     09-0022-bk
     AmeriCredit v. Tompkins
 1                              UNITED STATES COURT OF APPEALS
 2                                  FOR THE SECOND CIRCUIT
 3
 4                                           August Term 2009
 5
 6
 7   Argued: November 9, 2009                                                   Decided: May 18, 2010
 8
 9
10                                         Docket No. 09-0022-bk
11
12                              _____________________________________
13
14                                AMERICREDIT FINANCIAL SERVICES, INC .,
15
16                                          Petitioner-Appellant,
17
18                                                   -v.-
19
20                                JESSE A. TOMPKINS, SONJA I. TOMPKINS,
21
22                                       Respondents-Appellees.
23                              _____________________________________
24
25   Before:          LEVAL, PARKER, and LIVINGSTON, Circuit Judges.
26
27
28             On appeal from an August 13, 2008, memorandum decision and order of the United States

29   Bankruptcy Court for the Southern District of New York (Morris, J.), petitioner-appellant argues

30   that despite the 2005 amendments to 11 U.S.C. § 1325(a)(5), it is entitled to an unsecured claim with

31   regard to a deficiency it incurred upon the surrender and sale of a 2006 Chevrolet Impala in which

32   it held a purchase-money security interest. We conclude that the deficiency claim derives from the

33   contract between the parties and background state law and that, in the absence of a Bankruptcy Code

34   provision expressly disallowing it, such an unsecured claim may be maintained.

35             VACATED and REMANDED.

36                                         Martin A. Mooney (Mark D. Glastetter, on the brief), DEILY ,
 1                                         MOONEY & GLASTETTER , LLP, Albany, NY, for Petitioner-
 2                                         Appellant.
 3
 4                                         Andrea B. Malin, GENOVA & MALIN , Wappingers Falls, NY,
 5                                         for Respondents-Appellees.
 6
 7   LIVINGSTON, Circuit Judge:

 8          Petitioner-appellant AmeriCredit Financial Services, Inc. (“AmeriCredit”) appeals from a

 9   memorandum decision and order entered on August 13, 2008, in the United States Bankruptcy Court

10   for the Southern District of New York (Morris, J.), expunging AmeriCredit’s unsecured claim in the

11   Chapter 13 proceeding of respondents-appellees Jesse and Sonja Tompkins (“the Tompkinses”) and

12   overruling its objection to the confirmation of the plan. For the reasons that follow, we vacate the

13   judgment of the bankruptcy court and remand for further proceedings consistent with this opinion.

14                                           BACKGROUND

15          On August 25, 2006, the Tompkinses signed a contract with Long Beach Acceptance

16   Corporation (“Long Beach”) to finance a 2006 Chevrolet Impala, granting Long Beach a purchase-

17   money security interest in the vehicle. Long Beach properly recorded the lien. AmeriCredit is Long

18   Beach’s successor in interest.

19          The Tompkinses failed to make their payments to AmeriCredit for the months of December

20   2007 and January 2008. On February 11, 2008, they filed a voluntary Chapter 13 bankruptcy

21   petition in the United States Bankruptcy Court for the Southern District of New York. Shortly

22   thereafter, AmeriCredit filed a proof of claim for $21,729.92 and the Tompkinses surrendered their

23   automobile to AmeriCredit. The Tompkinses’ first amended plan, filed February 26, 2008, provided

24   as follows with regard to payments to be made to the holders of allowed secured claims: “Current

25   secured payments [are] to be made by the debtor(s) directly to claimant except the claim of

                                                      2
 1   AMERICREDIT, as the debtor has surrendered the 2006 Chevrolet Impala, in full satisfaction of

 2   the debt pursuant to 11 U.S.C. §506 and 11 U.S.C. §1325.” AmeriCredit filed a motion for relief

 3   from the automatic stay so that it could sell the Impala, but it also filed an objection to confirmation

 4   of the plan on the ground that the Tompkinses could not surrender the vehicle as full satisfaction of

 5   the claim.

