Fannie Shaw v. Aurgroup Fin'l Credit Union ( 2009 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0010p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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X
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FANNIE L. SHAW,
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Petitioner-Appellant,
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No. 08-3061
v.
,
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AURGROUP FINANCIAL CREDIT UNION and
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MARGARET A. BURKS,
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Respondents-Appellees.
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Appeal from the United States District Court
for the Southern District of Ohio at Cincinnati.
No. 07-00207—Sandra S. Beckwith, Chief District Judge.
Submitted: October 23, 2008
Decided and Filed: January 9, 2009
Before: BOGGS, Chief Judge; MERRITT and GRIFFIN, Circuit Judges.
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COUNSEL
ON BRIEF: David A. Kruer, DEARFIELD, KRUER & COMPANY, Cincinnati, Ohio, for
Appellant. Stephen Duane Miles, Dayton, Ohio, for Appellees.
GRIFFIN, J., delivered the opinion of the court, in which BOGGS, C. J., joined.
MERRITT, J. (p. 22), delivered a separate opinion concurring in the result.
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OPINION
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GRIFFIN, Circuit Judge. Debtor-petitioner Fannie L. Shaw appeals the district
court’s order affirming the bankruptcy court’s decision denying confirmation of her Chapter
13 plan. Shaw concedes that her proposed plan did not satisfy the provisions of 11 U.S.C.
§ 1325(a) but contends that the bankruptcy court could, nevertheless, have exercised
1
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 2
discretion and confirmed the plan if it was fair and equitable. The bankruptcy and district
courts held that a plan which does not satisfy the provisions in § 1325(a) cannot be
confirmed. The sole question presented on appeal is whether the provisions in § 1325(a) are
mandatory or discretionary. Because we hold that the provisions in § 1325(a) are mandatory
and that a court has no discretion to confirm a plan which does not comply with its
provisions, we affirm.
I.
The facts are not disputed. On March 21, 2005, debtor Fannie Shaw purchased a
2005 Dodge Caravan for personal use. Appellee Aurgroup Financial Credit Union financed
the purchase with a loan at an annual percentage rate of 12.13% secured by the automobile.
On July 21, 2006, or within 910 days of the purchase, Shaw filed a Chapter 13 petition. At
that time, Shaw still owed Aurgroup $23,606.20 on the loan, and Aurgroup filed a proof of
claim in that amount. In her reorganization plan, Shaw proposed to retain ownership of the
vehicle and pay $14,890.00 (the value of the vehicle at that time) at the rate of 7.5%.
Aurgroup and the Trustee, appellee Margaret Burks, objected to confirmation of the
plan on the basis that it did not comply with 11 U.S.C. § 1325(a)(5) and the “hanging
paragraph” following 11 U.S.C. § 1325(a)(9). Aurgroup contended that it was entitled to be
paid in full at the contract rate of interest.
Following a hearing, the Bankruptcy Court for the Southern District of Ohio denied
confirmation of the plan. It held that, although “imprecise,” § 1325(a)’s provisions are
mandatory, not discretionary, meaning that a plan cannot be confirmed unless it satisfies the
provisions of § 1325(a). Because Shaw conceded that her plan did not satisfy § 1325(a)(5)
and the “hanging paragraph” following § 1325(a)(9), the court concluded that the plan could
not be confirmed as a matter of law.
1
On appeal, the district court affirmed. Relying on decisions from her colleagues,
Chief Judge Sandra Beckwith ruled that Ҥ 1325(a) sets forth mandatory requirements
1
Sparks v. HSBC Auto Fin., No. 1:06-cv-670, 2007 U.S. Dist. LEXIS 51943 (S.D. Ohio July 18,
2007); Horr v. Jake Sweeney Smartmart, Inc., No. 1:07-cv-00010, 2007 U.S. Dist. LEXIS 49063 (S.D.
Ohio July 6, 2007).
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 3
for plan confirmation and that the bankruptcy court does not have discretion to confirm
a plan that does not comply with this section.”
Shaw timely appeals.
II.
While Shaw presents five separate issues on appeal, they are all variations of a
single question: Are the provisions in 11 U.S.C. § 1325(a) mandatory for confirmation
of a Chapter 13 bankruptcy plan? Because the issue is purely a question of law, we
review the bankruptcy court’s decision de novo. In re Hurtado, 342 F.3d 528, 531 (6th
Cir. 2003).
Chapter 13 of the Bankruptcy Code permits consumers and businesses with
relatively small debts to reorganize their debts. Johnson v. Home State Bank, 501 U.S.
78, 82 (1991). An eligible debtor may submit a plan to the bankruptcy court that
“modifies the rights of holders of secured claims or unsecured claims and that provides
for the payment of all or any part of any allowed claim.” Id. (citing 11 U.S.C. § 109(e);
quoting 11 U.S.C. § 1322(b)(2) & (b)(6)). The bankruptcy court is required to confirm
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 4
the plan so long as it satisfies the provisions of 11 U.S.C. § 1325(a).2 See § 1325(a)
2
Confirmation of plan
(a) Except as provided in subsection (b), the court shall confirm a plan if –
(1) the plan complies with the provisions of this chapter [11 U.S.C. §§ 1301 et seq.]
and with the other applicable provisions of this title [11 U.S.C. §§ 101 et seq.];
(2) any fee, charge, or amount required under chapter 123 of title 28 [28 U.S.C.
