§ 75.2     Motor Vehicles and Any Other Thing of Value
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 75.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The enigmatic hanging sentence added to the end of § 1325(a)1 by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)2 applies only to purchase money security interests3 and then only when the debt was incurred within 910 days before the petition and the collateral is a “motor vehicle (as defined in § 30102 of Title 49)” that was acquired for the personal use of the debtor4 or the collateral is “any other thing of value” and the debt was incurred during the one-year period before the petition. When the hanging sentence applies to an allowed secured claim provided for by the plan under § 1325(a)(5), § 506 “shall not apply.” A majority of courts have concluded that claims falling within the hanging sentence cannot be bifurcated or stripped down to the value of the collateral but must be paid in full with interest through the plan though other modifications under § 1322(b)(2) are permitted.5

[2]

Two of the many predicates for application of the hanging sentence deal with the kind of collateral that has entry to this new domain: Debt secured by a motor vehicle incurred within 910 days before the petition; and debt incurred within a year of the petition secured by any other thing of value. Motor vehicle is parenthetically defined by reference to 49 U.S.C. § 30102. There are issues of statutory construction and problems of application with both kinds of collateral.

[3]

Motor vehicles first. A quick look at 49 U.S.C. § 30102 reveals this definition: “‘motor vehicle’ means a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line.”6

[4]

The first reported decision to discuss the meaning of motor vehicle in context of the hanging sentence involved a Starcraft Travel Trailer. There was no question in In re Green7 that the travel trailer was a vehicle driven by mechanical power that was not operated on a rail line. The problem was whether a travel trailer was manufactured “primarily for use on public streets, roads, and highways.” Analyzing various interpretations of 49 U.S.C. § 30102 by the National Highway Transportation Safety Administration, the bankruptcy court in Green found ambiguity with respect to the status of a travel trailer and resolved that ambiguity in favor of the debtor:

The plain meaning of “primarily” is “chief” or “foremost,” and in this Court’s view the Debtor’s Trailer was manufactured primarily to provide temporary shelter for persons, not to traverse the public streets, roads and highways. . . . Debtor’s Trailer is not a motor vehicle.8
[5]

It has been held that a boat is not a motor vehicle for purposes of the hanging sentence.9 A boat can be “any other thing of value” but a debt secured by a boat incurred more than a year before the Chapter 13 petition is not protected by the hanging sentence.10 Similarly, a John Deere tractor is a “thing of value” but not a motor vehicle: a purchase money security interest secured by a tractor acquired within a year of the Chapter 13 petition is protected from § 506 by the hanging sentence and cannot be bifurcated.11

[6]

“Any other thing of value” starts out straightforward enough: If the debt was incurred within a year before the petition, it falls within the hanging paragraph if the collateral for that debt is any other12 “thing” and has “value.”

[7]

“Thing” is sometimes defined as a “tangible object” or an “item” or “material” in contrast to a concept or quality.13 This definition of thing might exclude security interests in nonmaterial and incorporeal property such as patents, leases and contracts. “Thing of value” could be interpreted to refer to the collateral and not to the interest available to secure the creditor’s lien.14 By this reading, a wholly underwater lien—one that has no “value” in the collateral because of liens with higher priority—could still claim the protection of the hanging sentence if the collateral itself has “value.”

[8]

Debtors will argue that a thing has no value for hanging-sentence purposes unless that value is available to the lienholder. This is a variation on the issue whether a wholly unsecured lienholder has access to § 1325(a)(5) in the first instance.15 A wholly unsecured lienholder would not have an allowable secured claim for § 1325(a)(5) purposes—arguably eliminating a crucial predicate to application of the hanging sentence.16

[9]

There are certain to be battles whether just any “value” will do. It is easy to conceive of collateral common in Chapter 13 cases that has de minimis value—for example, used furniture and bedding. This is especially likely to become an issue because the majority interpretation of the hanging sentence treats as fully secured any debt within the hanging sentence.17 In other words, it can be argued that a claim secured by one dollar of value in any thing becomes a fully secured debt for purposes of confirmation and § 1325(a)(5).18

[10]

Thing of value probably extends to real property. By one reading of “value,” a lien on real property has “value” without regard to priority of liens. The competing view argues that a second or third mortgage incurred within a year of the petition engages the hanging sentence only if there is value available to secure the claim. This “peppercorn” or any dollar of value logic catapults a barely secured lender into a fully secured lender based on any toehold in the collateral if the debt was incurred within a year of the petition.

[11]

The probability that some real estate-secured debt will slip into the hanging sentence raises more questions. A strong majority of courts have concluded that a debt within the hanging sentence cannot be bifurcated or stripped down, but the debt can be otherwise modified under § 1322(b)(2).19 Under § 1322(b)(2), debts secured only by a security interest in real property that is the debtor’s principal residence cannot be modified.20 A real estate-secured debt incurred within a year of the Chapter 13 petition could not be modified before BAPCPA added the hanging sentence if the only collateral was the debtor’s principal residence.21 That rule is not changed by the hanging sentence.

