The “hanging paragraph” found at § 1325(a)(9) of the Bankruptcy Code is well known. This provision prevents the bifurcation of certain secured claims if the creditor holds a purchase money security interest (PMSI) in collateral acquired by the debtor within certain pre-petition time periods. Section 1325(a)(9) provides:
For purposes of paragraph (5) [which deals with plan treatment of allowed secured claims], 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 period 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.
Most creditors focus on the 910-day limitation, which applies to motor vehicles acquired through a PMSI for the debtor’s personal use. Frequently overlooked is the one-year limitation that applies to all other PMSI collateral. Regarding the one-year limitation, courts are wrestling with whether a vehicle intended for non-personal (i.e., business) use and acquired within one year of the bankruptcy filing is protected from bifurcation by this section. Courts have taken two different views. Some courts hold that the first provision of the hanging paragraph applies to all motor vehicles (and prohibits modification only when the collateral was purchased within 910 days of the petition date and when the collateral was acquired for the personal use of the debtor) and that the second provision applies to “any other thing” (i.e., all collateral other than motor vehicles). Other courts hold that the first provision of the hanging paragraph narrowly applies to motor vehicles acquired for the debtor’s personal use, such that the second provision must apply to “any other thing,” including motor vehicles not acquired for the debtor’s personal use. The majority of courts allow a debtor to cram down the value of a vehicle acquired for business purposes within one year of the petition.
This issue was recently examined in In re Sandifer, where the debtor jointly financed the purchase a vehicle with his son. The debtor filed for bankruptcy within one year of the purchase and proposed in the chapter 13 plan to cram down the secured claim to the value of the collateral. The vehicle was not purchased for the debtor’s personal use. The secured creditor objected, arguing that the “hanging paragraph” prohibited such treatment because the creditor held a PMSI and the vehicle was “any other thing of value” acquired less than one year pre-petition.
The court examined the text of the statute, which clearly limits a debtor’s ability to bifurcate some, but not all, claims in chapter 13 cases:
The limitation’s duration depends on the collateral securing the debt. The first of the two timing limitiations [sic] is specific in the collateral it addresses. It prohibits bifurcation of a security interest in “a motor vehicle (as defined in § 30102 of title 49) acquired for the personal use of the debtor,” if purchased within the 910 days preceding the petition date. But where the first provision is specific, the second is general. It prohibits modification of a security interest in “any other thing” if purchased within one year of the petition date.”
The court in Sandifer pointed out that “any other thing” in the second provision could be referring either to (1) “any other thing besides motor vehicles,” or (2) “any other thing including motor vehicles not acquired for the debtor’s personal use.” The Court found that the hanging paragraph does not indicate that Congress intended to treat all motor vehicles differently; rather, Congress intended to treat only motor vehicles acquired for the personal use of the debtor differently. The court did not allow the debtor to value the vehicle, since it was acquired within one year of the filing. The court ruled that the hanging paragraph prevents a debtor from cramming down a PMSI claim in a vehicle acquired for non-personal use within one year pre-petition. The court acknowledged that the majority of bankruptcy courts interpreting the hanging paragraph have come to a different conclusion.
The court’s reasoning in In re Sandifer was followed by Judge McEwen in a 2018 unpublished opinion, In re Book. In the Book case, the debtor purchased a vehicle within one year of the bankruptcy filing and intended to use the vehicle for his hot dog business. The debtor filed a motion to value, and the creditor objected. The court denied the motion and adopted the analysis of the hanging paragraph in In re Sandifer. In the Book case, there was no dispute that the debtor purchased the vehicle for use in his business; therefore, the vehicle did not qualify for protection against cramdown under the first phase of the hanging paragraph as a motor vehicle purchased for the debtor’s “personal use.” The court found, however, that since the vehicle was purchased within one year of the petition date for business purposes, the vehicle qualified as “any other thing of value” under the second clause in the hanging paragraph.
The court in Book adopted the reasoning in two cases following the “minority” position of not allowing a vehicle purchased within one year for business purposes to be valued. Judge McEwen stated that “fundamental principles of grammar must be followed as they control the plain meaning,” and read that the 910-day protection applies not to all vehicles, but only to vehicles “acquired for the personal use of the debtor.” Under this reading, cramdown or valuation under § 506 would unavailable to a debtor if (1) a creditor held a PMSI, (2) the collateral “consists of any other thing of value,” including a vehicle used for business purposes, and (3) the debt was incurred within one year preceding the filing.
Litigation on this issue likely will continue until it is resolved by higher courts.