By Columbia – Lexington Bankruptcy Attorney Lex Rogerson.
Eleventh Circuit allows chapter 13 debtor to surrender recreational vehicle in full satisfaction of purchase money loan.
Folks sometimes finance these toys when they feel financially sound and then, after some reversal, become unable to make the payments. Because the items tend to depreciate quickly, this often leads to a repossession sale that produces far less than the payoff on the account, and the financial institution comes after the former owner for a huge deficiency.
In bankruptcy, however, this problem may be smaller or even go away. According to an appeals court ruling on March 27, 2014, the remaining amount owed to the creditor is measured not by the liquidation value of the item, or what it might produce when sold after repossession, but instead by its replacement cost — what a purchaser would have to pay to buy the collateral at retail.
The Brown case
In 2007, Phillip Brown of Macon, Georgia, bought a 37-foot Keystone Challenger, a large pull-behind RV known as a fifth wheel camper. This means a gooseneck hanging down from a forward projection on the trailer interlocks with a device in the bed of a large pickup that resembles the coupling of a tractor-trailer rig. This makes for relatively stable hauling, so the campers tend to be big – and expensive. Brown financed his RV, and Santander Consumer USA then purchased the loan.
Five years later, Brown filed a chapter 13 bankruptcy case. His plan indicated an intention to surrender the RV in full satisfaction of the debt to Santander. He contended this was permissible because the replacement value of the RV exceeded the payoff on the loan, and therefore Santander should not have any remaining claim after it sold its collateral. Santander objected to the plan, contending that it was entitled to a claim for the difference between the payoff and the lesser amount it would get after liquidation of the collateral. The bankruptcy court agreed with Brown and confirmed his plan, and the district court affirmed. Santander then appealed to the US Court of Appeals for the Eleventh Circuit, which agreed with the courts below.
The rules on valuing collateral
The decision turned on an amendment to the valuation rules included in a pro-creditor law called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Since before BAPCPA, Section 506 of the Bankruptcy Code has determined how much of a creditor’s claim will be considered secured and receive the special protections afforded secured claims. In general, a claim is secured to the extent of the value of the collateral. If the collateral is worth less than the full balance, the debt is generally split (“bifurcated”) into a secured debt equal to the value of the collateral and an unsecured debt equal to the remainder. Section 506 says the value is determined according to what is going to happen to the property.
The US Supreme Court applied this rule in a 1997 decision called Associates Commercial Corp. v. Rash, holding that where the debtor proposes to retain the collateral, it must be valued at its replacement value. This pro-creditor decision prevented debtors from paying creditors only the sometimes minimal amount the collateral would bring at a forced sale in order to keep the collateral.
In BAPCPA, Congress put this rule into the Code itself, adding a new provision to Section 506. But intentionally or not, the new language went a bit beyond the holding in Rash. It stated flatly that, in individual chapter 7 or chapter 13 cases, the value of the collateral is considered to be its replacement value. The provision said nothing about whether the debtor planned to keep the collateral.
In deciding Brown’s case, the Eleventh Circuit said this new provision means what it says: in individual bankruptcy cases, value means replacement value, whether the collateral will be retained or surrendered. Because Brown was an individual and filed under chapter 13, the value of his RV was its replacement value. Since that value was more than the amount Brown owed on the loan, Santander had no remaining unsecured claim. So Brown could surrender the Keystone in full satisfaction of the debt.
Does it matter?
The effect of the holding in Brown is to disallow any remaining unsecured claim a secured creditor would have in that situation. But why would this matter to a chapter 13 debtor?
In a district like the District of South Carolina, it often wouldn’t. In most chapter 13 cases, unsecured creditors are paid a very small percentage of their claims. In this district, the standard chapter 13 plan is a pure “pot” plan, in which the amount to be divided among secured creditors is a fixed dollar figure, which is determined by the amount remaining in the plan base after secured and priority claims are paid. If the total amount of unsecured debt increases, the percentage that each unsecured creditor just goes down proportionally; the plan payment does not increase. So other unsecured creditors may care whether a claim like Santander’s is allowed, but the debtor doesn’t.
In some other districts, with pure “percentage” form plans, it works differently. Plans on that model specify the percentage each unsecured debt must be paid. In those districts, a change in the total amount of secured debt affects the plan payment, so debtors have a definite incentive to hold down the amount of unsecured claims.
But where the Brown holding makes a big difference is in 100% plans. In rare cases, the debtor’s assets or disposable income mean he must pay his unsecured debts in full through the plan. In that situation, an allowed unsecured claim increases the amount the debtor must pay on a dollar-for-dollar basis.