§§ 1911 et seq.], or by the plan, to be paid before confirmation, has been paid;
(3) the plan has been proposed in good faith and not by any means forbidden by
law;
(4) the value, as of the effective date of the plan, of property to be distributed under
the plan on account of each allowed unsecured claim is not less than the amount that
would be paid on such claim if the estate of the debtor were liquidated under chapter 7
of this title [11 U.S.C. §§ 701 et seq.] on such date;
(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 determined under
nonbankruptcy law; or
(bb) discharge under section 1328 [11 U.S.C. § 1328]; and
(II) if the case under this chapter is dismissed or converted without
completion of the plan, such lien shall also be retained by such holder to the extent
recognized 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 of such claim is not less than the allowed amount of such
claim; and
(iii) if –
(I) property to be distributed pursuant to this subsection is in the form of
periodic payments, such payments 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;
(6) the debtor will be able to make all payments under the plan and to comply with
the plan;
(7) the action of the debtor in filing the petition was in good faith;
(8) the debtor has paid all amounts that are required to be paid under a domestic
support obligation and that first become payable after the date of the filing of the
petition if the debtor is required by a judicial or administrative order, or by statute, to
pay such domestic support obligation; and
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 5
(“[T]he court shall confirm a plan if –”) (emphasis added).
A debtor’s proposed plan must accommodate each allowed, secured creditor in
one of three ways under § 1325(a)(5): (1) by obtaining the creditor’s acceptance of the
plan; (2) by surrendering the property securing the claim; or (3) by permitting the
creditor to both retain the lien securing the claim and a promise of future property
distributions (such as deferred cash payments) whose total “value, as of the effective
date of the plan, . . . is not less than the allowed amount of such claim.” § 1325(a)(5);
Till v. SCS Credit Corp., 541 U.S. 465, 468 (2004). Shaw did not satisfy the first option
because Aurgroup objected to the plan, nor did she satisfy the second alternative because
she retained the Dodge Caravan. Thus, Shaw’s only avenue to comply with § 1325(a)
is the third option.
The third option, § 1325(a)(5)(B), is known as the “cramdown option” because
it may be enforced over a claim holder’s objection.3 Id. at 468-69. Prior to Congress’s
enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”), a Chapter 13 debtor who still owed money on an automobile could, over
the creditor’s objection, keep the vehicle and “bifurcate” (meaning divide or split) the
creditor’s fully secured claim into a secured portion and an unsecured portion under
§ 506(a)(1). See 11 U.S.C. § 506(a)(1)4; Nuvell Cred. Co., LLC v. Dean, 537 F.3d 1315,
1318 (11th Cir. 2008). The debt was secured up to the present value of the vehicle,
(9) the debtor has filed all applicable Federal, State, and local tax returns as
required by section 1308 [11 U.S.C. § 1308].
3
In other words, “the court crams down the creditor’s throat . . . .” In re Wright, 492 F.3d 829,
830 (7th Cir. 2007).
4
11 U.S.C. § 506(a)(1) provides:
Determination of secured status
(a) (1) An allowed claim of a creditor secured by a lien on property in which the estate
has an interest, or that is subject to setoff under section 553 of this title [11 U.S.C.
§ 553], 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 set off 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 conjunction with any hearing on
such disposition or use or on a plan affecting such creditor’s interest.
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 6
while the remainder of the debt was unsecured, with payments to be distributed, pro rata,
among the debtor’s unsecured creditors.5 Id. “[A]s long as the debtor paid the present
value of the [vehicle] (the allowed secured claim) over the term of the plan, which could
be up to five years[,]” the debtor could retain the vehicle. In re Dale, No. H-07-3176,
2008 U.S. Dist. LEXIS 88959, at *11-*12 (S.D. Tex. Aug. 14, 2008). “At the
conclusion of the plan, . . . any unpaid portion of the debt would be extinguished
pursuant to the provisions of Chapter 13.” Id. at *12. Ultimately, § 506(a)(1) permitted
a debtor to transform an under-secured creditor into an unsecured creditor for purposes
of pursuing any deficiency. Id. at *10.
However, “[i]t seems to be undisputed that Congress viewed this use of
‘cramdown’ as abusive and unfair to car lenders and other lienholders,” so when it
enacted BAPCPA in 2005, it added an unnumbered paragraph – commonly referred to
as the “hanging paragraph” – to the end of § 1325(a).6 Dean, 537 F.3d at 1318.
As it relates to this case, the “hanging paragraph” applies when: (1) the creditor
holds a purchase money security interest securing the debt that is the subject of the
claim; (2) the debt was incurred within the 910-day period preceding the date of the
filing of the petition; and (3) the collateral for that debt consists of a motor vehicle
acquired for the personal use of the debtor.7 Here, the parties do not dispute that all of
the requirements of a 910-claim are satisfied – Aurgroup holds a purchase money
security interest securing the debt that is the subject of its claim; Shaw bought the Dodge
5
Bifurcation under § 506 is known as the “stripping” of a creditor’s lien. In re Dale, No. H-07-
3176, 2008 U.S. Dist. LEXIS 88959, at *11, n.9 (S.D. Tex. Aug. 14, 2008).
6
The “hanging paragraph” following § 1325(a)(9) provides:
For purposes of paragraph (5), section 506 [11 U.S.C. § 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 [49 U.S.C. § 30102])
acquired for the personal 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.
7
A claim which meets the requirements of the “hanging paragraph” is known as a “910-claim.”
See Dean, 537 F.3d at 1318 n.2.
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 7
Caravan within 910 days of the filing date; and the collateral for that debt – the Dodge
Caravan – is a motor vehicle acquired for personal use.
While the impact of the hanging paragraph on 910-claims has resulted in some
debate, “virtually all reported decisions have held [that] the hanging paragraph means
only that 910-claims cannot be bifurcated into secured and unsecured portions under
section 506 and that such claims must be treated as fully secured.” Dean, 537 F.3d at
1319. Under this construction of the hanging paragraph, which Shaw, Aurgroup, the
Trustee, and the bankruptcy and district courts below have adopted, Shaw would not be
permitted to bifurcate the 910-claim as proposed in her plan.
Shaw attempts, however, to bypass that obstacle by urging that § 1325(a) in its
entirety, including the hanging paragraph, are discretionary only and that the bankruptcy
court could have confirmed her plan if it determined that the plan was fair and equitable.
Aurgroup, the Trustee, and the bankruptcy and district courts, however, all construe the
provisions in § 1325(a) as mandatory, meaning that a bankruptcy court cannot confirm
a plan that does not satisfy those criteria.
