Thomas B. Sparks and Dorothy E. Sparks

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
THOMAS B. SPARKS and
DOROTHY E. SPARKS,
Debtors.
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Case No. 05-24832
Judge Aug
Chapter 13
ORDER REGARDING OBJECTION TO CONFIRMATION
This matter is before the Court on the objection to confirmation of the plan
(Doc. 25) filed by Creditor HSBC Auto Finance aka Household Automotive Finance
(“HSBC”), the amended objection (Doc. 35), and on the Debtors’ response and
memorandum in support of confirmation (Doc. 36). In addition, Ford Motor Credit
Company was permitted to file an amicus curiae brief (Doc. 38) and HSBC filed a
hearing brief (Doc. 39). A hearing was held on June 14, 2006, after which this Court
considered the matter to be submitted on the briefs and arguments of counsel and took
the matter under advisement.
This Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a
core proceeding under 28 U.S.C. § 157(b)(2)(L). 	The following constitutes the
Court’s findings of fact and conclusions of law pursuant to Federal Rule of
Bankruptcy Procedure 7052.
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: July 26, 2006
____________________________________________________________
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Case No. 05-24832
1HSBC also asserts that the plan cannot be confirmed because to the best of HSBC’s
knowledge, the Debtors have failed to maintain insurance on the vehicle as required by L.B.R. 3015-
3. This issue was not argued at the hearing on June 14, 2006.
2
The facts in this matter are not disputed. On October 29, 2003, the Debtors
purchased a 2004 Jeep Grand Cherokee. 	On November 17, 2005, Debtors filed a
chapter 13 petition. Since Debtors filed their petition after October 17, 2005, they are
subject to the provisions of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (“BAPCPA”).
In their second amended plan (Doc. 32), the Debtors propose to cram down
HSBC’s debt to $18,237.50 with interest at the rate of 6.5%. In the event we find that
the Debtor cannot cram down HSBC’s loan, the Debtors provide two alternatives for
dealing with HSBC’s collateral in their plan. First, the Debtors propose that they be
given time to pursue a sale of the Jeep pursuant to the terms of § 363(f). 	Second,
Debtors propose to surrender the Jeep to HSBC in full satisfaction of the debt owed
to HSBC.
HSBC’s objections and hearing brief raise several1 issues that HSBC asserts
prevent the plan from being confirmable under any of the above scenarios:
1. 	Pursuant to the hanging paragraph in § 1325(a), the Debtors cannot cram
down HSBC’s claim.
2. 	Pursuant to the Supreme Court’s decision in Till v. SCS Credit Corp. (In
re Till), 541 U.S. 465, 124 S. Ct. 1951 (2004), the Debtors have failed to provide for
the proper amount of interest on HSBC’s claim.
3. 	Section 363(f) does not permit the Debtors to sell the Jeep free and clear
of all liens.
4. 	If Debtors surrender the Jeep to HSBC, the plan must provide for
payment of any deficiency balance as an unsecured claim.
In their memorandum in support of confirmation, the Debtors state that they are
prepared to stipulate for purposes of the hearing that
(1) the motor vehicle in question [the 2004 Jeep Grand Cherokee] is
subject to a duly perfected, purchase money security interest in favor of
and secures a consumer debt owed to the Creditor, HSBC Auto Finance,
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3
. . . (2) such debt was incurred seven hundred fifty days prior to the
Debtors’ date of filing the instant chapter 13 bankruptcy; (3) the claim
of [HSBC] falls within the scope of the claims described within the
hanging paragraph following [11 U.S.C.] § 1325(a)(9); (4) the contract
balance owed [HSBC] is $26,189.26; and (5) the fair value of such
vehicle ([HSBC’s] allowed secured claim for purposes other than
§ 1325(a)(5)) is $18,237.50, if determined using a replacement standard
as contemplated by Associates v. Rash, 520 U.S. 953, 117 S. Ct. 1879
(1997).
A. 	Cram down of 910 vehicle.
Relevant provisions of § 1325(a) of BAPCPA provide:
(a) Except as provided in subsection (b), the court shall confirm a
plan if–
. . .
(5) with respect to each allowed secured claim provided for by the
plan–
(A) 	the holder of such claim has accepted the plan;
(B) 	. . .
(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 . . . ; or
(C) 	the debtor surrenders the property securing such claim
to such holder.
11 U.S.C. § 1325(a)(5)(B)(ii). Also relevant to this decision is a paragraph following
§ 1325(a)(9) that has become known as the “hanging paragraph” of § 1325(a). This
hanging paragraph provides:
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 [period] 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 personal use of
the debtor, or if the collateral for the debt consists of any other thing of
value, if the debt was incurred during the 1-year period preceding that
filing.
