910 Vehicle Surrendered – Full Satisfaction of Claim

Yesterday the court issued an important decision in In re Johnson, Case No. 06-10611 (Bankr.S.D.Fla. July 2, 2007)(Olson J.) on the subject of the “910 car claim”. The specific issue before the court was whether 11 USC 1325(a)(5) and the “hanging paragraph” allow the debtor to surrender a vehicle in full satisfaction of the claim. That is, in other words, whether these provisions deny a creditor an unsecured deficiency claim if a vehicle is surrendered.

The court adopted what it noted was the majority position that allows a vehicle to be surrendered in full satisfaction of the claim. These courts conclude that the hanging paragraph applies to section 1325(a)(5) as a whole and that it applies to the retention of a vehicle under 1325(a)(5)(B) as well as the surrender of a vehicle under 1325(a)(5)(C). In re Ezell, 338 B.R. 330 (Bankr.E.D.Tenn. 2006). This may allow the creditor a great benefit when the vehicle is retained but may advantage the debtor if the vehicle is surrendered. The Court noted that if Congress intended the hanging paragraph to be limited to either subsection A, B, or C of 1325(a)(5), that it could have inserted the proper limiting language.

The court rejected the minority position that the surrender of a 910 vehicle does not achieve full satisfaction of the creditor’s claim. Some of these courts have determined that the hanging paragraph was ambiguous and looked to the legislative history to divine Congress’s intent. In re Duke, 345 B.R. 806 (Bankr.W.D.Ky.2006). The Court also reviewed and rejected other rationales used by other courts reaching the minority position.

In contrast to yesterday’s Johnson decision, today the 7th Circuit Court of Appeals issued its opinion under the minority approach in In re Wright, Case No. 07-1483 (7th Cir. 2007). The court reasoned that the hanging paragraph by “knocking out” section 506, leaves the parties to their contractual entitlements. The court states that the majority position is mistaken that section 506 is the only source of authority for a deficiency and that per Butner v. United States, 440 U.S. 48 (197) that state law determines rights and obligations when the Bankruptcy Code does not supply a federal rule. The court noted that section 306(b) of BAPCPA which enacted the hanging paragraph is captioned “Restoring the Foundations for Secured Creditor” and that this implies replacing section 506 with an agreement freely negotiated between the parties. The court reasoned that making the loan non-recourse would not “restore the foundations for secured credit.” The Court noted that when section 506 does not apply, the fallback under Butner is the parties’ contract which entitles the secured lender to an unsecured deficiency.

The Wright case went straight to the 7th Circuit Court on a direct appeal from the bankruptcy court as allowed by 28 U.S.C. 158 as amended by BAPCPA.

One may refer to a research paper entitled “A History of the Automobile Lender Provisions of BAPCPA” by University of Wisconsin Law Professor William Whitford for further information on the background of the hanging paragraph.

Kibbe 1st Circuit BAP Decision – Chapter 13 "Projected Disposable Income"

On February 20, 2007, the 1st Circuit BAP issued its decision in the Kibbe case. In re Kibbe, ___ B.R. ___, 2007 WL 512753 (1st Cir. BAP (N.H.)). The issue in the case involved the income component of the “projected disposable income” calculation under section 1325(b)(1)(B).

The Debtor’s present income was substantially higher than it was during recent 6 month period prior to filing. This below-median income Debtor sought to calculate the amount required to be paid in her Chapter 13 plan to unsecured creditors based on her Current Monthly Income (“CMI”) as per section 1325(b)(2). CMI is based on the historical earnings during the 6 month period prior to filing for bankruptcy per Section 101(10A). The Chapter 13 Trustee objected and argued that the calculation of the projected disposable income should be determined by the Debtor’s actual income as set forth in Schedule I and that the income should not be irrevocably set in the calculation of CMI as set forth in Form B22C.

The BAP Court noted that the BAPCPA did not define the term projected disposable income. It also noted that the the CMI is based on historical income while the term projected disposable income is forward-looking. It further noted that “disposable income” as used in section 1325(b)(2) is based on CMI which is not necessarily reflected of the current income of the debtor.

The BAP Court further noted that this apparent inconsistency within the term “projected disposable income” has produced two competing interpretations. One camp construes that “projected” simply means that the CMI figure Form B22C must be multiplied (projected out) by the number of months of the proposed plan. See In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006). The second camp holds that the term “projected” was intended to signal a reexamination of income potential over the life of the plan with the consequence that “disposable income” and “projected disposable income” have very different meanings. See In re Hardacre, 338 B.R. 718 (Bankr.N.D. Tex.2006).

In its discussion, the BAP pointed out that Congress intended to exclude certain categories of income when it defined “disposable income” in general and more specifically in the Chapter 13 context. Not to be included are, inter alia, benefits under the Social Security Act per section 101(10A)(B) and child support, foster care, or disability payments for a dependent child to the extent reasonably necessary to be expended for the child per section 1325(b)(2). The Court stated that these “Income Exclusions” are included in the income calculation set forth in Schedule I and that therefore Schedule I, without modification, is not an accurate measure of the new “disposable income” definition of section 1322(b)(2).

The BAP agreed with the Kibbe Bankruptcy Court that “projected disposable income” must be grounded in the Debtor’s anticipated income (less the noted “Income Exclusions”). The Court held that Form B22C must at least be the starting point for the determination of “projected disposable income”. If the debtor’s CMI is substantially the same as the actual current income (less the “Income Exclusions”) at the time of the confirmation of the plan the inquiry begins and ends with Form B22C. But where the CMI amount is not the same as the debtor’s actual current income (less the “Income Exclusions”), the courts should assume that Congress intended that they rely on what a debtor can realistically pay to his creditors through their plan and not on any “artificial measure”. The Court held that the income component of “projected disposable income” is the anticipated actual income of the Debtor, subject to the “Income Exclusions” during the plan commitment period. Where the debtor’s income at confirmation or as reasonably anticipated for the plan commitment period is materially different from the debtor’s “disposable income” the court must depart from the Form B22C calculation.

The Court noted that the figures set forth in Schedule I may also not be determinative as they ignore the new statutory definition of the term “disposable income” and also fail to account for reasonably anticipated changes in the debtor’s circumstances after the petition date. If the circumstances are that neither Form B22C nor Schedules I (less the “Income Exclusions”) and J accurately portray the debtor’s income projected over the plan commitment period, the Bankruptcy Court must make a fact-based determination at the time of confirmation.

The Court noted in footnote 11, that the ambiguities, if any, in the calculation of allowable expenses for the above or below-median income debtors were not before the Court.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983