[12]

But what about a real estate-secured debt incurred within a year of the petition secured by the debtor’s principal residence but with respect to which there is no “value” in the collateral? Under pre-BAPCPA law, the courts of appeals uniformly concluded that a wholly unsecured mortgage was not protected from modification by § 1322(b)(2) and the lien could be stripped off the property.22 Does the hanging sentence change this outcome with respect to wholly unsecured real estate mortgages incurred within a year of the petition?

[13]

The answer to that question may turn on whether a wholly unsecured mortgage on real property is a security interest in “any other thing of value.” If there must be value in the property to secure the purchase money security interest,23 then a wholly unsecured mortgage incurred within a year would not realize new protection under the hanging sentence. If value in the hanging sentence means only that the collateral has value without regard to the priority of liens, then even a wholly unsecured purchase money mortgage incurred within a year of the petition would become protected by the hanging sentence because § 506 would not apply.

[14]

There is a circularity to this inquiry for the reasons discussed above:24 In order for the hanging sentence to apply in the first instance, we must be dealing with an “allowed secured claim” provided for by the plan under § 1325(a)(5); if there is no value in the collateral to secure the lienholder, then there is no allowed secured claim for § 1325(a)(5) purposes and it is hard to explain why the hanging sentence would be in play.

[15]

But this logic depends on first applying § 506 to determine whether we have an allowable secured claim. As demonstrated above,25 many courts have looked outside the Bankruptcy Code to determine whether a secured claim is present to implicate the hanging sentence. A home mortgage incurred within a year of the petition would be a secured debt under state law without regard to whether there is any “value” in the collateral for the lienholder. The logic of many of the hanging-sentence cases points to the conclusion that even a wholly unsecured mortgage on real property would be a § 1325(a)(5) claim for purposes of the threshold inquiry whether the hanging sentence applies. Would these same courts also be willing to find that the wholly unsecured mortgage is secured by “any other thing of value”? This fact pattern will be a substantial test of the logic of the decisions that have found entry into hanging-sentence protection without first applying § 506 to determine the presence of an allowable secured claim.

[16]

Notice also that the protection from modification in § 1322(b)(2) extends only to security interests in real property that is the debtor’s principal residence, but the hanging sentence protects any other thing of value—including real property that is not the debtor’s principal residence. Arguably, a purchase money security interest in real property incurred within a year of the petition would not be subject to bifurcation or claim splitting under § 506 without regard to whether the real property is the debtor’s principal residence. Some purchase money real property security interests will realize protection from the hanging sentence that was not available before BAPCPA.

[17]

Two issues of interpretation with respect to any other thing of value arise from the position of this phrase in § 1325(a). The entire hanging sentence 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 interest 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.26
[18]

Does the purchase money condition in the first part of the sentence apply both to 910-day motor vehicle collateral and to any other thing of value? If the purchase money condition does not apply to any other thing of value, then the hanging sentence applies expansively to any secured debt incurred within a year of the petition when the collateral is a thing of value. On the other hand, if the purchase money condition applies both to motor vehicles and to any other thing of value, then the reach of the hanging sentence is narrowed to only purchase money security interests incurred within a year that are secured by any other thing of value.

[19]

To date, the courts have uniformly interpreted the hanging sentence to impose the purchase money condition on both motor vehicles and any other thing of value.27 For example, in In re Curtis,28 the debtor purchased two semi-truck tractors within a year of the petition. Navistar and Chrysler were ultimately determined to have purchase money security interests in the tractors but first argued that the hanging-sentence protection extended to any security interest incurred within a year without regard to purchase money character. The bankruptcy court found statutory construction to the contrary:

The plain and unambiguous language of the hanging paragraph demonstrates that a creditor must have a purchase money security interest in collateral consisting of “any other thing of value” in order to avoid being crammed down under § 506. . . . The use of the adjective “that” in this section indicates a reference to a previously mentioned debt. . . . [T]he difference between the first and second part of the hanging paragraph lies in the type of collateral involved in the transaction and not in the nature of the creditor’s security interest. . . . [T]he interpretation of the hanging paragraph that Navistar and Chrysler proffer . . . would result in an expansive reading of the statute that would abolish the debtor’s cram down powers under § 506 for every type of collateral purchased within one year . . . . [T]he only logical reading of the statute that gives meaning to the phrase “that debt” is to require that the creditor have a purchase money security interest in one of the two types of collateral listed in the hanging paragraph.29
[20]