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Section 506(a) provides:
(1) An allowed claim of a creditor secured by a lien on property
in which the estate has an interest . . . is a secured claim to the extent of
such 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.
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.
Section 1322(b)(2) provides that a plan may:
(1) modify the rights of holders of secured claims, other than a
claim secured only by a security interest in real property that is the
debtor’s principal residence, or of holders of unsecured claims, or leave
unaffected the rights of holders of any class of claims.
Debtors argue that regardless of the provisions of the hanging paragraph, they
may still cram down HSBC’s secured claim to the value of the Jeep. The Debtors’
argument rests on the proposition that the provisions of § 1325(a) are discretionary,
not mandatory. As support for this suggestion, Debtors cite In re Szostek, 886 F.2d
1405 (3d Cir. 1989) (compliance with the provisions of § 1325(a)(5)(B)(ii) is not
mandatory). 	Contra Barnes v. Barnes (In re Barnes), 32 F.3d 405 (9th Cir. 1994)
(compliance with the provisions of § 1325(a)(5)(B)(ii) is mandatory). The Supreme
Court has also stated pre-BAPCPA that “[t]o qualify for confirmation under Chapter
13, the [debtors’] plan had to satisfy the requirements set forth in § 1325(a) of the
Code.” Assoc. Commercial Corp. v. Rash, 520 U.S. 953, 956, 117 S. Ct. 1879, 1882
(1997). See also Till v. SCS Credit Corp., 541 U.S. 465, 468, 124 S. Ct. 1951, 1955
(2004) (to qualify for approval, a chapter 13 plan must accommodate each allowed,
secured creditor in one of the three ways set forth in § 1325(a)(5) (emphasis added)).
Debtors state that the plain language of § 1325(a) provides that the “court shall
confirm” a plan that meets the provisions of § 1325(a). However, they then take this
“plain language” and turn it on its head stating that it does not mean that the court
cannot confirm a plan that does not meet all of the provisions of § 1325(a) but only
prescribes the circumstances under which the court must confirm the plan. As support
for this proposition, the Debtors refer us to the language of § 1322(a) that contains the
provisions of what the plan shall contain.
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5
Even though the Debtors argue that the language of the statute is plain, they
then go on to read much into the nearly nonexistent legislative history and suggest that
such history reflects that Congress is aware of the discretionary nature of § 1325(a).
However, the Debtors cite to no language in the history that indicates Congress gave
any thought whatsoever to whether § 1325(a) is discretionary. Debtors concede that
the legislative history does show an intent by Congress to address a perceived abuse
of debtors purchasing a vehicle shortly before filing bankruptcy and then cramming
down the amount owed to the creditors. Debtors argue however that “it would be an
absurd result . . . to conclude Congress intended to absolutely eliminate cram down
and afford windfall profits to the car lending industry.” It is not clear, however, why
limiting (not eliminating) cram downs by debtors would be an absurd result where it
directly addresses the perceived abuse in a proposed amendment captioned “GIVING
SECURED 	CREDITORS 	FAIR 	TREATMENT 	IN 	CHAPTER 	13 	. 	. 	. 	(b)
RESTORING THE FOUNDATION FOR SECURED CREDIT.” Contrary to Debtors
conclusion, the amendment does not absolutely eliminate cram down but eliminates
it for a limited time period of 910 days which is consistent with preventing debtors
from cramming down a vehicle shortly after filing a chapter 13 petition.
Debtors have stipulated that “the claim of [HSBC] falls within the scope of the
claims described within the hanging paragraph following [11 U.S.C.] § 1325(a)(9) and
. . . the contract balance owed [HSBC] is $26,189.26.” Consistent with the majority
of the case law, we find that the provisions of § 1325(a) are mandatory and where the
debt meets the parameters of the hanging paragraph, the Debtors are prevented from
cramming down the secured debt of HSBC. See In re Brown, 339 B.R. 818 (Bankr.
S.D. Ga. 2006); In re Horn, 338 B.R. 110 (Bankr. M.D. Ala. 2006); In re Robinson,
338 B.R. 70 (Bankr. W.D. Mo. 2006); In re Johnson, 337 B.R. 269 (Bankr. M.D.N.C.
2006); In re Montoya, 341 B.R. 41 (Bankr. D. Utah 2006). Contra In re Carver, 338
B.R. 521 (Bankr. S.D. Ga. 2006) (§ 1325(a)(5) applies to secured claims; the status
of claims as secured or unsecured is made pursuant to § 506(a); the hanging paragraph
makes § 506 inapplicable to a 910 claim, therefore, § 1325(a)(5) does not apply to a
creditor’s 910 claim)). We respectfully disagree with the analysis set forth in In re
Carver.