III.
Shaw advances several theories to support her contention that the bankruptcy
court could have, in its discretion, confirmed her proposed plan, even though she
concedes that the plan did not comply with § 1325(a). First, she emphasizes the plain
language of § 1325(a). She contends that the language “the court shall confirm a plan
if – ” in § 1325(a) prescribes the circumstances under which the bankruptcy court must
confirm a proposed plan of reorganization. In her view, § 1325(a) guarantees the debtor
that her plan will be confirmed by commanding the bankruptcy court to confirm it if the
plan complies with § 1325(a). In this way, § 1325(a) allegedly functions as a “safe
harbor” for the debtor by preventing the bankruptcy court from improperly denying
confirmation of a plan that satisfies its statutory criteria.
Shaw observes that § 1325(a) is silent, however, about whether the bankruptcy
court may confirm plans that do not meet its standards. She emphasizes that the statute’s
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 8
plain language does not prevent a bankruptcy court from confirming plans, such as hers,
that are fair and equitable. She also reasons that because § 1325(a) does not contain the
words “only if” that are found in its Chapter 11 counterpart, 11 U.S.C. § 1129(a),8
“Congress sought to give greater flexibility to cases filed under chapter 13 compared to
cases under chapter 11 when the Bankruptcy Code was first enacted in 1978 and to keep
it that way through every major revision since, including BAPCPA.”
Second, Shaw cites to case law to support her characterization of § 1325(a) as
discretionary. She relies heavily on In re Szostek, 886 F.2d 1405 (3d Cir. 1989), where
the Third Circuit explained:
If the provisions of § 1325(a)(5) are mandatory, as Kissell contends, then
a plan cannot be confirmed if it does not meet the requirements of that
section. We must determine whether § 1325(a)(5)(B)(ii) is mandatory,
as Kissell contends, or whether the section is discretionary, i.e., it
guarantees confirmation if a plan comports with the statutory provisions,
but does not mandate that the provisions be met in order for confirmation
to occur.
We note at the outset that the Code section which explicitly contains
mandatory requirements for confirmation of a debtor’s Chapter 13 plan
is 11 U.S.C. § 1322, which unequivocally states “the plan shall” do three
things. Section 1322 provides in relevant part:
(a) The plan shall –
(1) provide for the submission of all or such portion of
future earnings or other future income of the debtor to the
supervision and control of the trustee as is necessary for
the execution of the plan;
(2) provide for the full payment, in deferred cash
payments of claims entitled to full priority under section
507 of this title, unless the holder of a particular claim
agrees to a different treatment of such claims; and
(3) if the plan classifies claims, provide the same
treatment for each claim within a particular class.
8
11 U.S.C. § 1129(a) provides that “[t]he court shall confirm a plan only if all of the following
requirements are met: . . . .”
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 9
11 U.S.C. § 1322(a). By comparison, the language of § 1325(a) states
that a “court shall confirm a plan if” certain things occur. However, it
does not state “only if” the described events occur. Thus, the logical
interpretation is that if the conditions of § 1325(a) occur, the court must
confirm the plan. On the other hand, if the conditions of § 1325(a) are
not met, although the requirements of § 1322 are fulfilled, the court has
the discretion to confirm the plan. If Congress had intended for
§ 1325(a) to be mandatory, it could have included that requirement with
the requirements already listed in § 1322.
Review of a comparable bankruptcy section, one dealing with the
confirmation of chapter 11 plans, supports the conclusion that § 1325(a)
is not mandatory. The text of 11 U.S.C. § 1129 specifically states that
“The court shall confirm a plan only if all of the following requirements
are met” . . . . (Emphasis added.) Thus, the distinction between § 1322
and § 1325(a) and the inclusion of the “only if” language in § 1129,
which is absent from § 1325(a), show an unmistakable intent on the part
of Congress that a plan may be confirmed even if it does not comport
with the requirements of § 1325(a)(5).
Szostek, 886 F.2d at 1411.
Shaw also quotes from In re Britt, 199 B.R. 1000 (Bankr. N.D. Ala. 1996), in
which the Bankruptcy Court for the Northern District of Alabama, relying on Szostek,
held:
Section 1325(a) need not be satisfied for the Court to confirm a plan.
Section 1325(a) is a “safe harbor” provision by which the debtor can
require the Court to confirm a plan which satisfies all its provisions. It
provides the Court “shall confirm a plan if,” in addition to satisfying
subsection (b), the plan complies with the provisions of each of the six
paragraphs of subsection (a). Consequently, the “court is required to
confirm if [the] six requirements are met.” H. Rept. No. 95-595 to
accompany H.R. 8200, 95th Cong., 1st Sess. (1977) p. 430. See also, S.
Rept. No. 95-989 to accompany S. 2266, 95th Cong., 2d Sess. (1978) p.
142. Unlike § 1129, which allows confirmation “only if” all of its
requirements are met, § 1325(a) does not impose mandatory
requirements. In re Szostek, 886 F.2d 1405, 1412 (3d Cir. 1989). The
Court has discretion, therefore, to confirm a plan which satisfies §§ 1322
and 1325(b) but does not satisfy § 1325(a). Id.
Britt, 199 B.R. at 1006-07.
Shaw also relies on, but does not discuss, the following cases: In re Escobedo,
28 F.3d 34 (7th Cir. 1994) (holding that a plan under Chapter 13, although confirmed,
was invalid because it failed to comply with the mandatory provisions of 11 U.S.C.
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 10
§ 1322(a)(2) requiring full payment of all claims entitled to priority); In re Burgess, 143
F. App’x 692 (7th Cir. 2005) (unpublished) (rejecting creditor’s attempt to invalidate a
confirmed plan because creditor failed to properly and timely object to confirmation and
because compliance with § 1325(a) is, under Szostek, not mandatory for confirmation);
In re Averhart, 372 B.R. 441, 444 (Bankr. E.D. Wis. 2007) (“This court joins with
Szostek and other cases which hold that § 1325(a) is not a mandatory provision for
confirmation.”); In re Wampler, 345 B.R. 730 (Bankr. Kan. 2006) (relying on Szostek
to conclude that § 1325(a) is discretionary); In re Siegfried, 114 B.R. 358 (Bankr.
