In Re Ballard

FILED
United States Court of Appeals
Tenth Circuit

May 19, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re: JOHN JASON BALLARD;
SUMMER MICHELLE BALLARD,
formerly known as Summer Ray; and
MICHAEL JUSTIN QUICK, also
known as Justin Quick,

Debtors,

-------------------------

DAIMLERCHRYSLER FINANCIAL
SERVICES AMERICAS LLC,
successor by merger to
DaimlerChrysler Services North
America LLC,

Appellant, Nos. 07-5109 and 07-5112

v.

JOHN JASON BALLARD; SUMMER
MICHELLE BALLARD, and
MICHAEL JUSTIN QUICK,

Appellees.

-------------------------

WELLS FARGO BANK, N.A.;
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 CORP.; BANK OF
AMERICA, N.A.; AMERICAN
HONDA FINANCE CORPORATION;
AMERICREDIT FINANCIAL,
SERVICES, INC; AND JPMORGAN
CHASE BANK, N.A.,

Amicus Curiae.

APPEAL FROM THE UNITED STATES BANKRUPTCY PANEL
OF THE TENTH CIRCUIT
BAP Nos. NO-07-025 and NO-07-026

Layla Dougherty, Love, Beal & Nixon, P.C., Oklahoma City, Oklahoma, and
Stephen L. DeGiusti, Crowe & Dunlevy, Oklahoma City, Oklahoma, appearing
for Appellant.

J. Scott McWilliams, J. Scott McWilliams, P.C., Tulsa, Oklahoma, appearing for
Appellee.

Before TACHA, EBEL, and McCONNELL, Circuit Judges.

TACHA, Circuit Judge.

Appellant DaimlerChrysler Financial Services Americas LLC

(“DaimlerChrysler”) objected to the confirmation of debtors’ plans in two Chapter

13 bankruptcy proceedings. Because the two proceedings involve the same legal

issue, the bankruptcy court consolidated argument and overruled

DaimlerChrysler’s objections. The Bankruptcy Appellate Panel (“BAP”)

-2-
affirmed. We also granted the parties’ request for consolidated argument, and

exercising jurisdiction under 28 U.S.C. § 158(d), we REVERSE the judgment of

the BAP and remand both proceedings to the bankruptcy court.

I. BACKGROUND

This is an appeal from core proceedings in two Chapter 13 bankruptcies:

the cases of Michael Justin Quick and John Jason and Summer Michelle Ballard.

The relevant facts are the same in both cases. The debtors purchased vehicles for

their personal use less than 910 days before they filed bankruptcy petitions under

Chapter 13 of the Bankruptcy Code, 11 U.S.C. §§ 1301–1330. To finance the

vehicles, the debtors entered into retail installment contracts that were eventually

assigned to DaimlerChrysler. Under these contracts, DaimlerChrysler acquired

purchase money security interests in both vehicles. When the debtors filed for

bankruptcy, each vehicle was worth less than the balance due under the contract.

In both cases, DaimlerChrysler filed a proof of claim for the balance, 1 and the

debtors did not object to the claims as filed. Rather, in their Chapter 13 plans,

both debtors proposed to surrender the vehicle in full satisfaction of

DaimlerChrysler’s claim, that is, in satisfaction of the entire amount owed to

DaimlerChrysler. DaimlerChrysler timely objected to the confirmation of both

plans, arguing that surrendering the vehicle would not fully satisfy the claim, and

1
DaimlerChrysler filed a secured claim of $19,712.84 in the Quick case and
$10,614.51 in the Ballard case.

-3-
it may therefore assert an unsecured claim based on state law for any deficiency

following liquidation.

Because the bankruptcy court concluded that federal law does not allow a

deficiency claim under these circumstances, it overruled DaimlerChrysler’s

objection and confirmed the plan in both proceedings. The court also entered an

order staying plan distributions to general, nonpriority unsecured creditors

pending resolution of the parties’ appeal to the BAP. The BAP subsequently

affirmed the bankruptcy court’s judgment and entered an order in both appeals

staying its own judgment and mandate pending resolution of the appeal to this

Court. Although this is an appeal from a BAP decision, we independently review

the decision of the bankruptcy court, reviewing the court’s factual findings for

clear error and its legal conclusions de novo. See In re Kuhnel, 495 F.3d 1177,

1179–80 (10th Cir. 2007). As we explain below, because we hold that federal law

does not preclude DaimlerChrysler from filing an unsecured deficiency claim

based on state law, we reverse the BAP’s judgment and remand both proceedings

to the bankruptcy court.

