Source: https://lundinonchapter13.com/Content/Section/78.6
Timestamp: 2019-10-24 05:48:26
Document Index: 530392761

Matched Legal Cases: ['§ 78', '§ 78', '§ 1325', '§ 1325', '§ 506', '§ 506', '§ 1325', '§ 1325', '§ 506', '§ 506', '§ 1325', '§ 506', '§ 1325', '§ 506', '§ 506', '§ 506', '§ 506', '§ 506', '§ 506', '§ 506', '§ 506', '§ 1325', '§ 506', '§ 511', '§ 506', '§ 506', '§ 511', '§ 506', '§ 511', '§ 511', '§ 506', '§ 511', '§ 511', '§ 75', '§ 506', '§ 1325', '§ 451', '§ 506', '§ 75', '§ 506', '§ 506', '§ 116', '§ 78', '§ 111', '§ 77', '§ 513', '§ 136', '§ 511', '§ 513', '§ 136', '§ 506', '§ 506', '§ 506', '§ 502', '§ 506', '§ 506', '§ 1322', '§ 1322', '§ 1322', '§ 506', '§ 506', '§ 506', '§ 506', '§ 511', '§ 511', '§ 506', '§ 1325', '§ 1325', '§ 506', '§ 511']

§ 78.6 Oversecured Claims after BAPCPA
Cite as: Keith M. Lundin, Lundin On Chapter 13, § 78.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
BAPCPA may have changed the rights of oversecured claim holders when the claim falls within the new hanging sentence at the end of § 1325(a). Discussed immediately above,1 BAPCPA added a hanging sentence at the end of § 1325(a): § 506 “shall not apply” when a creditor has a purchase money security interest, the debt was incurred within 910 days preceding the petition and the collateral is a motor vehicle acquired for the personal use of the debtor, or when the collateral is any other thing of value and the debt was incurred within one year of the petition.2 There are many conceptual and interpretive problems with this new hanging sentence.3 One in particular should concern oversecured claim holders.
Under § 506(b), to the extent an allowed secured claim is secured by property that has a value greater than the amount of the claim, the holder is allowed “interest on such claim, and any reasonable fees, costs or charges provided for under the agreement or state statute under which such claim arose.”4 An allowed secured claim provided for by the Chapter 13 plan under § 1325(a)(5) which is described in the new hanging sentence at the end of § 1325(a) arguably cannot claim the benefits of § 506(b) because § 506 “shall not apply.”
There is uncertainty about this outcome because the hanging sentence at the end of § 1325(a) is a final exam in statutory construction.5 The mandate that § 506 shall not apply comes after a cross-reference to § 1325(a)(5)—a subsection that defines the rights of allowed secured claim holders at confirmation in a Chapter 13 case. An allowed claim ripens into an allowed secured claim only by virtue of § 506(a)—a subsection that does not apply to claims described in the new hanging sentence. The issue becomes: how can a debt of the special kind described in the hanging sentence become an allowed secured claim except to first pass through § 506; and if § 506 first applies, and then does not apply, does § 506(b) do its magic before or after § 506 does not apply?
These aren’t silly questions for oversecured claim holders. If § 506(b) adds interest, fees and costs to the allowed secured claim before the guillotine drops in the new hanging sentence, oversecured 910-day PMSI car lenders and the like bank the bennies from § 506(b), then hide behind the elevated status in the hanging sentence. If the hanging sentence means what it says and § 506 does not apply to an oversecured 910-day PMSI car claim provided for under § 1325(a)(5), then the lender suffers a bit of loss on the way to hanging-sentence Nirvana.
Oversecured claim holders will think twice before claiming whatever benefits there may be in the new hanging sentence—at risk of losing the certain benefits in § 506(b). Chapter 13 debtors will find some compensation in the new hanging sentence—a limitation on the accrual of interest, attorney fees and the like with respect to oversecured claim holders with security described in the hanging sentence. Even a real estate mortgage incurred within a year of the petition can fall in the new hanging sentence with the result that postpetition interest and attorney fees would not be recoverable in a Chapter 13 case.
At confirmation, the usual present value rules would apply,6 but Chapter 13 debtors would avoid the accrual of interest and fees between the petition and confirmation with respect to oversecured claims secured by cars or other things of value within the time periods and other conditions fixed by the new hanging sentence. There is certain to be litigation over this outcome.
