In re Williams, Case No. 06-32921-KRH (Bankr. E.D.Va. 7/19/2007), Case No. 06-32921-KRH.
| Decision Date | 19 July 2007 |
| Docket Number | Case No. 06-32921-KRH. |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | IN RE: RUSSELL J. WILLIAMS and JOANN M. WILLIAMS, Chapter 13, Debtors. |
This matter comes before the Court on the objection of Ford Motor Credit Company to the confirmation of the Debtors' Chapter 13 plan. For reasons outlined below, the objection will be overruled and the Debtors' Chapter 13 plan will be confirmed.
The Debtors purchased a 2002 Ford Mountaineer (the "Vehicle") from David Ford Lincoln Mercury. The installment contract of sale for the Vehicle was dated January 19, 2006, and was thereafter assigned to Ford Motor Credit Company ("Ford Motor Credit"). The parties do not dispute that Ford Motor Credit has a purchase money security interest in the Vehicle. The certificate of title for the Vehicle lists Ford Motor Credit as the first lienholder.
On October 20, 2006, the Debtors filed their Chapter 13 bankruptcy case in this Court. Ford Motor Credit filed a proof of claim in the case, asserting its security interest in the Vehicle and listing its claim at the time the Debtors filed their Chapter 13 case as $13,947.76. In their schedules and statement of affairs, the Debtors valued the Vehicle at $11,625.00.
The Debtors filed their first Chapter 13 plan on November 3, 2006, and Ford Motor Credit objected to confirmation because the plan did not propose to pay the entire amount of the claim secured by the Vehicle.1 Ford Motor Credit claimed that § 1325(a)(5) of the Bankruptcy Code2 required the Debtors to treat its claim as fully secured by the Vehicle. It further argued that it was impermissible to separate its claim into secured and unsecured portions. That objection was sustained. On January 8, 2007, the Debtors filed an amended Chapter 13 plan (the "Amended Plan").
The Amended Plan provides that the Vehicle is to be surrendered in full satisfaction of the claim of Ford Motor Credit. Ford Motor Credit has filed a timely objection to the confirmation of the Amended Plan, arguing that it is entitled to be deemed the holder of an unsecured deficiency claim for any amount of its claim that is not satisfied by the value of the surrendered Vehicle. Hearing on the objection was held on April 25, 2007, at which time the Court took the matter under advisement.
The Court has jurisdiction over the parties and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(K) and (L). Resolution of this matter requires the Court to address the interaction between (i) the confirmation requirements of § 1325(a)(5) of the Bankruptcy Code,3 (ii) the infamous "hanging paragraph" following § 1325(a), and (iii) § 506 of the Bankruptcy Code.4
Section 1325 of the Bankruptcy Code outlines the requirements for confirmation of a Chapter 13 plan. Subparagraph (a)(5), at issue here, prescribes the treatment for each "allowed secured claim provided for by the plan:"
(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 —
(aa) the payment of the underlying debt determined under nonbankruptcy law; or
(bb) discharge under section 1328; and
(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;
In a nutshell, § 1325(a)(5) provides that if a chapter 13 plan is to be confirmed, a debtor must either (i) comply with subparagraph (A) by obtaining the acceptance of the plan from each secured creditor, (ii) comply with subparagraph (C) by surrendering the secured creditor's collateral, or (iii) comply with the provisions of subparagraph (B), which comprise the bulk of § 1325(a)(5). In this case, the Debtors are proposing to surrender the collateral, thus complying with subparagraph (C).
Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005) ("BAPCPA"), the Debtors would have been required to determine the value of Ford Motor Credit's secured claim by applying the provisions of § 506 of the Bankruptcy Code. Section 506 governs to what extent an allowed claim is secured. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 238-39 (1989) (). Most relevant to this case, § 506 provides that an allowed claim 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." 11 U.S.C.A. § 506(a). Thus, a debtor would be able to bifurcate a creditor's claim into secured and unsecured portions, the amount of the secured portion being set as the value of the collateral and the amount of the unsecured portion being set as the amount by which the claim exceeds the value of the collateral. The unsecured portion of the claim would be paid pro-rata with the other general nonpriority unsecured creditors.
However, BAPCPA changed that practice with the addition of a section that has come to be known as the "hanging paragraph," so called because of its insertion into § 1325 immediately following subparagraph (a) but bearing no numbering of any type. The hanging paragraph provides that:
[f]or 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 hanging paragraph provides that if a creditor holds a purchase money security interest in a motor vehicle acquired for the debtor's personal use, and if the debt was incurred within the 910-day period prior to the bankruptcy filing,5 the bifurcation of the debt into its secured and unsecured components under § 506 is no longer permissible. What the hanging paragraph does not say is how such a secured claim should be treated if it is not to be bifurcated. Interpretation of this aspect of the hanging paragraph has given rise to a multitude of litigation. Some courts have held that the hanging paragraph prohibits the treatment of the secured creditor's claim as fully secured,6 while other courts have held that the hanging paragraph requires that secured claims be treated as fully secured.7 The majority position, and the position taken by all of the courts in this district that have had occasion to address the issue,8 is that the effect of the hanging paragraph is to require that a 910 claim be treated as fully secured.9
This Court is in agreement with the majority view that the effect of the hanging paragraph is to require treatment of a 910 claim as fully secured. Accepting this premise, as it has been decided in the Eastern District of Virginia, the Court must now address the issue of whether a surrender of the collateral securing the 910 creditor's fully secured claim satisfies the secured claim and thus deprives the 910 creditor of any unsecured deficiency claim.
This District has had prior occasion to address the issue of the application of the "hanging paragraph" to 910 surrender cases. In his consideration of the issue, Judge Adams introduced the controversy succinctly:
At first blush, it would seem simple to apply the language of the hanging paragraph and exclude the application of § 506 to all 910 claims regardless of how they were treated in the plan. That is, after all, what it says. However, application of the statute has not proven quite so simple and numerous courts have had to address the very question we are faced with here. . . . The answer is based on statutory interpretation, but as might be expected, not everyone is in agreement as to the outcome.
In re Kenney, No. 06-71975-A, 2007 WL 1412921, at *4 . In Kenney, the Court found that the minority position is that the 910 creditor is entitled to assert an unsecured deficiency claim10 and that the majority position is that surrender of the 910 collateral terminates the rights of the 910 creditor to assert an unsecured deficiency claim.11 Id. at *4-6. Kenney followed the majority and concluded that § 506 is not available to allow bifurcation of the 910 creditor's claim when the debtor surrenders the collateral through a Chapter 13 plan.
That same issue is presently before this Court — whether the hanging...
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