Opinion
NO. 1:07-CV-00010.
July 5, 2007
OPINION AND ORDER
This matter is before the Court on Appellants Gregory and Wendy Horr's Appeal from United States Bankruptcy Court (doc. 3), the Brief of Appellee, Jake Sweeney Smartmart, Inc. (doc. 6), and the Reply Brief of Appellants (doc. 9). For the reasons stated herein, the Court AFFIRMS the decision by the United States Bankruptcy Court for the Southern District of Ohio.
I. Background
The following facts, as drawn from the filings, are not in dispute. Appellants Wendy and Gregory Horr ("Debtors") filed a joint bankruptcy petition under Chapter 13 on April 17, 2006 (doc. 1). Their plan of reorganization proposed to retain ownership of two motor vehicles used by Debtors for their personal transportation needs, and which were acquired within the 910-day period preceding the date of the filing of the petition (doc. 3). Appellee Jake Sweeney Smartmart, Inc. ("Creditor") holds claims secured by purchase money security interests in both vehicles (doc. 6). Debtors' First Amended Plan proposed that the claims in both vehicles would be "crammed down," or that the price paid to Creditor to satisfy the debts would be less than the claims themselves (Id.).
The First Amended Plan proposed that Creditor's claim on Debtor Wendy Horr's 1998 Pontiac Grand Prix, which has a balance of $7,373.85, would be "crammed down" to a $4,700.00 value paid at the interest rate of 7.25% (doc. 6). The plan proposed that Creditor's claim on Debtors' 1997 Mercury Mountaineer, which has a balance of $7,176.30, would be "crammed down" to a $4,800.00 value paid at the interest rate of 7.25% (Id.).
Creditor objected to the confirmation of the plan, asserting among other reasons that the attempted reduction of its allowed secured claims to the proposed values was an application of 11 U.S.C. § 506 that was prohibited by the hanging paragraph at the end of 11 U.S.C. § 1325(a)(9) (Id.). At the confirmation hearing on August 16, 2006, the Bankruptcy Court denied confirmation and in the related Order entered on September 26, 2006, the Bankruptcy Court stated that it:
[D]oes not have the statutory discretion to confirm a proposed plan of reorganization unless the requirements of 11 U.S.C. 1325(a) have been satisfied and by operation of the last paragraph immediately following 11 U.S.C. 1325(a)(9), commonly referred to as the hanging paragraph, the claims of the Debtors cannot be bifurcated because 11 U.S.C. 506 does not apply for purposes of 11 U.S.C. 1325(a)(5)(B) (doc. 3).
Thereafter, Debtors filed the instant appeal to the Bankruptcy Court's Order (doc. 1).
II. Discussion
While Debtors present their appeal as six separate issues, the overarching question for the Court is whether the Bankruptcy Court committed reversible error in finding that the so-called "hanging paragraph" of 11 U.S.C. 1325(a) prohibited confirmation of Debtors' First Amended Plan (doc. 3).
Creditor also states that an issue on appeal is whether the Bankruptcy Court correctly determined the "national prime rate" of interest (doc. 6). However, to the contrary, this question was not appealed by Debtors (doc. 9) and so the Court will not consider it.
The hanging paragraph of 1325(a) states:
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 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.
Section 506(a) provides:
(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of such value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest is . . . less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
If the Court finds the requirements of 11 U.S.C. § 1325(a), including the hanging paragraph, are mandatory for confirmation of a Chapter 13 bankruptcy plan, then the "cram down" proposal in Debtors' First Amended Plan would preclude confirmation, and the Court must affirm the Bankruptcy Court's decision.
The Court has jurisdiction over Debtors' timely filed appeal under 28 U.S.C. 158(a)(1). As the issues presented in this appeal arise solely from conclusions of law made by the Bankruptcy Court, the Court will review these issues de novo. In re Hurtado, 342 F.3d 528, 531 (6th Cir. 2003).
A. Debtors' Appeal
Debtors argue that in fact, the Bankruptcy Court does have the discretion to confirm their plan, citing numerous theories in support (Id.). Debtors first claim that the plain language of 11 U.S.C. § 1325(a) reflects that the Bankruptcy Court has the discretion to confirm their plan (Id.). Debtors argue that while this section prescribes the circumstances under which the Bankruptcy Court is mandated to confirm a proposed plan, these are not the only set of conditions under which the Bankruptcy Court may confirm a plan (Id.). Debtors contend that the Third Circuit's opinion in In re Szostek, 886 F.2d 1405 (3d Cir. 1989), supports their interpretation that a plan that does not meet the requirements of § 1325(a) may still be confirmed (Id., also citing In re Burgess, 143 Fed.Appx. 692 (7th Cir. 2005); In re Escobedo, 28 F.3d 34 (7th Cir. 1994); In re Britt, 199 B.R. 1000 (Bankr. N.D. AL 1996); In re Siegfried, 114 B.R. 358 (Bankr. N.D. NY 1990)). Specifically, Debtors state that these cases conclude the phrase "shall confirm only if" that modifies the requirements in § 1129(a), but is excluded from § 1325(a), indicates that the requirements in the latter provision are not mandatory (Id.). Debtors concede that the holdings in Barnes v. Barnes, 32 F.3d 405 (9th Cir. 1994), and In re Sparks, 346 B.R. 767 (Bkrtcy. S.D. Ohio 2006) might be seen as contradictory to their argument, but contend those cases are distinguishable (Id.).