B. 	Interest Under Till.
Both parties agree that interest on the debt is to be calculated pursuant to the
Supreme Court’s decision Till v. SCS Credit Corp., 541 U.S. 464, 124 S. Ct. 1951
(2004).
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[N]o provision of BAPCPA prohibits the modification of secured
creditors’ rights under § 1322(b)(2). 	Consequently, while the 910
Creditors are entitled to fully secured claims, the applicable interest rate
necessary to meet the present value requirement of § 1325(a)(5)(B)(ii)
is governed by Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951,
158 L. Ed. 2d 787 (2004).
In re Brown, 339 B.R. at 822.
A debtor’s promise of future payments is worth less than an
immediate payment of the same total amount because the creditor cannot
use the money right away, inflation may cause the value of the dollar to
decline before the debtor pays, and there is always some risk of
nonpayment. 	The challenge for bankruptcy courts reviewing such
repayment schemes, therefore, is to choose an interest rate sufficient to
compensate the creditor for these concerns.
Till, 541 U.S. at 474, 124 S. Ct. at 1958. The rate to be applied is the “prime-plus”
formula discussed in Till. In re Robinson, 338 B.R. at 75.
Taking its cue from ordinary lending practices, the [formula] approach
begins by looking to the national prime rate, reported daily in the press,
which 	reflects 	the 	financial 	market's 	estimate 	of 	the 	amount 	a
commercial bank should charge a creditworthy commercial borrower to
compensate for the opportunity costs of the loan, the risk of inflation,
and the relatively slight risk of default. 	Because bankrupt debtors
typically pose a greater risk of nonpayment than solvent commercial
borrowers, the approach then requires a bankruptcy court to adjust the
prime rate accordingly. The appropriate size of that risk adjustment
depends, of course, on such factors as the circumstances of the estate, the
nature 	of 	the 	security, 	and 	the 	duration 	and 	feasibility 	of 	the
reorganization plan.
Till, 541 U.S. at 478-79, 124 S. Ct. at 1961.
Debtors propose to pay interest on HSBC’s debt at the rate of 6.5% based on
“prime” being either the “Federal Funds Rate (the rate at which commercial banks
loan money to each other) or the Federal Reserve Bank Discount Rate (the rate at
which banks borrow money from the Federal Reserve).”
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HSBC objects, arguing that it is entitled to interest using the “national prime
rate” according to the Wall Street Journal as a starting point and then applying the
plus one to three percent suggested in Till as a risk factor generally used by the
bankruptcy courts. Till, 541 U.S. at 480, 124 S. Ct. at 1962.
As noted above, the Supreme Court held that the rate of interest should be “the
national prime rate, reported daily in the press, which reflects the financial market's
estimate of the amount a commercial bank should charge a creditworthy commercial
borrower.” 	Id. at 478, 124 S. Ct. at 1961. We believe that neither of the Debtors’
proposed sources reflect this rate of interest. One is the rate charged between banks
and the other is the rate at which banks can borrow from the Federal Reserve. Both
of which must be less than a bank would then charge a “creditworthy commercial
borrower.”
We agree with HSBC that the rate published daily in the WSJ satisfies the
source contemplated by the Supreme Court. The WSJ prime rate reflects the “base
rate posted by 75% of the nation’s largest banks.” In addition, the rate published by
the Federal Reserve as the “bank prime loan rate” is also a satisfactory source for the
“national prime rate.” That rate reflects the “rate posted by a majority of top 25 (by
assets in domestic offices) insured U.S.-chartered commercial banks. Prime is one of
several base rates used by banks to price short-term business loans.” Our research
reflects that these rates are substantially similar. Accordingly, we find that the prime
rate published daily in the Wall Street Journal or the bank prime loan rate published
daily by the Federal Reserve at www.federalreserve.gov/releases/H15 meet the
requirements of the Supreme Court to start with the “national prime rate” in
calculating the rate of interest due to creditors under § 1325(a)(5).
Both Debtors and HSBC added a risk factor of 1.5% to their suggested national
prime rate. Therefore, since they are apparently in agreement, we need not determine
the specific risk factor in this case.
C. 	Applicability of § 363(f) to Chapter 13.
In the event Debtors are unsuccessful in their attempt to cram down HSBC’s
debt, Debtors ask this Court to delay entry of an order on confirmation so that they
have time to file a motion under §§ 363(f) and 506 to sell the property of the estate
free and clear of HSBC’s lien as a “redemption.” To do this, the Debtors propose to
sell the Jeep to themselves for the trade-in value of the Jeep which they claim is
$16,837.50. Nowhere do Debtors provide support for this presumptuous tactic.