With respect to one special class of sometimes oversecured claim holders—tax claims—BAPCPA changed the methodology for determining allowable interest and other charges. Detailed elsewhere,7 BAPCPA added a new § 511 to the Bankruptcy Code, “Rate of Interest on Tax Claims,” which states:
(b) In the case of taxes paid under a confirmed plan under this title, the rate of interest shall be determined as of the calendar month in which the plan is confirmed.8
After the Supreme Court’s decision in United States v. Ron Pair Enterprises, Inc.,9 we know that the provision in § 506(b) that allows an oversecured creditor to include in its claim “interest . . . and any reasonable fees, costs or charges” applies not only to consensual lienholders but also to nonconsensual liens such as those held by taxing authorities. BAPCPA added the phrase “or state statute” to § 506(b), basically codifying the holding in Ron Pair.
But new § 511 is a change from pre-BAPCPA practice. Prior to BAPCPA, the right of an oversecured creditor to add interest and other charges to its claim under § 506(b) was clear, but the Bankruptcy Code was silent with respect to the appropriate rate of interest. Oversecured taxing authorities were sometimes allowed interest at applicable state law rates but more likely, at confirmation in Chapter 13 cases, the rate of interest would be calculated using the methodology in Till v. SCS Credit Corp.10 The Till rate of interest on an oversecured tax claim would be the prime rate plus a risk factor.11
As explained by the bankruptcy court in In re Jones,12 the enactment of § 511 appears intended by Congress “to remove the bankruptcy court’s equitable discretion under Till to determine an appropriate interest rate on a case-by-case basis and replace it with a uniform rate applicable to all tax claims.”13 In Jones, the bankruptcy court read new § 511 to require application of state law to determine the interest rate on an oversecured tax claim. Looking to Texas law, the Jones court found provisions for attorney’s fees, for penalties and for interest on the principal amount of a tax, but Texas law was completely silent on the issue of interest on interest or interest on attorney’s fees. The bankruptcy court concluded that only interest on principal was allowed to the oversecured tax claimant:
Whether viewed under § 506(b) or § 511, the holder of a tax lien must establish that applicable state law authorizes interest, penalties and fees in addition to the principal of its claim. Here, there is no dispute that the County is entitled to the principal of its claim, plus interest on that principal of 12.00% per annum, plus reasonable attorneys’ fees, costs and penalties. However, the County is not entitled to interest on interest, nor is the County entitled to interest on the attorney’s fees, costs, and penalties.14
Jones seems well reasoned, and there is good news and bad news here for oversecured tax claim holders. Taxing authorities are often oversecured because tax liens typically prime other liens on real and personal property. New § 511 refers the bankruptcy courts to state law to determine the entitlement of an oversecured lienholder to interest, fees and other charges. As illustrated in Jones, state law may be less than precise or complete at least until state legislatures clarify state law in this bankruptcy context.
1 See discussion beginning at § 75.1 In General: Modification Without § 506.
2 11 U.S.C. § 1325(a), discussed in § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
4 11 U.S.C. § 506(b), discussed in § 116.1 [ Oversecured Claim Holders ] § 78.5 Oversecured Claim Holders.
6 See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1 “Value, As of the Effective Date of the Plan” Means Interest.
7 See § 513.1 [ Taxes ] § 136.3 Taxes after BAPCPA.
8 11 U.S.C. § 511, discussed in § 513.1 [ Taxes ] § 136.3 Taxes after BAPCPA.
10 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004).
12 No. 06-35051, 2007 WL 1170620 (Bankr. S.D. Tex. Apr. 18, 2007).
13 2007 WL 1170620, at *3.
14 2007 WL 1170620, at *4.
First United Sec. Bank v. Garner (In re Garner), 663 F.3d 1218, 1220 (11th Cir. Nov. 30, 2011) (Dubina, Cox, Hunt) (Oversecured creditor is entitled to contract interest through date of confirmation and then to present value at rate determined under Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (May 17, 2004). "In [Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed.2d 424 (June 7, 1993)], the Supreme Court noted that an oversecured creditor's claim for interest accrues under Section 506(b) 'as part of the allowed claim from the petition date until the confirmation or effective date of the plan.' . . . Section 506(b) allows oversecured creditors to include post-petition interest, costs and fees as part of the secured claim until confirmation. . . . Every circuit that has discussed the temporal aspect of Section 506(b) relies on the Supreme Court's statement in Rake that Section 506(b) applies only from the date of filing through confirmation.").
