In re Acaya, 06-51741-MM.

• Decision Date: 18 May 2007
• Docket Number: No. 06-51741-MM.,06-51741-MM.
• Parties: In re Leticia I. ACAYA, Debtor.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California

369 B.R. 564

In re Leticia I. ACAYA, Debtor.

No. 06-51741-MM.

United States Bankruptcy Court, N.D. California.

May 18, 2007.

Rodney M. Kleman, Law Offices of Rodney M. Kleman, Monterey, CA, for Debtor.

Devin Derham-Burk, Chapter 13 Trustee, San Jose, CA.

OPINION AND ORDER ON OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN

MARILYN MORGAN, Bankruptcy Judge.

INTRODUCTION

Wells Fargo Financial Acceptance (WFFA) objects to confirmation of Leticia Acaya's proposed chapter 13 plan. At issue is whether the negative equity from Acaya's trade-in vehicle should be treated as purchase money for the purposes of the hanging paragraph of § 1325(a) or whether the entire transaction has been transformed, entirely losing its purchase money status, or whether the dual status rule is applicable in California.

FACTUAL BACKGROUND

The facts are undisputed. Leticia Acaya purchased a 2005 Chevrolet Cavalier vehicle for $9,288 for her personal use on June 15, 2005, which is fewer than 910 days before the petition date in this case. Acaya financed the purchase of the Cavalier with a loan from the dealer, executing a Motor Vehicle Contract & Security Agreement. The amount financed included the following:

                Purchase price of vehicle          $ 9,288.00
                Document fees                           45.00
                Optional service contract            2,495.00
                GAP insurance                          600.00
                License fees                           135.00
                California tire fees                     8.75
                Sales tax                              676.64
                Smog certificate                         8.00
                Subtotal $13,256.39
                

To facilitate the purchase, Acaya traded in her 2003 Ford Taurus, receiving a $7,000 trade-in value. At the time, she had a remaining balance of $13,683 on her loan for the Taurus. The dealer rolled into the new loan the negative equity of $6,683, which is the difference between the outstanding balance on the Ford Taurus loan and that vehicle's trade-in value. The end result was that Acaya financed a total of $19,939.39 at an annual percentage rate of fourteen and one-half percent, payable over sixty months in installments of $440.15. The dealer subsequently assigned the Motor Vehicle Contract & Security Agreement to WFFA.

Acaya commenced this chapter 13 case on September 7, 2006. As of the petition date, the net payoff under the agreement with WFFA was $17,099.89. WFFA filed a proof of claim on September 12, asserting a secured claim in that amount. Acaya proposes to pay WFFA's secured claim based on a mid-range Kelly Blue Book value of $9,757 at seven percent interest, with the balance of its claim to be treated as unsecured. Unsecured creditors will receive no dividend.

WFFA objects to the proposed treatment of its claim under the plan, asserting that it is entitled to repayment of the full contract balance. It further contends that if the court concludes that the purchase money obligation does not include the negative equity in the trade-in vehicle, the court should adopt the dual status rule, rejecting the transformation rule, and find that the secured creditor has a purchase money security interest to the extent the debt was incurred to enable Acaya to acquire the new vehicle.

LEGAL DISCUSSION

Prior to October 17, 2005, the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors could bifurcate claims into secured and unsecured portions pursuant to 11 U.S.C. § 506(a). To the extent the claim was undersecured, the debtor could pay that portion as an unsecured claim. This is commonly referred to as "cramdown." However, under BAPCPA, a provision was added to the end of § 1325(a)(9) that prevents the bifurcation of certain claims. This unnumbered provision, referred to as the "hanging paragraph," provides:

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 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....

In order to avoid cramdown, four conditions must be satisfied: (1) the creditor has a purchase money security interest; (2) the debt was incurred within 910 days preceding the filing of the petition; (3) the collateral for the debt is a motor vehicle; and (4) the motor vehicle was acquired for the personal use of the debtor. The only requirement that is in dispute is whether WFFA has a purchase money security interest.

