FILED: June 27, 2008
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
___________________
No. 07-1664 (L)
(06-71975-DHA)
___________________
TIDEWATER FINANCE COMPANY
Creditor - Appellant
v.
JENNIFER LEE KENNEY;
Debtor - Appellee
and
FRANK J. SANTORO
Trustee - Appellee
-------------------------
WELLS FARGO BANK NA; GMAC, LLC; TOYOTA MOTOR CREDIT
CORPORATION; FORD MOTOR CREDIT COMPANY, LLC; NUVELL CREDIT
COMPANY, LLC; NUVELL NATIONAL AUTO FINANCE, LLC; AMERICAN
SUZUKI FINANCIAL SERVICES COMPANY, LLC; NISSAN MOTOR
ACCEPTANCE CORPORATION; BANK OF AMERICA, NA; AMERICAN HONDA
FINANCE CORPORATION; AMERICREDIT FINANCIAL SERVICES,
INCORPORATED; JPMORGAN CHASE BANK, NA
Amici Supporting Appellant
___________________
O R D E R
___________________
The court amends its opinion filed June 25, 2008, as
follows:
On page 1, “Bankruptcy” is substituted for “District” in
identifying the court from which the appeal was taken.
For the Court
/s/ Patricia S. Connor, Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
TIDEWATER FINANCE COMPANY,
Creditor-Appellant,
v.
JENNIFER LEE KENNEY,
Debtor-Appellee,
and
FRANK J. SANTORO,
Trustee-Appellee.
WELLS FARGO BANK NA; GMAC,
LLC; TOYOTA MOTOR CREDIT No. 07-1664
CORPORATION; FORD MOTOR CREDIT
COMPANY, LLC; NUVELL CREDIT
COMPANY, LLC; NUVELL NATIONAL
AUTO FINANCE, LLC; AMERICAN
SUZUKI FINANCIAL SERVICES
COMPANY, LLC; NISSAN MOTOR
ACCEPTANCE CORPORATION; BANK OF
AMERICA, NA; AMERICAN HONDA
FINANCE CORPORATION; AMERICREDIT
FINANCIAL SERVICES, INCORPORATED;
JPMORGAN CHASE BANK, NA,
Amici Supporting Appellant.
Appeal from the United States Bankruptcy
Court for the Eastern District of Virginia, at
Norfolk. David H. Adams, Bankruptcy Judge.
(06-71975-DHA)
Argued: March 18, 2008
Decided: June 25, 2008
2 TIDEWATER FINANCE v. KENNEY
Before KING and DUNCAN, Circuit Judges, and Jane R. ROTH,
Senior Circuit Judge of the United States Court of Appeals for the
Third Circuit, sitting by designation.
Vacated and remanded with instructions by published opinion. Senior
Judge Roth wrote the opinion, in which Judge King and Judge Dun-
can joined.
COUNSEL
ARGUED: James Robert Sheeran, TIDEWATER FINANCE COM-
PANY, Chesapeake, Virginia, for Appellant. Mark Clifton Leffler,
BOLEMAN LAW FIRM, P.C., Richmond, Virginia, for Appellees.
ON BRIEF: Matthew M. Barnes, TIDEWATER FINANCE COM-
PANY, Chesapeake, Virginia, for Appellant. James M. Flaherty,
BOLEMAN LAW FIRM, P.C., Richmond, Virginia, for Appellee
Jennifer Lee Kenney. Joseph R. Prochaska, WILLIAMS &
PROCHASKA, P.C., Nashville, Tennessee; David Greer, WIL-
LIAMS MULLEN, Norfolk, Virginia, for Amici Supporting Appel-
lant.
OPINION
ROTH, Senior Circuit Judge:
I.
