Minority Position on Surrendering Vehicles Subject to Hanging Paragraph Gains Support; Automobile Lenders Allowed Deficiency Claims

Some of the architects of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have said that they would not change a word of this complex legislation. However, some of those words have left judges scratching their heads. One of the more troublesome provisions has been the so-called “hanging paragraph” of 11 U.S.C. Sec. 1325(a). Immediately following Sec. 1325(a)(9), it provides that the valuation provisions of Sec. 506(a) do not apply to a loan for purchase of a vehicle for personal use incurred within 910 days prior to bankruptcy.

In one context, the hanging paragraph is clear. If a debtor intends to retain a 910-day vehicle, he must pay the full amount owed regardless of its value. However, does the same logic apply in reverse? If the debtor elects to surrender the vehicle, must the lender give credit for the full amount of the debt regardless of the value?

The symmetry of an anti-valuation provision which applied in both directions (that is, retaining or surrendering) appealed to several courts. In fact, it became known as the majority position. Examples of this position include In re Payne, 347 B.R. 278 (Bankr. S.D. Ohio 2006); In re Turkowitch, 355 B.R. 120 (Bankr. E.D. Wis. 2006); In re Gentry, 2006 WL 3392947 (Bankr. E.D. Tenn. 11/22/06); In re Quick, 360 B.R. 722 (Bankr N.D. Okla. 2007).

However, several recent appellate decisions may have shifted the weight of authority. Four cases from the Sixth, Seventh and Eighth Circuits have all held that surrender of a 910-day vehicle does not prevent the creditor from filing an unsecured deficiency claim. In re Long, 2008 U.S. App. LEXIS 4549 (6th Cir. 3/4/08); AmeriCredit Financial Services, Inc. vs. Moore, 2008 U.S. App. LEXIS 2497 (8th Cir. 2/5/08); Capital One Auto Finance vs. Osborn, 515 F.3d 817 (8th Cir. 2008); Matter of Wright, 492 F.3d 829 (7th Cir. 2007). These cases take a broader look at the application of Sec. 502 and 506 to determine that a deficiency claim is not barred. Basically, they hold that Sec. 506(a) only applies to determination of a claim secured by property of the estate. Once the secured property is surrendered, the estate no longer has an interest in property to be valued. From that point, the issue shifts to Sec. 502, which determines allowance of claims. Because Sec. 502 does not contain any provision requiring disallowance of a 910-day deficiency claim, the claim should be allowed.

Within Texas, this shift in position should not affect a major change. Several Texas courts were already following the “minority” position adopted by the recent appellate opinions. In re Aguerro, No. 07-12195 (Bankr. W.D. Tex. 3/30/08)(Gargotta, B.J.); In re Newberry, 2007 Bankr. LEXIS 1589 (Bankr. W.D. Tex. 2007)(McGuire, B.J.); In re Gay, 375 B.R. 343 (Bankr. E.D. Tex. 2007)(Parker, B.J.).

In most cases, allowing or disallowing a deficiency claim will not have a major effect on the debtor, since the typical chapter 13 plan pays unsecured creditors mere pennies on the dollar. However, in some instances it could make a lot of difference. In re Esparza, No. 06-31040 (Bankr.W.D. Tex. 5/9/07) was just such a case. In Esparza, the debtors financed two vehicles with GECU. One vehicle was purchased within 910 days and the other was not. The debtors elected to surrender the 910 day vehicle, which resulted in a deficiency. Because the two loans were cross-collateralized, the deficiency from the surrendered vehicle attached to the retained vehicle. Because the balance owed on the retained vehicle was small enough, the value of this vehicle was sufficient to secured both the remaining value on the vehicle financed and the deficiency on the surrendered vehicle. If the one vehicle could have been surrendered in full satisfaction of the debt, the amount to be paid on the retained vehicle would have been much less. Thus, because the hanging paragraph did not mandate full satisfaction of the debt, the debtors had to pay an extra $11,809.84 as a secured claim. The only way to have avoided this result would have been to retain both vehicles (in which case the 910-day vehicle would have been required to be paid in full) or to surrender both vehicles in which case the deficiency, if any, would have been a mere unsecured claim).

Note: The original version of this article erroneously referred to In re Dominquez, No. 06-31167 (Bankr. W.D. Tex. 5/11/07) instead of In re Esparza, No. 06-31040 (Bankr. W.D. Tex. 5/9/07). The article has been corrected and now refers to the appropriate case.