Shaw v. Aurgroup Financial Credit Union

• Citation: 552 F.3d 447
• Decision Date: 09 January 2009
• Docket Number: No. 08-3061.,08-3061.
• Parties: Fannie L. SHAW, Petitioner-Appellant, v. AURGROUP FINANCIAL CREDIT UNION and Margaret A. Burks, Respondents-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

552 F.3d 447

Fannie L. SHAW, Petitioner-Appellant, v. AURGROUP FINANCIAL CREDIT UNION and Margaret A. Burks, Respondents-Appellees.

No. 08-3061.

United States Court of Appeals, Sixth Circuit.

Submitted: October 23, 2008.

Decided and Filed: January 9, 2009.

ON BRIEF:

David A. Kruer, Dearfield, Kruer & Company, Cincinnati, Ohio, for Appellant. Stephen Duane Miles, Dayton, Ohio, for Appellees.

Before BOGGS, Chief Judge; MERRITT and GRIFFIN, Circuit Judges.

GRIFFIN, J., delivered the opinion of the court, in which BOGGS, C.J., joined. MERRITT, J. (p. 462), delivered a separate opinion concurring in the result.

OPINION

GRIFFIN, Circuit Judge.

Debtor-petitioner Fannie L. Shaw appeals the district court's order affirming the bankruptcy court's decision denying confirmation of her Chapter 13 plan. Shaw concedes that her proposed plan did not satisfy the provisions of 11 U.S.C. § 1325(a) but contends that the bankruptcy court could, nevertheless, have exercised discretion and confirmed the plan if it was fair and equitable. The bankruptcy and district courts held that a plan which does not satisfy the provisions in § 1325(a) cannot be confirmed. The sole question presented on appeal is whether the provisions in § 1325(a) are mandatory or discretionary. Because we hold that the provisions in § 1325(a) are mandatory and that a court has no discretion to confirm a plan which does not comply with its provisions, we affirm.

I.

The facts are not disputed. On March 21, 2005, debtor Fannie Shaw purchased a 2005 Dodge Caravan for personal use. Appellee Aurgroup Financial Credit Union financed the purchase with a loan at an annual percentage rate of 12.13% secured by the automobile. On July 21, 2006, or within 910 days of the purchase, Shaw filed a Chapter 13 petition. At that time, Shaw still owed Aurgroup $23,606.20 on the loan, and Aurgroup filed a proof of claim in that amount. In her reorganization plan, Shaw proposed to retain ownership of the vehicle and pay $14,890.00 (the value of the vehicle at that time) at the rate of 7.5%.

Aurgroup and the Trustee, appellee Margaret Burks, objected to confirmation of the plan on the basis that it did not comply with 11 U.S.C. § 1325(a)(5) and the "hanging paragraph" following 11 U.S.C. § 1325(a)(9). Aurgroup contended that it was entitled to be paid in full at the contract rate of interest.

Following a hearing, the Bankruptcy Court for the Southern District of Ohio denied confirmation of the plan. It held that, although "imprecise," § 1325(a)'s provisions are mandatory, not discretionary, meaning that a plan cannot be confirmed unless it satisfies the provisions of § 1325(a). Because Shaw conceded that her plan did not satisfy § 1325(a)(5) and the "hanging paragraph" following § 1325(a)(9), the court concluded that the plan could not be confirmed as a matter of law.

On appeal, the district court affirmed. Relying on decisions¹ from her colleagues, Chief Judge Sandra Beckwith ruled that "§ 1325(a) sets forth mandatory requirements for plan confirmation and that the bankruptcy court does not have discretion to confirm a plan that does not comply with this section."

Shaw timely appeals.

II.

While Shaw presents five separate issues on appeal, they are all variations of a single question: Are the provisions in 11 U.S.C. § 1325(a) mandatory for confirmation of a Chapter 13 bankruptcy plan? Because the issue is purely a question of law, we review the bankruptcy court's decision de novo. In re Hurtado, 342 F.3d 528, 531 (6th Cir.2003).

Chapter 13 of the Bankruptcy Code permits consumers and businesses with relatively small debts to reorganize their debts. Johnson v. Home State Bank, 501 U.S. 78, 82, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). An eligible debtor may submit a plan to the bankruptcy court that "modifies the rights of holders of secured claims or unsecured claims and that provides for the payment of all or any part of any allowed claim." Id. (citing 11 U.S.C. § 109(e); quoting 11 U.S.C. § 1322(b)(2) & (b)(6)). The bankruptcy court is required to confirm the plan so long as it satisfies the provisions of 11 U.S.C. § 1325(a).² See § 1325(a) ("[T]he court shall confirm a plan if —") (emphasis added).