This is a direct appeal by creditor Tidewater Finance Co. from the
Bankruptcy Court’s final order confirming debtor Jennifer Kenney’s
Chapter 13 bankruptcy plan. The narrow issue on appeal concerns a
pure question of law and is a matter of first impression with this
Court: Whether the "hanging paragraph" in 11 U.S.C. § 1325(a),
added by the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 (BAPCPA), prevents a creditor with a purchase money
security interest in a "910 vehicle" from exercising his contractual
TIDEWATER FINANCE v. KENNEY 3
right, under state law, to an unsecured claim for the portion of the
debt not covered by the sale of such vehicle (i.e., the deficiency
amount) after the vehicle is surrendered to the creditor by a Chapter
13 debtor pursuant to § 1325(a)(5)(C).1 We hold that the hanging
paragraph does not operate to deprive such undersecured "910 credi-
tors" of their deficiency claims because the parties are bound to their
contractual rights and obligations under operative state law, and the
Bankruptcy Code does not command otherwise. For this reason, we
will reverse the decision of the Bankruptcy Court and remand the case
for further proceedings consistent with this opinion.
II.
Kenney purchased a 2003 Chevrolet Impala from Calvary Cars &
Service on September 29, 2006, under a Retail Installment Sales Con-
tract. Pursuant to the sales contract, Kenney made a down payment
of $700, financed with Calvary the payment of $12,102.24, which
included the cost of the vehicle, taxes, and other required fees, and
provided Calvary with a purchase money security interest in the vehi-
cle securing the entire debt. Calvary perfected the security interest
and then assigned the sales contract, including the perfected security
interest to Tidewater. Tidewater’s lien was noted on the vehicle’s
title.
On December 19, 2006, less than three months after purchasing the
vehicle, Kenney filed for bankruptcy. On February 1, she filed an
amended Chapter 13 reorganization plan which provided for the sur-
render of the vehicle in full satisfaction of the debt she owed to Tide-
water even though the vehicle was worth less than the balance owed.
On March 6, Tidewater filed an objection to the confirmation of the
amended plan. On April 12, Tidewater filed a proof of claim listing
the total amount of secured debt as $12,341.84. After obtaining relief
from the automatic stay and disposing of the surrendered vehicle,
1
The hanging paragraph applies to claims secured by a purchase
money security interest in a motor vehicle purchased within 910 days of
the bankruptcy filing. Such claims are referred to as "910 claims," the
vehicles are called "910 vehicles," and the creditors are called "910 cred-
itors." The hanging paragraph specifically excludes 910 claims from the
bifurcation method prescribed under 11 U.S.C. § 506.
4 TIDEWATER FINANCE v. KENNEY
Tidewater amended its proof of claim to change the status of the debt
to unsecured and the total amount of debt to $5,271.34—the defi-
ciency amount due under the sales contract.
By order dated May 11, 2007, the Bankruptcy Court overruled
Tidewater’s objection to the plan’s confirmation. Specifically, the
Bankruptcy Court followed the approach taken by a majority of bank-
ruptcy courts in other circuits, concluding that the hanging paragraph
in 11 U.S.C. § 1325(a) prevents a 910 creditor from bifurcating her
claim and asserting an unsecured deficiency claim for any portion of
the debt not covered by the sale of the vehicle. The Bankruptcy Court
then entered its order confirming the plan on May 25, 2007.2
On June 5, 2007, the Bankruptcy Court certified, pursuant to
Interim Rule 8001(f) of the Federal Rules of Bankruptcy Procedure
and 28 U.S.C. § 158(d)(2)(A), that a direct appeal from Tidewater
presents, among other things, a question of law as to which there is
no controlling decision of this Court or of the United States Supreme
Court and which requires resolution of conflicting decisions among
bankruptcy courts in various circuits. We granted Tidewater’s timely
petition for direct appeal.
III.
We have subject matter jurisdiction over direct appeals from final
orders of bankruptcy courts pursuant to 28 U.S.C. § 158(d)(2).
Because the narrow issue on appeal concerns the proper interpretation
of the Bankruptcy Code, our review is plenary. Butler v. David Shaw,
Inc., 72 F.3d 437, 441 (4th Cir. 1996).
IV.
Chapter 13 of the Bankruptcy Code affords a reorganization rem-
edy for consumers and business owners with relatively small debts.