Debtors further argue that when Congress made changes to 11 U.S.C. 1325(a) in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), it was aware of case law regarding the discretionary nature of the provision, and yet chose not to make any changes to the relevant language (Id.). Debtors claim that because there was no change in this language, Congress presumably intended to allow the Bankruptcy Court to use its discretion in confirming Chapter 13 plans (Id.). Debtors also argue that cases which found the requirements of § 1325(a) mandatory prior to the enactment of BAPCPA are of limited relevance because the significance of the provision's mandatory or discretionary nature changed with the additions to the bankruptcy law (Id.).
The effect of finding the provisions of § 1325(a) discretionary, Debtors aver, is that the Court has the ability, despite the hanging paragraph, to allow bifurcation on 910-claims when the particular circumstances call for it and when it is fair and equitable to do so (Id).
In addition to their above arguments, Debtors argue that "it is useful to consider the evolution of the legislation through the Senate that eventually resulted with the enactment of BAPCPA" (Id.). Debtors contend that Congress considered but rejected legislation that would have absolutely eliminated bifurcation on 910-claims, supporting the conclusion that it did not intend to make the hanging paragraph absolutely mandatory (Id.). Debtors note that the Congressional reports on this issue are not clear, but that because the language and case law are not ambiguous, inferences of Congressional intent are not appropriate (Id., citing among others Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004)).
B. Creditor's Response in Opposition
In response, Creditor claims that the many courts that have reviewed the effect of the hanging paragraph have held that a chapter 13 debtor may no longer apply 11 U.S.C. § 506(a) to cram down the claim of a secured creditor that meets the parameters of the hanging paragraph (doc. 6, citing a string of eighteen cases, including In re Sparks, 346 B.R. at 770-71). Further, Creditor cites numerous cases that treat the various provisions of 11 U.S.C. § 1325(a) as mandatory (Id., citing, among others,Associates Commercial Corp. v. Rash, 520 U.S. 953, 956 (1997);Rake v. Wade, 508 U.S. 464 (1993); In re Copper, 426 F.3d 810, 813 (6th Cir. 2005); In re Nolan, 232 F.3d 528, 533 (6th Cir. 2000); In re Alt, 305 F.3d 413, 419 (6th Cir. 2002)).
Creditor avers that Debtors reliance on In re Szostek is misplaced, and that it has no precedential value with the Court (Id.). Creditor cites to lower courts in the third circuit that have either distinguished Szostek, or considered the language in the case stating that § 1325(a) is mandatory to be dicta (Id., citing, among others, In re Bryant, 323 B.R. 625, 639 (Bankr.E.D.Pa. 2005); In re Haas, 203 B.R. 573, 576 (Bankr.E.D.Pa. 1996) (Distinguishing that case from Szostek because the creditor in Szostek did not object to the plan prior to confirmation). Creditor also points to opinions by the Ninth and Eleventh Circuit Courts of Appeals that have rejectedSzostek's statement that § 1325(a) is discretionary (Id., citingIn re Barnes, 32 F.3d 405 (9th Cir. 1994); In re Bateman, 331 F.3d 821 (11th Cir. 2003)).
Further, Creditor argues that Debtors proposed construction of § 1325(a) is contrary to the over-all theme of the BAPCPA, which is to minimize judicial discretion (Id., citing In re Gross, 344 B.R. 919, 922 (Bankr.W.D.Mo. 2006)). Creditor contends that Congress did not intend for the hanging paragraph to be applied with discretion, in § 1329(b)(1) describing the provisions of § 1325(a) as "requirements" (Id.). Additionally, Creditor points to House Report, 109-031, which describes the hanging paragraph as a "prohibition" (Id., citing H.R. Rep. No. 109-031, Part 1, at page 17). Creditor concludes that "Debtors contention that the requirements of § 1325(a) are not mandatory is contrary to the weight of case law and the policy underlying the bankruptcy code" (Id.).
C. Debtors Reply
Debtors argue that the cases cited by Creditor that have concluded the hanging paragraph is mandatory, other than In re Sparks, have not discussed the disparity between the language in § 1325(a) and § 1129(a) that Debtors contend is key to their analysis (doc. 9). Further, Debtors contend the cases cited by Creditor that found the requirements of § 1325(a) mandatory before the enactment of the BAPCPA are inapplicable (Id.). Debtors conclude that "[i]f Congress enacted into law something different from what it intended, then it should amend the statute to conform with its intent" (Id.).
