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Why Hang Just the Paragraph?

posted by Bob Lawless

Among the many fine drafting points--where "fine" means "disastrous"--of the 2005 bankruptcy amendments was the so-called hanging paragraph in section 1325 where the law lists the requirements for a court to approve a consumer's chapter 13 plan. Wacky bankruptcy types like myself refer to this provision as the "hanging paragraph" because Congress did not bother to number it and just threw it in at the end of a section. Today, we have news on the hanging paragraph.

The hanging paragraph states that "section 506" shall not apply to any purchase-money security interest on (1) all items purchased within one year of the bankruptcy filing and (2) all automobiles purchased with 2 1/2 years of the bankruptcy filing. (A "purchase money security interest" occurs when a consumer gives a lien/security interest in an asset to secure the loan for the asset's purchase price. For example, when a consumer buys a car and gives the bank a lien against the car for the car loan, that is a purchase money security interest.) In turn, section 506 has a number of provisions, but perhaps most importantly provides the rule that a creditor has a secured claim up to the value of its collateral and an unsecured claim for any amounts in excess of the collateral.

What was Congress doing? If section 506 does not apply, a creditor with a purchase-money security interest covered in section 1325 would not have a secured claim at all. That would mean a chapter 13 debtor could keep their car and pay the car lender on the same basis as the credit card companies and other creditors without collateral. Did Congress actually help the consumer here? Nah. Although that interpretation follows exactly the words in the statute, Congress was trying to help car lenders. What Congress tried to say was that car lenders have a secured claim for the entire amount of the debt, even if the car was worth less at the time of bankruptcy. Outside of bankruptcy, the car lender would only be entitled to the value of the car, but inside bankruptcy, car lenders get special treatment.

Sometimes in bankruptcy court, a debtor will simply surrender collateral to a secured lender, and when a debtor does that, the law (§ 1325(a)(5)) states the surrender satisfies the secured claim. With the hanging paragraph, what if a debtor surrenders the car to the car lender? Most bankruptcy have reasoned the statute is clear. If the hanging paragraph says the car lender's entire claim is a secured claim and the statute says surrender of the car satisfies a secured claim, the car lender's claim is satisfied in full even if the value of the car was less than the amount of the debt. A district court in Wisconsin has now disagreed (Dupaco Community Credit Union v. Zehrung (In re Zehrung), No. 06-C-437-S (W.D. Wis. Oct. 16, 2006). The court relies on "probable congressional intent."

In this instance, why should a court rely on what it thinks Congress intended? If a law is replete with special interest provisions, doesn't it make sense to construe the special interest provisions against the special interests? This statutory interpretive point is a cousin to the idea that contractual ambiguities are construed against the drafter. Why should the courts make it easier for special interests to get their political bargains enforced? If special interests are going to get political bargains, shouldn't courts put a burden on these special interests to make the bargains clear in the statute?


It seems to me that most bankruptcy judges making rulings post-BAPCPA are trying to draw attention to the poor drafting of BAPCPA, and are maybe even trying to punish legislators for it by declaring that their hands are tied. Also, it appears on the surface that it may also be a reaction to the constant accusations the judiciary faces of "activist judges." Whether it is is anyone's guess, of course.

Recall Jim Caher's rule of construction: we follow the letter of the statute, unless it seems to favor the debtor.

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