Cite as: Keith M. Lundin, Lundin On Chapter 13, § 75.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
There are important procedural issues with respect to the hanging sentence at the end of § 1325(a).1 When the hanging sentence is in play, a majority of courts have concluded that the debt can be modified consistent with § 1322(b)(2), but because § 506 does not apply, the collateral cannot be valued, the debt cannot be bifurcated and the claim must be treated through the plan as if it were fully secured.2
When the debtor believes that the hanging sentence does not apply or contends that the majority interpretation is not correct, issue typically is joined when the debtor proposes a plan that does not provide fully secured treatment for the hanging-sentence claim holder. In all material respects, this circumstance is no different than myriad others in which a Chapter 13 debtor takes a position with respect to the meaning or application of a confirmation requirement that is adverse to the position of a secured claim holder. Perhaps because the hanging sentence is new or perhaps because there has been so much attention to the hanging sentence in reported decisions, the courts have not consistently applied the same procedural framework to hanging-sentence litigation as is familiar to other disputes with lienholders at confirmation in Chapter 13 cases.
For example, bankruptcy courts in Utah and Kentucky have reported decisions rejecting Chapter 13 plans that proposed to bifurcate and cram down hanging-sentence debts notwithstanding the absence of a timely objection from a creditor and without regard to the adequacy of notice to the lienholder.3 Detailed elsewhere,4 in many contexts over many years, bankruptcy courts and appellate courts across the country have recognized that if notice is adequate, a lienholder’s failure to timely object to a plan that is adverse to its interests is fatal to collateral attack and leaves the lienholder bound by the confirmed plan. There is an inkling in a few of the hanging sentence cases that bankruptcy courts will be less respectful of the binding effect of confirmation when the plan is not consistent with the interpretation of the hanging sentence in the district.
Somewhat less worrisome, at least one court has classified any treatment of a hanging-sentence claim other than fully secured with interest as the kind of (mis)treatment of a lienholder that requires “special notice” through the confirmation process.5 Chapter 13 debtors are cautioned that in some districts the quality of notice of the plan necessary to make confirmation stick may be higher when the plan provides for a hanging sentence creditor in any manner other than fully secured with interest. Heightened notice in this context probably includes identifying any creditor that holds hanging-sentence debt, stating in the plan that the debt will not be treated as fully secured and describing the alternative treatment—bifurcation, cramdown or whatever. Robust, individualized notice may be especially important when the debtor contends that a hanging-sentence creditor’s silence should be interpreted as acceptance of a plan that does not treat the hanging- sentence claim as fully secured.6
Especially in a district that supports surrender in full satisfaction of a hanging- sentence claim,7 Chapter 13 debtors are likely to present hanging sentence issues in plans that are unfamiliar to lienholders. Putting aside that BAPCPA made Chapter 13 plans more complicated in general,8 the hanging sentence forces Chapter 13 debtors to consider offering alternative proposals to lienholders.
For example, the plan might surrender a 910-day PMSI car in full satisfaction of the debt or, in the alternative, offer the lienholder an economically reasonable valuation that the creditor can accept with interest through the plan. An alternative plan of this sort was not common in pre-BAPCPA Chapter 13 practice. Lienholders with hanging-sentence protection must be prepared to analyze the alternatives and to elect the creditors’ best position on the accelerated schedule caused by the new confirmation timing imperatives in § 1324.9 Lienholders in Chapter 13 cases are not used to electing among plan provisions and are not accustomed to managing plans that “default” to one treatment or another if no timely response is filed. Creditors with any substantial Chapter 13 involvement will need new procedures to digest and respond to new forms of the Chapter 13 plan that deal with hanging-sentence claims in alternatives.
In the miscellaneous hanging-sentence category, one clever creditor attempted to use the hanging sentence as a defense to an avoidance action. In In re Lewis,10 documents to perfect a car lender’s lien were delivered to the Department of Motor Vehicles 41 days after the sale and the resulting lien was subject to avoidance under § 544.11 The car was purchased within 910 days of the Chapter 13 petition and the debt fell within the protection of the hanging sentence. Playing off that ball, the car lender argued that its fully secured status under the hanging sentence prevented avoidance of its lien by the trustee. The bankruptcy court held that the hanging sentence was not a defense because avoidance came first: the car lender’s lien was avoidable; the car lender would not have an allowed secured claim for purposes of § 1325(a)(5); there was no allowed secured claim to trigger application of the hanging sentence.
1 Hanging sentence at the end of 11 U.S.C. § 1325(a), discussed in § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
2 See § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
3 See In re Montgomery, 341 B.R. 843, 845 (Bankr. E.D. Ky. 2006) (Sustains untimely objection to confirmation of plan that bifurcated a 910-day PMSI car claim. Citing In re Montoya, 341 B.R. 41 (Bankr. D. Utah 2006), hanging sentence at the end of § 1325(a) prohibits bifurcation and cramdown “even where the lender failed to object to the debtor’s proposed plan.”); In re Montoya, 341 B.R. 41, 44 (Bankr. D. Utah 2006) (On “independent review,” plan cannot be confirmed that bifurcates a 910-day PMSI car claim notwithstanding proper notice and absence of objection to confirmation. “The majority of courts interpreting the hanging paragraph hold that it precludes a Chapter 13 debtor from using § 506 to cram down a 910-day vehicle. This Court agrees with the majority.”).
4 See §§ 228.1 [ 11 U.S.C. § 1327: Overview ] § 120.1 11 U.S.C. § 1327: Overview–231.1 [ 11 U.S.C. § 1327(c): Free and Clear Effect on Liens ] § 120.4 11 U.S.C. § 1327(c): Free and Clear Effect on Liens and 358.1 [ On Liens ] § 162.3 On Liens.
5 See Regional Acceptance Corp. v. Williams (In re Williams), Nos. 06-80695 13, 06-09024, 2007 WL 128891, at *5 (Bankr. M.D.N.C. Jan. 12, 2007) (Confirmation of plan that bifurcated 910-day PMSI car claim without adequate notice was not accepted by silence and was not binding. Plan valued RAC’s car collateral and bifurcated unsecured portion. Plan did not disclose that collateral was a 910-day PMSI car. RAC did not object to confirmation but filed an adversary proceeding after confirmation seeking a determination that the unsecured portion of its claim was not discharged and would remain subject to its lien following completion of payments. “[C]ourts in this district have now clearly established, a debtor may no longer modify a secured creditor’s 910 claim in a Chapter 13 plan pursuant to § 1325(a)(5)(B). . . . [A] secured creditor may expect that if it has a 910 claim, it will be treated as if fully secured . . . . [T]he Debtor’s Plan did not afford RAC with notice adequate to entitle it to preclusive effect. RAC was entitled to expect that its claim would be treated pursuant to the provisions of BAPCPA. . . . RAC had no notice that it held a 910 claim which was being treated in a manner contrary to the provisions of BAPCPA. . . . [T]o the extent that its claim is not paid in full under the Plan, RAC is entitled to an order stating that its claim will not be discharged upon completion of the Plan and that the Vehicle will remain subject to RAC’s lien until the claim has been paid in full.”).
7 See § 451.5 [ Surrender in Full Satisfaction? ] § 75.5 Surrender in Full Satisfaction?.
9 See 11 U.S.C. § 1324, discussed in § 502.1 [ Timing of Hearing on Confirmation ] § 115.2 Timing of Hearing on Confirmation after BAPCPA.
10 363 B.R. 477 (Bankr. D.S.C. 2007).
11 See §§ 53.1 [ Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances ] § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances and 60.1 [ Avoidance and Recovery Powers ] § 53.12 Avoidance and Recovery Powers.