In re Robert Harris LONG and Ginger Denise Long, Debtors.
AmeriCredit Financial Services, Inc., Creditor-Appellant,
v.
Robert Harris Long and Ginger Denise Long, Debtors-Appellees.
United States Court of Appeals, Sixth Circuit.
*289 ARGUED: Stephen P. Hale, Hale, Dewey & Knight, Memphis, Tennessee, for Appellant. John P. Newton, Jr., Mayer & Newton, Knoxville, Tennessee, for Appellees. ON BRIEF: Stephen P. Hale, Hale, Dewey & Knight, Memphis, Tennessee, Holly N. Knight, Hale, Dewey & Knight, Nashville, Tennessee, for Appellant. John P. Newton, Jr., Richard M. Mayer, Brent S. Snyder, Mayer & Newton, Knoxville, Tennessee, for Appellees. Tara A. Twomey, San Jose, California, Richardo I. Kilpatrick, Kilpatrick & Associates, Auburn Hills, Michigan, Joseph R. Prochaska, Williams & Prochaska, Nashville, Tennessee, for Amici Curiae.
*290 Before: MERRITT and CLAY, Circuit Judges; COX, District Judge.[*]
MERRITT, J., delivered the opinion of the court. COX, D.J. (pp. 299-301), delivered a separate opinion concurring in the judgment. CLAY, J. (p. 301), delivered a separate dissenting opinion.
OPINION
MERRITT, Circuit Judge.
This consumer bankruptcy, Chapter 13 case arises because the debtor bought a car under a typical financing arrangement in which the lender retained a lien or mortgage on the car as security for payment of the outstanding loan that enabled the debtor to buy the car. The debtor proposed to surrender the car to the finance company as part of the Chapter 13 plan. The value of the car was less than the outstanding debt. Due to a glitch or gap in a recent revision of the Bankruptcy Code intended to benefit creditors, the law is now silent on what happens to the remaining indebtedness in the surrender-of-the-car situation. The bankruptcy court below held that the congressional mistake in drafting the revision means that the remaining indebtedness is completely wiped out. We believе the gap should be filled and the Congressional mistake corrected. The law previously governing this situation should be restored until Congress can correct its mistake and fill in the gap.
I. The Issue to be Decided
The gap in the law is caused by a newly-formed inconsistency between §§ 1325(a) and 506 of the Bankruptcy Code. Congress simply overlooked providing for what happens in Chapter 13, consumer bankruptcy cases when the debtor surrenders the car to the lender instead of retaining the car and paying off the loan.
In the twelve-month period ending September 2007, there were 310,802 Chapter 13 bankruptcies. In many of these, there were secured loans for automobiles or trucks and other personal property for the bankruptcy courts and Chapter 13 trusteеs to deal with. Some courts have addressed the gap in the law by adopting a remedy based on state law remedies of foreclosure, repossession, sale at auction and adjudication to determine the deficiency that arises from the fact that the collateral is usually worth less than the remaining debt. These several state law contractual, foreclosure and judicial remedies vary widely from state to state.
By a mistake in drafting, the 2005 revision of the Bankruptcy Code does not provide for the situation in which a Chapter 13 debtor proposes to surrender the collateral to the creditor holding the lien, or purchase-money mortgage or other security interest. As Chief Judge Easterbrook recently wrote for the Seventh Circuit in an Illinois Chapter 13 case similar to the one before us:
Bankruptcy judges across the nation have divided over the effect of the unnumbered hanging paragraph that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added to § 1325(a) of the Bankruptcy Code, 11 U.S.C. § 1325(a). Section 1325, part of Chapter 13, specifies the circumstances under which a consumer's plan of repayment can be confirmed. The hanging paragraph says that, for the purpose of *291 a Chapter 13 plan, § 506 of the code, 11 U.S.C. § 506, does not apply to certain secured loans.