2
Kenney’s Chapter 13 plan is funded at $210 per month for 36 months,
a total of $7,560. It treats the surrender of the 910 vehicle to Tidewater
as fully satisfying Kenney’s entire indebtedness to Tidewater, including
the $5,271.34 deficiency, and it promises a 15% dividend to all unse-
cured creditors, except Tidewater.
TIDEWATER FINANCE v. KENNEY 5
Johnson v. Home State Bank, 501 U.S. 78, 82 (1991). A debtor who
qualifies for Chapter 13 relief may submit a plan that modifies the
rights of secured and unsecured creditors. The bankruptcy court will
confirm the plan so long as it satisfies the requirements of 11 U.S.C.
§ 1325(a). Under § 1325(a)(5), a plan’s proposed treatment of an "al-
lowed secured claim" will be confirmed if the plan can provide that
(1) the debtor and secured creditor agree on how the claim will be
paid, see id. at § 1325(a)(5)(A); or (2) the debtor retains the collateral
securing the claim while the creditor retains the lien until either the
debt is repaid under the plan or until the debtor receives a discharge,
whichever occurs first, and the debtor pays adequate protection pay-
ments to the secured creditor, the total of which must not be less than
the allowed amount of the claim as of the effective date of the plan,
see id. at § 1325(a)(5)(B); or (3) the debtor surrenders the secured
collateral to the creditor holding the lien, see id. at § 1325(a)(5)(C).3
3
Both prior and subsequent to the enactment of the BAPCPA,
§ 1325(a) provided, in pertinent part, as follows:
(a) Except as provided in subsection (b), the court shall confirm
a plan if—
(1) the plan complies with the provisions of this chapter and
with the other applicable provisions of this title;
*****
(5) with respect to each allowed secured claim provided
for by the plan—
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that—
(I) the holder of such claim retain the lien securing
such claim until the earlier of—
(aa) the payment of the underlying debt deter-
mined under nonbankruptcy law; or
(bb) discharge under section 1328; and
(II) if the case under this chapter is dismissed or con-
verted without completion of the plan, such lien shall
also be retained by such holder to the extent recog-
nized by applicable nonbankruptcy law;
(ii) the value, as of the effective date of the plan, of
property to be distributed under the plan on account
6 TIDEWATER FINANCE v. KENNEY
By enacting the BAPCPA in 2005, Congress revised § 1325(a) by
adding an unnumbered paragraph—commonly referred to as the
hanging paragraph—at the end of that subsection. The hanging para-
graph provides as follows:
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 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 per-
sonal 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.
11 U.S.C. § 1325(a) (emphasis added). Pertinent here, § 506(a) speci-
fies how an "allowed claim of a creditor secured by a lien on prop-
erty" should be valued by providing a method of bifurcating, or
dividing, a consumer’s debt into secured and unsecured amounts, with
the unsecured amount equaling the amount that the debt exceeds the
current value of the collateral.4 See 11 U.S.C. § 506(a). Under this
of such claim is not less than the allowed amount of
such claim; and
(iii) if—
(I) property to be distributed pursuant to this subsec-
tion is in the form of periodic payments, such pay-
ments shall be in equal monthly amounts; and
(II) the holder of the claim is secured by personal
property, the amount of such payments shall not be
less than an amount sufficient to provide to the
holder of such claim adequate protection during the
period of the plan; or
(C) the debtor surrenders the property securing such
claim to such holder;
*****
11 U.S.C. § 1325(a) (emphasis added).
4
For purposes of this appeal, the relevant portion of § 506 provides as
follows:
TIDEWATER FINANCE v. KENNEY 7
bifurcation method, an undersecured creditor becomes an unsecured
creditor for purposes of pursuing a deficiency claim.
Prior to the BAPCPA’s enactment, if a Chapter 13 consumer
debtor proposed a plan for confirmation which provided for the sur-
render of the 910 vehicle to the creditor pursuant to § 1325(a)(5)(C),
§ 506(a) supplied the creditor with a federal recourse remedy for a
deficiency after the sale of the collateral.5 However, since the hanging
(a)(1) An allowed claim of a creditor secured by a lien on prop-
erty in which the estate has an interest, or that is subject to setoff
under section 553 of this title, is a secured claim to the extent of
the value of such creditor’s interest in the estate’s interest in
such property, or to the extent of the amount subject to setoff,
as the case may be, and is an unsecured claim to the extent that
the value of such creditor’s interest or the amount so subject to
setoff is less than the amount of such allowed claim. Such value
shall be determined in light of the purpose of the valuation and
of the proposed disposition or use of such property, and in con-
junction with any hearing on such disposition or use or on a plan
affecting such creditor’s interest.
