Cite as: Keith M. Lundin, Lundin On Chapter 13, § 74.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
For many of the reasons discussed immediately above with respect to acceptance of plans,1 the surrender of collateral has become more common and more important in Chapter 13 practice after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2
BAPCPA made no change to the provision in § 1325(a)(5)(C) that a Chapter 13 plan shall be confirmed if “with respect to each allowed secured claim provided for by the plan . . . (C) the debtor surrenders the property securing such claim to such holder.”3 But other changes by BAPCPA to the treatment of secured claims at confirmation have multiplied the cases in which it is not economically sensible for a Chapter 13 debtor to keep property because to do so means paying a lienholder substantially more than the collateral is worth.4 In particular, the sentence BAPCPA dangled at the end of § 1325(a)5 often forces Chapter 13 debtors to pay substantially more to keep a car acquired within 910 days of the petition than the car is worth. Some of these debtors make the smart choice to surrender collateral rather than pay too much through the Chapter 13 plan.
Surrender of collateral has always been available to Chapter 13 debtors under § 1325(a)(5)(C), and the thinly reported case law reveals little pre-BAPCPA controversy about surrender of collateral in Chapter 13 cases.6 This changed after BAPCPA with increasing use of surrender by debtors and uncertainties about the effects of surrender after BAPCPA. There has been litigation with respect to whether the debtor must physically deliver collateral to accomplish surrender to a lienholder7 and the related question whether surrender is possible when the collateral no longer exists or the debtor no longer has possession but offers the lienholder whatever rights there may be to recover the collateral.8 There is also the question whether a Chapter 13 debtor can surrender part of the collateral for a debt and keep part. There is a split of authority in the pre-BAPCPA case law addressing this issue.9 One post-BAPCPA decision seems to allow partial surrender.10
Most significantly, there has been a huge volume of litigation about the effect of surrender when the lienholder has a claim described in the hanging sentence at the end of § 1325(a). Detailed elsewhere,11 BAPCPA appended an undesignated sentence at the end of § 1325(a) which provides that § 506 “shall not apply” to purchase money debts incurred within 910 days of the petition when the collateral is a motor vehicle acquired for the personal use of the debtor or the collateral is any other thing of value and the debt was incurred within a year of the petition. This hanging sentence at the end of § 1325(a) conspired with the power to surrender property under § 1325(a)(5)(C) to create a statutory black hole.
Section 1325(a)(5) applies to each “allowed secured claim provided for by the plan.” An allowed claim becomes a secured claim only by virtue of § 506 of the Code. There is circularity in the hanging sentence: a lienholder must pass through § 506 to have an allowed secured claim but then § 506 “shall not apply” if the debt meets the new 910-day or one-year rules.12 It is not a stupid question to ask: What happens when the Chapter 13 plan surrenders property securing an “allowed secured claim” with respect to which § 506 “shall not apply”?
Debtors have argued without much appellate success that surrender under § 1325(a)(5)(C) is in full satisfaction of any debt described in the hanging sentence at the end of § 1325(a).13 BAPCPA requires the plan to treat claims described in the hanging sentence as if they were fully secured for purposes of confirmation under § 1325(a)(5).14 Because § 506 is not available to split the claim, the debt should also be fully secured for purposes of surrender. By definition, surrender of all collateral ordinarily eliminates a fully secured claim.
Creditors have responded successfully that the allowed secured claim that began the § 1325(a)(5) analysis remains an “allowed claim” for the full amount of the debt.15 Surrender of the collateral retires that allowed claim only to the extent of the value of the collateral. If liquidation of the surrendered collateral does not fully pay the debt, the balance is an allowed unsecured claim in the Chapter 13 case.
This disagreement has been too easily resolved by the appellate courts notwithstanding the puzzling circularity in the hanging sentence at the end of § 1325(a). An allowed secured claim to which § 506 does not apply is an oxymoron. Section 1325(a)(5)(C) prior to BAPCPA contemplated that surrender of all collateral eliminated the allowed secured claim because, by definition, the allowed secured claim could not exceed the value of the collateral under § 506. What does surrender under § 1325(a)(5)(C) mean when the statute forbids the relationship between § 1325(a)(5) and § 506 that renders § 1325(a)(5) applicable in the first place?