In re Wright,
In the absence of any clear bankruptcy law covering how to handle the surrender of cars and other collateral, we agrеe with the Seventh Circuit that the bankruptcy courts should not simply allow the debtor to surrender the car and then wipe out the deficiency, as the bankruptcy court in the instant case ruled. Wiping out the deficiency altogether undermines reasonable obligations created by the contract between the parties. These contractual obligations are referred to in our Constitution, see U.S. CONST. art. I, § 10, cl. 1, and normally should be enforced as a part of the Rule of Law based on concepts of freedom of contract and private property. But we do question the wisdom of the Seventh Circuit and our concurring colleague that the resulting deficiency judgment in bankruptcy should depend entirely on the vagaries of state laws as to foreclosure, repossession, sale and judicial remedy. By the adoption of § 506 and § 1325, Congress has demonstrated an intent to federalize and make uniform the treatment of purchase-money mortgages in bankruptcy. A uniform national rule should be adopted and substituted for the widely varying procedural and substantive foreclosure, repossession and deficiency judgment rules provided by the 50 states.
II. Analysis of Sections 506(a) and 1325(a) of the 2005 Revision of the Bankruptcy Code
Section 506(a)(1) and (2), as amended, which defines for bankruptcy the nature of the secured creditor's claim, reads in relevant part:
(a)(1) An allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the valuе 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. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property . . .
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or housеhold purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.
11 U.S.C. § 506 (2007). After establishing the "allowed secured claim" in § 506(a), section 1325(a) then provides for one of three treatments "with respect to each allowed secured claim provided for by the plan," as set out below.[1] First, the holder *292 of the claim can accept the debtor's proposed plan under § 1325(a)(5)(A). If the creditor does not accept the plan, the debtor can either retain the collateral subject to the requirements in § 1325(a)(5)(B), or surrender the collateral pursuant to § 1325(a)(5)(C). Prior to the 2005 revisiоn, 11 U.S.C. §§ 506(a) and 1322(b)(2)[2] operated to enable Chapter 13 debtors to bifurcate claims into secured and unsecured portions.
What has caused the confusion and incoherence in the law is known as the unnumbered "hanging paragraph" or "anti-cramdown paragraph" that Congress inserted immediately following section 1325(a):
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) acquirеd 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.
Courts use different terms to talk about the hanging paragraph because the provision does not have an alphanumeric designation. See In re Carver,
The reader immediately notices two problems. First, the provision "has no alphanumeric designation and merely dangles at the end of § 1325(a). There is no way to cite to this provision other than its proximity to other citable provisions." Dianne C. Kerns, Cram-a-lot: The Quest Continues, 24-Nov. Am. Bankr.Inst. J. 10, 10 (2005). In addition, the provision is "missing an operable word. The first sentence refers to `the 910-day [pеriod] preceding the date of *293 the filing of the petition. . . .'" Id. Without the addition of "period," the provision makes little sense and could be read to apply only to debts of the type described that were incurred exactly 910 days no more, no less prior to the petition date. These two problems are mere shadows of the larger interpretation difficulties this provision presents.
(internal citation omitted). Not only must words be added to make any sense of the paragraph, but the literal meaning of the paragraph must be altered to deal with debtors who surrender the collateral instead of retaining it. (Our concurring colleague seems to be the only observer who finds no gap, mistake or incongruity in connection with the surrender of collateral under sections 506(a) and 1525.)
The bankruptcy court found and neither party disputes that all of the requirements set forth in the hanging paragraph are met in this case. Specifically, (1) the debtors purchased a car within the 910-day period set forth in the statute, (2) AmeriCredit holds a purchase money security interest in the car, and (3) the car was acquired for the debtors' personal use. Creditors falling under this paragraph are commonly referred to as "910 creditors."
