In Re Jamie Allen Westfall

• Decision Date: 24 March 2010
• Docket Number: No. 08-4530.,08-4530.
• Citation: 599 F.3d 498
• Parties: In re Jamie Allen WESTFALL; Angela Ann Westfall, Debtors. Nuvell Credit Corporation, nka Nuvell Credit Company LLC, Appellant, v. Jamie Allen Westfall; Angela Ann Westfall; Toby L. Rosen, Chapter 13 Trustee, Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

599 F.3d 498

In re Jamie Allen WESTFALL; Angela Ann Westfall, Debtors. Nuvell Credit Corporation, nka Nuvell Credit Company LLC, Appellant, v. Jamie Allen Westfall; Angela Ann Westfall; Toby L. Rosen, Chapter 13 Trustee, Appellees.

No. 08-4530.

United States Court of Appeals

Sixth Circuit.

Argued: Dec. 3, 2009.

Decided: March 24, 2010.

ARGUED: Barkley Clark, Stinson Morrison Hecker LLP, Washington, D.C., for Appellant. George Max Reiber, Law Office, Rochester, New York, for Appellees. ON BRIEF: Barkley Clark, Katherine M Sutcliffe Becker, Stinson Morrison Hecker LLP, Washington, D.C., Jeffrey A. Lipps Angela M. Paul Whitfield, Carpenter &amp Lipps LLP, Columbus, Ohio, for Appellant. Robert P. Harbert, Office of the U.S Trustee, Canton, Ohio, for Appellees. James R. Bruinsma, Myers Nelson Dillon & Shierk, PLLC, Grand Rapids, Michigan, for Amicus Curiae.

Before: BOGGS and COOK, Circuit

Judges; COLLIER, Chief District Judge.^*

OPINION

COOK, Circuit Judge.

Nuvell Credit Corporation (Nuvell) appeals from a judgment of the United States District Court for the Northern District of Ohio affirming the bankruptcy court's order overruling Nuvell's objection to confirmation of the Chapter 13 plan filed by debtors Jamie and Angela Westfall (Debtors). This appeal concerns whether the protection from "cramdown" offered by the so-called "hanging paragraph" of 11 U.S.C. § 1325(a) applies to the portion of a creditor's secured claim attributable to the payoff of negative equity in a trade-in vehicle. Because we find that negative equity financing constitutes a purchase money obligation under the Uniform Commercial Code (UCC) and thus that the associated security interest satisfies the UCC's definition of a purchase money security interest we hold that the portion of a creditor's secured claim attributable to the payoff of negative equity qualifies for protection from cramdown under the hanging paragraph, and accordingly REVERSE.

I.

On May 31, 2005, Debtors purchased a Chevy Silverado pickup for their personal use from Jack Matia Chevrolet and, in connection with the purchase, traded in a 2001 Chevy Blazer subject to an existing lien of $9,588.47. The dealer granted a $6,000 gross trade-in allowance for the Blazer, leaving negative equity—the amount needed to extinguish the lien—of $3,588.47.¹ Debtors entered into a Retail Installment Sale Contract (RISC) documenting their purchase of the Silverado, financed a total of $18,723.65 (including the negative equity), and granted the dealer a security interest in the vehicle. The dealer assigned the RISC to Nuvell.

Debtors filed a Chapter 13 petition on March 13, 2006, within 910 days of executing the RISC. Seeking to retain the Silverado, Debtors' fourth amended Chapter 13 plan assigned a secured value of $14,701.89—the balance owed, minus negative equity—to Nuvell's claim, proposing to pay that amount with 7% interest, while treating the remainder as a general unsecured claim, which the plan offered to pay at 40 cents on the dollar. Nuvell objected to confirmation, and, after several hearings, the bankruptcy court determined that the portion of Nuvell's security interest attributable to negative equity did not qualify as a purchase money security interest and instead applied the "dual status" rule to apportion Nuvell's claim between secured and unsecured. Nuvell appealed to the district court, which affirmed the bankruptcy court's judgment. This timely appeal followed.

II.

In an appeal from a district court's review of a bankruptcy court order we review the bankruptcy court's orderdirectly, giving no deference to the district court decision. In re Hamilton, 540 F.3d 367, 371 (6th Cir.2008). Because this appeal asks a question of law (interpretation of the Bankruptcy Code), we review de novo. Phar-Mor, Inc. v. McKesson Corp., 534 F.3d 502, 504 (6th Cir.2008) (citing In re S. Air Transp., Inc., 511 F.3d 526, 530 (6th Cir.2007)); see also Rittenhouse v. Eisen, 404 F.3d 395, 396 (6th Cir.2005).

A.