A debtor's proposed plan must accommodate each allowed, secured creditor in one of three ways under § 1325(a)(5): (1) by obtaining the creditor's acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by permitting the creditor to both retain the lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total "value, as of the effective date of the plan, ... is not less than the allowed amount of such claim." § 1325(a)(5); Till v. SCS Credit Corp., 541 U.S. 465, 468, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004). Shaw did not satisfy the first option because Aurgroup objected to the plan, nor did she satisfy the second alternative because she retained the Dodge Caravan. Thus, Shaw's only avenue to comply with § 1325(a) is the third option.

The third option, § 1325(a)(5)(B), is known as the "cramdown option" because it may be enforced over a claim holder's objection.³ Id. at 468-69, 124 S.Ct. 1951. Prior to Congress's enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), a Chapter 13 debtor who still owed money on an automobile could, over the creditor's objection, keep the vehicle and "bifurcate" (meaning divide or split) the creditor's fully secured claim into a secured portion and an unsecured portion under § 506(a)(1). See 11 U.S.C. § 506(a)(1)⁴; Nuvell Financial Services Corp. v. Dean, 537 F.3d 1315, 1318 (11th Cir.2008). The debt was secured up to the present value of the vehicle, while the remainder of the debt was unsecured, with payments to be distributed, pro rata, among the debtor's unsecured creditors.⁵ Id. "[A]s long as the debtor paid the present value of the [vehicle] (the allowed secured claim) over the term of the plan, which could be up to five years[,]" the debtor could retain the vehicle. In re Dale, No. H-07-3176, 2008 WL 4287058, *2, 2008 U.S. Dist. LEXIS 88959, at *11-*12 (S.D.Tex. Aug.14, 2008). "At the conclusion of the plan, ... any unpaid portion of the debt would be extinguished pursuant to the provisions of Chapter 13." Id. at 2008 WL 4287058, *2, 2008 U.S. Dist. LEXIS 88959, *12. Ultimately, § 506(a)(1) permitted a debtor to transform an under-secured creditor into an unsecured creditor for purposes of pursuing any deficiency. Id. at 2008 WL 4287058, *2, 2008 U.S. Dist. LEXIS 88959, *10.

However, "[i]t seems to be undisputed that Congress viewed this use of `cramdown' as abusive and unfair to car lenders and other lienholders," so when it enacted BAPCPA in 2005, it added an unnumbered paragraph — commonly referred to as the "hanging paragraph" — to the end of § 1325(a).⁶ Dean, 537 F.3d at 1318.

As it relates to this case, the "hanging paragraph" applies when: (1) the creditor holds a purchase money security interest securing the debt that is the subject of the claim; (2) the debt was incurred within the 910-day period preceding the date of the filing of the petition; and (3) the collateral for that debt consists of a motor vehicle acquired for the personal use of the debtor.⁷ Here, the parties do not dispute that all of the requirements of a 910-claim are satisfied — Aurgroup holds a purchase money security interest securing the debt that is the subject of its claim; Shaw bought the Dodge Caravan within 910 days of the filing date; and the collateral for that debt — the Dodge Caravan — is a motor vehicle acquired for personal use.

While the impact of the hanging paragraph on 910-claims has resulted in some debate, "virtually all reported decisions have held [that] the hanging paragraph means only that 910-claims cannot be bifurcated into secured and unsecured portions under section 506 and that such claims must be treated as fully secured." Dean, 537 F.3d at 1319. Under this construction of the hanging paragraph, which Shaw, Aurgroup, the Trustee, and the bankruptcy and district courts below have adopted, Shaw would not be permitted to bifurcate the 910-claim as proposed in her plan.

Shaw attempts, however, to bypass that obstacle by urging that § 1325(a) in its entirety, including the hanging paragraph, are discretionary only and that the bankruptcy court could have confirmed her plan if it determined that the plan was fair and equitable. Aurgroup, the Trustee, and the bankruptcy and district courts, however, all construe the provisions in § 1325(a) as mandatory, meaning that a bankruptcy court cannot confirm a plan that does not satisfy those criteria.

III.

Shaw advances several theories to support her contention that the bankruptcy court could have, in its discretion, confirmed her proposed plan, even though she concedes that the plan did not comply with § 1325(a). First, she emphasizes the plain language of § 1325(a). She contends that the language "the court shall confirm a plan if — " in § 1325(a) prescribes the circumstances under which the bankruptcy court must confirm a proposed plan of reorganization. In her view, § 1325(a) guarantees the debtor that her plan will be confirmed by commanding the bankruptcy court to confirm it if the plan complies with § 1325(a). In this way, § 1325(a) allegedly functions as a "safe harbor" for the debtor by preventing the bankruptcy court from improperly denying confirmation of a plan that satisfies its statutory criteria.

Shaw observes that § 1325(a) is silent, however, about whether the bankruptcy court may confirm plans that do not meet its standards. She emphasizes that the statute's plain language does not prevent a bankruptcy court from confirming plans, such as hers, that are fair and equitable. She also reasons that because § 1325(a) does not contain the words "only if" that are found in its Chapter 11 counterpart, 11 U.S.C. § 1129(a),⁸ "Congress sought to give greater...