1. The hanging paragraph does not make § 506 entirely inapplicable to secured claims.When the hanging paragraph applies, it purports to exempt all 910 claims from treatment under 11 U.S.C. § 506 which is titled "Determination of secured status." In addition to providing for the bifurcation of claims, section 506 is used first to determine when allowed claims become "secured" for purposes of the Bankruptcy Code. It may be argued that literally, without section 506, there cannot be an "allowed secured claim" at all under § 1325(a)(5). In his treatise, Judge Lundin explains that "[a]n allowed secured claim to which § 506 does not apply is an oxymoron" because "a lienholder must pass through § 506 to have an allowed secured claim but then § 506 `shall not apply' if the debt meets the new 910-day [rule]." KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY, 3D ED. 446-2, 3 (2000 & Supp. 2007-1). We agree with Judge Lundin and with those courts that have found that this literal interpretation makes no sense and that Congress did not intend for 910 claims to be a unique, previously unheard-of, class of claims not governed by section 1325(a)(5). See, e.g., In re DeSardi,
2. The purpose of the hanging paragraph is to change the law relating to retained collateral. The hanging paragraph is often referred to as the "anti-cramdown" or "anti-bifurcation" paragraph "because its most obvious function is to block bifurcation of a 910 Creditor's lien into secured and unsecured portions so that a debtor who wishes to retain a 910 Vehicle under Section 1325(a)(5)(B) must pay the full amount owing to the secured creditor without regard to the present value of the collateral." In re Pinti,
Prior to BAPCPA, cramdown of secured claims at confirmation in Chapter 13 cases was uniform and well understood. Oversimplified, under § 506(a) an allowed claim was a secured claim to the extent of the value of the collateral. Undersecured claims were split into secured and unsecured components based on the value of the collateral. With or without consent of the lienholder, a Chapter 13 debtor could confirm a plan that proposed to pay the allowed secured claim in full with present value interest and to treat the balance of the debt as an unsecured claim.
KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY, 3D ED. 445-1 (2000 & Supp.2007-1). Cramdown occurred exclusively under § 1325(a)(5)(B) when debtors elected to retain the collateral. In contrast, when debtors chose to surrender the collateral under § 1325(a)(5)(C), the present value of the collateral (the foreclosure value) was subtracted from the debt and the remaining debt was an allowed unsecured claim within the debtor's Chapter 13 plan. The surrender of the collateral satisfied the allowed secured claim in full leaving the undersecured creditor with a deficiency that could only be asserted as a general unsecured claim. The hanging paragraph eliminates the cramdown occurring under § 1325(a)(5)(B) by eliminating bifurcation under § 506. Without § 506, creditors falling within the scope of the hanging paragraph are fully secured so that when a debtor elects to retain the collateral, the debtor must propose a plan that will pay the full amount of the claim.
Although sparse, the legislative history supports the conclusion that the paragraph was оnly intended to prohibit debtors from cramming down debt when they elect to retain collateral under § 1325(a)(5)(B). See H.R. REP. NO. 109-31, pt. 1, at 17 and 71-72 (2005), reprinted in U.S.C.C.A.N. 88, 103, 140. Based upon the legislative history, there is little doubt that the "hanging-sentence architects intended only good things for car lenders and other lienholders." KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY, 3D ED. 451.5-1 (2000 & Supp. 2007-1); see, e.g., In re Duke,
3. Literal Application of the hanging paragraph to surrendered collateral leaves a gap in contractual remedies. The current confusion over the effect of the hanging paragraph is created because, by its terms, the hanging paragraph applies to the several alternatives that arise under § 1325(a)(5) "only one of which has come to be known as `cramdown.'" KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY, 3D ED. 451.5-1 (2000 & Supp.2007-1). One of those alternatives is the surrender of collateral pursuant to § 1325(a)(5)(C). Before *295 the amendment, courts interpreted section 1325(a)(5)(C) to permit a "Chapter 13 debtor to satisfy an `allowed secured claim' by surrendering the property securing the claim. After disposition of the surrendered collateral, an undersecured creditor may only assert the deficiency as a general unsecurеd claim." In re Eubanks,
The numerous courts that have addressed this issue have reached widely conflicting conclusions. The majority of courts conclude that debtors can surrender collateral in full satisfaction of the debt without any further deficiency claim. The first decision on point and the leading case for the majority is In re Ezell in which Judge Stair concluded:
[i]f the property is to be retained pursuant to Revised 1325(a)(5)(B), the debtor must treat the entire claim as secured . . . [and] must propose a plan that will pay the full amount of the claim as secured over the life of the plan. It only stаnds to reason that the same analysis is true when applied to surrender under Revised § 1325(a)(5)(C) the creditor is fully secured, and surrender therefore satisfies the creditor's allowed secured claim in full.