(2) If the debtor is an individual in a case under chapter 7 or 13,
such value with respect to personal property securing an allowed
claim shall be determined based on the replacement value of
such property as of the date of the filing of the petition without
deduction for costs of sale or marketing. With respect to property
acquired for personal, family, or household purposes, replace-
ment value shall mean the price a retail merchant would charge
for property of that kind considering the age and condition of the
property at the time value is determined.
11 U.S.C. § 506(a) (emphasis added).
5
Tidewater contends that the hanging paragraph does not apply to the
surrender provision in § 1325(a)(5)(C). To support this contention, Tide-
water argues that prior to the BAPCPA’s enactment, § 506 was only
applicable when the debtor retained collateral under § 1325(a)(5)(B), and
not applicable when the debtor surrendered the collateral under
§ 1325(a)(5)(C). We do not agree. Rather, we conclude that, pre-
BAPCPA, § 506(a) applied to the surrender of collateral under
§ 1325(a)(5)(C), especially given the Supreme Court’s explicit recogni-
8 TIDEWATER FINANCE v. KENNEY
paragraph was added to § 1325(a), bankruptcy courts across the
nation disagree as to the paragraph’s effect on a 910 creditor’s con-
tractual right, under state law, to a deficiency judgment after the pro-
ceeds from the collateral’s sale fail to satisfy the total debt owed. The
majority of bankruptcy courts have concluded that, by eliminating the
application of § 506(a) to 910 claims, the hanging paragraph ensures
that such creditors are without a remedy to bifurcate their loans into
secured and unsecured portions, therefore rendering their loans non-
recourse regardless of what the parties’ contract allows. See e.g, In re
Kenney, No. 06-71975-A, 2007 WL 1412921, at *5 (Bankr. E.D. Va.
May 10, 2007) (listing cases in which bankruptcy courts have adopted
the majority view). Conversely, a minority of bankruptcy courts have
concluded that Article 9 of the Uniform Commercial Code (UCC) and
contract law entitle 910 creditors to an unsecured deficiency judgment
after surrender of the vehicle, unless the contract provides for a non-
recourse loan. Id. at *4 (listing cases in which bankruptcy courts have
adopted the minority view). Under this approach, the unsecured bal-
ance is treated in the same manner as other unsecured debts under a
Chapter 13 reorganization plan.
tion, in Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 962 (1997), of
the apparent applicability of § 506(a) to the surrender provision. Based
on the language of § 506(a) which specifies that valuation of collateral
should be based upon its "disposition or use," Justice Ginsburg
explained:
As we comprehend § 506(a), the "proposed disposition or use"
of the collateral is of paramount importance to the valuation
question. If a secured creditor does not accept a debtor’s Chapter
13 plan, the debtor has two options for handling allowed secured
claims: surrender the collateral to the creditor, see
§ 1325(a)(5)(C); or, under the cram down option, keep the collat-
eral over the creditor’s objection and provide the creditor, over
the life of the plan, with the equivalent of the present value of
the collateral, see § 1325(a)(5)(B). The "disposition or use" of
the collateral thus turns on the alternative the debtor chooses-in
one case the collateral will be surrendered to the creditor, and in
the other, the collateral will be retained and used by the debtor.
Id. Accordingly, it is evident to this Court that § 506 was applicable to
the surrender provision in § 1325(a)(5)(C) pre-BAPCPA and continues
to be applicable post-BAPCPA.