II. DISCUSSION

A. The Question Presented by the “Hanging Paragraph”

This appeal presents a single legal question: whether a Chapter 13 debtor’s

surrender of a “910 vehicle” (i.e., a vehicle the debtor purchased within the 910

days preceding his bankruptcy petition) fully satisfies a creditor’s claim secured

-4-
by the vehicle and prevents the creditor from filing an unsecured claim for the

deficiency based on state law. To answer this question, we must interpret two

provisions of the Bankruptcy Code, 11 U.S.C. § 1325(a)(5) and § 506(a), in light

of an unnumbered paragraph added to § 1325(a) by the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005 (“BAPCPA”).

Section 1325(a)(5) specifies the conditions for confirmation of a debtor’s

plan “with respect to each allowed secured claim provided for by the plan.”

Under § 1325(a)(5), a debtor seeking confirmation of a plan has three options

regarding a creditor’s allowed secured claim: (1) obtain the creditor’s acceptance

of the plan; (2) keep the collateral securing the claim and make payments

equaling the present value of the claim; or (3) surrender the collateral securing

the claim to the creditor. § 1325(a)(5)(A)–(C). Generally, a debtor exercising the

retention option under § 1325(a)(5)(B), also known as “cram down,” keeps the

collateral securing the debt and satisfies the debt by making monthly payments

equal to the present value of the collateral, rather than the remaining balance on

the loan.

The “cram down” is the result of § 1325(a)(B)(ii)’s requirement that the

debtor pay the present value of the creditor’s claim and § 506(a)’s provision for

judicial valuation of claims secured by collateral. Section 506(a) specifies how a

claim secured by a lien on property should be valued:

An allowed claim of a creditor secured by a lien on property in which

-5-
 the estate has an interest . . . is a secured claim to the extent of the
value of such creditor’s interest in the estate’s interest in such
property . . . and is an unsecured claim to the extent that the value of
such creditor’s interest . . . is less than the amount of such allowed
claim.

Thus, under § 506(a), a claim secured by a lien is separated, or bifurcated, into a

secured portion reflecting the value of the property and an unsecured portion

reflecting the remaining debt or deficiency. When a claim is bifurcated under

§ 506(a), the debtor may retain the collateral and meet the requirements of

§ 1325(a)(5)(B) by making payments only on the secured portion of the bifurcated

claim. As a result of this process, an undersecured creditor may seek payment of

a deficiency only as an unsecured creditor. 2

Since BAPCPA, however, the hanging paragraph has prevented the

valuation of certain claims under § 506(a). 3 Most salient for purposes of this

2
The Supreme Court has described the “cram down” option as follows:
“Under the cram down option, the debtor is permitted to keep the property over
the objection of the creditor; the creditor retains the lien securing the claim, see §
1325(a)(5)(B)(i), and the debtor is required to provide the creditor with payments,
over the life of the plan, that will total the present value of the . . . collateral, see
§ 1325(a)(5)(B)(ii). The value of the collateral is governed by § 506(a) of the
Code.” Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 957 (1997); see also
Capital One Auto Fin. v. Osborn, 515 F.3d 817, 820 (8th Cir. 2008) (describing
the option).
3
The hanging paragraph provides in relevant part:

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
(continued...)

-6-
case, § 506 no longer applies to a “910 car claim,” that is, a claim secured by a

910 vehicle. Both the bankruptcy court and the BAP acknowledged that this

change in law prevents a debtor from engaging in the “cram down” when electing

to retain the vehicle. Because the valuation provision of § 506(a) no longer

applies to bifurcate the creditor’s claim into secured and unsecured portions, a

debtor who keeps the 910 vehicle under § 1325(a)(5)(B) must now pay the entire

claim as filed. In other words, a 910 car claim under § 1325(a)(5)(B) is treated as

fully secured.

