In Re Wright
58 Collier Bankr. Cas. 2d 504, 63 U.C.C. Rep. Serv. 2d (West) 823, 492 F.3d 829 (2007)
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Rule of Law:
When the 'hanging paragraph' of 11 U.S.C. § 1325(a) renders § 506 of the Bankruptcy Code inapplicable to a secured claim, the parties' rights regarding a deficiency are governed by the underlying contract and applicable state law, not federal bankruptcy law.
Facts:
- Craig Wright and LaChone P. Giles-Wright (the Wrights) purchased a motor vehicle for personal use.
- They financed the purchase with a loan that created a purchase-money security interest in the vehicle.
- The loan agreement specified that upon default, the creditor could repossess the vehicle and the Wrights would remain liable for any deficiency.
- The outstanding balance on the Wrights' loan exceeded the market value of the vehicle.
- Within 910 days of purchasing the vehicle, the Wrights filed for Chapter 13 bankruptcy.
Procedural Posture:
- The Wrights filed a Chapter 13 bankruptcy petition and proposed a repayment plan in the U.S. Bankruptcy Court.
- The plan proposed to surrender their vehicle to the secured creditor in full satisfaction of the debt, with no payment toward the deficiency.
- The bankruptcy judge denied confirmation of the plan, holding that the creditor was entitled to an unsecured claim for the deficiency.
- The bankruptcy judge certified the order for a direct appeal to the U.S. Court of Appeals for the Seventh Circuit, bypassing the district court.
- The Court of Appeals accepted the direct appeal to resolve the conflicting decisions on the issue among bankruptcy courts.
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Issue:
Does the 'hanging paragraph' of 11 U.S.C. § 1325(a), which makes § 506 inapplicable to certain secured loans, eliminate a creditor's state-law right to a deficiency claim when a Chapter 13 debtor surrenders the collateral?
Opinions:
Majority - Easterbrook, Chief Judge.
No, the 'hanging paragraph' does not eliminate a creditor's state-law right to a deficiency claim. By making § 506 inapplicable, the statute removes the federal mechanism for bifurcating claims but does not create a new federal rule extinguishing state-law rights. The court reasoned that under the principle established in Butner v. United States, state law and private contracts govern parties' rights in bankruptcy unless a specific provision of the Bankruptcy Code dictates otherwise. Here, the hanging paragraph removes the relevant federal provision (§ 506), causing the analysis to revert to the parties' contract and the Uniform Commercial Code as adopted by Illinois. Both the contract and state law explicitly permit the creditor to seek a deficiency judgment. Therefore, when the Wrights surrendered the vehicle, the creditor was left with an unsecured claim for the difference between the loan balance and the vehicle's value, which must be treated like other unsecured debts in the Chapter 13 plan.
Analysis:
This decision resolves a significant split among bankruptcy courts that arose from the 2005 BAPCPA amendments. It reinforces the foundational Butner principle that bankruptcy law acts as an overlay on state-law entitlements rather than a complete replacement of them. By holding that the removal of § 506 restores, rather than extinguishes, state-law remedies, the court prevents debtors from using the hanging paragraph to convert recourse loans into non-recourse loans through the act of surrender. This ruling strengthens the position of secured creditors for '910 loans' and ensures that deficiency claims are included in the pool of unsecured debts to be addressed in a Chapter 13 plan.
