Miyong Mary Kang, Is it Time to Hang the Hanging Paragraph, 11 U.s.c. Sec. 1325(a)?

• Publication year: 2011

COMMENTS

IS IT TIME TO HANG THE HANGING PARAGRAPH, 11 U.S.C.

Sec. 1325(A)?

INTRODUCTION

Consider the following scenario.¹You purchased a new car almost two years ago with financing offered by the dealer's financing and insurance department. Times have been tough: you recently took a big pay cut and the medical bills are piling up. After much soul searching, you decide to take the plunge and file for personal bankruptcy. Night after night, you have calculated where to scrimp and where to save; your thoughts wander out to the garage- that car. The monthly payments on your automobile take a toll on your limited resources. If you give up your car, will the creditor still have a claim against you for the deficiency-the shortfall amount between the depreciated value of the car and the amount of the debt?²This distressing scenario has become a reality for many Americans in the last several years as our economy has melted down.³

The reality of consumer debt and bankruptcy presents a serious question to both debtors and creditors, not to mention automobile manufacturers. Is this a scenario fraught with abuse that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") was aimed at fighting, or is it a situation in which the consumer may need protection? These are some of the real life issues that this Comment considers when addressing the problem created by the "hanging paragraph."

In 2005, BAPCPA amended the Bankruptcy Code ("Code") to include a provision which trails the end of Sec. 1325(a) and is unnumbered-hence its appellation of the "hanging paragraph."⁴Currently, there is a split of opinion between the majority of bankruptcy courts at the trial level and federal circuit courts at the appellate level. The majority of bankruptcy courts across the nation have held that the surrender of applicable property under the hanging paragraph means that the claim cannot be bifurcated, and no deficiency claim survives beyond the surrender.⁵However, in the past couple of years, five federal circuit courts, beginning with the Seventh Circuit Court of Appeals in its 2007 In re Wright decision, have held the opposite-that a deficiency claim can survive surrender even though the hanging paragraph appears to preclude one.⁶After five federal circuit courts have found that the creditor still has a deficiency claim,⁷is there any hope that the initial wisdom of the majority of

