The U.S. Court of Appeal for the Second Circuit found that an undersecured creditor may maintain an unsecured claim for a deficiency not satisfied by the surrender and sale of the collateral, even where §506(a) of the Bankruptcy Code is inapplicable. In so ruling, the Second Circuit sided with the majority of Appellate Courts that have ruled on this issue. A copy of the opinion is attached.
The debtors signed a contract to finance the purchase of an automobile that granted Long Beach Corporation a purchase-money security interest in the car. AmeriCredit is the successor in interest to Long Beach. The debtors filed for Chapter 13 bankruptcy within 910 days of buying the car, and AmeriCredit filed their proof of claim shortly thereafter. The debtors surrendered the automobile financed by their contract to AmeriCredit. AmeriCredit sold the car for less than the amount of the claim, creating a deficiency that they sought to recover by filing an amended claim as a general unsecured creditor. The Bankruptcy Court sustained the debtor’s objection to the claim finding that the Bankruptcy Code prevented AmeriCredit from maintaining its unsecured claim.
Section 506(a) provides that where a creditor seeks a claim secured by collateral, the value of which is less than the amount of the claim, the claim is treated as secured to the extent of the value of the collateral and any deficiency is treated as unsecured.
However, §1325(a) of the Bankruptcy Code specifically removes from § 506(a) treatment creditors with a purchase money security interest in an automobile purchased within 910 days of the filing of the bankruptcy petition. Thus, the question in this case “may an undersecured creditor, in the absence of section 506(a) and its explicit provision for dividing a claim partly secured by a lien on property into its secured and unsecured components, maintain an unsecured claim for a deficiency not satisfied by the surrender and sale of the vehicle?”
The Second Circuit answers this question in the affirmative and determines that a creditor is allowed to seek the deficiency as an unsecured claim if such actions are permitted under the applicable state law. In this case, the terms of the contract between AmeriCredit and the debtors as well as the applicable state law both allow AmeriCredit to seek a deficiency. The Second Circuit relied on the general presumption that, “claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed,” to determine that AmeriCredit should be allowed to maintain its unsecured claim.
Ralph T. Wutscher
Kahrl Wutscher LLP
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