In re Gianasmidis, 318 F. Supp. 3d 442, 453–55 (D. Mass. Aug. 3, 2018) (Young) (Attorneys with large arbitration award against Chapter 13 debtor are oversecured and entitled to interest from the petition to confirmation under § 506(b) without regard to arguably contrary state law. Remand necessary to calculate correct rate of interest and amount. “Federal law simply recognizes a right in bankruptcy proceedings that Massachusetts courts have chosen to deny. . . . Pendency interest runs from the petition date. . . . [T]he Bankruptcy Court incorrectly construed section 506(b) to make the right to pendency interest dependent on the contract or state statute.”).
In re Davis, 570 B.R. 522, 525 (E.D.N.C. Apr. 28, 2017) (Warren) (Consent order between Chapter 13 debtor and taxing authority that allowed “other costs and expenses pursuant to § 506” was not an agreement or state statute for purposes of recovery of attorney fees under § 506(b).).
In re Smith, 594 B.R. 376 (Bankr. W.D. La. Dec. 3, 2018) (Hodge) (Between the petition date and confirmation an oversecured creditor in a Chapter 13 case is entitled to “pendency” interest at the contract interest rate.).
In re Milbourne, 557 B.R. 376 (Bankr. E.D. Pa. Sept. 7, 2016) (Chan) (Condominium association not entitled to include late charges in its arrearage claim under § 502(b) because association failed to produce a contract that allowed late charges. Prepetition attorney fees and costs were allowed because provided for in the condominium declaration. Postpetition costs are also allowed but are capped by value of equity securing association’s claim.).
In re Herman, No. 15-80027-G3-13, 2016 WL 520306, at *2-*3 (Bankr. S.D. Tex. Feb. 9, 2016) (Paul) (Oversecured mortgagee, whose debt was current and being paid directly by debtor under confirmed plan, failed to prove reasonableness or necessity under § 506(b) for $425 postpetition charge for filing proof of claim. "Although Debtors are current on their payments to Creditor who is being paid outside of the confirmed plan, the fact that the bankruptcy proceeding is pending might still significantly affect Creditor's interest in the property. . . . [I]t is not unreasonable for Creditor to have filed a proof of claim under the facts of this case, regardless of whether the creditor is required to do so. . . . The court has concluded in other bankruptcy cases, after the submission of evidence, that a flat or fixed fee of $425 for the filing of a proof of claim is reasonable. In order for the court to determine that the fees are reasonable under section 506(b) of the Bankruptcy Code, the creditor must establish that fees were for services rendered that were necessary, that the fees were actually incurred, and that the amounts charged for the services rendered were reasonable. Creditor offered no testimony or evidence. . . . [N]o evidence was submitted or proffer made to describe the services rendered . . . . Creditor failed to sustain its burden of proof to show that the fees are reasonable under section 506(b) of the Bankruptcy Code. . . . [T]he burden of proof is on the oversecured creditor . . . . [T]he court must determine whether the creditor took the kinds of actions that similarly situated creditors might reasonably conclude should be taken under the circumstances and that the fees and costs claimed are reasonable amounts to charge for the services rendered.").
In re Onochie, No. 14-80447-G3-13, 2015 WL 4095742, at *2 (Bankr. S.D. Tex. July 6, 2015) (Paul) (Oversecured tax lienholder not entitled to attorney fees and costs because services for which fees are sought—preparation of proof of claim—are not "provided for" under Texas law. "The services addressed in the time and expense records attached to the instant applications are not within the categories provided for under [Texas law]. . . . [T]he fees and expenses sought in the instant applications are not 'provided for under the agreement or State statute' under which the applicants' claims arose. Thus, the fees sought are not allowed pursuant to Section 506(b) . . . .").
In re Wirth, 503 B.R. 800, 802-03 (Bankr. W.D. Wis. Oct. 29, 2013) (Martin) (Oversecured mortgagee is allowed attorney fees under § 506(b) "'only from the date of filing through the confirmation date.' . . . '[A]fter confirmation, the creditors' rights to costs and fees are solely through the plan . . . .' . . . The one exception to this rule is a claim secured only by security interest in real property that is the debtor's principal residence. . . . Such claims are protected from modification under § 1322(b)(2). . . . If the underlying contract requires the debtor to pay attorney's fees, that contractual right cannot be modified by the Chapter 13 plan. . . . By enacting 11 U.S.C. § 1322(e), Congress added as a requirement for the allowance of postpetition attorney's fees that they be an element of curing default. [Under § 1322(e)] 'if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.' . . . 'Failure of either condition—the absence of a contract provision or a prohibition under applicable nonbankruptcy law—will defeat recovery of attorney fees . . . as an element of curing default.' . . . The attorney's fees in this case resulted from the creditor's prior insufficient itemization of attorney's fees. While the debtor's default was the reason for the need of detailed itemization of 'the time spent and the nature of each discrete task performed,' the debtor was not responsible for [creditor's] lack of diligence in preparing its claim for attorney's fees.").