N.D.N.Y. 1990) (holding that § 1325(a) is discretionary, based on 5 COLLIER ON
BANKRUPTCY P. 1322.01[1] (15th ed. 1989), which cited § 1322(a) as the sole
mandatory provision of the Code regarding Chapter 13 plans, and other decisions,
including Szostek).
Third, Shaw emphasizes the canon of statutory interpretation that Congress is
presumed to be aware of existing case law pertinent to the legislation it enacts. See, e.g.,
Goodyear Atomic Corp. v. Miller, 486 U.S. 174, 185 (1988). She contends that because
Congress did not modify the language in § 1325(a) after Szostek, it intended to permit
bankruptcy courts to confirm Chapter 13 plans that do not comply with § 1325(a).
Fourth, Shaw asserts that pre-BAPCPA decisions holding directly, or suggesting
in dicta, that § 1325(a) is mandatory are not persuasive because those cases were not
confronted with the hanging paragraph. According to Shaw, the hanging paragraph
imposes unfair burdens on debtors that did not exist pre-BAPCPA.
Fifth, Shaw argues that a construction of § 1325(a) as mandatory would
unfavorably erode the finality of the confirmation order. In support of that contention,
Shaw cites our decision in In re Ruehle, 412 F.3d 679 (6th Cir. 2005). In Ruehle, we
held that the portion of a Chapter 13 plan discharging the debtor’s student loans by
declaration, although it had been confirmed, was nevertheless void because the debtor
failed to initiate an adversary proceeding alleging undue hardship, as required by 11
U.S.C. § 523(a)(8) and FED. R. BANKR. P. 7001(6), and because the creditor’s due
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 11
process rights had been violated when it received no notice or process concerning the
discharge. Id. at 681.
According to Shaw, “Ruehle made clear that when something is mandatory under
the bankruptcy code or bankruptcy rules, then a confirmation order that purports to do
otherwise is void and will be vacated upon motion.” If § 1325(a) were deemed
mandatory and Ruehle’s holding applied, Shaw asserts that a debtor’s failure to comply
with any requirement in § 1325(a) could result in a determination that the plan, although
confirmed, is nevertheless void. “[U]nder the logic of Ruehle,” she reasons, “ any
creditor could seek to have the confirmation of the plan, years after confirmation,
vacated on the basis of it being void[,]” thus undermining finality.
Sixth, Shaw relies on BAPCPA’s legislative history. She asserts that the initial
legislative proposals did not prevent bifurcation in her circumstance.
Finally, Shaw suggests that granting bankruptcy courts discretion to confirm
plans that do not satisfy the provisions in § 1325(a) would not be unjust to creditors. “If
a debtor seeks to keep an asset that is unnecessary for an effective reorganization, such
as a pleasure boat as an extreme example, it is hard to imagine how a Court could grant
confirmation without abusing its discretion.” “Simply stated, it is not always inherently
fair or inequitable to confirm a plan that recognizes the economic reality of the creditor’s
secured status by paying the fair value of a particular motor vehicle to the creditor
holding a lien upon it.” She then contends, without explaining, that a discretionary
construction of § 1325(a) would actually benefit creditors and advance Congress’s intent
of treating affected creditors “more fairly.” “It is a balanced result given the historic
preference of chapter 13 bankruptcy and the concerns of Congress as to debtors gaming
the bankruptcy system.” Further,
[i]t avoids the absurd result of rewarding the motor vehicle lending
industry with huge windfalls that would otherwise result from an
absolute elimination of bifurcation on 910-claims . . . . With such a view,
the affected creditor still has an allowed secured claim that is still subject
to bifurcation but only when the Court, given the discretion clearly given
to it by Congress for the reasons stated above and the particular
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 12
circumstances of the case, believes it would be fair and equitable to do
so.
IV.
At the outset, we acknowledge that 11 U.S.C. § 1325(a) is poorly worded. See
Henry E. Hildebrand, III, Impact of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 on Chapter 13 Trustees, 79 AM. BANKR. L.J. 373, 386 n.65
(Spring 2005) (“Though it appears that the intent of the hanging paragraph is to preclude
the claim splitting or ‘cramdown’ that is embodied in 506(a), the means by which such
restriction was drafted is confusing, at best.”). Nevertheless, we have consistently
treated the provisions in § 1325(a) as mandatory requirements for confirmation. See In
re Nichols, 440 F.3d 850, 857 (6th Cir. 2006) (noting that a debtor may cure a post-
confirmation default by modifying the plan as long as the modified plan conforms with
the “requirements” of § 1325(a)); In re Adkins, 425 F.3d 296, 300 (6th Cir. 2005)
(stating that § 1325(a)(5)(B) “mandates that a secured claim is fixed in amount and
status and must be paid in full once it has been allowed”; “a post-confirmation surrender
and subsequent reclassification is an attempt to bifurcate a claim that has already been
classified as fully secured, and thus would negate the requirement in section
1325(a)(5)(B)(ii) that a plan is not to be confirmed unless the property to be distributed
on account of a claim is not less than the allowed amount of the claim.”) (emphasis
added); In re Alt, 305 F.3d 413, 419 (6th Cir. 2002) (treating the provisions of § 1325(a)
as mandatory); In re Nolan, 232 F.3d 528, 533 (6th Cir. 2000) (same); In re Glenn, No.
98-5128, 1999 U.S. App. LEXIS 847, at *5 (6th Cir. Jan. 20, 1999) (unpublished)
(“Because the value of property to be distributed under the plan is not less than the value
of City Bank’s claim, the requirements of § 1325(a)(5)(B) have been satisfied”; “Section
1325(a)(6) requires that the debtor be able to make all payments under the plan and to
comply with the plan.”) (emphasis added); In re Fishell, No. 95-1637, 1997 U.S. App.