A purchase money security interest is "an exceptional category in the statutory scheme that affords priority" over other creditors. Matthews v. Transamerica Financial Services (In re Matthews), 724 F.2d 798, 801 (9th Cir.1984). Because the Bankruptcy Code does not define what constitutes a purchase money security interest, courts uniformly refer to state law to make the determination. Billings v. Avco Colorado Industrial Bank (In re Billings), 838 F.2d 405, 406 (10th Cir. 1988); Pristas v. Landaus of Plymouth, Inc. (In re Pristas), 742 F.2d 797, 800 (3rd Cir.1984). The Uniform Commercial Code as adopted in California provides in pertinent part:

(a) In this section:

(1) "Purchase money collateral" means goods or software that secures a purchase money obligation incurred with respect to that collateral.

(2) "Purchase money obligation" means 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.

(b) A security interest in goods is a purchase money security interest as follows:

(1) To the extent that the goods are purchase money collateral with respect to that security interest....

Cal. U. Com.Code § 9103. Section 9103 of the California Uniform Commercial Code (UCC) defines a "purchase money security interest" by reference to "purchase money collateral," which in turn incorporates the term "purchase money obligation." A "purchase money obligation" is defined by reference to the "price" of the collateral or the "value given" to enable the debtor to acquire rights in the collateral. The term "price," however, is not defined in the section. The official comment to the section amplifies the definitions by making clear that additional charges are included in the terms "purchase money obligation," "price," and "value given." It provides:

[T]he definition of "purchase-money obligation," the "price" of collateral or the "value given to enable" includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage; administrative charges, expenses of collection and enforcement, attorneys' fees, and other similar obligations.

The concept of "purchase-money security interest" requires a close nexus between the acquisition of the collateral and the secured obligation. (Emphasis added.)

Cal. U. Com.Code § 9103, corn. 3. However, the comment does not specify whether the negative equity in a trade-in is included in these terms.

WFFA asserts that because § 2981(e) of the California Automobile Sales Finance Act (ASFA) defines "cash price" to include the negative equity in a trade-in vehicle, the term "price" as used in California UCC § 9103(a)(2) similarly includes negative equity. ASFA § 2981(e) provides:

As used on this chapter, unless the context otherwise requires:

(e) "Cash price" means the amount for which the seller would sell and transfer to the buyer unqualified title to the motor vehicle described in the conditional sale contract, if the property were sold for cash at the seller's place of business on the date the contract is executed, and shall include taxes to the extent imposed on the cash sale and the cash price of accessories or services related to the sale, including, but not limited to, delivery, installation, alterations, modifications, improvements, document preparation fees, a service contract, a vehicle contract cancellation option agreement, and payment of a prior credit or lease balance remaining on property being traded in.

Cal. Civ.Code § 2981(e)(emphasis added). WFFA relies on In re Graupner, a case with similar facts that was decided under Georgia law. In that case, the bankruptcy court read the Georgia UCC definition of purchase money obligation in pari, materia with the provisions of the Georgia Motor Vehicle Sales Finance Act, which, like ASFA § 2981(e), includes in the cash sale price any amount paid on a trade-in vehicle. In re Graupner, 356 B.R. 907, 922-23 (Bkrtcy.M.D.Ga.2006). Notably, § 9201(b) of the California UCC provides that a transaction subject to division 9 is also subject to the provisions of the ASFA, stating:

(b) A transaction subject to this division [9 of the California Uniform Commercial Code] is subject to ... the Automobile Sales Finance Act, Chapter 2b (commencing with Section 2981) of Title 14 of Part 4 of Division 3 of the Civil Code .

Cal. Com.Code § 9201(b). See also Bank of America v. Lallana, 19 Cal.4th 203, 77 Cal.Rptr.2d 910, 960 P.2d 1133 (1998)(seller must comply with notice provisions of both division 9 of the California UCC and the Rees-Levering Motor Vehicle Sales and Finance Act, the predecessor to the ASFA, as a prerequisite for collection of deficiency judgment). However, it is unclear whether "cash price" as defined in the ASFA is synonymous with "price of the collateral" as used in California UCC § 9103.

In determining how the California UCC and the ASFA interrelate for purposes of defining a purchase money security interest, federal courts interpreting...