There is symmetry in the argument that a lienholder embracing the special advantage in the hanging sentence at the end of § 1325(a) can’t assert a fully secured claim unmarked by § 506 one moment and then adopt the inconsistent possession of both a secured and an unsecured claim based on § 506. More sensibly, the hanging sentence in § 1325(a) works with surrender of collateral under § 1325(a)(5)(C) in the same manner that an undersecured creditor risks full satisfaction by surrender when it elects to be fully secured in a Chapter 11 case under 11 U.S.C. § 1111(b).
During the first two years after the effective date of BAPCPA, there was an avalanche of reported decisions tackling the question whether surrender of all collateral to a creditor holding a 910-day PMSI car claim results in full satisfaction of the debt. The first-round cases were fractured with respect to outcome and logic, with a majority allowing surrender in full satisfaction of a 910-day PMSI car claim.16 However, on appeal, the trend sharply reversed, and at this writing, the circuit courts of appeals that have addressed the issue have unanimously concluded that surrender of hanging-sentence collateral does not preclude allowance of an unsecured deficiency claim.17
The hanging sentence in § 1325(a) still provides some grist for negotiation. A Chapter 13 debtor with a 910-day PMSI car claim or a debt incurred within a year and secured by any other thing of value is well advised to propose to surrender the collateral when the debt significantly exceeds the economic value of the collateral. Rather than litigate whether the lienholder has an unsecured claim that survives surrender, a negotiated compromise would allow the debtor to keep the collateral by paying an amount less than the entire debt, with appropriate interest in installments through the confirmed plan. Such a compromise makes sense for the debtor and creditor when the negotiated value is reasonably within range of the economic value of the collateral. In Chapter 13 cases in which unsecured claim holders will not receive a substantial dividend, the possibility that the lienholder will assert an unsecured claim after surrender is not a threat to the debtor. The amount of money the debtor will have to pay to fund the plan typically will not be affected by whether a lienholder asserts an unsecured deficiency claim after surrender. Many Chapter 13 debtors will be well-positioned to surrender rather than litigate the treatment of hanging-sentence collateral.
Perhaps because of the debate with respect to surrender in full satisfaction of hanging-sentence collateral, there has been a post-BAPCPA burp of cases in which plans propose to surrender collateral in full satisfaction of debt that is not protected from § 506 by the hanging sentence. The general rule before and after BAPCPA is that surrender of all of the collateral securing a claim fully resolves the allowed secured claim of the lienholder but does not eliminate the unsecured deficiency when the collateral is worth less than the underlying debt.18 There is an important exception to this general rule: if the plan is clearly worded19 and properly noticed and the lienholder does not object, confirmation can bind an undersecured creditor to accept surrender of its collateral in full satisfaction of its debt.20
BAPCPA did not directly address whether surrender of real property that is burdened with homeowners association dues or similar fees absolves the debtor of liability for postpetition dues, fees or assessments. There is a long-standing split of authority with respect to the nature of homeowners association dues in bankruptcy cases. One line of cases considers HOA dues to be “covenants running with the land” that are not ordinary debts and cannot be discharged in bankruptcy.21 Other courts treat HOA dues as debts that arise from prepetition contracts and that can be discharged in bankruptcy.22
The Bankruptcy Code was amended in 1994 and again in 2005 to address the dischargeability of HOA dues in Chapter 7 cases and at hardship discharge in a Chapter 13 case. Section 523(a)(16) now unambiguously declares nondischargeable a “fee or assessment that becomes due and payable after the order for relief” to a condominium or homeowners association “for as long as the debtor . . . has a legal, equitable, or possessory ownership interest” in the underlying property.23 The problem in Chapter 13 cases is that § 523(a)(16) is not applicable at the completion of payments and discharge under § 1328(a). In other words, there is no statutory exception to discharge for HOA dues at the completion of payments in a Chapter 13 case.
