In Re Estrada

Citations: 387 B.R. 875; 59 Collier Bankr. Cas. 2d 1305; 21 Fla. L. Weekly Fed. B 320; 2008 Bankr. LEXIS 1552; 2008 WL 2152547Docket: 06-07011-8W3

Court: United States Bankruptcy Court, M.D. Florida; May 23, 2008; Us Bankruptcy; United States Bankruptcy Court

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Lizardo and Blanca Rosa Estrada filed a joint Chapter 13 bankruptcy petition on December 9, 2006, having purchased a 2004 Dodge Truck less than 910 days prior. MacDill Federal Credit Union, which financed the vehicle, submitted a proof of claim for $19,762.07. The Estradas proposed to surrender the vehicle in their Chapter 13 plan, asserting that this would fully satisfy MacDill's secured claim, relying on the "hanging paragraph" of section 1325(a) of the Bankruptcy Code, which they argued eliminates section 506 bifurcation for 910 vehicles. 

MacDill objected to this plan, contending it should maintain a right under state law to an unsecured deficiency claim after the vehicle's liquidation. The court sustained MacDill's objection, concluding that section 1325(a)(5)(C) does not affect section 506. Instead, section 502 governs the situation post-surrender, allowing state law to dictate the creditor’s right to claim any remaining deficiency. Consequently, the hanging paragraph does not grant Chapter 13 debtors the ability to surrender a 910 vehicle as a means to extinguish the creditor's rights to an unsecured deficiency claim.

Under 11 U.S.C. § 1325(a)(5), a debtor in a Chapter 13 plan can treat secured claims in three ways: 1) by obtaining the creditor's acceptance of the plan (subsection 1325(a)(5)(A)), 2) through a 'cram down' where the debtor retains the lien and proposes new payment terms against the creditor's objection (subsection 1325(a)(5)(B)), or 3) by surrendering the collateral to the creditor (subsection 1325(a)(5)(C)). The "Hanging Paragraph" makes section 506 unavailable for determining secured claims under these subsections, impacting how secured claims are confirmed in Chapter 13. 

Under subsection 1325(a)(5)(A), the debtor can confirm the plan simply by obtaining the creditor's acceptance, which does not involve section 506. In contrast, subsection 1325(a)(5)(B) allows a debtor to confirm a plan that alters the terms of the secured claim despite the creditor's objections, provided the future payments' present value meets or exceeds the claim's allowed amount, a process known as 'cram down.' This term originated from the Bankruptcy Act of 1898, highlighting the court's authority to enforce a plan against creditor objections. 

Additionally, while section 506 permits the bifurcation of secured claims into secured and unsecured portions, known as 'strip down,' the Hanging Paragraph prohibits its application in the context of the three treatment options under section 1325(a)(5). It is crucial to differentiate between 'cram down' and 'strip down,' as confusion between the two concepts has arisen in case law.

The excerpt provides a detailed analysis of the legal concepts of "cram-down" and "strip down" in the context of the Bankruptcy Code, specifically sections 506 and 1325. "Cram-down" refers to reducing a secured claim to the collateral's value and discharging the remaining balance as unsecured. However, these terms are distinct, as established by the Supreme Court and various circuit courts, emphasizing that sections 506 and 1325 operate independently. 

"Strip down" applies when a mortgage is partially secured, allowing debtors to reduce liens to the value of the collateral under section 506. The passage notes the distinction between these provisions, highlighting that prior to the enactment of the Hanging Paragraph, debtors could benefit from both cram-down and strip-down in Chapter 13 cases. The Hanging Paragraph, however, restricts this by disallowing strip-down for certain secured claims related to 910 vehicle debts while still permitting cram-down of repayment terms.

Consequently, debtors wishing to retain their 910 vehicles must pay the full amount owed, regardless of the vehicle's value. The excerpt also mentions that when debtors choose to surrender collateral under section 1325(a)(5)(C), courts are divided on how to handle 910 vehicle debts, with the majority opinion asserting that the Hanging Paragraph not only renders section 506 inapplicable but also eliminates deficiency claims upon surrendering collateral.

The excerpt analyzes case law relating to secured creditors' deficiency claims in bankruptcy, particularly under section 506. It emphasizes that a secured creditor's right to a deficiency claim arises from section 506, which is crucial for establishing such claims following collateral surrender. Courts have observed that in cases involving 910 vehicles, absent the application of section 506, a secured creditor retains only a fully secured claim without a deficiency claim. The interpretation of section 1325(a) is also noted, with some courts asserting that it prevents the bifurcation of secured claims, reinforcing the idea that section 506 is essential for creating unsecured deficiencies.

However, a counterargument exists stating that section 506 is not necessary for deficiency claims when collateral is surrendered. Upon surrender, the secured creditor can foreclose and pursue deficiency claims based on non-bankruptcy law and loan agreements. The process following collateral surrender includes the creditor disposing of the collateral, typically through an auction, applying sale proceeds to reduce the debt, and then filing or amending a claim for any remaining deficiency, which is generally allowed unless contested.

The excerpt also references the Supreme Court's precedent establishing that property interests in bankruptcy are defined by state law, and claims enforceable under state law are presumed allowed unless explicitly disallowed.

A majority of circuit courts have determined that the "Hanging Paragraph" of the Bankruptcy Code does not prevent secured creditors from pursuing deficiency judgments after a debtor surrenders collateral. Key rulings highlight that whether a creditor can seek an unsecured claim for a deficiency depends on the underlying contract and applicable state law. Notable cases include In re Ballard, which emphasizes the role of state law in allowing creditors to pursue unsecured claims post-sale of surrendered vehicles. The court acknowledges that while the Hanging Paragraph limits the application of section 506, it does not negate a claimholder's rights under state law. Consequently, if a creditor is eligible for an unsecured deficiency claim under state law, the surrender of collateral does not eliminate that right. In this case, the debtors' plan to surrender their 910 vehicle was opposed by MacDill, which argued for the allowance of a deficiency claim under state law. The court upheld MacDill's objection, asserting that section 502 governs the creditor’s right to an unsecured claim following collateral liquidation, affirming that the Hanging Paragraph does not preclude such claims. Thus, MacDill is entitled to an unsecured deficiency claim under Florida law. The court's order sustains MacDill's objection to the debtors' confirmation plan.