D. Analysis
After reviewing the arguments of both parties, the Court finds the plain language of the statute and the overwhelming weight of the case law support Creditor's interpretation of § 1325(a) and the hanging paragraph. Despite Debtors contention that the difference in language between § 1325(a) and § 1322(a) clearly demonstrates the discretionary nature of § 1325(a) and the hanging paragraph, the Court, like the majority of courts who have addressed this question, does not find this difference significant. Courts that have reviewed the effect of the hanging paragraph added by the BAPCPA have held that the language is mandatory. As an example, the Bankruptcy Court in In re Sparks, 346 B.R. at 771, found:
See, e.g. In re Sparks, 346 B.R. 767, 770-71 (Bankr.S.D.Ohio 2006); In re Brown, 346 B.R. 868, 876 (Bankr.N.D.Fla. 2006); In re Wright, 338 B.R. 917, 919-20 (Bankr.M.D.Ala. 2006); In re Ezell, 338 B.R. 330, 340 (Bankr.E.D.Tenn. 2006); In re Fleming, 339 B.R. 716, 722 (Bankr.E.D.Mo. 2006); In re Montoya, 341 B.R. 41, 44 (Bankr.D.Utah 2006); In re DeSardi, 340 B.R. 790, 812-13 (Bankr.S.D.Texas 2006); In re Shaw, 341 B.R. 543, 546 (Bankr.M.D.N.C. 2006); In re Scruggs, 342 B.R. 571, 574 (Bankr.E.D.Ark. 2006); In re Brooks, 344 B.R. 417, 421 (Bankr.E.D.N.C. 2006); In re Bufford, 343 B.R. 827, 832-33 (Bankr.N.D.Texas 2006); In re Soards, 344 B.R. 829, 831 (Bankr.W.D.Ky. 2006); In re Vega, 344 B.R. 616, 620 (Bankr.D.Kan. 2006); In re Brown, 339 B.R. 818, 821 (Bankr.S.D.Ga. 2006), In re Murray, 346 B.R. 237, 243-44 (Bankr.M.D.Ga. 2006); In re Brown, 346 B.R. 246, 248-49 (Bankr.M.D.Ga. 2006); In re Horn, 338 B.R. 110 (Bankr. M.D. Ala. 2006); In re Robinson, 338 B.R. 70 (Bankr. W.D. Mo. 2006); In re Johnson, 337 B.R. 269 (Bankr. M.D.N.C. 2006).
Consistent with the majority of the case law, we find that the provisions of § 1325(a) are mandatory and where the debt meets the parameters of the hanging paragraph, the Debtors are prevented from cramming down the secured debt.Id. Further, most courts, other than the Szostek case cited by Debtors, have long considered the language in § 1325(a) to be mandatory in nature. The Supreme Court in Associates Commercial Corp., 520 U.S. at 956 stated "to qualify for confirmation under Chapter 13, the [debtors'] plan had to satisfy the requirements set forth in § 1325(a) of the Code." See also, Till v. SCS Credit Corp., 541 U.S. at 468 (finding that to qualify for court approval under Chapter 13, a debtor's proposal must meet the requirements of § 1325(a)); In re Simmons, 765 F.2d 547, 553 (5th Cir. 1985); In re Barnes, 32 F.3d 405 (9th Cir. 1994) (holding that compliance with the provisions of § 1325(a)(5)(B)(iii) is mandatory); In re Bateman, 331 F.3d 821 (11th Cir. 2003). In the face of this precedent, the Court is not inclined to follow the language in Szostek finding that Bankruptcy Courts have the discretion to approve a plan that does not meet the requirements of § 1325(a). 886 F.2d 1405.
The Court finds Debtors claim that cases addressing the nature of § 1325(a) prior to the enactment of the BAPCPA are of limited relevance unconvincing, particularly because Debtors rely heavily on Szostek, a case also decided prior to the enactment of the BAPCPA.
Further, the Court is not convinced by Debtors interpretation of the legislative history of the BAPCPA in relation to the hanging paragraph. As Debtors concede, there is very little evidence to reflect what Congress intended by the language it chose to enact in the hanging paragraph (doc. 3). See also, In re Sparks, 346 B.R. at 771 (finding the legislative history "nearly nonexistent"). Debtors have presented no convincing evidence, and have cited to no language indicating that Congress intended the language of the hanging paragraph to be discretionary.
For the above stated reasons, the Court finds, in accordance with the plain language of the statute and the overwhelming weight of the case law, that the provisions of § 1325(a), including the hanging paragraph, are mandatory. Therefore, the Court holds that Bankruptcy Court did not have the discretion to confirm Debtors' First Amended Plan.
III. Conclusion
For the foregoing reasons, the decision by the United States Bankruptcy Court for the Southern District of Ohio is AFFIRMED (doc. 1).
SO ORDERED.