The question remains for Chapter 13 debtors: how can the debtor avoid liability for postpetition HOA dues? The answer appears to be surrender. As explained by the bankruptcy court in In re Heflin,24 surrender of property satisfies the secured claim, including any claim for postpetition dues owed to a property owners association. If the debtor completes payments under a plan that surrenders the underlying real property, postpetition dues are not excepted from discharge and should be discharged.
There is a “should” in that last sentence because until the Chapter 13 debtor actually accomplishes surrender, there may be continuing postpetition liability for HOA dues. The Bankruptcy Appellate Panel for the Ninth Circuit recently addressed the question whether postpetition HOA dues are debts dischargeable in a Chapter 13 case under § 1328(a). In Foster v. Double R Ranch Ass’n (In re Foster),25 the BAP dove into the pre-BAPCPA debate and found under Washington state law that postpetition HOA dues were a “covenant running with the land”—a “property interest not subject to discharge under § 1328(a).”26 The issue of surrender of property burdened by HOA dues was not before the BAP in Foster, but the BAP had this to say about the nature of HOA dues:
[W]e hold that, as a matter of law, debtor’s personal liability for HOA dues continues postpetition as long as he maintains his legal, equitable or possessory interest in the property and is unaffected by his discharge. In essence, the “running” covenant rule in this case boils down to one of “you stay, you pay” since debtor’s confirmed plan indicates he will stay in his home by curing his prepetition default on his mortgage and maintain on-going payments through his confirmed Chapter 13 plan.27
The quotation above from Foster indicates that a Chapter 13 debtor remaining in possession of property subject to HOA dues runs the risk—at least under Washington state law—of remaining personally liable for the dues covenant notwithstanding a plan that proposes to surrender the underlying real property. In Chapter 7 cases, the exception to discharge in § 523(a)(16) has inspired HOAs and mortgage holders to refuse to “accept” surrender of property that is burdened by a dues or fees covenant—sticking the debtor with accruing fees even when the debtor is trying to get rid of the property. A Chapter 13 debtor who intends to surrender property that is subject to HOA dues or assessments should do all the obvious physical things that are consistent with surrender—move out of the property, give the keys to the homeowners association or mortgagee, and the like. Any behavior that is inconsistent with surrender may trigger issues under state law that could stick the debtor with continuing liability for dues, fees and assessments notwithstanding surrender through the plan.
1 See § 445.1 [ Acceptance of Plan ] § 74.4 Acceptance of Plan after BAPCPA.
2 Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 11 U.S.C. § 1325(a)(5)(C), discussed in § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA.
4 See §§ 450.1 [ New Valuation Standards ] § 76.7 Valuation after BAPCPA, 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506 and 456.1 [ What Claims Are Unsecured: The Hanging-Sentence Enigma ] § 86.4 What Claims Are Unsecured: The Hanging-Sentence Enigma after BAPCPA.
5 See> the hanging sentence at the end of 11 U.S.C. § 1325(a), discussed beginning at § 75.1 In General: Modification Without § 506.
6 See § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA.
7 See, e.g., Armstrong v. Trustco Bank (In re Armstrong), 434 B.R. 120, 128 (Bankr. S.D.N.Y. Aug. 4, 2010) (Morris) (Plan provision for surrender of property is not automatically effective without some other action. When creditor attempted to foreclose before the petition but there were no buyers, and plan provided for surrender but nothing more happened during case, debtors remained owners, no surrender occurred and debtor is not entitled to any refund or credit against the full payment the creditor received on account of its allowed unsecured claim. “The Court unequivocally rejects any argument that a bald statement of future intent to surrender is an effective legal surrender of real property pursuant to Bankruptcy Code § 1325. Such an action is vague, leaves the debtor associated with the property on the public records of ownership and encumbrances, and does not resolve the question of the creditor’s right to a deficiency judgment. Accord, In re Stone, 166 B.R. 621, 623 (Bankr. S.D. Tex. Dec. 14, 1993) (Letitia Clark) (physical abandonment of homestead and statements in plan indicating surrender did not constitute a surrender within the meaning of § 1325(a)(5)(C); surrender required consent of the creditor or approval of the court).”).
