In re Price

• Decision Date: 06 March 2007
• Docket Number: No. 06-00957-5-ATS.,06-00957-5-ATS.
• Citation: 363 B.R. 734
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: In re Telephius Letoinne PRICE, Shawana Denise Price, Debtors.

363 B.R. 734

In re Telephius Letoinne PRICE, Shawana Denise Price, Debtors.

No. 06-00957-5-ATS.

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division.

March 6, 2007.

COPYRIGHT MATERIAL OMITTED

William E. Brewer, Jr., The Brewer Law Firm, Raleigh, NC, for Debtors.

Pamela P. Keenan, Kirshbaum Nanney Keenan & Griffin, PA, Raleigh, NC, for Wells Fargo Financial Acceptance.

ORDER REGARDING OBJECTION TO CONFIRMATION

A. THOMAS SMALL, Bankruptcy Judge.

The matter before the court is the objection filed by Wells Fargo Financial Acceptance ("Wells Fargo") to confirmation of the plan proposed by the chapter 13 debtors, Telephius Letoinne Price and Shawana Denise Price. The issue before the court is whether the unnumbered paragraph immediately following 11 U.S.C. § 1325(a)(9) (sometimes referred to as the "hanging paragraph") precludes the debtors from bifurcating Wells Fargo's secured claim. A hearing was held in Raleigh, North Carolina on January 16, 2007.

The debtors filed their petition for relief under chapter 13 of the Bankruptcy Code on June 29, 2006. Wells Fargo filed a proof of claim in the amount of $18,332.37, which is secured by the debtors' automobile, a 2001 Lincoln LS. The debtors' plan, which states that Wells Fargo's claim is for $17,869.05, proposes to "strip down" the claim to $12,475.00, which is the value of the automobile, and to give Wells Fargo an unsecured claim for the balance. Wells Fargo maintains that its claim is a purchase money security interest obtained within 910 days preceding bankruptcy, and that pursuant to the "hanging paragraph" of § 1325(a), its secured claim may not be bifurcated.

The debtors disagree, contending that Wells Fargo does not have a purchase money security interest because the amount of its claim includes obligations separate from, and in addition to, the purchase price of the vehicle. Specifically, the debtors contend that the installment contract that is the basis of Wells Fargo's claim includes sums advanced to purchase "gap insurance" and to pay the balance owed against the vehicle the debtors traded-in in connection with the purchase of the Lincoln LS. Wells Fargo agrees that the claim includes these amounts, but the parties disagree as to the significance of their inclusion.

Background Facts

On July 16, 2005, the debtors purchased the 2001 Lincoln LS from Capital Mazda of Cary and financed the purchase pursuant to terms set forth in an installment sales contract that was subsequently assigned to Wells Fargo. The contract states that the purchase price of the vehicle was $14,437.17, and that the debtors made a cash down payment of $1,400 and traded in a 1997 Nissan Maxima. The trade-in allowance given to the debtors by Capital Mazda for the Maxima was $2,861, which was $2,837.96 less than what the debtors owed against that vehicle. Additionally, the debtors incurred standard fees and taxes of $426 and purchased "gap insurance" at a cost of $600.

The total amount financed under the installment sales contract was $16,901.13. This includes the purchase price of $14,437.17, "negative trade-in equity" of $2,837.96, $600 for the cost of gap insurance, and $426 for standard fees and taxes, minus the debtor's $1,400 cash down payment. The balance of $16,901.13 was to be secured by the 2001 Lincoln LS and, according to the terms of the installment sales contract, was to be paid with interest at an annual percentage rate of 19.65% in 72 monthly installments of $401.40. As of the date of the petition, the net payoff, according to Wells Fargo's proof of claim, was $18,332.37 plus interest. The debtors contend that the payoff as of the petition date is only $17,869.05, but the debtors have not filed an objection to the claim.

The debtors' chapter 13 plan proposes to bifurcate Wells Fargo's claim into two claims: a secured claim to the extent of the value of the vehicle, which the debtors assert is $12,475.00, and an unsecured claim for the balance. Wells Fargo maintains that it has a purchase money security interest acquired within 910 days preceding bankruptcy in the amount of $18,332.87, and that pursuant to the hanging paragraph of § 1325(a), its fully secured claim may not be bifurcated because the hanging paragraph makes the "strip down" provisions of § 506 inapplicable.

