In re Dale, 08-20583.

• Citation: 582 F.3d 568
• Decision Date: 08 September 2009
• Docket Number: No. 08-20583.,08-20583.
• Parties: In the Matter of: Rebecca Ann DALE, also known as Becky Dale, also known as Dale Enterprises, Debtor. Ford Motor Credit Company, LLC, Appellee, v. Rebecca Ann Dale, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

582 F.3d 568

In the Matter of: Rebecca Ann DALE, also known as Becky Dale, also known as Dale Enterprises, Debtor.

Ford Motor Credit Company, LLC, Appellee, v. Rebecca Ann Dale, Appellant.

No. 08-20583.

United States Court of Appeals, Fifth Circuit.

September 8, 2009.

William M. Burke (argued), Costa Mesa, CA, R. Christopher Naylor, Devlin, Naylor & Turbyfill, Houston, TX, for Appellee.

Reese Walker Baker (argued), Baker & Associates, Houston, TX, for Appellant.

Earl Ferdinand Sundmaker, III, Douglas L. Grundmeyer, Jonathan C. McCall, Chaffe, McCall, Phillips, Toler & Sarpy, New Orleans, LA, for Amici Curiae.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, and PRADO and HAYNES, Circuit Judges.

HAYNES, Circuit Judge:

This appeal involves the proper construction of the "hanging paragraph"¹ in 11 U.S.C. § 1325(a), which was added to the Bankruptcy Code (Code) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Under the Code, a lien creditor generally holds a secured claim only to the extent of the present value of the collateral that the lien encumbers. If the amount of the secured claim exceeds the present value of the collateral, the Code treats the excess amount as a separate, unsecured claim. This process is known as bifurcation or "stripping down" the secured claim to the value of the collateral. The hanging paragraph is an exception to this general rule, preventing bifurcation of a claim when the creditor has a "purchase-money security interest" (securing the claimed debt) in a motor vehicle acquired for the debtor's personal use within 910 days of the debtor's bankruptcy filing. The issue here is whether the purchase-money security interest exception contained in the hanging paragraph applies to those portions of a claim attributable to the pay-off of negative equity in a trade-in vehicle, gap insurance, and an extended warranty. The district court found that it does. We AFFIRM.

I. FACTS

The facts of this case are undisputed. Debtor Rebecca Ann Dale purchased a 2006 Ford F150 pick-up truck from Gullo Ford Mercury of Conroe, Texas. The vehicle was for her personal use and had a cash price of $38,291.42. Ford Motor Credit Company, LLC (Ford) financed the sale under a retail sales contract (Sales Contract) and retained a security interest in the vehicle to secure the unpaid balance of the total sale price.

As part of the transaction, Dale traded in a 2003 Ford Expedition. That vehicle had a negative equity, with Dale owing $4,760 more on the vehicle than its then-market value.² As required by Texas law, Ford paid off this negative equity before accepting Dale's trade-in and included the sum in the new vehicle's total sale price.³ The total sale price also included a gap insurance premium of $576.84; taxes not included in the cash price totaling $1,450.03; fees totaling $162.73; and an extended warranty charge of $3,030. Dale financed this entire amount totaling $48,271.02 through Ford at 0% interest.

Dale filed for bankruptcy less than one year later and submitted a Chapter 13 reorganization plan. Of the $41,834.94 still owed under the Sales Contract, Dale's Chapter 13 plan proposed to pay Ford $23,900 over 37 months at 10.25% interest. Under Dale's proposal, the remaining amount owed to Ford would be paid pro-rata with other unsecured claims. Ford objected to this plan and filed a proof of claim in the amount of $41,834.94, secured by the 2006 F150. The bankruptcy court declined to approve Dale's Chapter 13 plan and sustained Ford's objection in part. The court ruled that Ford's purchase-money security interest did not extend to those portions of the vehicle loan attributable to the pay-off of negative equity, the gap insurance premium, and the extended warranty charge. The court deemed these portions of the loan unsecured.

On appeal, the district court reversed. The court held that Ford had a purchase-money security interest in the entire Sales Contract, including those portions attributable to negative equity, gap insurance, and the extended warranty. Dale challenges that conclusion in this appeal.

II. DISCUSSION

The proper scope of the hanging paragraph presents a legal question, which we review de novo. In re Sewell, 180 F.3d 707, 710 (5th Cir.1999). We must decide whether the Code's hanging paragraph applies to the portion of a secured claim attributable to the pay-off of a trade-in vehicle's negative equity, gap insurance, and an extended warranty.