8 Both of these issues are discussed in the pre-BAPCPA context in § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA. See also IRS v. White (In re White), 487 F.3d 199 (4th Cir. June 7, 2007) (Williams, Michael, Shedd) (Chapter 13 debtor does not accomplish surrender for § 1325(a)(5) purposes by tendering personal property to IRS when IRS cannot levy upon that property without further legal action in a nonbankruptcy forum.); In re Rowell, 421 B.R. 524 (Bankr. D. Minn. Dec. 15, 2009) (Kishel) (Citing IRS v. White (In re White), 487 F.3d 199 (4th Cir. June 7, 2007) (Williams, Michael, Shedd), and arguably in dicta, federal tax lien cannot be satisfied by surrender of personal property that is statutorily exempt from seizure by the IRS.).
9 See § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA.
10 See In re Stevens, 368 B.R. 5, 9 (Bankr. D. Neb. Apr. 9, 2007) (Saladino) (When car loan is secured by several vehicles and only part of debt is purchase money, debtor can surrender some vehicles and keep others; surrender of 910-day PMSI car collateral is full satisfaction of debt, and surrender of non-PMSI cars results in application of § 506 and unsecured deficiencies. “[N]othing in § 1325 appears to prevent Debtor from surrendering one vehicle with bifurcation of its value into secured and unsecured portions under § 506, and under § 1325(a)(9) surrendering another in full satisfaction of the portion of the claim attributable to such vehicle and paying in full the portion of the claim attributable to the retained vehicle.”).
11 See discussion beginning at § 75.1 In General: Modification Without § 506.
12 See § 451.5 [ Surrender in Full Satisfaction? ] § 75.5 Surrender in Full Satisfaction?.
13 See § 451.5 [ Surrender in Full Satisfaction? ] § 75.5 Surrender in Full Satisfaction?.
14 See § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
15 See § 451.5 [ Surrender in Full Satisfaction? ] § 75.5 Surrender in Full Satisfaction?.
16 See § 451.5 [ Surrender in Full Satisfaction? ] § 75.5 Surrender in Full Satisfaction?.
17 See § 451.5 [ Surrender in Full Satisfaction? ] § 75.5 Surrender in Full Satisfaction?.
18 See § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA. See, e.g., In re Finley, 408 B.R. 111 (Bankr. E.D. Mich. July 21, 2009) (McIvor) (Plan cannot surrender “in full satisfaction” real property that is not protected from modification by § 1322(b)(2) when property is not worth as much as balance on mortgage. Citing AmeriCredit Financial Services, Inc. v. Long (In re Long), 519 F.3d 288 (6th Cir. Mar. 4, 2008) (Merritt, Clay, Cox), “there is no meaningful distinction, for purposes of determining the secured status of a creditor’s claim, between the surrender of real property and the surrender of a vehicle.” The power to modify in § 1322(b)(2) does not include the power to wipe out the deficiency claim.); In re Hughes, 402 B.R. 404 (Bankr. M.D. Fla. July 24, 2008) (Briskman) (Plan cannot surrender real property in full satisfaction of a second mortgage when value of property is not sufficient to satisfy second lienholder’s debt.). See also In re King, No. 08-00077, 2008 WL 2856688, at *1 (Bankr. D.D.C. July 20, 2008) (unpublished) (Teel) (Confirmed plan cannot be modified to surrender real property in full satisfaction of deficiency that might result after foreclosure. “Litton should not be barred by the plan and any amended confirmation order from filing an amended proof of claim. Although 11 U.S.C. § 1325(a)(5)(C) permits a debtor to address a creditor’s allowed secured claim by providing for the surrender of the collateral to the creditor, § 1325(a)(5)(C) does not purport to address satisfaction of the claim, because it does not amount to a valuation of the collateral . . . . [A] plan may not be confirmed that would treat surrender as precluding the creditor from asserting a deficiency claim if the collateral on foreclosure fetches an insufficient amount to pay the claim in full.”).
19 See In re Coffia, No. 09-50899, 2010 WL 1872878 (Bankr. S.D. Ga. Mar. 22, 2010) (Dalis) (Plan provision for surrender of real property in satisfaction of secured claim under § 1325(a)(5)(C) did not suggest that surrender would satisfy unsecured deficiency; mortgage creditor may seek reconsideration of its claim under § 502(j) to assert deficiency, and confirmed plan did not prevent reconsideration.).
