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Capital One Auto Finance v. Osborn: BANKRUPTCY - BAPCPA hanging paragraph and undersecured creditor's deficiency claim

1 The Honorable David S. Doty, United States District Judge for the District of
Minnesota, sitting by designation.
United States Court of Appeals
No. 07-1726
Capital One Auto Finance, *
Movant – Appellant, **
Appeal from the United States
v. * Bankruptcy Appellate Panel
* for the Eighth Circuit.
Nathan L. Osborn and *
Catherine C. Osborn, *
Debtors – Appellees. *
Submitted: November 16, 2007
Filed: February 5, 2008
Before WOLLMAN and BENTON, Circuit Judges, and DOTY,1 District Judge.
BENTON, Circuit Judge.
Nathan L. and Catherine C. Osborn purchased a Chevrolet financed by Capital
One. Capital One repossessed it three days before the Osborns filed for Chapter 13
bankruptcy. The Chapter 13 plan proposed that the surrender of the Chevrolet was in
full satisfaction of the debt owed to Capital One. Capital One objected to
confirmation of the plan, asserting a deficiency claim. The bankruptcy court ruled that
the Osborns were permitted under 11 U.S.C. § 1325(a)(5)(C) to surrender the car in
2 The “hanging paragraph” describes the unnumbered paragraph in 11 U.S.C.
§ 1325, directly following §1325(a)(9). This paragraph was added as a part of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
full satisfaction of the debt. The Bankruptcy Appellate Panel affirmed. In re Osborn,
363 B.R. 72 (B.A.P. 8th Cir. 2007). Capital One appeals. Having jurisdiction under
28 U.S.C. § 158(d)(1), this court reverses.
The Osborns bought the vehicle on August 31, 2005, and Capital One
immediately perfected its security interest. Eight months later, Capital One
repossessed the vehicle because the Osborns had defaulted. Three days after the
repossession, the Osborns filed for Chapter 13 bankruptcy. Capital One filed a proof
of claim for ,279.80, the balance due under the contract. The Osborns submitted
a Chapter 13 plan, proposing that the Chevrolet be surrendered in lieu of the entire
debt. The plan would also pay unsecured creditors 100 percent of their claims.
Capital One objected to confirmation of the plan, asserting an unsecured
deficiency claim for the difference between the car’s value and the balance due. The
bankruptcy court overruled the objection. The court determined that the “hanging
paragraph”2 made 11 U.S.C. § 506 inapplicable to Capital One’s claim, and therefore
it was fully secured. The court also concluded that 11 U.S.C. § 1325(a)(5)(C) allowed
the Osborns to surrender the Chevrolet in full satisfaction of the secured claim.
Capital One appealed to the BAP, which affirmed. Upon confirmation of the plan, the
stay terminated and the vehicle was sold at auction for ,800.00. After deducting
costs of the sale, Capital One has a deficiency of ,916.50.
3 11 U.S.C. § 1325(a)(5) states that a 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
This case presents the question whether the hanging paragraph eliminates an
under-secured creditor’s deficiency claim when, in a Chapter 13 plan, the debtors
propose to surrender a car purchased within 910 days before filing for bankruptcy.
The courts are split on this issue. The majority of bankruptcy courts have ruled that
the under-secured creditor has no deficiency claim. See In re Quick, 371 B.R. 459,
464 (B.A.P. 10th Cir. 2007); In re Kenney, 2007 WL 1412921, at *5 (Bankr. E.D. Va.
May 10, 2007) (listing cases following majority position); In re Ezell, 338 B.R. 330,
342 (Bankr. E.D. Tenn. 2006). The trend, however, is toward allowing a deficiency
claim. See In re Wright, 492 F.3d 829, 832 (7th Cir. 2007); In re Rodriguez, 375
B.R. 535, 548-49 (B.A.P. 9th Cir. 2007); In re Particka, 355 B.R. 616, 626 (Bankr.
E.D. Mich. 2006). See generally In re Kenney, 2007 WL 1412921, at *4 (listing
cases following minority position).