While bankruptcy courts across the country have divided on this issue, see In re Graupner, 537 F.3d 1295, 1300 (11th Cir.2008) (collecting cases), three circuit courts and a state's highest court on certified question have recently weighed in on the debate, uniformly holding that the hanging paragraph prevents bifurcation of vehicle loans, including those portions attributable to negative equity pay-off. See In re Price, 562 F.3d 618, 628 (4th Cir. 2009) (hanging paragraph prevents bifurcation of portions of claim attributable to negative equity and gap insurance); Graupner, 537 F.3d at 1301 (hanging paragraph prevents bifurcation of portions of claim attributable to negative equity); In re Ford, 574 F.3d 1279, 1285 (10th Cir. 2009) (hanging paragraph prevents bifurcation of portions of claim attributable to negative equity); In re Peaslee, 13 N.Y.3d 75, 81, 885 N.Y.S.2d 1, 3-4, 913 N.E.2d 387, 389-90 (2009) (on certified question from the Second Circuit) (hanging paragraph prevents bifurcation of portions of claim attributable to negative equity).⁴ We adopt this emerging majority position for the reasons explained below.

1. Statutory Scheme

The hanging paragraph was enacted as part of the BAPCPA. Prior to the enactment of the BAPCPA, the Code allowed a Chapter 13 debtor to modify the rights of a secured creditor with a purchase-money security interest in a vehicle by bifurcating the claim into secured and unsecured portions based on the vehicle's then-market value. 11 U.S.C. §§ 506(a)(1), 1325(a)(5). Section 506(a)(1) of the Code provides in relevant part:

An allowed claim of a creditor secured by a lien on property ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

Under this provision, a creditor with a $15,000 claim secured by a vehicle with a present market value of $10,000 would have a secured claim of $10,000 and an unsecured claim of $5,000. Under a Chapter 13 plan, the $10,000 secured claim would be paid in full with interest, while the $5,000 unsecured claim would be paid pro-rata with other unsecured claims. Use of § 506 in this manner is known as "bifurcation and cramdown" because the secured claim is reduced to the present value of the collateral, while the remainder of the debt becomes unsecured, forcing the secured creditor to accept less than the full value of its claim. See In re Wright, 492 F.3d 829, 830 (7th Cir.2007) (discussing the effect of cramdown on the secured creditor's ability to recover the full value of its claim). Before the enactment of the BAPCPA, this cramdown provision had a pernicious effect on car dealers: it forced them to sustain a deficiency loss on the unsecured portion of the claim, while also forcing them to wait for payout on a now-reduced loan balance, with all the attendant risks of default that accompanied the original loan. In re Sanders, 377 B.R. 836, 844-45 (Bankr.W.D.Tex.2007), rev'd, 403 B.R. 435 (W.D.Tex.2009).

In apparent response to the undesirable effects of this cramdown on car dealers, Congress enacted the hanging paragraph as part of the BAPCPA. That provision eliminates bifurcation and cramdown in value if the vehicle was purchased within 910 days of the filing of the bankruptcy petition, and "if the creditor has a purchase-money security interest securing the debt that is the subject of the claim." As relevant here the provision reads:

section 506 [allowing bifurcation and cramdown] shall not apply to a claim ... 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 [sic] 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[.]

11 U.S.C. § 1325(a). Under the hanging paragraph, a creditor with a $15,000 claim secured by a vehicle with a present market value of $10,000 would avoid bifurcation and cramdown under § 506 and instead retain a secured claim in the entire purchase price of the vehicle.

2. Proper Scope of the Hanging Paragraph

In this case, it is undisputed that Dale incurred her debt within 910 days of filing for bankruptcy, that this debt was secured by a motor vehicle, and that Dale acquired this vehicle for her personal use. Thus, the sole issue is whether Ford has a "purchase-money security interest" securing that portion of the debt attributable to negative equity, gap insurance, and the extended warranty.

Ford urges, and the district court held, that the "plain and unambiguous" meaning of "purchase-money security interest" coupled with the hanging paragraph's pertinent legislative history is sufficient to resolve this issue. Statutory construction, of course, begins with the plain language of the statute. Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002). But the phrase "purchase-money security interest" does not have an ordinary or generally understood meaning; rather, it is a term of art. The phrase is used in only one other place in the Code, see 11 U.S.C. § 522(f), and the Code itself does not provide a definition. In short, the plain text of the hanging paragraph is insufficient to resolve...