LEXIS 8394, at *13 (6th Cir. Apr. 16, 1997) (unpublished) (characterizing § 1325(a)(3)
as a good faith “requirement”); In re Shortridge, No. 93-2558, 1995 U.S. App. LEXIS
32890, at *6-7 (6th Cir. Aug. 31, 1995) (unpublished) (same); Lawson v. BancBoston
Mort. Corp., No. 90-6441, 1991 U.S. App. LEXIS 19035, at *6-*7 (6th Cir. Aug. 8,
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 13
1991) (unpublished) (“[N]either [the district court, nor the bankruptcy court,] addressed
whether the debtors’ proposed plan met the requirements of 11 U.S.C. § 1325(a), which
requires the bankruptcy court to find, inter alia, that the plan is feasible and proposed
in good faith.”) (emphasis added); Hardin v. Caldwell, 897 F.2d 529, n.6 (6th Cir. 1990)
(stating in dicta that “[i]n order for a debtor to obtain judicial confirmation of a Chapter
13 reorganization plan, the plan must conform with the requirements of 11 U.S.C. § 1325
. . . .”) (emphasis added); In re Hardy, 755 F.2d 75, 78 (6th Cir. 1985) (affirming
decision denying confirmation of a plan because plan failed to satisfy the “statutory
requirement” in § 1325(a)(4)). In Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427
(6th Cir. 1982), we observed that:
[s]ection 1325(a)(5)(B) seems to require the Bankruptcy Court to assess
interest on the secured claim for the present value of the collateral (if it
is not to be paid immediately) in order not to dilute the value of that
claim through delay in payment. In effect the law requires the creditor
to make a new loan in the amount of the value of the collateral rather
than repossess it, and the creditor is entitled to interest on his loan.
Id. at 429 (emphasis added).
Most recently, in In re Long, 519 F.3d 288 (6th Cir. 2008), we stated:
The hanging paragraph eliminates the cramdown occurring under
§ 1325(a)(5)(B) by eliminating bifurcation under § 506. Without § 506,
creditors falling within the scope of the hanging paragraph are fully
secured so that when a debtor elects to retain the collateral, the debtor
must propose a plan that will pay the full amount of the claim.
...
Based upon the legislative history, there is little doubt that the
“hanging-sentence architects intended only good things for car lenders
and other lienholders.” Keith M. Lundin, CHAPTER 13 BANKRUPTCY, 3d
ed. 451.5-1 (2000 & Supp. 2007-1) . . . .
Id. at 294.
Our construction of § 1325(a) as imposing mandatory requirements for plan
confirmation is consistent with several Supreme Court decisions suggesting the same.
See Till v. SCS Credit Corp., 541 U.S. 465, 468 (2004) (“To qualify for court approval
under Chapter 13 of the Bankruptcy Code, an individual debtor’s proposed debt
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 14
adjustment plan must accommodate each allowed, secured creditor in one of three ways
[under § 1325(a)(5)] . . . .”) (emphasis added); Assocs. Commercial Corp. v. Rash, 520
U.S. 953, 956 (1997) (“To qualify for confirmation under Chapter 13, the Rashes’ plan
had to satisfy the requirements set forth in 1325(a) of the Code.”) (emphasis added);
Johnson v. Home State Bank, 501 U.S. 78, 87-88 (1991) (“A bankruptcy court is
authorized to confirm a plan only if the court finds” that the requirements of 1325(a)
have been satisfied) (emphasis added).
Shaw cites no Supreme Court or Sixth Circuit decision holding or even
suggesting that the provisions in § 1325(a) are discretionary. Other circuits have also
held that the provisions in § 1325(a) are mandatory. The most recent decision so holding
is In re Jones, 530 F.3d 1284 (10th Cir. 2008), in which the Tenth Circuit stated:
We begin by acknowledging that § 1325(a) does not expressly state that
a court must confirm a plan only if certain conditions occur; rather, it
states that “the court shall confirm a plan if” these conditions occur.
According to the debtors, this language permits confirmation of a plan
that does not satisfy the conditions because the statute does not direct the
court to confirm a plan only if the conditions occur. Read in context,
however, the conditions specified in § 1325(a) are clearly mandatory
requirements. See Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 809
(1989) (“It is a fundamental canon of statutory construction that the
words of a statute must be read in their context and with a view to their
place in the overall statutory scheme.”). For example, § 1325(a)(3)
permits confirmation when “the plan has been proposed in good faith and
not by any means forbidden by law.” If we were to adopt the debtors’
reading of the statute, a bankruptcy court would have the discretion to
confirm a plan even if it were proposed in bad faith or by illegal means.
Given this result, it is not surprising that we have repeatedly treated the
conditions set forth in § 1325(a) as mandatory. Moreover, in analyzing
questions arising under § 1325(a), the Supreme Court has described the
statutory conditions as mandatory requirements.
Furthermore, a reading that fails to recognize the mandatory nature of
§ 1325(a) would be in conflict with § 1329, the section governing
modification of a plan after confirmation. This section explicitly states
that “the requirements of section 1325(a) . . . apply to any modification”
under § 1329. § 1329(b)(1) (emphasis added). To hold that the
conditions set forth in § 1325(a) are not requirements for confirmation
would clearly “violate[] the general maxim that the Bankruptcy Code and
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 15
Rules be construed so that their provisions are harmonious with each
other.”
We therefore hold that the conditions set forth in § 1325(a) are
requirements the debtor must satisfy to qualify a Chapter 13 plan for
confirmation. As a result, when a secured creditor objects to
confirmation because the plan does not comply with § 1325(a)(5)–as is
the case here– the bankruptcy court may not confirm the plan unless it
meets the requirements of that subsection.