 6           Upon obtaining relief from the automatic stay, AmeriCredit sold the vehicle and, after

 7   receiving less than the full $21,729.92 it claimed, it filed an amended claim as a general unsecured

 8   creditor for the deficiency: $15,373.92. The debtors objected. On August 13, 2008, the bankruptcy

 9   court sustained the objection, expunged the unsecured claim, and overruled AmeriCredit’s objection

10   to the plan confirmation, relying on its reasoning in an earlier case, In re Pinti, 363 B.R. 369 (Bankr.

11   S.D.N.Y. 2007), to find that the Bankruptcy Code prevented AmeriCredit from maintaining its

12   unsecured claim. The amended plan was confirmed on August 21. AmeriCredit appealed to the

13   district court, which then certified a direct appeal to this Court. The debtors converted their case

14   from Chapter 13 to Chapter 7 on May 6, 2009, during the pendency of this appeal.

15

16                                              DISCUSSION

17           As an initial matter, we examine our subject matter jurisdiction over this appeal; if we

18   conclude that a case is moot, we lack jurisdiction to hear it. Dean v. Blumenthal, 577 F.3d 60, 64

19   (2d Cir. 2009). “A case is moot . . . when ‘the parties lack a legally cognizable interest in the

20   outcome.’” Fox v. Bd. of Trustees, 42 F.3d 135, 140 (2d Cir. 1994) (quoting County of L.A. v. Davis,

21   440 U.S. 625, 631 (1979)). In a bankruptcy case, mootness may be based as well on “jurisdictional

22   and equitable considerations stemming from the impracticability of fashioning fair and effective

                                                        3
 1   judicial relief.” In re Sasso, 409 B.R. 251, 254 (B.A.P. 1st Cir. 2009). The conversion of a petition

 2   from one chapter to another generally moots an appeal taken from an order in the original chapter.

 3   Id.

 4          To the extent that AmeriCredit appeals the portion of the bankruptcy court’s order overruling

 5   its objection to the confirmation of the Chapter 13 plan, this appeal is moot, as the conversion of the

 6   case to Chapter 7 renders the plan irrelevant and this Court unable to provide effective relief in that

 7   respect. We agree with the parties, however, that in the case at hand part of the appeal of the

 8   bankruptcy court’s order is not moot, despite the conversion of the petition from Chapter 13 to

 9   Chapter 7. Whether an unsecured claim is allowed is a determination that, unlike many orders

10   entered with respect to a Chapter 13 petition, has an impact on the distribution of assets in a Chapter

11   7 proceeding. We may therefore still grant AmeriCredit effective relief because, if its claim is

12   allowed, it may take part in any future Chapter 7 distribution. Cf. In re Howard’s Express, Inc., 151

13   F. App’x 46, 48-49 (2d Cir. 2005) (summary order). Although the Tompkinses have received a

14   Chapter 7 discharge during the pendency of the litigation, the case is not yet closed. See In re

15   Boodrow, 126 F.3d 43, 47 (2d Cir. 1997) (finding that the entry of a discharge did not alone moot

16   an appeal); see also In re Sherman, 491 F.3d 948, 968 (9th Cir. 2007) (same). Any assets that may

17   yet come into the estate can, therefore, still be distributed to the creditors. Given that at this time

18   there has been no distribution of assets to other creditors — nor, indeed, have any assets been found

19   to distribute — the equitable concerns that often make fashioning relief impracticable in bankruptcy

20   cases are lacking here.

21          We therefore turn to the substantive merits of the case, addressing the import of a

22   “notorious” provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

                                                       4
 1   (“BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23, the so-called “hanging paragraph,” which follows

 2   subparagraph (9) of 11 U.S.C. § 1325(a). In re Peaslee, 547 F.3d 177, 184 (2d Cir. 2008).

 3   AmeriCredit argues that contrary to the bankruptcy court’s conclusion, the hanging paragraph did

 4   not bar its unsecured deficiency claim in the Chapter 13 bankruptcy proceeding, so that this claim

 5   should have been allowed and AmeriCredit should be able to take part in any future Chapter 7

 6   distribution. Whether the hanging paragraph barred AmeriCredit’s claim is a purely legal question

 7   that we review de novo. See In re Ames Dep’t Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009).