Here, however, the debtors surrendered the vehicles under § 1325(a)(5)(C).

Because a 910 car claim is treated as fully secured when a debtor retains the

vehicle, the bankruptcy court and the BAP reasoned that it must also be treated as

fully secured when the debtor surrenders the vehicle. Following this logic,

surrender fully satisfies the claim and precludes an unsecured claim for a

deficiency.

Although courts agree that the hanging paragraph now prevents the

application of § 506 to 910 car claims under § 1325(a)(5), they have reached

different conclusions concerning the effect of this change on cases involving the

3
(...continued)
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.

11 U.S.C. § 1325(a).

-7-
surrender of a 910 vehicle. In the present case, the bankruptcy court and the BAP

adopted the majority view among bankruptcy courts; both courts concluded that,

because a 910 car claim is no longer subject to bifurcation into secured and

unsecured claims under § 506(a), the debtor’s surrender of the vehicle under

§1325(a)(5)(C) satisfies the entire claim, and the creditor may not pursue an

unsecured claim, based on state law, to recover a deficiency. See, e.g., In re

Moon, 359 B.R. 329, 333 (Bankr. N.D. Ala. 2007); see also In re Rodriguez, 375

B.R. 535, 542 n.6 (9th Cir. BAP 2007) (listing cases in which bankruptcy courts

have adopted this view). Conversely, a growing number of courts, including the

only circuit courts to address this issue, have held that a creditor may pursue an

unsecured deficiency claim when the debtor surrenders the vehicle. See In re

Long, 519 F.3d 288, 298, 299–301 (6th Cir. 2008); Capital One Auto Fin. v.

Osborn, 515 F.3d 817, 822–23 (8th Cir. 2008); In re Wright, 492 F.3d 829,

832–33 (7th Cir. 2007); see also In re Rodriguez, 375 B.R. at 548–49 (rejecting

majority view adopted by bankruptcy courts).

B. Statutory Analysis

We join the growing number of courts adopting the latter view and hold

that, by making § 506 inapplicable to 910 car claims, the hanging paragraph does

not abrogate a creditor’s right to assert a deficiency claim authorized by state law.

Like the Seventh and Eighth Circuits, we reach this conclusion based on the plain

language of the statute. See Osborn, 515 F.3d at 821; In re Wright, 492 F.3d at

-8-
832. Because the statutory language is clear, we need not look beyond it. See

United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (noting that

judicial inquiry into the meaning of a statute should end when the language is

plain).

We begin with the presumption “that claims under applicable state law will

be allowed in bankruptcy unless they are expressly disallowed.” Travelers Cas.

& Sur. Co. v. Pac. Gas & Elec. Co., 127 S. Ct. 1199, 1206 (2007). Neither the

debtors nor the bankruptcy court has identified any provision in the Bankruptcy

Code “expressly disallowing” an unsecured deficiency claim based on state law.

Section 1325(a) contains no language invalidating a creditor’s claim for an

unsecured deficiency under state law. And nothing in § 502, the provision

governing the allowance of claims, excludes or limits such a claim. See Osborn,

515 F.3d at 822 (“As nothing in § 502 or § 1325 denies a creditor an unsecured

deficiency claim, [the creditor] is entitled to one.”). Furthermore, although § 506

governs the treatment of most secured claims, it does not follow that its

inapplicability to 910 car claims invalidates creditors’ rights under state law. As

the Seventh Circuit recently explained, the question is not what happens when

§ 506 applies, but “what happens when § 506 does not apply.” In re Wright, 492

F.3d at 833. 4

4
An argument exists that the valuation method under § 506(a) never applies
to surrendered collateral of any kind under § 1325(a)(5)(C) because § 506(a) only
(continued...)

-9-
 The BAP and bankruptcy court erroneously concluded that DaimlerChrysler

could not pursue an unsecured claim because both courts understood § 506(a),

rather than state law, to be the only source of DaimlerChrysler’s deficiency claim.

