Shaw v. Aurgroup Financial Credit Union

In March 2005, Fannie Shaw (debtor) purchased a vehicle for personal use. Shaw financed the purchase with a loan from Aurgroup Financial Credit Union (Aurgroup) (creditor). The loan was secured by the vehicle, which gave Aurgroup a purchase-money security interest (PMSI) in the vehicle. In July 2006, Shaw filed for Chapter 13 bankruptcy. Aurgroup filed a proof of claim for the $23,606.20 that Shaw still owed on the loan. Shaw’s proposed Chapter 13 plan provided that Shaw would retain ownership of the vehicle and pay Aurgroup $14,890 (the vehicle’s then-present value), at a rate of 7.5 percent. Aurgroup and Chapter 13 trustee Margaret Burks objected to confirmation of Shaw’s proposed plan, asserting that the plan did not comply with 11 U.S.C. § 1325(a)(5) and the hanging paragraph following 11 U.S.C. § 1325(a)(9). The various subsections of § 1325(a) set forth conditions for plan confirmation. Under § 1325(a)(5), the debtor’s plan had to accommodate the holders of allowed secured claims in one of three ways. The debtor could (1) obtain acceptance of the plan from each allowed secured creditor; (2) surrender the property securing the claim; or (3) keep the property, allow the creditor to retain the lien securing the claim, and bifurcate the creditor’s claim into a secured portion up to the vehicle’s present value and an unsecured portion subject to eventual pro rata distribution along with the debtor’s other unsecured creditors. However, because the third option was seen as unfair to motor-vehicle lenders and lienholders, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) included an amendment to § 1325(a) that added the hanging paragraph after § 1325(a)(9). Under the hanging paragraph, a debtor’s plan could not bifurcate a creditor’s claim into secured and unsecured portions if (1) the creditor held a PMSI securing the debt, (2) the debt was incurred within 910 days before the bankruptcy filing, and (3) the collateral securing the debt was a motor vehicle acquired for the debtor’s personal use. Shaw conceded that the hanging paragraph’s requirements applied in her bankruptcy and that her proposed plan did not satisfy § 1325(a)(5) or the hanging paragraph. However, Shaw asserted that the bankruptcy court could still confirm her plan because § 1325(a)’s provisions were discretionary, rather than mandatory. The bankruptcy court ruled that § 1325(a)’s provisions were mandatory and denied confirmation. The district court affirmed, and Shaw appealed to the Sixth Circuit.