In re Gift, 469 B.R. 800 (Bankr. M.D. Tenn. Mar. 22, 2012) (Mashburn) (Although oversecured creditor was entitled to postpetition interest under § 506(b), penalty portion of Government's tax claim was not part of claim entitled to postpetition interest. Applying rationale of Bondholder Committee v. Williamson County (In re Brentwood Outpatient, LTD), 43 F.3d 256 (6th Cir. Dec. 13, 1994) (Merritt, Milburn, Siler), § 506(b) was amended by BAPCPA to add state statute as basis for allowing oversecured creditor's recovery of interest on non-consensual liens, but Brentwood conclusion that § 506(b) did not include penalties was still valid. "Penalty" had distinct meaning, not within § 506(b) "fees, costs or charges.").
In re Crigler, No. 10-22769, 2011 WL 1344497 (Bankr. E.D. Ky. Apr. 8, 2011) (Wise) (Purchaser of delinquent tax claim was oversecured and entitled to postpetition interest at rate prescribed under Kentucky law, plus reasonable attorney fees. Under new § 511, statutory interest at 12% was determined under Kentucky law. Debtors contributed to increase in attorney fees by resisting creditor's secured status, when law was clear that tax purchaser had secured claim.).
In re Burnbaum, 404 B.R. 39 (Bankr. D. Mass. Apr. 21, 2009) (Hillman) (Under § 511, oversecured town was entitled to pre- and postpetition interest on tax claim at state statutory rates.).
In re Fondren, 398 B.R. 553 (Bankr. N.D. Miss. Nov. 10, 2008) (Houston) (Contract rate is presumptive interest rate at confirmation with respect to oversecured creditor because Drive Financial Services, L.P. v. Jordan, 521 F.3d 343 (5th Cir. 2008), applies Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004), to overrule Green Tree Financial Servicing Corp. v. Smithwick, 121 F.3d 211 (5th Cir. 1997), only with respect to undersecured claims and 910- day PMSI claims. "[T]he bank's claims in the current proceeding are identical to Green Tree's oversecured claim in Smithwick. Since the claims are oversecured, § 506(b) of the Bankruptcy Code, . . . must be considered . . . . In Drive Financial, the creditor's claim was 'deemed' fully secured. It was obviously not oversecured. Section 506(b) was not applicable, and, consequently, the factual scenario in this proceeding is distinguishable from that in Drive Financial. . . . Because the facts herein are obviously different from those in Drive Financial, this court reads the literal language of Drive Financial to mean that Smithwick is still binding precedent as to the payment of allowed oversecured claims through a Chapter 13 plan. . . . Chapter 13 debtors who are required to pay oversecured claims through their plans presumptively must pay the contract rate of interest unless an exception, as contemplated in the Smithwick opinion, dictates otherwise.").
In re Leath, 389 B.R. 494 (Bankr. E.D. Tex. Jan. 23, 2008) (Parker) (Absent exception, interest stops accruing on secured claims at petition and recommences on effective date of the plan to provide present value under § 1325(a)(5); oversecured creditors subject to the hanging sentence at the end of § 1325(a) are not entitled to add interest to their claims for period between petition and confirmation because § 506 shall not apply.).
In re Yelverton, No. 06-10664-DHW, 2007 WL 1521595 (Bankr. M.D. Ala. May 21, 2007) (unpublished) (Williams) (Applying Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004), to an oversecured car lender, plan must provide prime rate of interest, but no debtor-specific adjustment is required when debtor has made every payment under plan, value of car exceeds amount of debt and prime rate exceeds contract rate.).
In re Jones, 368 B.R. 602 (Bankr. S.D. Tex. Apr. 18, 2007) (Because of new § 511, oversecured tax claim is entitled to interest at rate provided in nonbankruptcy law; because Texas law does not grant interest on interest, interest on penalties or interest on fees, oversecured taxing authority is only entitled to state statutory rate of interest on principal portion of tax claim.).