Yesterday the court issued an important decision in In re Johnson, Case No. 06-10611 (Bankr.S.D.Fla. July 2, 2007)(Olson, J.) on the subject of the “910 car claim”. The specific issue before the court was whether 11 USC 1325(a)(5) and the “hanging paragraph” allow the debtor to surrender a vehicle in full satisfaction of the claim. That is, in other words, whether these provisions deny a creditor an unsecured deficiency claim if a vehicle is surrendered.
The court adopted what it noted was the majority position that allows a vehicle to be surrendered in full satisfaction of the claim. These courts conclude that the hanging paragraph applies to section 1325(a)(5) as a whole and that it applies to the retention of a vehicle under 1325(a)(5)(B) as well as the surrender of a vehicle under 1325(a)(5)(C). In re Ezell, 338 B.R. 330 (Bankr.E.D.Tenn. 2006). This may allow the creditor a great benefit when the vehicle is retained but may advantage the debtor if the vehicle is surrendered. The Court noted that if Congress intended the hanging paragraph to be limited to either subsection A, B, or C of 1325(a)(5), that it could have inserted the proper limiting language.
The court rejected the minority position that the surrender of a 910 vehicle does not achieve full satisfaction of the creditor’s claim. Some of these courts have determined that the hanging paragraph was ambiguous and looked to the legislative history to divine Congress’s intent. In re Duke, 345 B.R. 806 (Bankr.W.D.Ky.2006). The Court also reviewed and rejected other rationales used by other courts reaching the minority position.
In contrast to yesterday’s Johnson decision, today the 7th Circuit Court of Appeals issued its opinion under the minority approach in In re Wright, Case No. 07-1483 (7th Cir. 2007). The court reasoned that the hanging paragraph by “knocking out” section 506, leaves the parties to their contractual entitlements. The court states that the majority position is mistaken that section 506 is the only source of authority for a deficiency and that per Butner v. United States, 440 U.S. 48 (197) that state law determines rights and obligations when the Bankruptcy Code does not supply a federal rule. The court noted that section 306(b) of BAPCPA which enacted the hanging paragraph is captioned “Restoring the Foundations for Secured Creditor” and that this implies replacing section 506 with an agreement freely negotiated between the parties. The court reasoned that making the loan non-recourse would not “restore the foundations for secured credit.” The Court noted that when section 506 does not apply, the fallback under Butner is the parties’ contract which entitles the secured lender to an unsecured deficiency.
The Wright case went straight to the 7th Circuit Court on a direct appeal from the bankruptcy court as allowed by 28 U.S.C. 158 as amended by BAPCPA.
One may refer to a research paper entitled “A History of the Automobile Lender Provisions of BAPCPA” by University of Wisconsin Law Professor William Whitford for further information on the background of the hanging paragraph.