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8
Section 363(f) permits the Debtors to sell property free and clear of liens, only
if
(1) applicable nonbankruptcy law permits sale of such property
free and clear of such interests;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is
to be sold is greater than the aggregate value of all liens on such
property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable
proceeding, to accept a money satisfaction of such interest.
First, redemption is available to chapter 7 debtors under 11 U.S.C. § 722. There
is no comparable “redemption” procedure available in chapter 13.
Further, Debtors cannot show that they meet any of the above five situations
that would permit them to sell the Jeep to themselves free and clear of HSBC’s liens.
Nonbankruptcy law does not permit the sale of the Jeep free and clear of the liens (to
anyone, let alone the Debtors); obviously HSBC does not consent to the sale nor could
it be compelled to accept a money satisfaction less than the amount owed on the debt.
Debtors have stipulated that they owe the debt to HSBC so there can be no bona fide
dispute regarding the debt.
Finally, we have already determined that the value of the property securing the
lien cannot be separated into secured and unsecured parts. The value of the lien is
$26,189.26 and pursuant to § 363(f)(3) the price at which the Jeep is sold must be
greater than the value of the liens on the Jeep. Therefore, $26,189.26 is the amount
that Debtors must pay if they wish to sell the Jeep to themselves pursuant to § 363(f).
D. 	Surrender of Vehicle in Full Satisfaction of Debt.
In the event all else fails, the Debtors propose to surrender the Jeep to HSBC
in full satisfaction of their debt. HSBC argues that historically a creditor has been
allowed to file a claim for the unsecured balance remaining due to the creditor after
a proper sale of the vehicle.
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In this district, Judge Preston recently addresses this very issue in the well-
reasoned opinion In re Payne, No. 06-50029, (Bankr. S.D. Ohio July 10, 2006).
Similar to HSBC, the creditor in In re Payne argued that through BAPCPA, Congress
was attempting to remedy a perceived abuse by debtors who purchase vehicles on
credit on the eve of filing bankruptcy and then use § 1325 to pay the creditor less than
the full amount of the debt. HSBC argues that under BAPCPA Congress intended to
provide more protection to creditors and that Congress could not have meant to
expand the rights of Debtors in the area of surrender.
However, as stated by Judge Preston,
This Court having studied the “hanging paragraph” of § 1325(a)
finds the language unambiguous and clear. The “hanging paragraph” of
§ 1325(a) does not limit its application to claims treated under § 1325
(a)(5)(B). It states quite simply, that “[f]or purposes of paragraph (5),
section 506 shall not apply to a claim described in that paragraph . . . .”
Thus, it must apply to claims described in § 1325(a)(5)(C) as well. The
plain meaning of this statute cannot be overcome by silence in the
legislative history.
* * *
From a practical standpoint, this application of § 1325(a)(5)
requires the creditor to forego the opportunity to take advantage of the
provisions of § 506 should it liquidate the collateral for less than the
amount it is due, just as it requires the debtor to do so should the debtor
decide to retain the vehicle. While this may appear to be inconsistent
with the overall goals of BAPCPA to provide greater protections to
creditors, the Court is not prepared to say that this is an absurd result in
light of the sparse guidance from Congress.
In re Payne, No. 06-50029, slip op. at 8, 9. See also, In re Ezell, 338 B.R. 330, 342
(Bankr. E.D. Tenn. 2006) (the hanging paragraph applies equally to revised
§ 1325(a)(5)(B) and revised § 1325(a)(5)(C); surrender of the collateral subject to the
hanging paragraph satisfies the allowed secured claim in full).
As stated, we find the decision in In re Payne to be very well-reasoned and
adopt Judge Preston’s analysis. We find that the Debtors’ plan may provide for the
surrender of the Jeep in full satisfaction of the secured debt owed to HSBC.
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Based on the foregoing, the Debtors shall, within fourteen (14) days of entry of
this Order, file a Third Amended Plan consistent with the findings herein.
IT IS SO ORDERED.
Copies to:
Thomas & Dorothy Sparks
5 Beech Street
Wheelersburg, OH 45694
David A. Kruer, Esq.
Attorney for Debtors
Dearfield, Kruer & Company LLC
800 Gallia Street, Suite 28
Portsmouth, OH 45662
Waymon B. McLeskey II, Esq.
Attorney for HSBC Auto Finance
5 East Long Street, Suite 405
Columbus, OH 43215-2915
John A. Schuh, Esq.
Attorneys for Ford Credit
2662 Madison Road.
Cincinnati, OH 45208
Margaret A Burks
Chapter 13 Trustee
36 East Fourth Street, Suite 900
Cincinnati, OH 45202
Asst. U.S. Trustee (Cincinnati)
Office of the US Trustee
36 East Seventh Street, Suite 2050
Cincinnati, OH 45202
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