How's It Hanging?

The Ninth Circuit BAP has spoken on the “hanging paragraph” issue, siding with consumer lenders. Ever since the enactment of BAPCPA, some have claimed that poor legislative drafting must be read as substantially liberalizing the treatment of certain consumer loans in chapter 13.

In re Trejos, 2007 WL 2391184 (Bankr. App. 9th Cir. July 30, 2007) interprets the following language which was added to Bankruptcy Code section 1325(a) but left “hanging” without inclusion in any of its subparagraphs:

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 interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [period] 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.

The Debtors first asserted that because their vehicle finance contract was assigned by the dealer to VW Credit, the assignee did not have a “purchase money security interest.” The BAP disposed of this argument, holding that “under the assignment, VW Credit simply stepped into the Dealer's shoes.”

The Debtors next argued that because under the language of the hanging paragraph, section 506 did not apply , VW credit could not have an allowed secured claim. In support of this position they cited the following passage in Colliers:

It is possible that [the “Hanging Paragraph”] was intended to prohibit the use of section 506(a) to bifurcate a secured claim into an allowed secured claim and an allowed unsecured claim as part of the cramdown permitted by section 1325(a)(5)(B) and, therefore, that such claims should be treated as fully secured claims regardless of the value of the collateral. But, even if that was the intent, because [the “Hanging Paragraph”] renders entirely inapplicable for some creditors the only section, section 506(a), that gives those creditors allowed secured claims, it does not to [sic] carry out such intent.

The assumption made by Colliers is that it is section 506 that “gives” creditors an allowed secured claim. In holding otherwise, the BAP quoted In re Brown, 346 B.R. 868, 873 (Bankr.N.D.Fla.2006): “Just because § 506 does not apply does not mean that there is no secured claim. Section 506(a) simply provides for bifurcation of claims into secured and unsecured portions in accordance with the value of the collateral; it does not form the basis for a secured claim.”

Trejos was not one of those cases in which the Court was invited to interpret the “plain language” of BAPCPA to reach an absurd result. In order to sustain the Debtors’ position, one was required to make basic assumptions about bankruptcy law that go far beyond the tinkering of BAPCPA. A creditors’ lien is not a privilege created by the Bankruptcy Code. It is a constitutionally protected property interest that the Bankruptcy Code can affect within limits. This opinion may be quoted for that much broader and significant holding long after the “hanging paragraph” issue has been finally resolved.