 8           Section 1325(a) of the Bankruptcy Code, as amended by BAPCPA, sets forth requirements

 9   that must be met before the plan of repayment for a consumer in Chapter 13 may be confirmed. The

10   statute provides three circumstances in which a secured claim poses no obstacle to plan

11   confirmation: (1) when the secured creditor accepts the plan; (2) when the debtor surrenders the

12   secured property; or (3) in an option known as a cramdown, when the debtor, over the creditor’s

13   objection, retains the secured property, “yet pay[s] only the present value of the collateral to the

14   creditor . . . over the life of the plan,” with “[t]he remaining balance of the debt [becoming] a general

15   unsecured claim.” Capital One Auto Finance v. Osborn, 515 F.3d 817, 820 (8th Cir. 2008); see 11

16   U.S.C. § 1325(a)(5).

17           In the context of a cramdown, the “allowed amount” of an allowed secured claim, see 11

18   U.S.C. § 1325(a)(5)(B)(ii), is determined by reference to section 506 of the Bankruptcy Code, which

19   provides generally for the treatment of allowed secured claims in bankruptcy. Section 506(a)

20   specifies, with regard to claims arising from debts secured by liens on property, that such claims

21   may be divided into secured and unsecured portions in those circumstances where the collateral is

22   inadequate to satisfy the debt: “[T]he unsecured portion is the amount by which the debt exceeds

                                                        5
 1   the current value of the collateral.”1 In re Wright, 492 F.3d 829, 830 (7th Cir. 2007).

 2          The hanging paragraph, which we shall denote as 11 U.S.C. § 1325(a)(*), describes two

 3   situations in the context of Chapter 13 plans in which section 506(a)’s general prescription for

 4   dividing inadequately secured claims into their secured and unsecured parts do not apply. It reads

 5   as follows:

 6                  For purposes of [§ 1325(a)(5), which describes the three
 7                  circumstances in which a secured claim poses no obstacle for
 8                  confirmation of a Chapter 13 plan], section 506 shall not apply to a
 9                  claim described in that paragraph if the creditor has a purchase
10                  money security interest securing the debt that is the subject of the
11                  claim, the debt was incurred within the 910-day [sic] preceding the
12                  date of the filing of the petition, and the collateral for that debt
13                  consists of a motor vehicle (as defined in section 30102 of title 49)
14                  acquired for the personal use of the debtor, or if collateral for that
15                  debt consists of any other thing of value, if the debt was incurred
16                  during the 1-year period preceding that filing.

17   11 U.S.C. § 1325(a)(*). By preventing recourse to section 506(a)’s provision for the bifurcation of

18   a claim into its secured and unsecured parts, this passage has generally been interpreted to

19   “prohibit[] cramdown of [purchase money security interests] secured by an automobile purchased



            1
             Section 506(a)(1) states:
                   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, 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 setoff 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.
            11 U.S.C. § 506(a)(1).

                                                       6
 1   within 910 days of the debtor’s bankruptcy filing.” In re Peaslee, 547 F.3d at 184. A debtor who

 2   chooses to retain a vehicle purchased within this period must now either reach agreement with the

 3   creditor as to what is owed or must pay the entire claim, treating it as fully secured. In re Barrett,

 4   543 F.3d 1239, 1243 (11th Cir. 2008).

 5           The question presented here concerns the effect of the hanging paragraph not on the

 6   cramdown of vehicles purchased within 910 days of a bankruptcy filing, but on those cases in which

 7   a debtor surrenders a vehicle purchased within this period to his creditor. The hanging paragraph,

 8   by its terms, renders section 506(a) inapplicable not only to so-called “910 vehicles” that are

 9   retained by the debtor after a bankruptcy filing, but also to vehicles that are surrendered. May an

10   undersecured creditor, in the absence of section 506(a) and its explicit provision for dividing a claim

11   partly secured by a lien on property into its secured and unsecured components, maintain an

12   unsecured claim for a deficiency not satisfied by the surrender and sale of the vehicle? One line of

13   cases, originally espoused by several bankruptcy courts after the initial passage of BAPCPA, holds

14   that without section 506(a) there simply is no deficiency claim; the loan is secured only by the

15   vehicle, and surrender of the collateral satisfies the loan. See, e.g., In re Pinti, 363 B.R. 369 (Bankr.