*296 The United States Supreme Court in Associates Commercial Corp. v. Rash,
As we comprehend § 506(a), the "proposed disposition or use" of the collateral is of paramount importance to the valuation question. . . . [T]he debtor has two options for handling allowed secured claims: surrender the collateral to the creditor . . . or, under the cram down option, keep the collateral over the creditor's objection and provide the creditor . . . with the equivalent of the present value of the collateral. . . . The "disposition or use" of the collateral thus turns on the alternative the debtor chooses in one case the collateral will be surrendered to the creditor, and in the other, the collateral will be retained and used by the debtor.
Some courts are inclined to rely on non-bankruptcy law to create the deficiency. As stated above, the Seventh Circuit concluded that state law, and the parties' underlying contract, creates and defines the deficiency judgment upon surrender of the collateral. Specifically, the Court found that "by knocking out § 506, the hanging paragraph leaves thе parties to their contractual entitlements. . . ." In re White,
a mere browse through the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy code, 11 U.S.C. § 101 et seq., demonstrates Congress's intent to create a whole system under federal control which is designed to bring together and adjust all of the rights and duties of creditors and embarrassed debtors alike. While it is true that bankruptcy law makes reference to state law at many points, the adjustment of rights and duties within the bankruptcy process itself is uniquely and exclusively federal. It is very unlikely that Congress intended to permit the superimposition *297 of state remedies on the many activities that might be undertaken in the management of the bankruptcy process.
Pertuso v. Ford Motor Credit Co.,
4. The hanging paragraph gap should be filled by prior law. The Supreme Court, addressing amendments to the Bankruptcy Code, has determined that "[w]hen Congress amends the bankruptcy laws, it does not write `on a clean slate,'" and, therefore, the "Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to еffect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history." Dewsnup v. Timm,
Because we are unable to find any legislative history that suggests that Congress intended to eliminate all deficiency claims upon surrender of the collateral and because we conclude that a literal interpretation of the statute would create an unintended and illogical result, we decline to adopt a literal interpretation of the statute. Clearly, this is not an issue free from doubt, but where a statute cannot literally be applied without undermining Congressional intent, equity requires that this Court interpret the language to produce results that conform with Congress' intent and the overriding purpоses of the Bankruptcy Code.
In determining how to fill the gap left by Congress after the 2005 amendments, we employ a well-established common law principle of interpretation known as "the equity of the statute." This method of interpretation of gaps, mistakes and ambiguities in statutes has guided common law judges at least since the interpretation of the statute De Deonis in the Fourteenth *298 Century. See THEODORE F.T. PLUCKNETT, A CONCISE HISTORY OF THE COMMON LAW 331-35 (1956); see also North Dakota v. Fredericks,
a thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers. This has been often asserted, and the reports are full of cases illustrating its application. This is not the substitution of the will of the judge for that of the legislator, for frequently words of general meaning are used in a statute, words broad enough to include an act in question, and yet a consideration of the whole legislation, or of the circumstances surrounding its enactment, or of the absurd results which follow from giving such broad meaning to the words, makes it unreasonable to believe that the legislator intended to include the particular act.
In the same opinion, the Court noted that when determining how to properly interpret the statute when the literal meaning creates an unintended result a guide to the meaning "is found in the evil which it is designed to remedy." Id. at 463,
For these reasons, we reverse and remand for further proceedings in accordance with this opinion.
*299 COX, District Judge, concurrence in judgment.
I write separately because while I concur in the result, that the bankruptcy court's ruling should be reversed and remanded, I do not concur in the reasoning.
I do not agree with the lead opinion's holding that the "literal interpretation of [11 U.S.C. § 1325 and 11 U.S.C. § 506] would create an unintended and illogical result." Further, I do not find a "gap" in the law that must be filled by the courts. Finally, I am not aware of any legislative history that unequivocally supports the construction of a judge-made national rule allowing defiсiency claims following surrender of collateral pursuant to 11 U.S.C. § 1325(a)(5)(C), as the lead opinion appears to hold.