A Chapter 13 debtor has three options to deal with allowed secured claims of
creditors: (1) obtain the creditor’s acceptance of the plan, (2) retain the collateral but
make full payment of the creditor’s allowed secured claim, or (3) surrender the
collateral to the creditor. 11 U.S.C. § 1325(a)(5).3 Before BAPCPA took effect on
without completion of the plan, such lien shall also be
retained by such holder to the extent recognized by
applicable nonbankruptcy law;
(ii) the value, 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 payment, such payment 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
4 Section 506(a)(1), which was not altered by BAPCPA, states:
An allowed claim of a creditor secured by a lien on property
in which the estate has an interest, or that is subject to setoff
under section 553 if this title, is a secured claim to the extent
of the value of such creditor’s interest in the estate’s interest
October 17, 2005, a Chapter 13 debtor could choose the retention option, yet pay only
the present value of the collateral to the creditor, over the life of the plan. See Assocs.
Commercial Corp. v. Rash, 520 U.S. 953, 957 (1997). The remaining balance of the
debt was a general unsecured claim. See In re Fleming, 339 B.R. 716, 722 (Bankr.
E.D. Mo. 2006). This option, a “cram down,” could be done over the creditor’s
objection. See Till v. SCS Credit Corp., 541 U.S. 465, 468-69 (2004). Cram down
resulted because § 1325(a)(5)(B) allows a debtor to keep the collateral, so long as the
creditor receives “not less than the allowed amount of such [allowed secured] claim.”
See 11 U.S.C. § 1325(a)(5)(B) (1998). This amount was determined by reference to
§ 506, which created a secured claim for the value of the collateral, and an unsecured
claim for any remainder. See 11 U.S.C. § 506(a)(1998).4
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, and in
conjunction with any hearing on such disposition or use or on
a plan affecting such creditor’s interest.
BAPCPA eliminated the cram down option for cars purchased less than 910
days before the Chapter 13 bankruptcy, by adding the hanging paragraph at the end
of § 1325(a)(9):
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) 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.
Post-BAPCPA, the hanging paragraph prohibits application of § 506(a) to 901-claims.
See, e.g., In re Scruggs, 342 B.R. 571, 574 (Bankr. E.D. Ark. 2006). Therefore, the
creditor’s claim is considered secured, and if the debtors choose to retain the vehicle,
they are liable for the entire amount of the debt according to § 1325(a)(5)(B)(ii). See
id. at 573-75 (a claim is an “allowed secured claim” for purposes of § 1325(a)(5)
because it is secured under state law, not by authority of § 506).
The issue here is the effect of the hanging paragraph when the debtor surrenders
a 910-car. The majority position is: since § 506(a) does not apply, the entire claim is
secured, and therefore, under § 1325(a)(5)(C), the surrender of the vehicle fully
5 Some courts in the minority reason that § 506 did not apply to the surrender
option pre-BAPCPA, and thus, the hanging paragraph has no effect on the surrender
option post-BAPCPA. See, e.g., In re Rodriguez, 375 B.R. at 543-45 (section 506(a)
has never applied to the surrender option, because § 506(a) only applies to property
“in which the estate has an interest,” and the estate does not have an interest after the
property is surrendered). As the Supreme Court has implicitly recognized, however,
§ 506(a) did apply to surrender pre-BAPCPA. See Rash, 520 U.S. at 962-63 (“The
‘disposition or use’ of the collateral [clause of § 506(a)] 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.”).
satisfies the claim. See, e.g., In re Osborn, 363 B.R. at 78. The minority position is:
because § 506(a) does not apply, state law applies, and the surrender does not fully
satisfy the claim. See, e.g., In re Wright, 492 F.3d at 832.5
In an appeal from the BAP, this court sits as a second court of review,
reviewing findings of fact for clear error and conclusions of law de novo. See In re
Hixon, 387 F.3d 695, 700 (8th Cir. 2004). As the facts of this case are undisputed,
the BAP’s ruling is reviewed de novo.
By the plain language of the hanging paragraph, § 506 does not apply to a 910-
claim. Therefore, as with the retention option, the claim is considered secured because
it is secured according to state law. See Butner v. United States, 440 U.S. 48, 55
(1979) (“Property interests are created and defined by state law.”); In re Murray, 346
B.R. 237, 243 (Bankr. M.D. Ga. 2006) (“Whether that claim is secured is a matter of
contract and applicable perfection statutes.”), citing Dewsnup v. Timm, 502 U.S. 410,
415-17 (1992) (adopting the argument that § 506(a) is not a definitional provision).
