Court Opinion

ID: 3000725
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:08:25.461875+00
Date Added: 2024-06-11T11:45:42.465049
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

No. 07-1483
IN THE MATTER OF:
   CRAIG WRIGHT and LACHONE P. GILES-WRIGHT,
                                           Debtors-Appellants.
   SANTANDER CONSUMER USA INC.,
                                             Creditor-Appellee.
                        ____________
        Appeal from the United States Bankruptcy Court
      for the Northern District of Illinois, Eastern Division.
   No. 06 B 13363—A. Benjamin Goldgar, Bankruptcy Judge.
                        ____________
      ARGUED JUNE 5, 2007—DECIDED JULY 3, 2007
                    ____________

 Before EASTERBROOK, Chief Judge, and MANION and
WOOD, Circuit Judges.
  EASTERBROOK, Chief Judge. Bankruptcy judges across
the nation have divided over the effect of the unnumbered
hanging paragraph that the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 added to §1325(a) of
the Bankruptcy Code, 11 U.S.C. §1325(a). Section 1325,
part of Chapter 13, specifies the circumstances under
which a consumer’s plan of repayment can be confirmed.
The hanging paragraph says that, for the purpose of a
Chapter 13 plan, §506 of the Code, 11 U.S.C. §506, does
not apply to certain secured loans.
2                                               No. 07-1483

  Section 506(a) divides loans into secured and unsecured
portions; the unsecured portion is the amount by which
the debt exceeds the current value of the collateral. In a
Chapter 13 bankruptcy, consumers may retain the col-
lateral (despite contractual provisions entitling creditors
to repossess) by making monthly payments that the
judge deems equal to the market value of the asset, with
a rate of interest that the judge will set (rather than the
contractual rate). See Associates Commercial Corp. v.
Rash, 520 U.S. 953 (1997); Till v. SCS Credit Corp., 541
U.S. 465 (2004). This procedure is known as a
“cramdown”—the court crams down the creditor’s throat
the substitution of money for the collateral, a situation
that creditors usually oppose because the court may
underestimate the collateral’s market value and the
appropriate interest rate, and the debtor may fail to
make all promised payments, so that the payment
stream falls short of the collateral’s full value. (The effect
is asymmetric: if a judge overestimates the collateral’s
value or the interest rate, the debtor will surrender the
asset and the creditor will realize no more than the
market price. When the judge errs in the debtor’s favor,
however, the debtor keeps the asset and pays at the
reduced rate. Creditors systematically lose from this
asymmetry—and in the long run solvent borrowers must
pay extra to make up for creditors’ anticipated loss in
bankruptcy.)
  The question we must decide is what happens when, as
a result of the hanging paragraph, §506 vanishes from
the picture. The majority view among bankruptcy judges
is that, with §506(a) gone, creditors cannot divide their
loans into secured and unsecured components. Because
§1325(a)(5)(C) allows a debtor to surrender the col-
lateral to the lender, it follows (on this view) that sur-
render fully satisfies the borrower’s obligations. If this
is so, then many secured loans have been rendered nonre-
No. 07-1483                                                  3