The "hanging paragraph" in § 1325(a) provides that

For purposes of paragraph (5)[of section 1325(a)], 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 collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

11 U.S.C. § 1325(a) ("hanging paragraph") (the word "period" after "910-day" was apparently unintentionally omitted from the statute).

Many courts have struggled to discern the meaning of portions of the "hanging paragraph." See, e.g., In re Trejos, 352 B.R. 249, 253-54 n. 6 (Bankr.D.Nev. 2006). It is not a simple undertaking, and the problem is that the unnumbered paragraph is subject to several reasonable but conflicting interpretations. It is the court's "duty to make sense of the statute to the extent that is possible, and to give it an interpretation consistent at least with its semantic sense, if not consistent with some well-articulated purpose." Trejos, 352 B.R. at 259.

The debtors concede that the debt was incurred in the relevant 910-day period and that the collateral is a vehicle acquired for personal use. But, the debtors contend that Wells Fargo does not have a purchase money security interest. Alternatively, the debtors argue that if Wells Fargo does have a purchase money security interest, its purchase money security interest is for less than the full amount of its claim ($18,322.37), and the hanging paragraph does not prohibit strip down.

Issues

There are several questions that must be answered before the court can rule on Wells Fargo's objection to confirmation of the debtors' plan. The most obvious is, does Wells Fargo have a purchase money security interest for the full amount of its $18,322.37 secured claim? If not, does Wells Fargo, through application of a "dual status" rule, have a purchase money security interest for less than the full amount of its claim? Before deciding the second issue, however, the court must decide whether the prohibition against "strip down" in the "hanging paragraph" even applies if the purchase money security interest is less than the full amount of the claim. If it does not apply, the debtors may strip down Wells Fargo's claim whether or not it is determined that Wells Fargo, pursuant to the "dual status" rule, has a purchase money security interest in some lesser amount.

Before addressing these issues it may be helpful to define the unofficial, yet commonly used, bankruptcy terms "cram-down" and "strip down" as they apply in chapter 13 cases, and to review the procedural history that has brought these issues before the court.

Modification, "Cramdown," and "Strip Down"

Section 1322 provides that a chapter 13 plan may modify the rights of holders of secured claims. Some of the ways that a secured claim may be modified include reducing the contract interest rate, reworking the payment terms of the obligation, and "stripping down" the amount of the secured claim to the value of the collateral. Modifications to a secured claim may be accomplished through a plan without the consent of the holder of the secured claim as long as the requirements of § 1325(a)(5) are met. Modification pursuant to § 1325(a)(5) is known as "cramdown," and § 1325(a)(5) is known as the chapter 13 cramdown provision.

"Strip down" (bifurcation) of a secured claim is authorized by § 506(a), which provides that a secured claim "is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property." 11 U.S.C. § 506(a)(1). A stripped down claim is bifurcated into two claims: one that is a secured claim equal to the value of the collateral, and a second claim that is unsecured for the balance. The strip down of a secured claim in a chapter 13 case can be accomplished in several ways. A debtor or other party in interest may initiate a separate proceeding to determine the value of the collateral pursuant to Rule 3012 of the Federal Rules of Bankruptcy Procedure. A debtor may also propose a strip down as part of the debtor's chapter 13 plan and, if there is an objection, the court may hold a hearing to determine the value of the collateral in connection with the confirmation hearing. 11 U.S.C. § 506(a)(1).

There are a number of limitations on a chapter 13 debtor's ability to modify a secured claim. Section 1322(b)(2) provides that "a claim secured only by a security interest in real property that is the debtor's principal residence" may not be modified. The United States Supreme Court has held that the limitation in § 1322(b)(2) prohibits the bifurcation, or strip down, in a chapter 13 case of a secured claim that is a claim secured only by a security interest in real property that is the debtor's principal residence. Nobelman v. Am. Say. Bank (In re Nobelman), 508 U.S. 324, 332, 113 S.Ct. 2106, 2111, 124 L.Ed.2d 228 (1993).

Section 1325 (a)(5) (the chapter 13 cramdown provision) contains several limitations to modification of secured claims, including several added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. 109-8, 119 Stat. 23, that affect strip down. Section 1325(a)(5) provides:

(a) Except as provided in subsection (b), the court shall confirm a plan if —

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(5) with respect to each allowed...