The issue in this case is whether, in light of the "hanging paragraph," surrender of collateral in accordance with § 1325(a)(5)(C) is in full satisfaction of the debt, or if the creditor may pursue a claim for a deficiency. An analysis of the meaning of a statute begins with the language of the statute itself. In re Palmer,
Here, the so-called hanging paragraph of § 1325(a) is not ambiguous. Under its clear terms, for purposes of § 1325(a)(5), § 506 does not apply to claims falling within the definition set forth in the hanging paragraph, otherwise referred to as 910 claims. Section 1325(a)(5) provides that a plan can be confirmed if allowed secured claims are treated in one of three ways: (A) the holder of the allowed secured claim accepted the plan; (B) the debtor retains the collateral and pays the claim in full; or (C) the debtor surrenders the collateral. The hanging paragraph provides that:
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 preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle . . . 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.
11 U.S.C. § 1325(a). The function of the hanging paragraph is to prevent the bifurcation of 910 claims allowed under 11 U.S.C. § 506(a). Section 506(a)(1) provides:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estatе has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, *300 and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
Like the bankruptcy court and the dissent in this case, the majority оf courts deciding the issue of the effect of the hanging paragraph hold that there is no deficiency claim because § 506 does not apply to bifurcate the claim. See In re Ezell,
This argument fails because § 506 is not the source for a deficiency claim when collateral is surrendered. Section 506 is not applicable to surrender of collateral because once the collateral is surrendered, the estate no longer has an interest in the property. The property is returned to the creditor, who is free to foreclose upon the security interest and seek a deficiency pursuant to its contractual entitlements. This is the holding of In re Particka,
This is also consistent with the Supreme Court's holding in Butner v. United States,
The cases cited support the proposition that state law applies in the absence of a contrary federal bankruptcy statute and do not support the lead opinion's conclusion that whether a deficiency judgment is allowed should be determined by a "uniform national rule." A uniform national rule as urged by the lead opinion would allow a creditor to seek a deficiency following foreclosure without regard to whether the contract at issue was non-recourse under state law. There is no indication that this was the intent of Congress when it enacted the BAPCPA.
Surrender of collateral pursuant to § 1325(a)(5)(C) does not implicate § 506. Further, nothing in the Bankruptcy Code prohibits a deficiency claim under state law following surrender of collateral pursuant to § 1325(a)(5)(C). Accordingly, I would hold that a creditor has a right to an allowed unsecured deficiency claim under *301 § 502, to the extent the contractual entitlements and statе law allow a deficiency claim. See Particka,
CLAY, Circuit Judge, dissenting.
I respectfully dissent from the lead opinion because I believe it oversteps the bounds of judicial interpretation by essentially rewriting sections of the Bankruptcy Code. I agree with the court below that "a review of the legislative history for guidance does not provide any . . . evidence that the court's determination does not comport with Congressional intent when including the Anti-Cramdown Paragraph in Revised § 1325(a)." In re Ezell,
NOTES
Notes
[*] The Honorable Sean F. Cox, United States District Judge for the Eastern District of Michigan, sitting by designation.
[1] 11 U.S.C. § 1325(a)(5) provides:
(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 vаlue, 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. . . .
(emphasis added).
[2] (b) Subject to subsections (a) and (c) of this section, the plan may
. . .
(2) modify the rights of holders of secured claims, оther than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.
[3] Judge Arnold further explained the historic basis for this treatment of a gap in a statute as follows: "Sir Edward Coke put it this way:
`Equitie' is a construction made by the judges, that cases out of the letter of a statute, yet being within the same mischiefe, or cause of the making of the same, shall be within the same remedie that the statute provideth. . . .
Co.Litt., Lib. 1, C. 2, § 21, f. 24b. Or, as Dean Landis put it in a pioneering article, a statute can be a `nursing mother of the law,' Landis, Statutes and the Sources of Law, in Harvard Legal Essays Written in Honor of and Presented to Joseph Henry Beale and Samuel Williston 213, 214 (R. Pound ed.1934), reprinted in 2 Harv. J. on Legis. 7, 8 (1965). This principle enables `judges to distill from a statute its basic purpose,' and they can `then employ it to slough off the archaisms in their own legal structure.' Id. at 216 and 10." North Dakota v. Fredericks,