Opinion ID: 609741
Heading Depth: 2
Heading Rank: 1

Heading: Surrender of Collateral Under (C) Versus Distribution under (B)

Text: 23 The plain meaning of the language Congress used in a statute ordinarily is conclusive, except in the rare case where a literal reading defeats the drafter's aim in enacting the legislation. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989). Unfortunately, Congress' aim in enacting this legislation does not like a flash of lightning readily reveal itself. Instead, in construing this statute we painstakingly must examine its language and purpose in light of the competing interests of small farmers who borrow money and the institutions that loan to them. 24 We begin by agreeing with the bank's contention, and disagreeing with the district court, that the property securing such claim in (C) refers to all the debtor's collateral and that a transfer of only part of the collateral cannot be accomplished through that section. Accord In re Townsend, 90 B.R. 498, 502 (Bankr.M.D.Fla.1988) (transfer of less than all property securing claim did not comply with § 1225(a)(5)(C)); In re Graham, 123 B.R. 330, 332 (Bankr.W.D.Mo.1990) (partial transfer of collateral did not comply with similar provision 11 U.S.C. § 1325(a)(5)(C)). Subsection (C) allows a debtor to surrender the collateral to a secured creditor and carries different implications than a distribution of property under subsection (B). 25 When the debtor elects to surrender the collateral under (C), the secured creditor takes possession of the property and sells it in accordance with non-bankruptcy law. If a sale produces a deficiency, the creditor may assert the amount of such deficiency as an unsecured claim against the debtor's remaining assets. See 5 King, Collier on Bankruptcy p 1225.03, at 1225-27 (15th ed. 1992). Thus, even a creditor who receives its entire collateral under (C) is not guaranteed its claim will be satisfied to the last penny because any outstanding deficiency will, upon liquidation of the estate, entitle the creditor only to its pro rata share of those payments made to all unsecured creditors. Id. Additionally, if the sale produces a surplus, the creditor must pay the surplus to holders of junior liens or return the excess to the debtor. Id. Thus, the debtor can ensure that, should the value of the collateral surrendered exceed the creditor's allowed secured claim, the excess will benefit other creditors or the debtor. 26 In contrast, under a (B) distribution of property a creditor's claim may be deemed fully satisfied provided the property to be distributed has been valued as at least equal to the amount of that claim. 11 U.S.C. § 1225(a)(5)(B)(ii); In re Townsend, 90 B.R. at 502. Following a (B) distribution, the bankruptcy court ceases to be concerned with whether the transferred property is held or sold or what amount such sale brings. Although (B)(i) provides in those circumstances that a lien be maintained on the collateral, the lien does not guarantee what price the transferred property will bring upon ultimate sale. The (B)(i) lien only guarantees that the transfer is completed in accordance with the reorganization plan. A (B) distribution--quite distinct from a (C) surrender--provides that so long as the plan is carried out as approved, a creditor may not assert any deficiencies that may result when it sells the distributed property, nor need the creditor return any surplus. 27 Section (C) becomes a particularly appropriate vehicle for discharging debt where a debtor possesses collateral which, after reorganization, she or he no longer intends to use, and where such collateral is discrete and easily separated from the debtor's remaining property. Such would be the case if, for example, the collateral was a particular piece of farm equipment a farmer no longer needed. In that situation section (C) facilitates the transfer of collateral without the expenditure of time, money and the judicial resources required to revalue the collateral as of the effective date of the plan. But a section (C) surrender would not facilitate reorganization in Kerwin's case because to surrender the collateral would be to surrender the entire farm, thus destroying the point of a chapter 12 reorganization, which is after all to afford a farmer flexibility and a number of options to facilitate the family farmer's reorganization, in this case on a smaller scale. 28 Particularly given the different implications of and reasons for a (C) surrender versus a (B) distribution of property, we read the property securing such claim in (C) as referring to the entire collateral. Section 1225(a)(5)(C) accordingly does not provide an appropriate basis on which the bankruptcy court could have confirmed the plan's provision for the distribution of part of Kerwin's farm. It follows therefore that such a transfer could only have been effected under (B).