TIDEWATER FINANCE v. KENNEY 9
More recently, a growing number of circuit courts have adopted the
minority approach, thus recognizing a 910 creditor’s right to assert an
unsecured deficiency claim under state law when a Chapter 13 debtor
surrenders her vehicle under § 1325(a)(5)(c). See DaimlerChrysler
Financial Services Americas LLC v. Ballard, ___ F.3d ___, 2008 WL
2080852 (10th Cir. May 19, 2008); Capital One Auto Fin. v. Osborn,
515 F.3d 817 (8th Cir. 2008); In the Matter of Wright, 492 F.3d 829
(7th Cir. 2007); cf. In re Long, 519 F.3d 288 (6th Cir. 2008) (using
the common law principle of interpretation known as "the equity of
the statute" as a method of filling statutory gaps rather than resorting
to non-bankruptcy law to preserve deficiency claims).
Based on a plain reading of the hanging paragraph, there is no
question that Congress has unambiguously eliminated the 910 credi-
tor’s access to a federal remedy under § 506(a). See Ballard, 2008
WL 2080852 at *3; Osborn, 515 F.3d at 821; In re Wright, 492 F.3d
at 832. "Because the statutory language is clear, we need not look
beyond it." Ballard, 2008 WL 2080852 at *3, U.S. v. Ron Pair Enter-
prises, Inc., 489 U.S. 235, 241 (1989). However, in this case we are
asked to decide whether a 910 creditor nevertheless has recourse
against the debtor, under another body of law, for the remainder of
the debt owed. We join our sister courts in the Seventh, Eighth, and
Tenth Circuits in holding that, after a debtor satisfies the requirements
for plan confirmation under § 1325(a)(5)(C) by surrendering his 910
vehicle, the parties are left to their contractual rights and obligations,
and the creditor may pursue an unsecured deficiency claim under state
law. See Ballard, 2008 WL 2080852, at *5; Osborn, 515 F.3d 822-23;
Wright, 492 F.3d at 832-33.
The principle that state law determines the rights and obligations
of debtors and creditors when the Bankruptcy Code fails to supply a
federal rule is well recognized. See Butner v. United States, 440 U.S.
48, 55 (1970); see also Travelers Cas. & Sur. Co. v. Pac. Gas & Elec.
Co., 127 S.Ct. 1199, 1204-05 (2007) (explaining the settled principle
that "[c]reditors’ entitlements in bankruptcy arise in the first instance
from the underlying substantive law creating the debtor’s obligation,
subject to any qualifying or contrary provisions of the Bankruptcy
Code") (citations omitted); Am. Bankers Ins. Co. of Florida v.
Maness, 101 F.3d 358, 365 (4th Cir. 1996) ("[W]hen Congress has
not provided an explicit alternative to state law, we are mindful that
10 TIDEWATER FINANCE v. KENNEY
the Bankruptcy Code was written in the shadow of state law and con-
clude that Congress intended state law to fill the interstices.") (quot-
ing In re Estate of Medcare HMO, 998 F.2d 436, 441 (7th Cir. 1993)).
The Supreme Court in Butner explained the logic behind this princi-
ple as follows:
Property interests are created and defined by state law.
Unless some federal interest requires a different result,
there is no reason why such interests should be analyzed dif-
ferently simply because an interested party is involved in a
bankruptcy proceeding. Uniform treatment of property
interests by both state and federal courts within a State
serves to reduce uncertainty, to discourage forum shopping,
and to prevent a party from receiving "a windfall merely by
reason of the happenstance of bankruptcy." Lewis v. Manu-
facturers National Bank, 364 U.S. 603, 609, 81 S.Ct. 347,
350, 5 L.Ed.2d 323. The justifications for application of
state law are not limited to ownership interests; they apply
with equal force to security interests, including the interest
of a mortgagee in rents earned by mortgaged property.
440 U.S. at 55 (emphasis added). Accordingly, Butner confirms that,
as with property interests, state law creates and defines security inter-
ests at issue in bankruptcy proceedings if no federal law requires a
different result.