Before the addition of the hanging paragraph, the bifurcation process under

§ 506(a) separated a claim secured by a 910 vehicle into secured and unsecured

claims. But § 506(a) is certainly not the only means by which an undersecured

creditor may assert an unsecured deficiency claim. See Wright, 492 F.3d at 832

(“[I]t is a mistake to assume, as the majority of bankruptcy courts have done, that

§ 506 is the only source of authority for a deficiency judgment when the collateral

is insufficient.”). As the Supreme Court has emphasized, unless the Bankruptcy

Code says otherwise, the source of a secured or unsecured claim is state law; this

follows from the “settled principle that creditors’ 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.” Travelers Cas. & Sur. Co., 127 S. Ct. at 1204–05 (quotation and

4
(...continued)
applies when the estate has an interest in the collateral, and when a debtor
surrenders the collateral, that interest disappears. See In re Long, 519 F.3d at 300
(Cox, J., concurring in the judgment). But as the bankruptcy court explained,
under Oklahoma law, the debtor has the right to redeem collateral repossessed by
a creditor before certain conditions occur. See Okla. Stat. Ann. tit. 12A § 1-9-
623(a), (c); see also U.C.C. § 9-623(a), (c). This suggests that, under some
circumstances, the debtor (and therefore the estate) may have a continuing
interest in surrendered collateral. We need not resolve this larger issue, however,
because the hanging paragraph clearly prevents the application of § 506 to the
kind of claim at issue in this case.

-10-
alteration omitted); see also Nobelman v. Am. Sav. Bank, 508 U.S. 324, 329–30

(1993) (looking to mortgage contracts and state law to define a mortgage lender’s

“rights” when the Bankruptcy Code did not define the term “rights”). In the

absence of a contrary federal rule, a bankruptcy court should ensure that a

creditor’s rights are protected in accordance with state law. Butner v. United

States, 440 U.S. 48, 55–56 (1979).

The Bankruptcy Code does not contain a contrary federal rule or otherwise

qualify a creditor’s state-law entitlement to a deficiency claim. By removing 910

car claims from the valuation process under § 506(a), the hanging paragraph does

not prohibit the bifurcation of 910 car claims into secured and unsecured claims;

it “simply removes the bankruptcy code’s method of bifurcation.” Osborn, 515

F.3d at 822; see also Rash, 520 U.S. at 957 (explaining that § 506(a) governs the

value of an allowed secured claim). As the Seventh Circuit has explained,

creditors need not rely on § 506 “to create, allow, or recognize security interests,

which rest on contracts (and the UCC) rather than federal law.” Wright, 492 F.3d

at 833. In fact, any qualification of state law applicable to secured claims is a

consequence of valuation under § 506, which no longer applies to 910 car claims.

See id. A creditor is therefore free to pursue an unsecured deficiency claim based

on its contract with the debtor and state law.

In support of their contention that federal law invalidates deficiency claims

based on state law, the debtors urge us to adopt a novel interpretation of the

-11-
meaning of “allowed secured claim” in § 1325(a)(5). In essence, they contend

that the bifurcation process under § 506(a) gives meaning to the phrase “allowed

secured claim” in § 1325(a)(5). And because the hanging paragraph prevents

application of § 506 to 910 car claims, we must give the phrase “allowed secured

claim” in § 1325(a)(5) a particular meaning when applied to these claims.

According to the debtors’ interpretation, “allowed secured claim” in § 1325(a)(5)

means “allowed fully secured claim” regardless of whether the debtor retains or

surrenders the vehicle. They argue that, by preventing bifurcation under § 506(a),

the hanging paragraph creates a “fiction” that the 910 vehicle is worth the exact

amount of the balance on the loan. Because of this fictional value, the debtor

pays the full amount under the retention option, § 1325(a)(5)(B), and therefore

also satisfies the entire claim under the surrender option, § 1325(a)(5)(C).

We find this interpretation of § 1325(a)(5) unconvincing because the

language governing the retention and surrender options differs significantly. If

the debtor keeps the vehicle, the plan must ensure that “the value, as of the

effective date of the plan, of property to be distributed under the plan on account

of such claim is not less than the allowed amount of such claim.”