Restricting the hanging sentence to purchase money security interest seems to be the trend. Determining when and to what extent a security interest is purchase money is a far more complicated issue.30

[21]

The second question that may turn on word placement is: can “any other thing of value” be a motor vehicle? This becomes important when the motor vehicle was acquired within a year of the petition but the security interest does not fall within the preceding part of the hanging sentence—for example, if the car was not acquired for the personal use of the debtor.31 The conjunctive “or” and the phrase “any other” strongly suggest that motor vehicles are not included in the one-year provision at the end of the hanging sentence. In other words, a claim secured by a motor vehicle is protected from § 506 only if the debt meets all of the conditions mentioned above—purchase money security interest, incurred within 910 days before the petition and acquired for personal use of the debtor. For debts incurred within a year of the petition, secured by any thing of value other than a motor vehicle, § 506 does not apply if the creditor has a purchase money security interest.32

[22]

The early reported cases are split on this issue. In In re Littlefield,33 the debtor purchased a dump truck within a year of the petition for business purposes, not for the “personal use” of the debtor. The bankruptcy court found that the protection from bifurcation in the hanging sentence extended to the claim secured by the dump truck:

Congress extended (910 days, as opposed to 1-year) antimodification protection to creditors holding pmsi’s [sic] in motor vehicles acquired for a debtor’s personal use. It did not target pmsi’s [sic] in motor vehicles generally as a category of security that, but for the personal proviso, would receive less antimodification protection than all other things of value. . . . [C]laims of creditors holding purchase money liens on motor vehicles acquired for nonpersonal use of the debtor cannot be modified if the debtor incurred the debt within a year of the bankruptcy filing.34
[23]

In contrast, the bankruptcy court in In re Horton35 explained that a motor vehicle acquired for business purposes within one year of a Chapter 13 petition was not an “other thing of value” for purposes of the hanging sentence:

[S]ince the “hanging paragraph” creates an exception to the general right of a debtor to value secured claims under § 506, any ambiguity should be resolved in favor of limiting, not expanding the exception. . . . [T]he scant legislative history supports the majority interpretation. . . . In using the phrase “other type of property” in discussing “other thing of value,” it appears to this Court that Congress was talking about property other than a motor vehicle. It seems a strained reading of the legislative history to conclude that a motor vehicle acquired for business use is a different “type of property” than a motor vehicle acquired for personal use. . . . [A] motor vehicle acquired within one year of a bankruptcy filing is not an “other thing of value” as that term is used in the last clause of the hanging paragraph[.]36

 

1  See 11 U.S.C. § 1325(a), discussed in § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

2  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

3  See § 451.3 [ Only PMSIs Need Apply ] § 75.3  Only PMSIs Need Apply.

 

4  See § 451.4 [ Acquired for Personal Use of Debtor ] § 75.4  Acquired for Personal Use of Debtor.

 

5  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

6  49 U.S.C. § 30102(a)(6).

 

7  360 B.R. 34 (Bankr. N.D.N.Y. 2007).

 

8  360 B.R. at 42.

 

9  In re Kilgore, No. 06-61525, 2007 WL 1119932 (Bankr. N.D. Ohio Apr. 13, 2007) (unpublished).

 

10  2007 WL 1119932, at *4 (Because boat was purchased more than a year before petition, claim can be bifurcated and after surrender of boat, lienholder has allowable unsecured deficiency claim. “[W]hen dealing with other collateral of value, the debt must have been incurred in the year prior to the filing. Here, there is no dispute that the boat was purchased in 2001, well over one year before the August 21, 2006 filing date. Thus, the hanging sentence is not applicable to First Merit’s claim. The result is that the anti-bifurcation restriction of the hanging paragraph does not apply to First Merit’s claim. Since the claim is subject to bifurcation, the pre-BAPCPA law permitting a secured creditor to recover on its unsecured deficiency claim remains germane.”).

 

11  In re Hickey, 370 B.R. 219 (Bankr. D. Neb. 2007).

 

12  See below in this section.

 

13  Webster’s New 20th Century Dictionary 1897 (2d ed. 1983).

 

14  Compare 11 U.S.C. § 506(a) (“the value of such creditor’s interest in the estate’s interest in such property”).

 

15  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506. See also § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA.

 

16  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

17  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

18  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

19  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

20  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

21  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

22  See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA.

 

23  See below in this section, and see § 451.3 [ Only PMSIs Need Apply ] § 75.3  Only PMSIs Need Apply.

 

24  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

25  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

26  Hanging sentence at the end of 11 U.S.C. § 1325(a) (emphasis added).

 

27  The PMSI condition in the hanging sentence is discussed in § 451.3 [ Only PMSIs Need Apply ] § 75.3  Only PMSIs Need Apply.

 

28  345 B.R. 756 (Bankr. D. Utah 2006).

