Another Take on Purchase Money Vehicle Loans

Earlier, we discussed here several recent decisions on BAPCPA amendments to 11 U.S.C. 1325(a) dealing with the treatment of purchase-money auto loans made within 910 days of bankruptcy. See Strip Tease? No More Stripping Down Many Auto Loans. In the Johnson case, 2006 WL 270231, a debtor had unsuccessfully argued that such loans must be treated under the new provision as special unsecured loans that must get paid the liquidation value of the vehicle collateral. That argument didn't fly in the Johnson case, but a variation on it has been adopted in In re Carver, __ B.R. __, 2006 WL 563321 (Bankr. S.D. Ga. 3/6/06).

As described in the prior post, the two earlier cases which have addressed the provision conclude that for loans made on vehicles acquired for personal use within 910 days of bankruptcy ("910-day claims"), such loans cannot be "stripped down" to the value of the collateral and treated as secured claims for the collateral value and unsecured loans for the balance. Rather, the debtor is required to pay the full value of the claim, with flexibility only to modify the term and interest rate under a Chapter 13 plan.

Carver, like the previous cases, notes many of the confusing and apparently sloppy drafting issues presented by 1325(a): it has no alphanumeric designation and "merely dangles at the end of s. 1325(a)," and it omits the word "period" when it refers to "the 910-day [period] preceding the date of the filing of the petition..." Unlike the other cases, though, Judge Walker in Carver finds that the provision of 1325(a)(*) (as I refer to the un-numbered addition) providing that "section 506 shall not apply" to 910-day claims means that they are not secured claims.

According to Carver, without application of s. 506(a), a claim "is merely an allowed claim; it cannot be a secured claim." As a result, 1325(a)(*) "must be read to provide that for purposes of 1325(a)(5), a 910 claim is not a secured claim and therefore not subject to the treatment provided in that paragraph." [1325(a)(5) specifies the treatment that must be afforded to secured claims under a Chapter 13 plan]. Judge Walker rejected the creditor's contention that a claim secured by collateral is "inherently a secured claim," finding such "conversational terminology" useless in the context of the Bankruptcy Code where the allocation of money depends on the classification of a claim according to "precise terminology." In reaching his conclusion, Judge Walker reviews several years' worth of the history of the amendment, including predecessor versions which would have given such claims fully secured status (by requiring that the collateral be valued as the balance due on the debt). Since such provisions ultimately were rejected, Judge Walker concludes that such treatment was not intended by the legislation as it was ultimately passed.

Of course, the question remains of how such claims are to be treated. Judge Walker notes that by creating a special provision solely for 910-day claims, "Congress has demonstrated an intent to treat them differently than other unsecured or secured claims, but it has not provided a basis for treating them preferentially." Since he finds no basis for treating such claims as secured claims, "The Court is left with a claim that is not to be treated as unsecured (pro rata distribution) and not to be treated as secured (paid in full with interest)." Carver attempts to resolve this conundrum by seeking "to craft a rule consistent with the Court's understanding of congressional intent on this issue."

Using Section 1111(b) as a guide, Judge Walker determines that the rule should be that in a Chapter 13 plan, "a 910 claim must receive the greater of (1) the full amount of the claim without interest; or (2) the amount the creditor would receive if the claim were bifurcated and crammed down (i.e., secured portion paid with interest and unsecured portion paid pro rata)." In the case before the court, the claim was for $15,000 and the collateral was valued by the debtor at $14,500, who proposed to pay the creditor its claim in full without interest (i.e., $15,000). Since the creditor would likely receive greater than $15,000 if its claim were bifurcated ($14,500 plus interest over the life of the plan would presumably exceed $15,000, without even considering any distribution on the $500 unsecured claim), the court denied confirmation of the debtor's plan.

The rule in Carver is an interesting one, but it's unclear where it comes from. It has no clear basis in any of the language of the Code, either that which existed prior to amendment or in the BAPCPA amendments itself. The confusion, it seems, is in presuming that 506(a) provides the sole source for defining what a secured claim is, rather than treating 506(a) as merely a means for bifurcating an under-secured claim into a secured and unsecured portion. This presumption seems inconsistent with the general principle, fairly consistently recognized and applied, that liens and other secured interests are determined according to non-bankruptcy law and generally pass through bankruptcy unaffected. See, e.g., Dewsnup v. Timm, 502 U.S. 410 (1992).

Meanwhile, a couple other principles identified in the last post have been re-confirmed by additional decisions which, unlike Carver, hold that a 910-day claim must be treated as a secured claim:

In In re Jackson, __ B.R. __, 2006 WL 563317 (Bankr. M.D. Ga. 3/6/06), the court, like in In re Horn, __ B.R. __, 2006 WL 416314 (Bankr. M.D. Ala. 2/23/06), confirmed that the 910-day provisions do not apply where the vehicle has not been purchased for the debtor's personal use. In Jackson, Judge Walker rejected the creditor's argument that a sales contract which stated that the vehicle was purchased for "personal, family or household use" precluded the debtor from contesting that the vehicle was "acquired for the personal use of the debtor" (the language used in 11 U.S.C. 1325(a)(*)). In fact, the debtor had acquired the vehicle at issue to replace his wife's previous car, the wife was always the primary driver, and the debtor had primary use of another vehicle.

The court noted that while Congress has used the phrase "personal, family or household purpose" in other sections of the Bankruptcy Code, it elected not to use that language in 1325(a)(*), instead choosing the more narrow "personal use of the debtor." Under traditional principles of statutory interpretation, "it is generally presumed that Congress acts intentionally and purposefully when it includes particular language in one section of a statute but omits it in another." Accordingly, the Jackson court concluded that 1325(a)(*) only applied to vehicles acquired for the use of the debtor and not to vehicles acquired for family or household use by someone other than the debtor. As a result, the lender did not have the protections of 1325(a)(*).

In In re Wright, __ B.R. __, 2006 WL 547824 (Bankr. M.D. Ala. 2/28/06), the court confirmed, like in In re Robinson, __ B.R. __, 2006 WL 349801, that the BAPCPA amendments do not abrogate Till v. SCS Credit Corp., and thus do not preclude a debtor from altering the interest rate to be applied to such a claim.

While some courts are ending up on the same page, the Carver decision demonstrates that the language of 1325(a)(*) will vex courts and litigants as they struggle to give effect to both the language Congress has chosen and the intent it has expressed. The confusion in applying 1325(a)(*) when the debtor elects to surrender the vehicle will be discussed in the next post.