Tidewater Finance Company appealed a final order from the Bankruptcy Court confirming debtor Jennifer Lee Kenney’s Chapter 13 bankruptcy plan. The appeal addressed a legal question of first impression regarding the interpretation of the "hanging paragraph" in 11 U.S.C. § 1325(a), introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The issue was whether this paragraph prevents creditors with a purchase money security interest in a "910 vehicle" from claiming an unsecured deficiency after the vehicle has been surrendered by the debtor. The court held that the hanging paragraph does not deprive undersecured "910 creditors" of their deficiency claims, affirming that the parties remain bound by their contractual rights under state law. Consequently, the decision of the Bankruptcy Court was reversed and the case remanded for further proceedings consistent with this ruling.
Kenney acquired a 2003 Chevrolet Impala from Calvary Cars Service on September 29, 2006, via a Retail Installment Sales Contract, making a $700 down payment and financing $12,102.24. This amount included the vehicle cost, taxes, and fees, with Calvary holding a purchase money security interest. Calvary perfected this security interest and later assigned the contract to Tidewater, whose lien was recorded on the vehicle's title. Kenney filed for bankruptcy on December 19, 2006, and subsequently submitted an amended Chapter 13 plan on February 1, proposing to surrender the vehicle to satisfy her debt to Tidewater, despite the vehicle's lower value compared to the debt. Tidewater objected to the plan on March 6 and later filed a proof of claim for $12,341.84. After receiving relief from the automatic stay, Tidewater amended its claim to reflect a deficiency of $5,271.34 after disposing of the vehicle. On May 11, 2007, the Bankruptcy Court dismissed Tidewater's objection, ruling that under the hanging paragraph of 11 U.S.C. § 1325(a), a 910 creditor cannot bifurcate their claim into secured and unsecured portions. The court confirmed Kenney's plan on May 25, 2007. On June 5, 2007, the court certified the case for direct appeal due to the absence of controlling decisions on the legal questions raised. The appeal is under the jurisdiction of 28 U.S.C. § 158(d)(2) and involves a plenary review of the Bankruptcy Code's interpretation. Kenney's Chapter 13 plan proposes monthly payments of $210 for 36 months, totaling $7,560, and treats the vehicle surrender as full satisfaction of her debt to Tidewater, while offering a 15% dividend to other unsecured creditors. Under 11 U.S.C. § 1325(a), Chapter 13 allows debtors to modify creditor rights, with confirmation contingent on the plan satisfying specific statutory requirements.
Section 1325(a) of the Bankruptcy Code mandates that a court confirm a Chapter 13 plan if it complies with relevant provisions and adequately addresses allowed secured claims. Specifically, for allowed secured claims, the plan must either have the claim holder's acceptance, ensure retention of the lien until the underlying debt is paid or discharged, or involve the surrender of the property securing the claim. The BAPCPA of 2005 introduced a significant modification through the "hanging paragraph," which stipulates that Section 506 does not apply to certain claims involving purchase money security interests for motor vehicles acquired for personal use within 910 days before filing, or other collateral within one year. Section 506(a) outlines how to bifurcate a creditor’s claim into secured and unsecured portions, allowing undersecured creditors to pursue deficiency claims. However, post-BAPCPA, courts are divided on whether the hanging paragraph negates a 910 creditor's right to seek a deficiency judgment after collateral sale proceeds fall short of the debt. The prevailing view among bankruptcy courts is that the hanging paragraph removes the ability to bifurcate 910 claims, rendering such loans non-recourse, regardless of the terms agreed upon by the parties.
A minority of bankruptcy courts interpret that Article 9 of the UCC and contract law permit 910 creditors to obtain an unsecured deficiency judgment after a debtor surrenders a vehicle, unless a non-recourse loan is specified in the contract. This interpretation aligns the unsecured balance with other unsecured debts in a Chapter 13 reorganization plan. The Wright court emphasized that Section 506 is not the sole authority for deficiency judgments when collateral is insufficient. It is agreed that, upon surrendering a 910 vehicle under Section 1325(a)(5)(C), the hanging paragraph does not nullify a 910 creditor’s unsecured deficiency claim if supported by state law and the contract.
Post-BAPCPA, Section 506 is deemed inapplicable to 910 claims, and the absence of alternate bifurcation methods in the Bankruptcy Code allows 910 creditors to pursue deficiency claims as unsecured debts. Section 502, rather than 506, governs the allowance of claims, affirming that deficiency claims based on contractual obligations can be accepted as long as state law permits. In this case, Tidewater is entitled to a deficiency judgment against Kenney as the sales contract grants Tidewater a security interest in the vehicle. The contract stipulates that if the proceeds from the vehicle sale do not cover Kenney's debt, she is responsible for the remainder. Virginia law, particularly its version of Article 9 of the UCC, upholds this contractual right.
Consequently, upon surrendering the vehicle, Kenney effectively transferred its market value to Tidewater, and any resulting deficiency constitutes an unsecured debt within the bankruptcy plan. It is established that this unsecured debt does not need to be fully paid, similar to other unsecured debts, but cannot be entirely dismissed while other unsecured creditors receive partial payments. The judgment of the Bankruptcy Court is vacated and the case is remanded for further proceedings consistent with this ruling.