20 See §§ 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA and 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors. See, e.g., In re Martin, 427 B.R. 573 (Bankr. W.D. Va. Apr. 13, 2010) (Krumm) (Applying Student Aid Funds, Inc. v. Espinosa, __ U.S. __, 130 S. Ct. 1367, 176 L. Ed. 2d 158 (Mar. 23, 2010), failure to object to confirmation of plan that provided for surrender of car in full satisfaction of debt is fatal to deficiency claimant’s argument that debtor was required to file an adversary proceeding. Assignee of original car lender is in privity and bound by confirmation.); In re McGill, No. 07-13086 SR, 2009 WL 2912503 (Bankr. E.D. Pa. June 11, 2009) (Raslavich) (Car lender is bound by failure to object to amended plan that surrendered car that had been destroyed postpetition; vehicle was not protected by hanging sentence at end of § 1325(a).); In re Carter, 390 B.R. 648 (Bankr. W.D. Mo. July 11, 2008) (Federman) (Confirmed plan that surrendered property in full satisfaction of first and second mortgages precludes deficiency claim of second mortgage holder when notice was adequate and no provision of Code or Rules required heightened procedure. Plan proposed surrender of property “in lieu of the entire debt[s]” of first and second mortgage holder. Second mortgage holder filed unsecured deficiency claim and demanded payment in full with other unsecured creditors. Distinguishing Educational Credit Management Corp. v. Mersmann (In re Mersmann), 505 F.3d 1033 (10th Cir. Sept. 24, 2007) (en banc), “in contrast to a discharge-by-declaration, there is no requirement that a debtor initiate an adversary proceeding or otherwise engage in heightened procedural and notice processes in order to propose to surrender collateral in lieu of a debt. The Credit Union concedes that it received the required notice for plan confirmation. Because a surrender and satisfaction of debt does not invoke the procedural safeguards and heightened service of process required as in an adversary proceeding . . . the Credit Union’s due process rights were not violated.” With respect to surrender through the plan: “‘The term “surrender” was contemplated by Congress to be a return of property and a relinquishing of possession or control to the holder of the claim.’ . . . The Credit Union does not specify what would constitute a meaningful surrender under these circumstances—where it is a junior lienholder and the Debtor is also surrendering to the senior lienholder . . . . [T]here is no evidence to suggest that . . . the Debtor has not meaningfully surrendered the property to both lenders. . . . [I]f the Credit Union had reason to believe that its claim was wholly or partially unsecured, and did not want to accept surrender in lieu of its claim—then the time to raise that issue was at confirmation. . . . [N]othing in [Capital One Auto Finance v. Osborn, 515 F.3d 817 (8th Cir. Feb. 5, 2008) (Wollman, Benton, Doty),] says that a creditor is not permitted to waive its rights to a deficiency and agree to a plan that proposes a surrender in lieu. By failing to object to the Plan, that is what the Credit Union did.”); In re Kitts, No. 06 31215, 2006 WL 3337515 (Bankr. E.D. Tenn. Nov. 16, 2006) (unpublished) (Stair) (Confirmed plan that provided car would be “surrendered in full satisfaction of the debt” precludes allowance of deficiency claim. Citing § 1327(a), confirmed plan was binding on creditor, and value of car was immaterial.).
21 See, e.g., River Place E. Hous. Corp. v. Rosenfeld (In re Rosenfeld), 23 F.3d 833 (4th Cir. May 4, 1994) (Hamilton, Chapman, Young).
22 See, e.g., In re Rosteck, 899 F.2d 694 (7th Cir. Apr. 13, 1990) (Bauer, Flaum, Manion).
23 11 U.S.C. § 523(a)(16), as amended by BAPCPA.
24 No. 09-18642-SSM, 2010 WL 1417776 (Bankr. E.D. Va. Apr. 1, 2010) (Mitchell).
25 435 B.R. 650 (B.A.P. 9th Cir. July 19, 2010) (Jury, Hollowell, Russell).
26 435 B.R. at 661.
27 435 B.R. at 661.