course, no matter what the contract provides. See, e.g., In
re Payne, 347 B.R. 278 (Bankr. S.D. Ohio 2006); In re
Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006); In re Kenney,
2007 Bankr. LEXIS 1646 at *16-17 (Bankr. E.D. Va. May
11, 2007) (collecting cases). The minority view is that
Article 9 of the Uniform Commercial Code plus the law of
contracts entitle the creditor to an unsecured deficiency
judgment after surrender of the collateral, unless the
contract itself provides that the loan is without recourse
against the borrower. See, e.g., In re Particka, 355 B.R.
616 (Bankr. E.D. Mich. 2006); In re Zehrung, 351 B.R. 675
(W.D. Wis. 2006). That unsecured balance must be
treated the same as other unsecured debts under the
Chapter 13 plan.
  Craig Wright and LaChone P. Giles-Wright, debtors
in this proceeding, owe more on their purchase-money
automobile loan than the car is worth. Because the pur-
chase occurred within 910 days of the bankruptcy’s
commencement, the hanging paragraph in §1325(a)(5)
applies. This paragraph reads:
   For purposes of paragraph (5), section 506 shall
   not apply to a claim described in that paragraph if
   the creditor has a purchase money security inter-
   est securing the debt that is the subject of the
   claim, the debt was incurred within the 910-day
   [sic] preceding the date of the filing of the petition,
   and the collateral for that debt consists of a motor
   vehicle (as defined in section 30102 of title 49)
   acquired for the personal use of the debtor, or if
   collateral for that debt consists of any other thing
   of value, if the debt was incurred during the 1-year
   period preceding that filing.
Debtors proposed a plan that would surrender the car to
the creditor and pay nothing on account of the difference
between the loan’s balance and the collateral’s market
value. After taking the minority position on the effect of
4                                               No. 07-1483

bypassing §506, the bankruptcy judge declined to approve
the Chapter 13 plan, because debtors did not propose to
pay any portion of the shortfall.
  Normally the next step would be an appeal to the district
court, followed by an appeal to this court once a final
decision had been rendered. But the 2005 Act amends
28 U.S.C. §158 to allow a direct appeal from a bankruptcy
court to the court of appeals, bypassing the expense and
delay of litigation before a district judge. Section
158(d)(2)(A) now provides:
    The appropriate court of appeals shall have juris-
    diction of appeals described in the first sentence
    of subsection (a) if the bankruptcy court, the
    district court, or the bankruptcy appellate panel
    involved, acting on its own motion or on the re-
    quest of a party to the judgment, order, or decree
    described in such first sentence, or all the appel-
    lants and appellees (if any) acting jointly, certify
    that—
        (i) the judgment, order, or decree involves a
        question of law as to which there is no control-
        ling decision of the court of appeals for the
        circuit or of the Supreme Court of the United
        States, or involves a matter of public impor-
        tance;
        (ii) the judgment, order, or decree involves a
        question of law requiring resolution of conflict-
        ing decisions; or
        (iii) an immediate appeal from the judgment,
        order, or decree may materially advance the
        progress of the case or proceeding in which the
        appeal is taken; and if the court of appeals
        authorizes the direct appeal of the judgment,
        order, or decree.
No. 07-1483                                                  5

The bankruptcy judge certified that this litigation satis-
fies both subparagraphs (i) and (ii). A motions panel of
this court accepted the appeal because the issue not only
has divided the bankruptcy courts but also arises in a
large fraction of all consumer bankruptcy proceedings. A
clear answer is needed—yet this issue appears to be
“stuck” in the bankruptcy courts. No court of appeals
has addressed the subject, and few district judges have
done so. Lower litigation costs for thousands of debtors and
creditors may be achieved by expediting appellate consid-
eration of this case.
  Like the bankruptcy court, we think that, by knocking
out §506, the hanging paragraph leaves the parties to
their contractual entitlements. True enough, §506(a)
divides claims into secured and unsecured components.
(Section 506 does other things as well, see Dewsnup v.
Timm, 502 U.S. 410 (1992), but these have no bearing on
the question at hand.) Yet it is a mistake to assume, as the
majority of bankruptcy courts have done, that §506 is
the only source of authority for a deficiency judgment when
the collateral is insufficient. The Supreme Court held in
Butner v. United States, 440 U.S. 48 (1979), that state law
determines rights and obligations when the Code does not
supply a federal rule. See also, e.g., Travelers Casualty &
Surety Co. v. Pacific Gas & Electric Co., 127 S. Ct. 1199
(2007); Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15
(2000).
  The contract between the Wrights and their lender is
explicit: If the debt is not paid, the collateral may be seized
and sold. Creditor “must account to Buyer for any surplus.
Buyer shall be liable for any deficiency.” In other words,
the contract creates an ordinary secured loan with re-
course against the borrower. Just in case there were
doubt, the contract provides that the parties enjoy all of
their rights under the Uniform Commercial Code. Section
6                                               No. 07-1483