As we have previously indicated, however, if a secured creditor fails to
object to confirmation, the creditor will be bound by the confirmed plan’s
treatment of its secured claim under § 1325(a)(5). This is because the
failure to object constitutes acceptance of the plan. And a creditor’s
acceptance of a Chapter 13 plan is one way to satisfy the requirements of
§ 1325(a)(5) with respect to that creditor’s allowed secured claim. See
§ 1325(a)(5)(A) (providing that a plan qualifies for confirmation with
respect to an allowed secured claim when the holder of such claim
accepts the plan). In short, when the holder of an allowed secured claim
does not object, the court may interpret this silence as acceptance under
§ 1325(a)(5)(A); under these circumstances, the plan need not meet the
requirements set forth in § 1325(a)(5)(B), including the present-value
requirement.
The decision cited by the debtors, In re Szostek, essentially stands for this
proposition–that is, that a creditor’s failure to object constitutes
acceptance and permits confirmation even if the plan does not treat an
allowed secured claim in accordance with § 1325(a)(5)(B). See In re
Szostek, 886 F.2d at 1414. Citing our decision in In re Ruti-Sweetwater[,
Inc., 836 F.2d 1263, 1266-67 (10th Cir. 1988),] the Third Circuit rejected
a creditor's challenge to a Chapter 13 plan, holding that the creditor
accepted the plan when it “failed to object timely to the plan’s
confirmation.” Id. (citing In re Ruti-Sweetwater, 836 F.2d at 1263). This
holding is consistent with our prior case law and our decision today that
the conditions regarding allowed secured claims in § 1325(a)(5) are
mandatory: if the creditor objects (i.e., does not accept the plan under
§ 1325(a)(5)(A)), the plan must meet the requirements of
§ 1325(a)(5)(B).
Although In re Szostek contains broader language that suggests the
provisions of § 1325(a) are not mandatory, see 886 F.2d at 1412, the
court expressly limited its holding to the facts of the case, discussing at
length the creditor’s failure to object to confirmation, id. at 1413-14. We
therefore read the court’s holding narrowly. To the extent the court in In
re Szostek suggested that the statutory conditions are not mandatory, we
disagree. They are requirements for confirmation of a plan.
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 16
Here, the creditors objected to confirmation of the plans. Because they
did not accept the plans, see § 1325(a)(5)(A), and the debtors did not
surrender the vehicles, see § 1325(a)(5)(C), the plans had to satisfy the
requirements of § 1325(a)(5)(B)(ii) by proposing property distributions
equaling the present value of the claims. Because the plans do not
provide for the payment of interest on the claims, they fail to satisfy the
statute’s present-value requirement, and the bankruptcy court erred in
confirming the plans over the creditors’ objections.
Id. at 1290-92 (citations and footnote omitted).
Likewise, in In Re Barnes, 32 F.3d 405 (9th Cir. 1994), a pre-BAPCPA decision,
the Ninth Circuit rejected In re Szostek and held that the provisions in § 1325(a) are
mandatory:
It is possible to distinguish In re Szostek on the ground that the creditor
in that case did not timely object to the plan, whereas the Creditors here
did. But this distinction does not account for the broad language [of In
re Szostek].
We have not heretofore considered whether the language of
§ 1325(a)(5)(B)(ii) is a mandatory requirement for confirmation of a
Chapter 13 plan of reorganization. We have considered, however, the
question whether the good faith requirement of § 1325(a)(3) is such a
mandatory requirement. In Chinichian v. Campolongo, 784 F.2d 1440
(9th Cir. 1986), we held it was. We reasoned this was so because a
bankruptcy court has jurisdiction to revoke a plan if the plan was not
filed in good faith. Id. at 1442. We also stated: “For a court to confirm
a plan, each of the requirements of section 1325 must be present and the
debtor has the burden of proving that each element has been met.” Id. at
1443-44.
We conclude that, like the requirement of 11 U.S.C. § 1325(3), the
requirement of § 1325(a)(5)(B)(ii) is mandatory. The bankruptcy court
cannot confirm a plan of reorganization that does not comply with this
requirement. Here, the value of the property to be distributed during the
term of the five-year plan on account of the allowed secured claim is
$25,703.25. This is less than the allowed amount of the secured claim,
$43,000 plus interest, and the Debtors have not surrendered the property
securing the claim. The bankruptcy court erred in confirming the plan.
Id. at 407 (citations omitted).
In In re Bateman, 331 F.3d 821, 829 n.7 (11th Cir. 2003), the Eleventh Circuit
stated in dicta that the question of whether the provisions in § 1325(a) are mandatory or
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 17
discretionary “appears to be settled by [the Supreme Court’s decision in] Assocs.
Commercial Corp. v. Rash.” (Emphasis added.) More recently, the Eleventh Circuit’s
decision in In re Dean, 537 F.3d 1315 (11th Cir. 2008) also strongly suggests a
mandatory construction of § 1325(a) because Dean “fully adopt[ed]” the Tenth Circuit’s
holding in Jones that 910-claims are fully secured and are not subject to bifurcation. Id.
at 1320. Further, the Fifth Circuit in In re Simmons, 765 F.2d 547 (5th Cir. 1985)
characterized § 1325(a)(5) as “one of the six prerequisites to confirmation of a Chapter
13 plan” and held that “because the requisites of section 1325(a)(5) were not satisfied
with regard to Simmons’ proposed Chapter 13 plan, it was erroneously confirmed.” Id.
at 553-54 (emphasis added).
