562 F.3d 618 (4th Cir. 2009), 07-2185, In re Price

Docket Nº:07-2185, 08-1022.
Citation:562 F.3d 618
Party Name:In re Telephius Letoinne PRICE; Shawana Denise Price, Debtors. Wells Fargo Financial Acceptance, Plaintiff-Appellant, Telephius Letoinne Price; Shawana Denise Price, Debtors-Appellees. GMAC, LLC, Amicus Supporting Appellant, Ingrid M. Hillinger; Michael Hillinger; Adam J. Levitin; Michaela M. White; Jean Braucher; National Association of Consumer B
Case Date:April 13, 2009
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
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562 F.3d 618 (4th Cir. 2009)

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

Wells Fargo Financial Acceptance, Plaintiff-Appellant,

Telephius Letoinne Price; Shawana Denise Price, Debtors-Appellees.

GMAC, LLC, Amicus Supporting Appellant,

Ingrid M. Hillinger; Michael Hillinger; Adam J. Levitin; Michaela M. White; Jean Braucher; National Association of Consumer Bankruptcy Attorneys, Amici Supporting Appellees.

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

Wells Fargo Financial Acceptance, Plaintiff-Appellee,

Telephius Letoinne Price; Shawana Denise Price, Debtors-Appellants.

Ingrid M. Hillinger; Michael Hillinger; Jean Braucher; Adam J. Levitin; National Association of Consumer Bankruptcy Attorneys; Michaela M. White, Amici Supporting Appellants,

GMAC, LLC, Amicus Supporting Appellee.

Nos. 07-2185, 08-1022.

United States Court of Appeals, Fourth Circuit

April 13, 2009

Argued: Jan. 28, 2009.

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[Copyrighted Material Omitted]

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ARGUED:

David G. Epstein, Haynes & Boone, L.L.P., Dallas, Texas, for Wells Fargo Financial Acceptance.

William Earl Brewer, Jr., Raleigh, North Carolina, for Telephius Letoinne Price and Shawana Denise Price.

ON BRIEF:

Pamela P. Keenan, Kirschbaum, Nanney, Keenan & Griffin, P.A., Raleigh, North Carolina, for Wells Fargo Financial Acceptance.

Barkley Clark, Katherine M. Sutcliffe Becker, Stinson, Morrison, Hecker, L.L.P., Washington, D.C., for Amicus Curiae GMAC, L.L.C. Michael R. Totaro, Totaro & Shanahan,

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Pacific Palisades, California, for Amici Curiae Ingrid M. Hillinger, Michael Hillinger, Jean Braucher, Adam J. Levitin, and Michaela M. White.

Tara Twomey, National Association of Consumer Bankruptcy Attorneys, San Jose, California, for Amicus Curiae National Association of Consumer Bankruptcy Attorneys.

Before WILKINSON, KING, and GREGORY, Circuit Judges.

Reversed and remanded by published opinion. Judge WILKINSON wrote the opinion, in which Judge KING and Judge GREGORY joined.

OPINION

WILKINSON, Circuit Judge:

This appeal involves the application of the " hanging paragraph" in Chapter 13 of the Bankruptcy Code. See 11 U.S.C. § 1325(a). That paragraph prevents the bifurcation (or " strip-down" ) of a secured claim when the creditor has a " purchase money security interest" in a motor vehicle acquired for the debtor's personal use within 910 days of the debtor's bankruptcy filing. Id. In this case, we must decide how the hanging paragraph applies to a secured claim when a portion of that claim relates to the financing of " negative equity" (which, in a car transaction, refers to the difference between the value of a vehicle that the buyer trades in and the amount of the buyer's preexisting debt on that trade-in).

Applying the most natural interpretation of the statute, and in turn state law, we conclude that a creditor does have a " purchase money security interest" for the portion of its claim relating to negative equity. We reach that conclusion because negative equity financing is integral to the debtor's acquisition of a new car and because this result effectuates Congress's intent in the hanging paragraph. The judgment of the district court is therefore reversed. Because we hold that the debt in this case was secured by a purchase money security interest, we do not address the proper treatment of a debt that includes non-purchase money components.

I.

In July 2005, Telephius and Shawana Price bought a 2001 Lincoln LS from Capital Mazda in Cary, North Carolina. The Prices purchased the Lincoln on secured credit pursuant to a retail installment sales contract (" the contract" ). Capital Mazda subsequently assigned the contract to Wells Fargo Financial Acceptance.