The Seventh Circuit Court of Appeals was the first court to resolve
the split among bankruptcy courts regarding the hanging paragraph’s
effect on 910 claims when a vehicle is surrendered under
§ 1325(a)(5)(C). See Wright, 492 F.3d 829. In Wright, the court relied
on the principle of Butner to affirm the decision of a bankruptcy judge
who declined to approve a debtor’s reorganization plan which pro-
posed the surrender of a 910 vehicle to a creditor in full satisfaction
of a debt owed. 492 F.3d at 832-33. Applying Butner, the Wright
court held that, with § 506 no longer applicable to 910 claims, state
law, in conjunction with the parties’ underlying contract, created and
defined a 910 creditor’s entitlement to an unsecured deficiency judg-
ment upon surrender (and subsequent sale) of the vehicle. Id.
TIDEWATER FINANCE v. KENNEY 11
The Wright court made clear that "it is a mistake to assume . . . that
§ 506 is the only source of authority for a deficiency judgment when
the collateral is deficient." Id. at 832. Rather, the court recognized the
principle in Butner that "state law determines rights and obligations
when the [Bankruptcy] Code does not supply a federal rule." Id. (cit-
ing Butner, 440 U.S. 48 (1979)). Following this principle, the court
concluded that (1) nothing in the Bankruptcy Code prohibits or quali-
fies an unsecured deficiency claim under state law following the sur-
render of collateral pursuant to § 1325(a)(5)(C); (2) "[c]reditors don’t
need § 506 to create, allow, or recognize security interests, which rest
on contracts (and the UCC) rather than federal law"; and (3) rather,
"[s]ection 502 tells bankruptcy courts to allow claims that stem from
contractual debts" and "nothing in § 502 disfavors or curtails secured
claims."6 Id. at 832-33. Accordingly, the Wright court concluded that
6
Section 502, entitled "Allowance of claims or interest," is a compre-
hensive section of the Bankruptcy Code. 11 U.S.C. § 502. Section 502
provides, in pertinent part:
(a) A claim or interest, proof of which is filed under section 501
of this title, is deemed allowed, unless a party in interest, includ-
ing a creditor of a general partner in a partnership that is a debtor
in a case under chapter 7 of this title, objects.
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i)
of this section, if such objection to a claim is made, the court,
after notice and a hearing, shall determine the amount of such
claim in lawful currency of the United States as of the date of the
filing of the petition, and shall allow such claim in such amount,
except to the extent that—
(1) such claim is unenforceable against the debtor and prop-
erty of the debtor, under any agreement or applicable law for
a reason other than because such claim is contingent or
unmatured;
*****
(k)(1) The court, on the motion of the debtor and after a hearing,
may reduce a claim filed under this section based in whole on an
unsecured consumer debt by not more than 20 percent of the
claim, if—
(A) the claim was filed by a creditor who unreasonably
refused to negotiate a reasonable alternative repayment
12 TIDEWATER FINANCE v. KENNEY
the "fallback under Butner is the parties’ contract (to the extent the
deal is enforceable under state law)[,]" and any deficiency after sur-
render and sale of the collateral "must be treated as an unsecured
debt." Id. at 833.
We are persuaded by the Wright court’s reasoning and join the
Seventh, Eighth, and Tenth Circuit Courts of Appeals in holding that,
when a Chapter 13 debtor surrenders a 910 vehicle in accordance with
§ 1325(a)(5)(C), the hanging paragraph does not extinguish a 910
creditor’s unsecured deficiency claim so long as state law, in conjunc-
tion with the parties’ contract, allows for such claim. Specifically, we
agree that § 506 is not the exclusive method for separating out the
deficiency as an unsecured portion of a 910 claim. Pre-BAPCPA, the
bifurcation method articulated in § 506 presented an undersecured
910 creditor with a federal recourse remedy against a Chapter 13
debtor who surrendered a vehicle with a market value less than the
debt owed. Post-BAPCPA, we recognize that § 506 is no longer
schedule proposed on behalf of the debtor by an
approved nonprofit budget and credit counseling
agency described in section 111;
(B) the offer of the debtor under subparagraph (A)—
(i) was made at least 60 days before the date of the fil-
ing of the petition; and
(ii) provided for payment of at least 60 percent of the
amount of the debt over a period not to exceed the
repayment period of the loan, or a reasonable exten-
sion thereof; and
(C) no part of the debt under the alternative repayment
schedule is nondischargeable.
