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6th Cir. BAP Holds So-Called ‘910 Claims’ To Be Treated Like Other Allowed Secured Claims

The Bankruptcy Appellate Panel for the U.S. Court of Appeals for the Sixth Circuit recently reversed a lower bankruptcy court’s ruling that rejected an objection to the confirmation of debtors’ chapter 13 plan asserted by the holder of a claim relating to vehicle financing incurred within 910 days of the bankruptcy petition (a “910 claim”).

In so ruling, the Sixth Circuit BAP held that a creditor’s objection to confirmation must be sustained when a chapter 13 plan fails to provide that the holder of a 910 claim retains the lien securing its claim until the earlier of payment of the underlying debt determined under non-bankruptcy law or discharge under section 1328.

A copy of the opinion in In re Donnadio is available at:  Link to Opinion.

In March 2017, a consumer financed the purchase of a used vehicle through financing provided by a creditor. In July 2018 — less than 910 days after purchase of the vehicle — the consumer and his wife (“debtors”) filed for chapter 13 bankruptcy petition. 

The proposed Chapter 13 plan listed the creditor’s claim secured by the vehicle valued at $10,000 (the 910 claim) under Official Form 113, Section 3.3 (secured claims excluded from 11 U.S.C. 506), which provided for monthly plan payments to the creditor. 

Unlike Section 3.2 (request for valuation of security, payment of fully secured claims, and modification of undersecured claims), Section 3.3 does not discuss lien retention for claims treated thereunder.  Thus, the proposed plan did not include language addressing the creditor’s retention of its lien and did not include a nonstandard plan provision in Section 8.1 concerning retention of the creditor’s lien.

The creditor timely filed the 910 claim secured by the vehicle, and objected to the confirmation of the debtor’s plan, contending that it did not provide that the lien upon the vehicle would be retained until the debtors paid their entire debt under non-bankruptcy law or received their discharge under Section 1328 (the “lien retention language”).  In November 2018, the bankruptcy court confirmed the debtor’s plan subject to resolution of the creditor’s objection.

Thereafter, the bankruptcy court overruled the creditor’s objection, holding that although the creditor held a secured claim that was not subject to bifurcation under section 506 of the bankruptcy code owing to the so-called “hanging paragraph” in § 1325(a) (stating that section 506 does not apply to claims where the collateral for the debt is a motor vehicle for debtor’s personal use, the creditor has a purchase money security interest securing the debt, and the debt was incurred within the 910 days preceding the date of the filing of the petition) the court was “not convinced that this means § 1325(a)(5) applies to a 910-day claim exactly as it would to any other allowed, secured claim.”

After the creditor’s motion for reconsideration was denied, the creditor appealed the order, overruling its objection to the Sixth Circuit BAP.

On appeal, the lone issue presented to the BAP was whether an objection to confirmation must be sustained when a chapter 13 plan fails to provide that “the holder of a 910 claim retain[s] the lien securing its claim until the earlier of payment of the underlying debt determined under non-bankruptcy law or discharge under section 1328.”

Initially, the Sixth Circuit BAP cited its holding in  Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447 (6th Cir. 2009)  which rejected the debtor’s proposal to bifurcate (i.e. cramdown) a 910 claim, holding that the “hanging paragraph” of § 1325(a)(5) cannot be bifurcated.  Shaw, 552 F.3d at 451–52.

Here, as in Shaw, there was no dispute that the creditor holds a valid 910 claim.  Thus, the Court noted, the imperative question was whether the debtor’s plan properly treated the 910 claim under one of the three available options under section 1325(a)(5).  Shaw, 552 F.3d at 462 (bankruptcy courts have no discretion to confirm a plan if it fails to satisfy the provisions of section 1325(a)(5) in treating a secured claim).

As you may recall, a debtor’s proposed plan must accommodate each allowed, secured creditor in one of three ways under § 1325(a)(5): (1) by obtaining the creditor’s acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by permitting the creditor to both retain the lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total “value, as of the effective date of the plan, . . . is not less than the allowed amount of such claim.” § 1325(a)(5); Till v. SCS Credit Corp., 541 U.S. 465, 468, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004). 

Here, the creditor did not accept the treatment of its claim under the debtors’ proposed plan (which would satisfy § 1325(a)(5)(A)) and the debtors did not surrender the vehicle (which would satisfy § 1325(a)(5)(C)). Therefore, the debtors’ plan was required to satisfy § 1325(a)(5)(B) to achieve confirmation over the creditor’s objection. 

Although the debtors’ plan included deferred cash payments to the creditor in equal monthly amounts, satisfying § 1325(a)(5)(B)(ii) and (iii), it failed to “provide that” the creditor retains its lien on the vehicle as § 1325(a)(5)(B)(i)(I) requires.  See 11 U.S.C. § 1325(a)(5)(B) (“the plan must provide that (I) the holder of such claim retain the lien securing such claim until the earlier of—(aa) the payment of the underlying debt determined under non-bankruptcy law; or (bb) discharge under section 1328… “). 

Thus, the Sixth Circuit BAP concluded that the bankruptcy court erred in confirming the debtors’ plan over the creditor’s objection based on the statute’s plain language and the Sixth Circuit’s prior holding in Shaw, because the plan failed to satisfy § 1325(a)(5) by not treating the 910 claim in full compliance with § 1325(a)(5)(B). 

Lastly, the BAP rejected the debtors’ argument that inclusion of lien retention language in a nonstandard provision in the debtors’ plan to address the creditors’ objection violated Rule 9009(a), as the rule does not prohibit a chapter 13 plan, crafted from Official Form 113, from containing a nonstandard provision affording a 910 claimant lien retention rights in accordance with § 1325(a)(5)(B)(i)(I).

Accordingly, the bankruptcy court’s order overruling the creditor’s objection to the confirmation of the debtors’ chapter 13 plan was reversed, and the case was remanded for further proceedings.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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