§ 78.6     Oversecured Claims after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 78.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA may have changed the rights of oversecured claim holders when the claim falls within the new hanging sentence at the end of § 1325(a). Discussed immediately above,1 BAPCPA added a hanging sentence at the end of § 1325(a): § 506 “shall not apply” when a creditor has a purchase money security interest, the debt was incurred within 910 days preceding the petition and the collateral is a motor vehicle acquired for the personal use of the debtor, or when the collateral is any other thing of value and the debt was incurred within one year of the petition.2 There are many conceptual and interpretive problems with this new hanging sentence.3 One in particular should concern oversecured claim holders.

[2]

Under § 506(b), to the extent an allowed secured claim is secured by property that has a value greater than the amount of the claim, the holder is allowed “interest on such claim, and any reasonable fees, costs or charges provided for under the agreement or state statute under which such claim arose.”4 An allowed secured claim provided for by the Chapter 13 plan under § 1325(a)(5) which is described in the new hanging sentence at the end of § 1325(a) arguably cannot claim the benefits of § 506(b) because § 506 “shall not apply.”

[3]

There is uncertainty about this outcome because the hanging sentence at the end of § 1325(a) is a final exam in statutory construction.5 The mandate that § 506 shall not apply comes after a cross-reference to § 1325(a)(5)—a subsection that defines the rights of allowed secured claim holders at confirmation in a Chapter 13 case. An allowed claim ripens into an allowed secured claim only by virtue of § 506(a)—a subsection that does not apply to claims described in the new hanging sentence. The issue becomes: how can a debt of the special kind described in the hanging sentence become an allowed secured claim except to first pass through § 506; and if § 506 first applies, and then does not apply, does § 506(b) do its magic before or after § 506 does not apply?

[4]

These aren’t silly questions for oversecured claim holders. If § 506(b) adds interest, fees and costs to the allowed secured claim before the guillotine drops in the new hanging sentence, oversecured 910-day PMSI car lenders and the like bank the bennies from § 506(b), then hide behind the elevated status in the hanging sentence. If the hanging sentence means what it says and § 506 does not apply to an oversecured 910-day PMSI car claim provided for under § 1325(a)(5), then the lender suffers a bit of loss on the way to hanging-sentence Nirvana.

[5]

Oversecured claim holders will think twice before claiming whatever benefits there may be in the new hanging sentence—at risk of losing the certain benefits in § 506(b). Chapter 13 debtors will find some compensation in the new hanging sentence—a limitation on the accrual of interest, attorney fees and the like with respect to oversecured claim holders with security described in the hanging sentence. Even a real estate mortgage incurred within a year of the petition can fall in the new hanging sentence with the result that postpetition interest and attorney fees would not be recoverable in a Chapter 13 case.

[6]

At confirmation, the usual present value rules would apply,6 but Chapter 13 debtors would avoid the accrual of interest and fees between the petition and confirmation with respect to oversecured claims secured by cars or other things of value within the time periods and other conditions fixed by the new hanging sentence. There is certain to be litigation over this outcome.

[7]

With respect to one special class of sometimes oversecured claim holders—tax claims—BAPCPA changed the methodology for determining allowable interest and other charges. Detailed elsewhere,7 BAPCPA added a new § 511 to the Bankruptcy Code, “Rate of Interest on Tax Claims,” which states:

(a) If any provision of this title requires the payment of interest on a tax claim or on an administrative expense tax, or the payment of interest to enable a creditor to receive the present value of the allowed amount of a tax claim, the rate of interest shall be the rate determined under applicable nonbankruptcy law.
(b) In the case of taxes paid under a confirmed plan under this title, the rate of interest shall be determined as of the calendar month in which the plan is confirmed.8
[8]

After the Supreme Court’s decision in United States v. Ron Pair Enterprises, Inc.,9 we know that the provision in § 506(b) that allows an oversecured creditor to include in its claim “interest . . . and any reasonable fees, costs or charges” applies not only to consensual lienholders but also to nonconsensual liens such as those held by taxing authorities. BAPCPA added the phrase “or state statute” to § 506(b), basically codifying the holding in Ron Pair.

[9]

But new § 511 is a change from pre-BAPCPA practice. Prior to BAPCPA, the right of an oversecured creditor to add interest and other charges to its claim under § 506(b) was clear, but the Bankruptcy Code was silent with respect to the appropriate rate of interest. Oversecured taxing authorities were sometimes allowed interest at applicable state law rates but more likely, at confirmation in Chapter 13 cases, the rate of interest would be calculated using the methodology in Till v. SCS Credit Corp.10 The Till rate of interest on an oversecured tax claim would be the prime rate plus a risk factor.11

[10]

As explained by the bankruptcy court in In re Jones,12 the enactment of § 511 appears intended by Congress “to remove the bankruptcy court’s equitable discretion under Till to determine an appropriate interest rate on a case-by-case basis and replace it with a uniform rate applicable to all tax claims.”13 In Jones, the bankruptcy court read new § 511 to require application of state law to determine the interest rate on an oversecured tax claim. Looking to Texas law, the Jones court found provisions for attorney’s fees, for penalties and for interest on the principal amount of a tax, but Texas law was completely silent on the issue of interest on interest or interest on attorney’s fees. The bankruptcy court concluded that only interest on principal was allowed to the oversecured tax claimant:

Whether viewed under § 506(b) or § 511, the holder of a tax lien must establish that applicable state law authorizes interest, penalties and fees in addition to the principal of its claim. Here, there is no dispute that the County is entitled to the principal of its claim, plus interest on that principal of 12.00% per annum, plus reasonable attorneys’ fees, costs and penalties. However, the County is not entitled to interest on interest, nor is the County entitled to interest on the attorney’s fees, costs, and penalties.14
[11]

Jones seems well reasoned, and there is good news and bad news here for oversecured tax claim holders. Taxing authorities are often oversecured because tax liens typically prime other liens on real and personal property. New § 511 refers the bankruptcy courts to state law to determine the entitlement of an oversecured lienholder to interest, fees and other charges. As illustrated in Jones, state law may be less than precise or complete at least until state legislatures clarify state law in this bankruptcy context.


 

1  See discussion beginning at § 75.1  In General: Modification Without § 506.

 

2  11 U.S.C. § 1325(a), discussed in § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

3  See discussion beginning at § 75.1  In General: Modification Without § 506.

 

4  11 U.S.C. § 506(b), discussed in § 116.1 [ Oversecured Claim Holders ] § 78.5  Oversecured Claim Holders.

 

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

 

6  See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

7  See § 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA.

 

8  11 U.S.C. § 511, discussed in § 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA.

 

9  489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989).

 

10  541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004).

 

11  See § 112.2 [ Present Value After Till ] § 77.3  Present Value after Till.

 

12  No. 06-35051, 2007 WL 1170620 (Bankr. S.D. Tex. Apr. 18, 2007).

 

13  2007 WL 1170620, at *3.

 

14  2007 WL 1170620, at *4.