The Osborns, adopting the majority position, contend that because the claim is
fully secured, they may surrender the vehicle in full satisfaction of the claim. This
essentially turns a recourse loan into a non-recourse loan, to the benefit of unsecured
creditors. See In re Wright, 492 F.3d at 830. The majority position is not correct,
however, because “nothing in § 1325(a)(5) says that [the] ‘allowed secured claim’ is
satisfied by the debtor choosing the surrender option in subparagraph (C).” In re
Hoffman, 359 B.R. 163, 166 (Bankr. E.D. Mich. 2006). Unlike the retention option
in § 1325(a)(5)(B), the surrender option in § 1325(a)(5)(C) does not speak to
satisfaction of a claim. Section 1325(a)(5)(C) states that if the debtor chooses to
surrender the vehicle, the plan should be confirmed – even if the creditor does not
prefer the surrender option. “Unambiguously, it means nothing more than this.” In
re Hoffman, 359 B.R. at 166.
The Osborns invoke the core rationale of the majority position: “If a 910-claim
is fully secured under Section 1325(a)(5)(B)(ii) and bifurcation is prohibited, as the
majority of courts have thus far held, there is no logic in saying that a 910-claim may
still be bifurcated if the debtor chooses instead to surrender the collateral pursuant to
Section 1325(a)(5)(C).” See AmeriCredit Fin. Servs., Inc. v. Moore, 363 B.R. 91,
94 (Bankr. W.D. Ark. 2006). This assumes that the bankruptcy code prohibits
bifurcation. This is not true; the hanging paragraph simply removes the bankruptcy
code’s method of bifurcation. The hanging paragraph has no effect on state-law
rights. Moreover, retention and surrender are treated differently in the bankruptcy
code. Compare 11 U.S.C. §§ 1325(a)(5)(B)(ii) (requiring full payment of the secured
claim when the debtor retains the collateral), with 1325(a)(5)(C) (not discussing
payment requirements when the debtor surrenders the collateral).
The contract here gave Capital One the right to repossess the vehicle, sell it, and
apply the proceeds (minus reasonable sales expenses) to the debt owed. The contract
further allows Capital One to “sue [the debtors] for additional amounts if the proceeds
of the sale do not pay all of the amounts [the debtors] owe us.” In Missouri, an
6 Section 502 provides that a claim is allowed unless it is: (1) unenforceable by
agreement or law; (2) for unmatured interest; (3) for tax assessed against property of
the estate, exceeding the interest of the estate in the property; (4) for services of an
insider or attorney, exceeding the reasonable value of the services; (5) for unmatured
debt excepted from discharge; (6) the claim of a lessor, for damages resulting from the
termination of a lease of real property (and meets other conditions); (7) the claim of
an employee for damages resulting from termination of an employment contract (and
meets other conditions); (8) from a reduction, due to late payment, in the amount of
an otherwise applicable credit in connection with income tax; or (9) untimely. 11
U.S.C. § 502(b).
unsecured deficiency judgement is allowed when the creditor complies with Missouri
law governing disposition of collateral after default. See Reno Fin., Ltd. v. Valleroy,
229 S.W. 3d 622, 624 (Mo. Ct. App. 2007); Mo. Rev. Stat. § 400.9-615. As nothing
in § 5026 or § 1325 denies a creditor an unsecured deficiency claim, Capital One is
entitled to one. See Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 127
S.Ct. 1199, 1206 (2007) (“[W]e generally presume that claims enforceable under
applicable state law will be allowed in bankruptcy unless they are expressly
disallowed.”); In re Wright, 492 F.3d at 832-33.
The Osborns argue that Capital One’s state law right to a deficiency judgment
may be eliminated because 11 U.S.C. § 1322(b)(2) allows a Chapter 13 plan to
“modify the rights of holders of secured claims.” See 11 U.S.C. § 1322(b)(2).
Section 1322(b)(2) does allow bankruptcy courts to modify “the number, timing, or
amount of the installment payments from those set forth in the debtor’s original
contract.” See Till, 541 U.S. at 475. However, because no bankruptcy provision bars
a creditor’s state-law right to a deficiency claim, it is unnecessary to consider whether
§ 1322(b)(2) would allow a court to eliminate that claim.
Because state law gives Capital One a right to an unsecured deficiency
judgment, on the record here, it entitled to an unsecured deficiency claim in the
amount of ,916.50.
The judgments of the bankruptcy appellate panel and the bankruptcy court are
reversed, and the case is remanded to the bankruptcy court for further proceedings in
accordance with this opinion.


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