(2) The debtor shall have the burden of proving, by clear and
convincing evidence, that—
(A) the creditor unreasonably refused to consider the debt-
or’s proposal; and
(B) the proposed alternative repayment schedule was made
prior to expiration of the 60-day period specified in
paragraph (1)(B)(i).
TIDEWATER FINANCE v. KENNEY 13
applicable to 910 claims, and we find no other bifurcation method in
the Bankruptcy Code nor a rule in the Code which qualifies or elimi-
nates a 910 creditor’s contractual entitlement to a deficiency claim
under state law. Thus, we conclude that such a deficiency claim may
be pursued by a 910 creditor as an unsecured claim in a bankruptcy
proceeding In this regard, we recognize that, before the hanging para-
graph was added, § 506(a), as applied to 910 claims, merely provided
"a method for the judicial valuation of an allowed secured claim; it
[did] not provide a definition of the phrase ‘allowed secured claim’
applicable to other provisions of the Bankruptcy Code" which might
be interpreted to preclude an unsecured claim for a deficiency. Bal-
lard, 2008 WL 2080852 at 5 (citing Dewsnup v. Timm, 502 U.S. 410,
417 (1992)). As the Seventh Circuit Court of Appeals recognized,
"§ 502 rather than § 506 determines whether a claim should be
allowed . . . ." Wright, 492 F.3d at 832. Because § 502 directs bank-
ruptcy courts to allow claims stemming from contractual debts and
neither diminishes nor disapproves of secured claims, it is evident to
us that such deficiency claims must be permitted to the extent that
state law allows for them. See 11 U.S.C. §§ 502(a), 502(b)(1), 502(k);
see also Travelers Cas. & Sur. Co., 127 S.Ct. at 1206 ("[W]e gener-
ally presume that claims enforceable under applicable state law will
be allowed in bankruptcy unless they are expressly disallowed.");
Osborn, 515 F.3d at 822 (recognizing that "nothing in § 502 or § 1325
denies a creditor an unsecured deficiency claim").
Here, Tidewater is entitled, under state law and the parties’ under-
lying contract, to a deficiency judgment against Kenney. The parties’
sales contract provides Tidewater with a security interest in the vehi-
cle, and such interest "secures payment of all [Kenney] owe[s] on this
contract" and "secures [all] other agreements in this contract." App.
140-43 (emphasis added). The contract further provides that, upon
Tidewater’s sale of the vehicle, Tidewater "will apply the money from
the sale, less allowed expenses, to the amount [Kenney] owe[s,]" and,
"[i]f money from the sale is not enough to pay the amount [Kenney]
owe[s,] [she] must pay the rest to [Tidewater]." Id. (emphasis added).
Moreover, the sales contract specifies that "[f]ederal law and the law
of the state of [Virginia] apply to this contract." Id. Given the explicit
language in the parties’ contract, there is no dispute that the contract
provides Tidewater with a right to pursue a deficiency claim, and such
contract is enforceable under Virginia law, particularly that state’s
14 TIDEWATER FINANCE v. KENNEY
version of Article 9 of the UCC. See VA. CODE ANN. §§ 8.9A-607
- 626; U.C.C. §§ 9-607 - 626.
Accordingly, we hold that, by surrendering the 910 vehicle, Ken-
ney gave Tidewater the full market value of the collateral, and any
deficiency after the sale of the vehicle is an unsecured debt that must
be treated as an unsecured claim in the bankruptcy reorganization
plan. See Ballard, 2008 WL 2080852, at * 5; Osborne, 515 F.3d at
822-33; Wright, 492 F.3d at 833. We join the Seventh Circuit Court
of Appeals in further recognizing that "[such unsecured debt] need
not be paid in full, any more than [Kenney’s] other unsecured debts,
but it can’t be written off in toto while other unsecured creditors are
paid some fraction of their entitlements." Wright, 492 F.3d at 833.
V.
For the foregoing reasons, we vacate the judgment of the Bank-
ruptcy Court and remand this case for further proceedings in accor-
dance with this opinion.
VACATED AND REMANDED
WITH INSTRUCTIONS