§ 1325(a)(5)(B)(ii). In other words, under subparagraph (B), the debtor must pay

the present value of the entire claim (i.e., “the allowed amount of the claim”).

Conversely, subparagraph (C) does not refer to value of any kind; it simply

provides for plan confirmation when “the debtor surrenders the property securing

-12-
such claim to such holder.” § 1325(a)(5)(C); see also Osborn, 515 F.3d at

821–22 (disagreeing with the view that surrender fully satisfies a 910 car claim

because “the surrender option in § 1325(a)(5)(C) does not speak to satisfaction of

a claim”). The debtors therefore ask us to read the valuation applicable to the

retention option under § 1325(a)(5)(B) into the subparagraph governing surrender,

§ 1325(a)(5)(C). But we will not read language from one statutory section into

another; if Congress intended to provide for full satisfaction of a 910 car claim

upon surrender, it would have done so expressly. See Russello v. United States,

464 U.S. 16, 23 (1983) (noting that when “Congress includes particular language

in one section of a statute but omits it in another section of the same Act, it is

generally presumed that Congress acts intentionally and purposely in the disparate

inclusion or exclusion” (quotation omitted)).

The debtors’ interpretation of the phrase of “allowed secured claim” is also

based on the faulty premise that § 506(a) generally defines the term “allowed

secured claim.” Section 506(a) provides a method for the judicial valuation of an

allowed secured claim; it does not provide a definition of the phrase “allowed

secured claim” applicable to other provisions of the Bankruptcy Code. See

Dewsnup v. Timm, 502 U.S. 410, 417 (1992) (holding that the meaning of

“allowed secured claim” in § 506(a) does not determine the meaning of “allowed

secured claim” in § 506(d)). In addition, nothing in § 1325(a)(5) suggests that

§ 506(a) determines the meaning of the phrase “allowed secured claim” in that

-13-
section. In the absence of express language linking the meaning of “allowed

secured claim” in § 1325(a)(5) to § 506(a), the most natural reading of the phrase

is that it describes a claim that is both “allowed” under the Bankruptcy Code and

“secured” by a lien. Cf. id. (holding that the words “allowed secured claim” in

§ 506(d) refer to a claim that is secured by a lien and allowed under § 502).

Thus, the phrase “allowed secured claim” in § 1325(a)(5) simply means a claim

that is allowed under § 502 and secured by a lien under state law. 5

In sum, by choosing to surrender a 910 vehicle under § 1325(a)(5)(C), a

debtor satisfies the requirements for plan confirmation under § 1325(a)(5) with

respect to that particular allowed secured claim. Whether the creditor may bring

an unsecured claim to recover a deficiency after sale of the vehicle depends on

the underlying contract and state law. Here, the debtors agreed in their retail

installment contracts to pay any deficiency remaining after liquidation, and

DaimlerChrysler has the right under Oklahoma law to seek payment for any

deficiency. See 12A Okla. Stat. Ann. § 1-9-615(d)(2) (stating that a debtor is

liable for any deficiency). Because the Bankruptcy Code does not invalidate or

5
Although the debtors and bankruptcy court reason that a creditor secured
by a 910 vehicle cannot pursue an allowed unsecured claim without the
bifurcation process of § 506(a), they do not adopt the position that § 506 is the
only source of an allowed secured claim subject to treatment under § 1325(a)(5).
Under this view, the entire 910 car claim would be unsecured. See Wright, 492
F.3d at 832. Of course, this argument suffers from the same misconceptions as
the debtors’ other arguments, namely that state law must be implemented by the
Bankruptcy Code, id. at 832–33, and § 506(a) defines the phrase “allowed secured
claim” in § 1325(a)(5).

-14-
otherwise limit this right, DaimlerChrysler is entitled to pursue its unsecured

claims under Oklahoma law. 6

III. CONCLUSION

For the foregoing reasons, we REVERSE the judgment of the BAP and

REMAND to the bankruptcy court for further proceedings consistent with this

opinion.

6
We express no opinion, however, regarding the timeliness of
DaimlerChrysler’s unsecured claims.

-15-