9-615(d)(2) of the UCC, enacted in Illinois as 810 ILCS 5/9-
615(d)(2), provides that the obligor must satisfy any
deficiency if the collateral’s value is insufficient to
cover the amount due.
   If the Wrights had surrendered their car the day before
filing for bankruptcy, the creditor would have been en-
titled to treat any shortfall in the collateral’s value as an
unsecured debt. It is hard to see why the result should be
different if the debtors surrender the collateral the day
after filing for bankruptcy when, given the hanging
paragraph, no operative section of the Bankruptcy Code
contains any contrary rule. Section 306(b) of the 2005 Act,
Pub. L. 109-8, 119 Stat. 23, 80 (Apr. 20, 2005), which
enacted the hanging paragraph, is captioned “Restoring
the Foundation for Secured Credit”. This implies replac-
ing a contract-defeating provision such as §506 (which
allows judges rather than the market to value the collat-
eral and set an interest rate, and may prevent creditors
from repossessing) with the agreement freely negotiated
between debtor and creditor. Debtors do not offer any
argument that “the Foundation for Secured Credit” could
be “restored” by making all purchase-money secured
loans non-recourse; they do not argue that non-recourse
lending is common in consumer transactions, and it is
hard to imagine that Congress took such an indirect
means of making non-recourse lending compulsory.
  Appearing as amicus curiae, the National Association of
Consumer Bankruptcy Attorneys makes the bold argu-
ment that loans covered by the hanging paragraph cannot
be treated as secured in any respect. Only §506 provides
for an “allowed secured claim,” amicus insists, so the
entire debt must be unsecured. This also would imply that
a lender is not entitled to any post-petition interest.
Amicus recognizes that §502 rather than §506 determines
whether a claim should be “allowed” but insists that only
§506 permits an “allowed” claim to be a “secured” one.
No. 07-1483                                               7

  This line of argument makes the same basic mistake as
the debtors’ position: it supposes that contracts and
state law are irrelevant unless specifically implemented
by the Bankruptcy Code. Butner holds that the presump-
tion runs the other way: rights under state law count in
bankruptcy unless the Code says otherwise. Creditors don’t
need §506 to create, allow, or recognize security interests,
which rest on contracts (and the UCC) rather than federal
law. Section 502 tells bankruptcy courts to allow claims
that stem from contractual debts; nothing in §502
disfavors or curtails secured claims. Limitations, if any,
depend on §506, which the hanging paragraph makes
inapplicable to purchase-money interests in personal motor
vehicles granted during the 910 days preceding bankruptcy
(and in other assets during the year before bankruptcy).
  Both the debtors and the amicus curiae observe that
many decisions, of which United States v. Ron Pair
Enterprises, Inc., 489 U.S. 235, 238-39 (1989), is a good
example, state that §506 governs the treatment of secured
claims in bankruptcy. No one doubts this, but the question
at hand is what happens when §506 does not apply. The
fallback under Butner is the parties’ contract (to the ex-
tent the deal is enforceable under state law), rather than
non-recourse secured debt (the Wrights’ position) or no
security interest (the amicus curiae’s position). And there
is no debate about how the parties’ contract works: the
secured lender is entitled to an (unsecured) deficiency
judgment for the difference between the value of the
collateral and the balance on the loan.
  By surrendering the car, debtors gave their creditor the
full market value of the collateral. Any shortfall must be
treated as an unsecured debt. It need not be paid in
full, any more than the Wrights’ other unsecured debts,
but it can’t be written off in toto while other unsecured
creditors are paid some fraction of their entitlements.
                                                 AFFIRMED
8                                        No. 07-1483

A true Copy:
      Teste:

                   ________________________________
                   Clerk of the United States Court of
                     Appeals for the Seventh Circuit

               USCA-02-C-0072—7-3-07