bankruptcy courts will emerge as the law of the land?8This Comment argues in favor of the wisdom of the bankruptcy courts-that surrender of the vehicle constitutes full satisfaction of the debtor's obligations and no deficiency claim survives the surrender.9 The significance of this particular issue of automobile related indebtedness cannot be overemphasized. First, cars are a necessity for most Americans.10 The Code's hanging paragraph poses a serious problem because denial of full satisfaction upon surrender means fewer choices for the debtor. Second, automobile purchasing and financing has a huge impact on the economy: Just as Americans need cars, car companies need Americans to buy their cars. Creditors benefit just as much from financing large purchases, such as cars, houses, and furniture, as the customers who do not have the funds to pay for such costly items with cash.11While a car does not cost nearly as much as a home, few people can buy a new vehicle with cash.12A spokesperson for Alliance of Automobile Manufacturers estimates that "more than 90 percent of all vehicle purchases are financed through credit."13While statistics regarding dealership profits earned from finance charges and interest may vary from just over 25% to nearly 50%, there is little doubt that automobile creditors reap benefits from these financing deals.14 Resolution of the hanging paragraph provision is also critical for creditors who depend, perhaps unrealistically, on the full and timely repayment of all their claims. Automobile manufacturing success is an important part of our nation's economy.15Few consumer goods are manufactured in the United States anymore, and fewer and fewer Americans buy American-made cars anymore.16To keep up with the efficient and stylish imports rolling onto our shores, American car corporations, in tandem with their credit allies, have offered financing to customers looking for a good deal.17Moreover, sales of foreign automobiles benefit American dealerships and financing companies; fifteen years ago, a customer could not get decent financing on an Audi or a Toyota, but today, dealerships can offer qualified customers 0% financing.18 Without the ability to extend financing to American drivers, the manufacturers and dealerships would be hard-pressed to move cars out of their showrooms and lots and into our garages and highways. While the value of real estate generally increases, the value of a car is almost certain to depreciate.19Thus, if car makers and dealers benefit just as much from financing deals as customers do, then why do customers bear the burden of the shortfall when they choose to surrender their vehicles? The issue presented in this Comment is compelling in the context of bankruptcy law because bankruptcy law aims to equitably resolve creditors' claims and provide a fresh start for consumer debtors who have fallen astray.20The bankruptcy system is not meant to squeeze every dime out of the debtor, but rather, in the words of BAPCPA, to ensure that the debtors pay "the maximum they can afford."21 This Comment argues that surrender of property under Sec.1325(a)'s hanging paragraph constitutes full satisfaction of a claim against the surrendering debtor and no deficiency claim survives the surrender. While there is disagreement between the bankruptcy courts and the federal circuit courts as to whether the statute is ambiguous, even if the statute is ambiguous, this Comment reveals that there is no clear congressional intent to find that a deficiency claim survives beyond surrender of the vehicle. Additionally, this Comment argues that the result of full satisfaction is neither illogical nor absurd. The Comment is organized into four parts. Part I introduces the hanging paragraph and related statutory provisions. It also includes a brief explanation of the opposing views of the majority of bankruptcy courts finding for full satisfaction22and the federal circuit courts finding that a deficiency claim can exist.23 Part II lays out the framework for analysis and applies it to the hanging paragraph. The framework includes statutory construction and analysis of Supreme Court precedent. Part II recognizes that there is always the possibility that legislative intent is a factor and demonstrates that the congressional intent with regard to surrender is not apparent enough to warrant any one interpretation over another. Part II finishes with a look at a pre- BAPCPA Supreme Court case, Associates Commercial Corp. v. Rash, which includes interpretation of key concepts, such as retention and surrender, which are relevant to the later added hanging paragraph. This framework leads to the conclusion that, under the hanging paragraph, surrender constitutes full satisfaction and no claim for the deficiency survives.24 Part III argues that some federal circuit courts incorrectly look outside the Code for a basis for bifurcation. These circuits ignore the plain words of the statute, thus reaching a result that the Code proscribes. Part III includes analysis of the faulty reasoning in the federal circuit court opinions of In re Wright,25DaimlerChrysler Financial Services Americas LLC v. Ballard,26 Capital One v. Osborne,27Tidewater Financial Co. v. Kenney,28and AmeriCredit Financial Services, Inc. v. Long.29 Finally, Part IV explains why, from a policy perspective, surrender should constitute full satisfaction of the debtor's claim. One of the arguments advanced in Part IV discusses the nature of the automobile financing agreement and why full satisfaction should protect the debtor as opposed to the creditor. This part revisits the Supreme Court case, Associates Commercial Corp. v. Rash, to illustrate how full satisfaction is neither an illogical nor an unintended result of congressional action.30 I. THE HANGING PARAGRAPH AND CASE LAW A. The Statute and Related Provisions In 2005 Congress enacted BAPCPA, which included an unnumbered and hanging paragraph to Sec. 1325(a) dealing with plan confirmations in chapter 13 consumer bankruptcies. The paragraph provides in full: 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.31 Thus, in order for the hanging paragraph to apply, there are four required elements: 1) a situation as described under paragraph (5) of Sec. 1325(a), 2) a purchase money security interest, 3) a purchase within 910 days of filing for bankruptcy or one year, and 4) a vehicle purchased for personal use or "any other thing of value," respectively.32If all four requirements are met, then the hanging paragraph operates to make Sec. 506 inapplicable. Paragraph (5) directly refers to Sec. 1325(a)(5), which is one of the requirements necessary for plan confirmation. A plan can be confirmed under Sec. 1325(a)(5) under three different circumstances: the creditor approves of the plan, the debtor retains the vehicle, or the debtor surrenders the collateral to the creditor.33 A purchase money security interest ("PMSI") in goods is defined as a "security interest in goods . . . to the extent that the...