Purchase Money Vehicle Creditors Get No Claim Upon Surrender

In prior posts, we've discussed the new BAPCPA provisions that provide special treatment for secured loans made within 910 days of bankruptcy to acquire a vehicle for the debtor's personal use ("910-day claims"). See Strip Tease? No More Stripping Down Many Auto Loans; Another Take on Purchase Money Vehicle Loans. With one exception (In re Carver,2006 WL 563321), most courts have held that the amendment to 11 U.S.C. 1325(a) requires that such claims be treated as secured claims for the full amount of the claim. In re Johnson, 2006 WL 270231; In re Robinson, 2006 WL 349801; In re Wright, 2006 WL 547824.

None of those cases answer the question that is posed in In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 3/13/06): what is the effect of the new 1325(a)(*) provision when the debtor elects to surrender the vehicle instead of retain it? As discussed earlier, 1325(a)(*) states that 11 U.S.C. 506 (which provides, among other things, for the bifurcation of an undersecured claim into a secured portion for the value of the collateral and an unsecured portion for the deficiency) does not apply to 910-day claims. This is clearly an important question: the litigants in Ezell were joined by an amicus group of several lender intervenors, as well as the National Association of Consumer Bankruptcy Attorneys. The Ezell court held that if such a claim must be regarded as fully secured because 506 does not apply, then the claim has to be deemed fully satisfied when the collateral is surrendered.

Judge Stair in Ezell first discusses what happened to vehicle loans under pre-BAPCPA law. Generally, the debtor had three options: (1) the debtor and creditor could agree on terms; (2) the debtor could surrender the vehicle under 1325(a)(5)(C), in which case the creditor would sell the vehicle collateral, apply the sale proceeds to the debt, and have an unsecured claim for the deficiency; or (3) the debtor could retain the collateral under 1325(a)(5)(B)and "strip down" the lender's claim by providing in his Chapter 13 plan for a secured claim for the collateral value as of the petition date, and an unsecured claim for the deficiency. Thus, pre-BAPCPA, the 506(a) bifurcation provision "came into play" both when the debtor retained the vehicle and crammed down the plan, and when the debtor surrendered the vehicle. The Ezell court was unconvinced by the creditor's argument that 506(a) had no application when collateral was surrendered under pre-BAPCPA 1325(a)(5)(C).

Then, Judge Stair notes that the new BAPCPA provision (which we've referred to as 1325(a)(*), and he refers to as the "Anti-Cramdown Paragraph") precludes the use of 506 to reduce or bifurcate a 910-day claim into secured and unsecured components. As a result, unless the claim is subject to reduction for other reasons, the creditor's allowed secured claim must be fixed at the full amount of the debt. Thus if the debtor seeks to retain the vehicle, the plan must provide for the full amount of the claim to be paid as a secured claim over the life of the plan (as detailed in prior posts, this is consistent with the holding of several other cases addressing the amendment). For purposes of surrender as well, Judge Stair held that the claim must also be presumed to be fully secured, with the result being that there can be no deficiency claim:

It only stands to reason that the same analysis is true when applied to surrender under Revised s. 1325(a)95)(C) -- the creditor is fully secured, and surrender therefore satisfies the creditor's allowed claim in full.

Although Judge Stair did not find the language particularly ambiguous, he acknowledged that "because of its construction, Revised s. 1325(a) is, at best, confusing." He turned to the legislative history to evaluate his interpretation. Although it provided no "particular insight" helpful to the court, he also did not find any evidence that his interpretation was inconsistent with congressional intent. The legislative history only confirms that Congress intended to prevent bifurcation of 910-day claims, but provides no further clarification. Accordingly, "The court has no choice but to interpret the Anti-Cramdown Paragraph as written, i.e., that it applies to both Revised s. 1325(a)(5)(B) [retention of collateral] and (C) [surrender of collateral]." He noted:

To apply the Anti-Cramdown Paragraph only to Revised s. 1325(a)(5)(B), but not to Revised s. 1325(a)(5)(C), would allow a secured creditor, upon surrender of its collateral, to bifurcate its claim into different secured and unsecured components, contrary to its unambiguous mandate that Revised s. 506 "shall not apply to a claim described in [Revised s. 1325(a)(5)]."

Accordingly, a 910-day creditor whose collateral is surrendered cannot pursue a deficiency claim, regardless of the amount actually realized from the liquidation of the collateral: "Because application of s. 506(a) is entirely removed from the picture, there can be no deficiency balance, either secured or unsecured, and surrender satisfies an allowed claim in full."

It's hard to imagine that the credit lobby actually intended for the changes to1325(a) to preclude deficiency claims on surrendered vehicles, but it appears to be a logical -- even fair! -- reading of the statute. As Judge Stair notes, "A creditor whose allowed secured claim falls within the terms of the Anti-Cramdown Paragraph is no more or less disadvantaged by the debtor's surrender of its collateral ... than is the debtor who, if he or she chooses to retain the collateral, must ... pay the full amount of the debt in satisfaction of the creditor's allowed secured claim." Chalk this one up to the Law of Unintended Consequences?