Numerous district and bankruptcy courts outside the Fifth, Ninth, Tenth, and
Eleventh Circuits, including courts within this circuit, have also held, suggested, or
assumed that the provisions in § 1325(a) are mandatory.9 Based on the sheer weight of
authority, Szostek and the cases which rely upon it are in the minority. Interestingly, we
note that, although the Eastern District of Pennsylvania is bound by Szostek, its decision
in In re Haas, 203 B.R. 573 (E.D. Pa. 1996) distinguished it. In re Haas held that
“[s]ince compliance with § 1325(a)(5)(B)(ii) is mandatory and the Creditor objected to
9
See, e.g., Sparks v. HSBC Auto Fin., No. 1:06cv670, 2007 U.S. Dist. LEXIS 51943, at *14-*15
(S.D. Ohio July 18, 2007) (holding that § 1325(a) is mandatory and that the general powers of the court
codified in 11 U.S.C. § 105(a) do not permit a court to confirm a plan that does not satisfy § 1325(a)); Horr
v. Jake Sweeney Smartmart, Inc., No. 1:07-cv-00010, 2007 U.S. Dist. LEXIS 49063, at *12 (S.D. Ohio
July 6, 2007) (“In the face of this precedent, the Court is not inclined to follow the language in Szostek
finding that Bankruptcy Courts have the discretion to approve a plan that does not meet the requirements
of § 1325(a).”); In re Ezell, 338 B.R. 330, 342 (Bankr. E.D. Tenn. 2006) (concluding that the “Anti-
Cramdown Paragraph, as mandated by its terms,” renders a creditor whose claim falls within its scope
“fully secured”); In re Soards, 344 B.R. 829, 831 (Bankr. W.D. Ky. 2006) (“Under BAPCPA, vehicles
purchased within the 910 days preceding the filing of the petition may no longer be bifurcated into secured
and unsecured claims, but rather must be treated as fully secured.”) (emphasis added); In re Fleming, 339
B.R. 716, 721 (Bankr. E.D. Mo. 2006) (“In order to be confirmed, a Chapter 13 plan must provide one of
three options to secured creditors” under § 1325(a)(5)) (emphasis added); In re Robinson, 338 B.R. 70,
73-74 (Bankr. W.D. Mo. 2006) (noting that the parties do not dispute that the creditors of 910-claims “are
entitled to secured claims for the total amount of their claims, regardless of the value of the respective
vehicles, and the Debtor cannot bifurcate them.”); In re Scruggs, 342 B.R. 571, 575 (Bankr. E.D. Ark.
2006) (holding that a 910-claim is fully secured and requires that interest be added to the payment to arrive
at the present value of the claim); In re Shaw, 341 B.R. 543, 544 (Bankr. M.D. N.C. 2006) (stating that
§ 1325(a) contains general “requirements (i.e. that the plan be proposed in good faith) and mandates
specific treatment of certain creditors”) (emphasis added); In re Brooks, 344 B.R. 417, 419 (E.D. N.C.
2006) (“Section 1325(a) is the provision in the Code that sets forth the requirements for confirmation of
a Chapter 13 plan.”) (emphasis added); In re Johnson, 337 B.R. 269 (Bankr. M.D. N.C. 2006) (hanging
paragraph “prevents a debtor from paying less than the full contract amount if the debtor chooses to retain
the vehicle”) (emphasis added); In re Pearson, 10 B.R. 189, 194 (Bankr. E.D.N.Y. 1981) (“Before a court
may confirm a Chapter 13 plan, it must find” that 1325(a)(5)(B) has been satisfied.).
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 18
the Plan prior to confirmation, the bankruptcy court was not permitted to confirm the
Plan over [the] Creditor’s objection.” (Emphasis added.) Id. at 576.
After a thorough analysis, we conclude that Shaw’s reliance on two decisions
from the Seventh Circuit, In re Burgess and In re Escobedo, is misplaced. The Burgess
court relied on Escobedo to support its holding that § 1325(a) is discretionary, explaining
that:
Taylor asserts that § 1325(a)(4), like § 1322(a)(2), should be considered
a mandatory provision, such that we are entitled to disregard the time
limits established for revoking a confirmation order.
Unfortunately for Taylor, what Escobedo giveth, Escobedo taketh away.
In Escobedo, we distinguished the mandatory nature of § 1322(a)(2) from
the discretionary requirements of § 1325(a). 28 F.3d at 35. Our analysis
in Escobedo relied on the analysis of the Third Circuit in In re Szostek,
886 F.2d 1405, 1411 (3d Cir. 1989). Szostek found § 1322(a) mandatory
for all plans because that provision contained unequivocal language that
“the plan shall” satisfy three requirements. See id. This unequivocal
language meant that “a bankruptcy court lacks the authority to confirm
any plan unless it” complies with the provisions of § 1322(a). Escobedo,
28 F.3d at 35; Szostek, 886 F.2d at 1411. Szostek then considered the
language of § 1325(a), which provides that “a court shall confirm a plan
if certain things occur.” Szostek, 886 F.2d at 1411. The proper
interpretation of this provision is that if the requirements of § 1325(a) are
met, the bankruptcy court must confirm the plan, but if they are not met
(but § 1322(a) is satisfied), the bankruptcy court still has the discretion
to confirm the plan. See id. Section 1325(a), therefore, is not mandatory,
but only discretionary. As the Third Circuit noted, “if Congress had
intended for § 1325(a) to be mandatory, it could have included that
requirement with the requirements already listed in § 1322.” Id.
Burgess, 144 F. App’x at 694-95.
The Burgess court’s reliance on Escobedo, however, was erroneous. Escobedo
held only that confirmation of a debtor’s plan that did not comply with § 1322(a)(2) is
“nugatory” and “properly dismissed.” Escobedo, 28 F.3d at 35. Escobedo thus stands
for the sole proposition that the provisions in § 1322(a)(2) are mandatory. Id. Escobedo
did not address § 1325(a); rather, it merely noted, as an aside, that “while the provisions
of § 1325(a)(5) may be discretionary[,] the requirements of § 1322(a)(2) are mandatory.”
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 19
Id. (emphasis added). Escobedo’s purpose in noting the possible discretionary nature
of §1325(a)(5) was simply to emphasize that the statute before it – § 1322(a)(2) – was
undoubtedly mandatory. Therefore, we do not find Burgess, an unpublished, non-
binding decision in the Seventh Circuit, to be persuasive.