16   S.D.N.Y. 2007). The second line of cases, including the holdings of the majority of our sister

17   circuits, finds that a creditor can still pursue an unsecured claim for the deficiency. See, e.g., In re

18   Miller, 570 F.3d 633 (5th Cir. 2009); In re Barrett, 543 F.3d 1239; In re Wright, 492 F.3d 829. We

19   now adopt the latter point of view.

20           When section 506 is removed from consideration, the question of how to treat the allowed

21   claim of a creditor that is secured by a lien on property – meaning, whether and to what extent to

22   treat it as a secured claim and to what extent it is unsecured – is left open and unanswered by the

                                                        7
 1   Bankruptcy Code. In the absence of a controlling bankruptcy provision, however, the rights of the

 2   creditor under state law are not disturbed. As the Supreme Court has stated, “[p]roperty interests

 3   are created and defined by state law. Unless some federal interest requires a different result, there

 4   is no reason why such interests should be analyzed differently simply because an interested party

 5   is involved in a bankruptcy proceeding.” Butner v. United States, 440 U.S. 48, 55 (1979); see also

 6   Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 127 S. Ct. 1199, 1206 (2007) (“[W]e

 7   generally presume that claims enforceable under applicable state law will be allowed in bankruptcy

 8   unless they are expressly disallowed.”). The parties do not dispute that the contract between them

 9   gives AmeriCredit the right to collect any deficiency from the Tompkinses if a sale of the vehicle

10   fails to satisfy the debt, nor do they disagree that the law of New York permits such a property

11   interest. N.Y. U.C.C. § 9-615(d). Under Butner v. United States, 440 U.S. 48, 55 (1979), and

12   Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 127 S. Ct. 1199 (2007),

13   we therefore presume that AmeriCredit’s contractual right to collect any deficiency, a right

14   enforceable under state law, is a claim applicable in bankruptcy unless expressly disallowed.

15   Section 502 of the Bankruptcy Code, which lists disallowed claims, does not affect this deficiency

16   claim. See Osborn, 515 F.3d at 822 & n.6; In re Rodriguez, 375 B.R. 535, 545 (B.A.P. 9th Cir.

17   2007).

18            The Tompkinses argue that section 506 alone provides the definition of the type of secured

19   claim that a party holds in a bankruptcy proceeding and that, without it, the debt is fully satisfied by

20   surrender under the requirements of section 1325. However, “nothing in § 1325(a)(5) says that [the]

21   ‘allowed secured claim’ is satisfied by the debtor choosing the surrender option in subparagraph

22   (C).” Osborn, 515 F.3d at 821 (quoting In re Hoffman, 359 B.R. 163, 166 (Bankr. E.D. Mich.

                                                        8
 1   2006)) (internal quotation marks omitted). Moreover, under the theory that section 506 alone

 2   generates the secured nature of a claim, one could as easily come to the conclusion, proposed by

 3   amici curiae in the Seventh Circuit, that a creditor whose loan is affected by the hanging paragraph

 4   has an entirely unsecured claim rather than an entirely secured one. See In re Wright, 492 F.3d at

 5   832. Both results, however, deny the presumption of state law applicability explicated in Butner and

 6   expanded upon in Travelers. As our sister Circuits have recognized, this is error: “Creditors don’t

 7   need § 506 to create, allow, or recognize security interests, which rest on contracts (and the UCC)

 8   rather than federal law. . . . The fallback under Butner is the parties’ contract . . . rather than non-

 9   recourse secured debt . . . or no security interest.” Id. at 833.

10           Because both state law and the contract of the parties give AmeriCredit the right to an

11   unsecured deficiency judgment, on the record presented to this Court it is entitled to an unsecured

12   claim in the amount of $15,373.92.

13                                             CONCLUSION

14           For all of the foregoing reasons, the judgment of the bankruptcy court is therefore

15   VACATED and the case is REMANDED to the district court with instructions to remand to the

16   bankruptcy court for further proceedings in accordance with this opinion.




                                                        9