The contract stated that the purchase price of the Lincoln was $14,437.17. The Prices put down $1,400 in cash. They also traded in their 1997 Nissan Maxima, which earned them a trade-in allowance of $2,861. The Prices had purchased the Nissan on credit, and they still owed $5,698.96 on the Nissan to their previous lender. The contract for the Lincoln therefore included financing for $2,837.96 in " negative equity," or the difference between the amount the Prices received for the Nissan and the amount they still owed. The contract also included $426 in fees and taxes and $600 for gap insurance, which would cover the difference between the amount the Prices owed on the contract and the amount they would receive from an insurer if the Lincoln were totaled. The total amount financed in the contract-including the purchase price, the negative equity, fees and taxes, and the gap insurance, minus the down payment-was $16,901.13. This debt was secured by the Lincoln.

Almost one year later, in June 2006, the Prices filed a Chapter 13 bankruptcy petition. Wells Fargo presented a proof of claim showing that the Prices owed $18,332.37, reflecting accrued interest, under

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the contract at the time.1 The Prices' Chapter 13 plan proposed to invoke 11 U.S.C. § 506(a)(1) to bifurcate Wells Fargo's claim into two parts: a secured claim for $12,475 (the present value of the Lincoln), and an unsecured claim for the remainder. Wells Fargo objected to confirmation of the Prices' plan, arguing that the Bankruptcy Code's " hanging paragraph" protected its claim from bifurcation because that claim was secured by a " purchase money security interest." See 11 U.S.C. § 1325(a).

The bankruptcy court noted that " many courts have struggled to discern the meaning of portions of the ‘ hanging paragraph.’ " In re Price, 363 B.R. 734, 737 (Bankr.E.D.N.C.2007) (citing In re Trejos, 352 B.R. 249, 253-54 n. 6 (Bankr.D.Nev.2006)). Courts interpreting the hanging paragraph generally have disagreed on two points relating to motor vehicle transactions. First, courts have disagreed as to whether a purchase money security interest exists in the portion of a car loan relating to negative equity on a trade-in vehicle or to gap insurance. And second, even when courts have agreed that a purchase money security interest does not exist for these portions of the car loan, they have disagreed as to whether a purchase money security interest can still exist in the rest of the loan, or whether the hanging paragraph instead requires treating the entire debt as non-purchase money. See In re Graupner, 537 F.3d 1295, 1300 (11th Cir.2008) (collecting cases).

The bankruptcy court in this case determined that the meaning of " purchase money security interest" in the hanging paragraph depended on state law. 363 B.R. at 740. The court then concluded that, under North Carolina law, the negative equity and gap insurance components of the contract between the Prices and Wells Fargo did not give rise to a purchase money security interest. Id. at 740-41. The bankruptcy court next applied what is known as the " transformation rule," under which the non-purchase money portion of the debt converts the entire lien into a non-purchase money security interest. Id. at 745-46.

On appeal, the district court agreed that, under North Carolina law, " negative equity and gap insurance ... cannot give rise to a purchase money security interest." Wells Fargo Fin. N.C. 1, Inc. v. Price, No. 5:07-CV-133-BR, 2007 WL 5297071, at *3 (E.D.N.C. Nov.14, 2007). But the district court then applied the " dual status rule" and held that Wells Fargo did have a purchase money security interest for the part of its claim that did not relate to negative equity and gap insurance. Id. at *4. The district court therefore remanded the case to the bankruptcy court to determine the actual amount of Wells Fargo's secured claim. Id. at *5.

Wells Fargo now appeals the district court's conclusion that the negative equity and gap insurance components of the debt did not give rise to a purchase money security interest. The Prices cross-appeal the district court's application of the dual status rule, arguing that the court should have applied the transformation rule instead. Because both of these appeals present only questions of law, we review the district court's decision de novo. In re Bryson Props., XVIII, 961 F.2d 496, 499 (4th Cir.1992).

II.

A.

In Chapter 13 bankruptcy proceedings, the debtor has the option of retaining

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his property over the objection of a secured creditor with an interest in that property, as the Prices did here. See 11 U.S.C. § 1325(a)(5)(B). In return, the secured creditor retains its lien on the collateral, and the debtor must repay the present value of the creditor's " allowed secured claim" over time. Id. § 1325(a)(5); Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 957, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). Section 506(a)(1) of the Bankruptcy Code generally provides that the value of the allowed secured claim is equal to the value of the collateral. See 11 U.S.C. § 506(a)(1)2; Rash, 520 U.S. at 957, 117 S.Ct. 1879. Thus, if the secured creditor's claim is for more than the collateral's value, Section 506(a)(1)...

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