 

29  345 B.R. at 760–61. Accord In re Pajot, 371 B.R. 139 (Bankr. E.D. Va. 2007) (Citing In re Ellegood, 362 B.R. 696 (Bankr. E.D. Va. 2007), creditor claiming protection of hanging sentence with respect to car purchased within a year of petition must satisfy purchase money security interest condition.); In re Hickey, 370 B.R. 219, 221 (Bankr. D. Neb. 2007) (Tractor purchased within a year of the petition must satisfy purchase money security interest condition in hanging sentence.); In re Quevedo, 345 B.R. 238, 246 (Bankr. S.D. Cal. 2006) (Hanging sentence at end of § 1325(a) applies only to purchase money security interests whether collateral is a car or any other thing of value. Credit union made a loan within one year secured by nonpurchase money lien on debtor’s car. Plan proposed to bifurcate and cram down the claim. “The hanging paragraph is poorly written and ambiguous . . . . The BAPCPA Legislative History is not enlightening as to what Congress intended the amendment to mean. . . . [T]he Congressional intent for the cram down amendment never changed even though the statute underwent many revisions over the eight years the legislation was pending. Congress intended the cram down amendment to protect creditors with purchase money security interests. The Court finds nothing to persuade it that Congress intended to expand this protection to non-purchase money security interests . . . . [T]he Court . . . construes the paragraph to provide a longer 910-day period of protection for purchase money security interests in a vehicle. All other personal property purchase money security interests receive a shorter 1-year period of protection if the collateral has value.”); In re Parish, No. 05-BK-15702-JAF, 2006 WL 1679710, at *1 (Bankr. M.D. Fla. May 12, 2006) (unpublished) (“The second scenario where section 506 does not apply is where a creditor (1) has a purchase money security interest securing a debt, (2) the collateral for that debt consists of anything of value (other than a motor vehicle), and (3) the debt was incurred during the 1-year period preceding the filing.”).

 

30  See § 451.3 [ Only PMSIs Need Apply ] § 75.3  Only PMSIs Need Apply.

 

31  The personal use condition is discussed in § 451.4 [ Acquired for Personal Use of Debtor ] § 75.4  Acquired for Personal Use of Debtor.

 

32  The purchase money security interest condition is discussed above in this section and in § 451.3 [ Only PMSIs Need Apply ] § 75.3  Only PMSIs Need Apply.

 

33  388 B.R. 1 (Bankr. D. Me. 2008) (Haines).

 

34  388 B.R. at 6. Accord In re Curtis, 345 B.R. 756 (Bankr. D. Utah 2006) (Boulden) (Purchase money security interest in two semi-truck tractors purchased within a year of the petition is protected from § 506 by the hanging sentence notwithstanding that the type of collateral involved is motor vehicles.).

 

35  398 B.R. 73 (Bankr. S.D. Fla. 2008) (Mark).

 

36  398 B.R. at 76. Accord In re Ford, No. 07-28188-svk, 2008 WL 1925153, at *5 (Bankr. E.D. Wis. Apr. 29, 2008) (Kelley) (Motor vehicle acquired within one year of petition but not acquired for personal use of debtor does not qualify for treatment under hanging sentence. “[T]he second clause of the hanging paragraph does not apply to motor vehicles.”); In re Balsinde, No. 07-10093-GKC-RBR, 2007 WL 4247642, at *2–*3 (Bankr. S.D. Fla. Nov. 29, 2007) (unpublished) (Ray) (The one-year, any other thing of value portion of the hanging sentence does not apply to motor vehicles; truck acquired within a year of Chapter 13 petition must satisfy personal use requirement to avoid application of § 506(a). “The first section of the hanging paragraph specifically deals with motor vehicles. . . . [A]pplying the canon of construction that ‘the specific governs the general’ the second clause of the hanging paragraph is inapplicable to motor vehicles. . . . [T]o adopt HSBC’s reading the Court would have to ignore the word ‘other’ in the phrase ‘any other thing of value.’ . . . [A]dopting HSBC’s reading would give motor vehicle lenders who extend credit within one year of bankruptcy extra protection not contemplated by the code. They would have the traditional protection offered by the first part of the hanging paragraph and they would also be able to avoid the ‘personal use’ requirement through the second part of the paragraph. If Congress had intended to remove the personal use requirement for motor vehicle loans incurred within one year of the filing date, they were certainly capable of saying so.”); In re Pajot, 371 B.R. 139, 157 (Bankr. E.D. Va. 2007) (Second clause of hanging sentence does not apply to car purchased within a year of petition. “The distinction between the 910-day period and the 1-year period is the type of collateral—motor vehicle purchased for personal use in the 910-day period, or any other thing of value in the 1-year period—and not the type of security interest.”).