The Hanging Paragraph and Cramdown 11 U.S.C. 1325(a) and 506 after BAPCPA

In the uninformed rush by Congress to prevent bankruptcy abuse, §1325(a)
of the Bankruptcy Code was amended by BAPCPA¹ to include a hanging paragraph
at the end of §1325(a)(9). This insertion, which refers back to §1325(a)(5),
states the following:
</p><blockquote>
<blockquote>
<p>For purposes of paragraph (5), §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 preceding the date of the filing of the petition, and
the collateral for that debt consists of a motor vehicle (as defined in
§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 one-year period preceding that filing. </p>
</blockquote>
</blockquote>
<p>Since BAPCPA's enactment, four different courts have interpreted the amendment
in a dissimilar manner. Three assume or imply a secured claim; one does not.
Valuation questions are raised. Legislative intent seems to be a moving target.
But all of the decisions are efforts to make sense of the hanging paragraph.
The results of these efforts are discussed below.

</p><p>On Feb. 2, 2006, the court in <i>In re Johnson</i>² defined the issue as "whether
a debtor can strip down the lien of a secured creditor under the terms of §1325(a)(9)
when the collateral is a motor vehicle purchased by the debtor for personal
use within 910 days of the filing of the petition."
</p><p>The court laid out the elements for what it called "910 vehicles:"
</p><blockquote>
<blockquote>
<p>1. A purchase money security interest securing the debt which is the subject
of the claim, <br>
2. Incurred within 910 days preceding the date of filing the petition, <br>
3. For a motor vehicle, and <br>

4. Acquired for the debtor's personal use (referenced in this article as
"910 claim").</p>
</blockquote>
</blockquote>
<p> The debtors made four principal arguments in support of confirming their plan
as filed, which proposed to cram down the value of the secured claim. First,
the debtors argued that just because the statute says that "§506 shall
not apply," debtors were not prevented from modifying the term of the loan
or the interest rate. Second, the debtors asserted that the BAPCPA amendment
turned 910 claims into unsecured claims. Third, the debtors also asserted that
§506 still applied for all other purposes. The debtors bolstered this argument
by asserting that the focus should be on good faith since the purpose of BAPCPA
was to prevent debtor abuse of the bankruptcy laws. Finally, the debtors argued
that because the creditor, GMAC, was secured by insurance proceeds, maintenance
contract proceeds, etc., §1325(a)(9) did not apply since more than a motor
vehicle was involved. Of course, not all of this stuck to the wall.
</p><p>The <i>Johnson</i> court did not see good faith as being relevant. The court
went on to find that the statute simply prohibited bifurcation of 910 claims,
and the debtor was faced with the choice of full payment or returning the vehicle.
The court agreed with the creditor that §1322(b)(2) still applied and that
the term of the loan and the interest rate could be modified.
</p><p>On Feb. 10, 2006, the court in <i>In re Robinson</i>³ agreed with
the <i>Johnson</i> court. The debtor's plan in <i>Robinson</i> bifurcated the
910 claim initially, but by acknowledgment of the parties, the dispute was narrowed
and the only issue litigated was whether the interest rate could be modified.

</p><p>The court said that the debtor had three options: (1) obtain the 910 claim
creditor's approval of the plan, (2) surrender the collateral to the creditor
or (3) provide lien retention and deferred cash payments equal to the allowed
amount of the 910 claim. Finding that although §1325(a) as amended prohibited
bifurcation, the <i>Robinson</i> court said it did not overrule <i>Till v. SCS
Credit Corp.</i>,⁴ which clearly allowed modification of interest
rates by the court in a chapter 13. The <i>Robinson</i> court discussed <i>Till</i>
at length and compared its holding to the legislative history of amended §1325(a)
in concluding that <i>Till</i> remained controlling law. In other words, the
court agreed with the conclusion in <i>Johnson</i>, but arrived there by a slightly
different path.

</p><p>The court in <i>In re Horn</i>,⁵ decided on Feb. 3, 2006, did not need to reach
the issue of how to apply §1325(a) because it found that the key element
of a purchase money security interest did not exist. However, the court did
comment that "if §506 does not apply, the creditor's claim must be
treated under the plan as fully secured."⁶ This conclusion is not agreed
to by the last of the four cases reviewed in this article.
</p><p>On March 6, 2006, the court in <i>In re Carver</i>⁷ found that BAPCPA,
although "awkward or ungrammatical," was not clearly ambiguous in
the language of §1325(a)(9), and that the plain meaning of the hanging
paragraph was that §506 does not apply to 910 claims when determining secured
claim treatment. The <i>Carver</i> court went on to analyze treatment of 910
claims in the context of the Code, BAPCPA and legislative history.