Shaw’s reliance on In re Britt, 199 B.R. 1000 (Bankr. N.D. Ala. 1996), a
bankruptcy court decision from the Northern District of Alabama, is also misplaced. As
we previously noted, the Eleventh Circuit’s decisions in In re Dean and In re Bateman
suggest a strong inclination toward a mandatory construction of § 1325(a).
The specific arguments Shaw advances in support of a discretionary construction
of § 1325(a) are unavailing. Shaw’s contention that Congress implicitly approved
Szostek’s holding when it enacted BAPCPA without modifying the language in
§ 1325(a) is without merit. At the time Congress enacted BAPCPA in 2005, it had been
eleven years since the Ninth Circuit decided Barnes. In rejecting Szostek, Barnes
created an unambiguous circuit split. Further, as the cases cited in this opinion
demonstrate, numerous courts, including the Supreme Court, as well as our own,
suggested or operated under the assumption that the provisions in § 1325(a) were
mandatory before BAPCPA’s enactment.
Shaw characterizes the pre-BAPCPA decisions addressing § 1325(a) as being “of
limited relevance.” That argument is self-defeating because Shaw heavily relies on
Szostek, a case decided before BAPCPA’s enactment. Further, although Shaw protests
the apparent “harshness” of the hanging paragraph on debtors, it is the Congress, not the
courts, which makes bankruptcy law. Shaw’s construction of § 1325(a) as discretionary
would contravene the hanging paragraph and Congress’s intent to protect creditors of
910-claims. See David Gray Carlson, Cars and Homes in Chapter 13 After the 2005
Amendments to the Bankruptcy Code, 14 AM. BANKR. INST. L. REV. 301, 346 (Winter
2006) (characterizing Szostek’s holding as an “extraordinary and quite unnecessary
holding” because it “all but abolishes the hanging paragraph.”). Accordingly, Shaw’s
dispute is with Congress, not with the courts.
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 20
Shaw provides no support for her contention that a mandatory construction of
§ 1325(a) would, in conjunction with our decision in Ruehle, erode the finality of the
confirmation order. In fact, granting judges discretion to confirm proposed plans under
Chapter 13 would introduce needless uncertainties and inconsistencies in the
confirmation process. Congress enacted BAPCPA precisely so that judges would have
less, not more, discretion under the Bankruptcy Code. See Hon. Keith M. Lundin, Ten
Principles of BAPCPA: Not What Was Advertised, 24-7 A.B.I.J. 1, 69 (Sept. 2005)
(“BAPCPA is packed with provisions intended to ‘reduce the discretion’ of bankruptcy
judges.”).
Finally, Shaw’s argument that the legislative history supports her interpretation
of § 1325(a) as discretionary is equally baseless. While several courts have observed
that the legislative history of § 1325(a) is not particularly helpful in distilling Congress’s
intent, see, e.g., In re Brady, 86 B.R. 166, 169 (Bankr. D. Minn. 1988) (“While it is
always risky trying to determine congressional intent, it is even more perilous in the
Bankruptcy Code, since there are virtually no legislative history to speak of and that
which does exist tends to be unenlightening. The committee reports and comments that
do exist on § 1322 and § 1325 do nothing more than reiterate the language of the two
sections themselves”), and In re Ezell, 338 B.R. 330, 341 (Bankr. E.D. Tenn. 2006)
(noting that statements of Congress’s intent in the legislative history of § 1325(a)(5)
“basically mirror the statutory language” and that “there is no further clarification”), it
is apparent from the House of Representatives report accompanying BAPCPA that
Congress sought to protect secured creditors of 910-automobiles:
Protections for Secured Creditors. S. 256's protections for secured
creditors include a prohibition against bifurcating a secured debt incurred
within the 910-day period preceding the filing of a bankruptcy case if the
debt is secured by a purchase money security interest in a motor vehicle
acquired for the debtor's personal use. Where the collateral consists of
any other type of property having value, S. 256 prohibits bifurcation of
specified secured debts if incurred during the one-year period preceding
the filing of the bankruptcy case. The bill clarifies current law to specify
that the value of a claim secured by personal property is the replacement
value of such property without deduction for the secured creditor's costs
of sale or marketing. In addition, the bill terminates the automatic stay
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 21
with respect to personal property if the debtor does not timely reaffirm
the underlying obligation or redeem the property. S. 256 also specifies
that a secured claimant retains its lien in a chapter 13 case until the
underlying debt is paid or the debtor receives a discharge.
H.R. Rep. No. 109-031, Part 1, at 17 (2005) (emphasis added). Notably, the proposed
legislation preceding BAPCPA contained the following headings and sub-headings:
“SEC. 302. FAIR TREATMENT OF SECURED CREDITORS UNDER CHAPTER
13"; “(a) RESTORING THE FOUNDATION FOR SECURED CREDIT,” and “SEC.
306. GIVING SECURED CREDITORS FAIR TREATMENT IN CHAPTER 13 . . . .”
V.
For the reasons stated, we hold that the provisions in 11 U.S.C. § 1325(a) are
mandatory requirements for confirmation of a proposed plan under Chapter 13 of the
Bankruptcy Code and that a bankruptcy court has no discretion to confirm a plan which
does not comply with those requirements. Because Shaw conceded that her proposed
plan did not comply with the hanging paragraph following § 1325(a), the bankruptcy
court could not, as a matter of law, confirm the plan. Accordingly, we affirm.
No. 08-3061 Shaw v. Aurgroup Financial Credit Union, et al. Page 22
__________________________________
CONCURRING IN THE RESULT
__________________________________
MERRITT, Circuit Judge, concurring in the result. I have previously set out my
views with respect to the “hanging paragraph” and the handling of auto retention cases
in Chapter 13 proceedings, and I adhere to the views set out there which lead to the
affirmance of the judgment of the Bankruptcy Court in this case. See In re: Long, 519
F.3d 288 (6th Cir. 2008).