provision states, in pertinent part:

(a) Except as provided in subsection (b), the court shall confirm a plan if —

. . .

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

(A) the holder of such claim has accepted 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) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent

recognized by applicable nonbankruptcy law;

(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; and

(iii) if —

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or

(C) the debtor surrenders the property securing such claim to such holder.

With BAPCPA, Congress further modified § 1325(a) by adding the infamous "hanging paragraph" to the end of the section. This paragraph 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 during the 1-year period preceding that filing.

The exemption of § 506 is significant because § 506(a)(1) provides for the bifurcation of a secured claim into secured and unsecured portions, based on the value of the collateral: "An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... 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."

None of the parties dispute that Ford's and MMCU's claims are claims described in the hanging paragraph ("910-claims"). They do, however, disagree as to the Bankruptcy Code's treatment of these claims. The Turkowitches and the Austins (hereinafter, the "Debtors") read § 1325(a) as allowing them to surrender the collateral in full satisfaction of the 910-claims. Ford and MMCU (hereinafter, the "Creditors") argue two alternative theories: first, the hanging paragraph requires payment of the entire 910-claim in full, regardless of whether the debt is paid through the plan or the collateral is surrendered post-petition; and second, even if the creditor is not entitled to a "secured deficiency claim," state law would allow the claim holder to seek an unsecured deficiency claim upon surrender (and sale) of the collateral.

The courts that have addressed this issue have settled into two camps. The majority reads the hanging paragraph as preventing the bifurcation of secured claims upon surrender, which effectively precludes 910-creditors from asserting deficiency claims. The minority reaches the opposite result: surrender of the collateral does not fully satisfy a 910-claim, and the hanging paragraph does not prevent these creditors from pursuing claims for a deficiency.

The question boils down to: If § 506 does not apply, will the creditor have a claim after collateral is surrendered. A review of the pre-BAPCPA treatment of secured claims clarifies the answer.

Prior to BAPCPA, § 1325(a)(5) gave the debtor three options for dealing with secured debt. Under § 1325(a)(5)(A), the debtor and secured creditor could agree upon the treatment of the claim. This provision has not changed under BAPCPA. A creditor holding a 910-claim and the debtor can still negotiate acceptable payment terms.

Second, pursuant to § 1325(a)(5)(B), the debtor could propose to retain the collateral and pay the amount of the allowed secured claim in installments. This option, was known as the "cram down," is explained by the Supreme Court in Associates Commercial Corp. v. Rash:

Under the cram down option, the debtor is permitted to keep the property over the objection of the creditor; the creditor retains the lien securing the claim, see § 1325(a)(5)(B)(I), and the debtor is required to provide the creditor with payments, over the life of the plan, that will total the present value of the allowed secured claim, i.e., the present value of the collateral, see § 1325(a)(5)(B)(ii). The value of the allowed secured claim is governed by § 506(a) of the Code.

520 U.S. 953, 957, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997) (emphasis supplied). The definition of allowed secured claim in § 506 is tied to the value of the collateral. If the collateral is worth less than the debt, under § 506(a), the creditor's allowed secured claim is limited to that value, and the remaining balance on the debt will be an unsecured claim. As a result, pre-BAPCPA, application of the definition of "allowed secured claim" in § 506(a) to the cram down provisions of § 1325(a)(5)(B) (relative to collateral worth less than the amount of the debt) resulted in the bifurcation of the claim into a secured and unsecured portion. "The `allowed secured claim' of which § 1325(a)(5) speaks is derived through valuation and `bifurcation' in accordance with § 506(a)." As the Supreme Court explained, "Section 506 ... governs the definition and treatment of secured claims, ... `[and] provides that a claim is secured only to the extent of the value of the...