The Court of Appeals for the Second Circuit has joined three other Courts of Appeals in holding that a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), amending §1325(a) of the Bankruptcy Code, did not bar a secured creditor from asserting an unsecured deficiency claim after the debtors surrendered their vehicle to the creditor purportedly in full satisfaction of the secured debt. See AmeriCredit Financial Services, Inc. v. Tompkins, 604 F. 3d 753 (2d Cir. 2010). In so holding, the Second Circuit joins in similar rulings of the Fifth, Seventh and Eleventh Circuit Courts of Appeals and continues a trend away from contrary rulings of several bankruptcy courts issued shortly after BAPCPA became effective.
The debtors entered into a vehicle financing agreement granting a purchase money security interest in the vehicle financed to the predecessor-in-interest of AmeriCredit. Approximately 15 months later, the debtors defaulted on the loan and then filed a voluntary Chapter 13 petition three months after their default. They proposed a Chapter 13 plan, which provided that they would surrender their vehicle to AmeriCredit in full satisfaction of its debt. The debtors turned over the vehicle, AmeriCredit obtained relief from the automatic stay to foreclose on and liquidate the vehicle, and after liquidation, AmeriCredit had an approximate $15,000 unsecured deficiency balance outstanding under the loan.
AmeriCredit objected to the debtors’ plan on the grounds that it improperly failed to provide for payment of AmeriCredit’s unsecured deficiency claim. AmeriCredit also filed a general unsecured claim for the amount of the deficiency, and the debtors objected to AmeriCredit’s unsecured claim. The U.S. Bankruptcy Court for the Southern District of New York overruled AmeriCredit’s objection to the plan and disallowed its unsecured claim. AmeriCredit appealed, and the District Court certified the question for direct appeal to the Second Circuit, indicating the significance of the legal dispute and the need for a prompt and definitive determination on the question in that circuit.
The Problem of the Hanging Paragraph
BAPCPA was enacted in part to respond to perceived abuses of the Bankruptcy Code by individual debtors incurring substantial consumer debt and then filing bankruptcy to discharge that debt. Section 1325 of the Bankruptcy Code governs confirmation of plans in Chapter 13. As amended by BAPCPA, §1325(a)(5) provides that with respect to secured claims, the debtor may confirm a Chapter 13 plan where 1.) the secured creditor consents to its treatment under the plan, 2.) the debtor surrenders the collateral to the secured creditor or 3.) the debtor “crams down” the secured claim by retaining the collateral and paying the creditor the present value of the secured claim over the life of the plan, with any remaining balance of the claim in excess of the secured portion of the claim being treated as a general unsecured claim. Section 506(a) of the Bankruptcy Code bifurcates a secured creditor’s claim into a secured claim, determined based on the value of the collateral securing the debt, and an unsecured claim to the extent the debt exceeds the value of the collateral.
BAPCPA added an additional unnumbered provision in §1325(a) specifically to address motor vehicle financing and secured debt incurred within one year of the petition. The so-called “hanging paragraph” provides that for the purposes of §1325(a)(5) confirmation of Chapter 13 plans and the treatment of secured debt, the provisions of §506(a) “shall not apply” to 1.) a purchase money secured debt secured by a motor vehicle acquired for the personal use of the debtor where the debt is incurred within 910 days of the petition date or 2.) to other secured debt incurred during the one-year preceding the petition date.
The courts that have interpreted the “hanging paragraph” and its effect on a proposed cram down of the secured creditor’s debt under a Chapter 13 plan generally agree that the import of that paragraph, and its provisions making §506(a)’s claim bifurcation inapplicable under certain circumstances, is that a debtor that wants to retain a motor vehicle purchased within 910 days (two and a half years) of the petition date cannot cram down the debt secured by the so-called 910 vehicle. However, the issue before the Second Circuit in this case was the effect of the “hanging paragraph” on a debtor that surrenders the vehicle to the secured creditor.
The Second Circuit acknowledged that a number of bankruptcy courts interpreting the paragraph in decisions issued shortly after its enactment held that the hanging paragraph provisions making §506(a) “inapplicable” to a motor vehicle debt where the debtor surrenders the collateral meant that there was no provision for an unsecured deficiency claim and that the surrender of the collateral by the debtor under the plan satisfies the loan. The U.S. Bankruptcy Court for the Southern District of New York is one of the courts that so held. See In re Pinti, 363 B.R. 369 (Bankr. S.D.N.Y. 2007).
The Second Circuit reached a different conclusion. The Second Circuit noted that under long-standing precedent, in the absence of controlling Bankruptcy Code provisions, the determination of the rights and claims of creditors is based on applicable state or other non-bankruptcy law. The provision making §506(a) of the Bankruptcy Code inapplicable then requires the courts to look to applicable state law regarding the extent to which state law allows the creditor to assert a claim against the debtor for any remaining balance of the motor vehicle loan after liquidation of the collateral. Applicable non-bankruptcy law allowed the creditor in that case to assert an unsecured claim against the debtors for the deficiency balance, and the Second Circuit held nothing in the “hanging paragraph” or the other provisions of §1325(a)(5) would prevent the secured creditor from asserting that claim.
Further, the court noted that nothing in the language of §1325(a)(5) mandates that the secured creditor accept the surrender of the motor vehicle in full satisfaction of the debt. While the surrender of the vehicle is an option expressly provided under §1325, the language of the statute does not indicate that the exercise of that option by the debtor requires the secured creditor to forego assertion of an unsecured claim for the balance of its debt.
Implications of the Decision
Motor vehicle financers no doubt have much to cheer about in this decision. The decision should be influential in the treatment of non-vehicle secured loans in Chapter 13 where the secured loan is incurred within one year of the filing as a similar result should apply to those loans under the rationale of this decision. The holding will make it more difficult for debtors, in some instances, to confirm a Chapter 13 plan by increasing the amount of unsecured debt that must be addressed under their plan.
Lesley Anne Hawes, a partner in the Los Angeles office of McKenna Long & Aldridge, LLP, specializes in the representation of secured and unsecured creditors in bankruptcy proceedings and in the representation of federal equity receivers appointed in civil enforcement actions by federal agencies. Hawes is a regular contributor to the Monitor and other legal journals, and she has lectured for numerous organizations. She graduated Order of the Coif from University of Southern California law school and earned her undergraduate degree in political science magna cum laude from University of Southern California.
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