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the Bankruptcy Code generally allowed Chapter 13 debtors to modify the rights of a secured creditor holding a purchase money security interest in a vehicle by bifurcating the creditor's claim into secured and unsecured portions, with the secured amount determined by the vehicle's fair market value on the petition date and the excess classified as an unsecured claim. See 11 U.S.C. § § 506(a)(1), 1325(a). After bifurcating the claim, the debtor could treat the secured and unsecured portions separately in accordance with the priority scheme established by the Code. The bankruptcy court could then confirm the debtor's plan over the objection of the affected secured creditor as long as the creditor received a lien securing the claim, along with payments over the life of the plan equal to the present value of the allowed secured claim, i.e., the present value of the collateral. See 11 U.S.C. § 1325(a)(5)(B); Rake v. Wade, 508 U.S. 464, 469, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993). This process, known in bankruptcy parlance as "cramdown, " essentially permitted a debtor to strip a secured creditor's lien down to the value of the collateral, with the remaining balance receiving payment on a pro-rata basis as an unsecured claim pursuant to the terms of the plan, and, to the extent not satisfied, subject to discharge. Thus, by employing cramdown, a debtor could force a secured creditor to accept less than the full value of its claim.

B.

With BAPCPA, Congress amended the Code to prevent the cramdown of certain secured consumer obligations. The relevant provision appears as an unnumbered paragraph following § 1325(a), now commonly referred to as the "hanging paragraph, " which states:

For purposes of paragraph (5), 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 [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).

In a recent decision addressing the hanging paragraph's impact on debtors proposing to surrender their vehicles in full satisfaction of the creditor's claim, this court described the legislative purpose behind the hanging paragraph:

The hanging paragraph eliminates the cramdown occurring under § 1325(a)(5)(B) by eliminating bifurcation under § 506. Without § 506, creditors falling within the scope of the hanging paragraph are fully secured so that when a debtor elects to retain the collateral, the debtor must propose a plan that will pay the full amount of the claim.

...

Based upon the legislative history, there is little doubt that the "hanging-sentence architects intended only good things for car lenders and other lienholders."

In re Long, 519 F.3d 288, 294 (6th Cir. 2008) (quoting Keith M. Lundin, CHAPTER 13 BANKRUPTCY, 3d ed. 451.5-1 (2000 & Supp.2007-1)).

Where (instead of surrendering it) the debtor seeks to retain the vehicle through bankruptcy, a creditor whose claim meets the four criteria set forth in the hanging paragraph—(1) the creditor holds a purchase money security interest; (2) the debt was incurred within 910 days of filing; (3) the collateral consists of a motor vehicle; and (4) the debtor acquired the vehicle for his/her personal use—receives protection from bifurcation and cramdown. In this case, the collateral securing Nuvell's claim consists of a motor vehicle Debtors acquired for their personal use within 910 days of filing the petition. Thus, the only disputed issue concerns the extent to which Nuvell holds a "purchase money security interest" (PMSI)—specifically, whether or not the security interest that secures the portion of its claim attributable to negative equity qualifies as a PMSI.

C.

Where the Code does not define the relevant term, "we generally assume that Congress has 'left the determination of property rights in the assets of a bankrupt's estate to state law, ' since such 'roperty interests are created and defined by state law.'" Nobelman v. Am Sav. Bank, 508 U.S. 324, 329, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (quoting Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (alteration in original)). Moreover, "[t]he justifications for application of state law are not limited to ownership interests, " but "apply with equal force to security interests." Butner, 440 U.S. at 55, 99 S.Ct. 914.

Ohio, like the other forty-nine states, adopted Revised Article 9 of the UCC, to which the courts have looked for a definition of PMSI. See, e.g., In re Price, 562 F.3d 618, 625 (4th Cir.2009) (agreeing "with the great majority of other courts" that "state law controls the meaning of 'purchase money security interest' in the hanging paragraph"). Because Debtors reside in Ohio and purchased the vehicle in question from an Ohio dealer pursuant to a RISC governed by Ohio law, we look to Ohio's UCC to define PMSI.

According to the UCC, "[a] security interest in goods is a purchase-money security interest: (l)[t]o the extent that the goods are purchase-money collateral with respect to that security interest." Ohio Rev.Code S 1309.103(B)(1). "Purchase money collateral" is in turn defined as "goods or software that secures a purchase-money obligation incurred with respect to that collateral." Ohio Rev.Code § 1309.103(A)(1). And the UCC defines a "purchase-money obligation" as "an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used." Ohio Rev.Code § 1309.103(A)(2). Thus, the UCC-derived definition of PMSI focuses on the "purchase-money obligation" that the collateral secures....