</p><p>Referring to the <i>Johnson</i>, <i>Robinson</i> and <i>Horn</i> decisions,
the <i>Carver</i> court found that since §506 did not apply, a 910 claim
was not a secured claim as those decisions assumed. In reviewing the legislative
history, the court discussed the 1997, 1998 and 1999 versions of bankruptcy
reform legislation. The 1997 version added a sentence to §506: "Subsection
(a) shall not apply to an allowed claim to the extent attributable in whole
or in part to the purchase price of personal property acquired by the debtor
during the 90-day period preceding the date of filing the petition." It
also added a "hanging" provision at the end of §1325(a): "For
the purposes of paragraph (5), §506 shall not apply to a claim described
in that paragraph."⁸ This version was further modified in the
1998 and 1999 versions, which set collateral value as the amount due on the
debt.⁹ The 2000 and 2001 versions eliminated the §506 provision
and inserted five-year and three-year look-backs, respectively, instead of the
910 days finally adopted.¹⁰ The <i>Carver</i> court concluded that
Congress, in creating special treatment for certain claims, did not intend 910
claims to be treated as secured claims under a chapter 13 plan because §506
is required in that determination.¹¹ The <i>Carver</i> court goes
on to extrapolate and discuss possibilities in order to determine what was most
likely the congressional intent, ultimately crafting a rule based on §1111(b).
The rule it sets out is as follows:

</p><blockquote>
<blockquote>
<p>In a chapter 13 plan, a 910 claim must receive the greater of (1) the full
amount of the claim without interest; or (2) the amount the creditor would
receive if the claim were bifurcated and crammed down (<i>i.e.</i>, secured
portion paid with interest and unsecured portion paid <i>pro rata</i>).¹²
</p>
</blockquote>
</blockquote>
<p>The court felt this admittedly cumbersome rule protected 910 claims from punishment
under BAPCPA.
</p><p> The <i>Carver</i> court also admitted that this rule is likely to require
a valuation process but, in the end, the court relied on the value in the filed
proof of claim. The court found that since the debtor did not propose to pay
that claim value (even without interest), the objection to confirmation was
sustained. The court did not address <i>Till</i> or §1322(b)(2).

</p><p>Prior to these decisions, commentators raised the issue of how a secured claim
is "allowed" if §506 does not apply.¹³ A thorough
analysis of the dilemma caused by the inartful drafting of BAPCPA can be found
at "Rash and Ride-through Redux" by Jean Braucher, 13 Am. Bankr. Inst.
L. Rev. No. 2, pp. 469-474. Lawyers and creditors on the front lines of consumer
bankruptcy law may wish to apply the practical approach in <i>In re Johnson</i>¹⁴
and, if the value is determined, fashion an agreement to the loan term and the
interest rate.
</p><h3> Footnotes</h3>
<p> 1 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L.
No. 109-8, 199 Stat. 23 §418 (April 20, 2005).
</p><p>2 337 B.R. 269 (Bankr. M.D.N.C. 2006).
</p><p>3 338 B.R. 70, (Bankr. W.D. Mo. 2006).
</p><p>4 541 U.S. 465, 475, 124 S.Ct. 1951, 1959, 158 L.Ed.2d 787 (2004).
</p><p>5 338 B.R. 110 (Bankr. M.D. Ala. 2006).

</p><p>6 <i>In re Horn</i> at 113.
</p><p>7 ____ B.R. _____, 2006 WL 563321 (Bankr. S.D. Ga.).
</p><p>8 <i>In re Carver</i> at __, <i>citing</i> Consumer Bankruptcy Reform Act of
1997, S.1301, 105th Cong. §302(a) and (c), 1997.
</p><p>9 Bankruptcy Reform Act of 1998, H.R. 3150, 105th Cong., §128 (1998);
Bankruptcy Reform Act of 1999, H.R. 833, 106th Cong. §122 (1999).
</p><p>10 Bankruptcy Reform Act of 2000, S.3186, 106th Cong. §306(b) (2000);
Bankruptcy Reform Act of 2001, H.R. 333, 107th Cong. §306(b) (2001).
</p><p>11 <i>In re Carver</i> at __.

</p><p>12 <i>In re Carver</i> at __.
</p><p>13 Brown, Hon. William Houston and Ahern Lawrence R. III, <i>2005 Bankruptcy
Reform Legislation with Analysis 2d</i>, 2006, Thomson/West, page 65.
</p><p>14 <i>See supra</i> n.2.