In re Austin

• Decision Date: 12 February 2008
• Docket Number: No. 07C-22771.,07C-22771.
• Citation: 381 B.R. 892
• Parties: In re James J. AUSTIN, and Nicole M. Austin, Debtors.
• Court: U.S. Bankruptcy Court — District of Utah

381 B.R. 892

In re James J. AUSTIN, and Nicole M. Austin, Debtors.

No. 07C-22771.

United States Bankruptcy Court, D. Utah.

February 12, 2008.

COPYRIGHT MATERIAL OMITTED

Lee J. Davis, Law Office of Davis & Jones, PC, Salt Lake. City, UT, for Debtors.

GLEN E. CLARK, Chief Judge.

This matter came before the court on the 6th Day of November, 2007 on the objection of James J. Austin and Nicole M. Austin ("Debtors") to proof of claim # 27 filed by Zions First National Bank ("Zions"). Lee J. Davis of Davis & Jones, P.C. appeared on behalf of the Debtors and Kami L. Peterson appeared on behalf of Zions.

JURISDICTION

The Court has jurisdiction to consider this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

BACKGROUND

On November 1, 2005, the Debtors purchased a 2005 Dodge Grand Caravan. (the "Van") using Zions to finance the purchase. The cash sale price of the Van was $23,998.96. In conjunction with the purchase, the Debtors traded in a 1999 Pontiac ("Pontiac") for which they were given a $2,500.00 trade-in allowance, and for which they still owed $5,500.00. The $5,500.00 owed by the Debtors on the Pontiac was rolled-over into the financing of the Van. The net effect of trading in the Pontiac resulted in Zions rolling $3,000.00 of negative equity into the Van's financing. With the roll-over of debt owed on the Pontiac plus other fees, the total amount financed by Zions was $27,968.46¹.

The Debtors admit that the Van was purchased within 910 days of their bankruptcy, that the Van was purchased for the Debtors' personal use, and that Zions has a perfected security interest in the Van. The Debtors do not dispute that the amount advanced by Zions to cover the actual purchase price of the Van qualifies as a purchase money obligation. At the hearing, Zions put on the testimony of Michelle Hamilton (Hamilton), a Vice-President of Zions Bank and a manager of Zions' Dealer Loan Center. Hamilton testified that the Debtors would not have qualified for financing on the Van unless the Debtors traded in their Pontiac, and that Zions would not have agreed to finance the Van unless the Debtors agreed to finance the negative equity of $3,000.00 from the trade-in. Hamilton testified that Zions requires the financing of negative equity from trade-ins because, under Zions' loan criteria, if there is only one buyer, Zions will finance only one vehicle. Had the Debtors not traded in the Pontiac, the Debtors would be obligated to continue making monthly payments on the Pontiac as well as make monthly payments on the Van, which is something that the Debtors could not afford at that time. Hamilton also testified that had the Debtors surrendered the Pontiac to the original secured party without paying the balance owed, or had the Pontiac been repossessed by the original secured party, Zions would have refused to finance because the Debtors would have been viewed as a credit risk.

ANALYSIS

Section 1325(a)(9) of the United States Bankruptcy Code (the "Code") contains a hanging paragraph (the "Hanging Paragraph") that operates to prevent certain purchase money security interest claims from being bifurcated pursuant to § 506 of the Code. The Debtors argue that the Hanging Paragraph does not apply to Zions' entire claim because the negative equity financed by Zions from the trade in of the Pontiac does not qualify as purchase money security interest financing.

The Hanging Paragraph, according to the Debtors, is unambiguous and should be read literally and narrowly to not apply in those situations where a creditor rolls-over an existing loan into a new transaction. Debtors argue that because the words "purchase money security interest" found in the Hanging Paragraph are not modified by words such as "to the extent" or "any portion" the term "purchase money security interest" found in the Hanging Paragraph should be construed to include only debt that is a part of the collateral's purchase price.

The Bankruptcy Code does not define "purchase money security interest." Rather than accept the Debtors' invitation to define the term "purchase money security interest" for the purposes of the "hanging paragraph," the Court will instead look to state law². Utah Code Annotated defines a purchase money security interest as follows:

(1) In this section:

(a) "purchase-money collateral" means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and

(b) "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.

(2) A security interest in goods is a purchase-money security interest:

(a) to the extent that the goods are purchase-money collateral with respect to the security interest; ...

Utah Code Annotated § 70A-9a-103.

The issue to be determined by the Court is whether the negative equity financing provided by Zions to the Debtors qualifies as a "purchase-money obligation" with respect to the purchase of the Van, a consumer-goods transaction. Utah Code Annotated § 70A-9a-103(6)(a) provides that in the case of transactions other than a consumer-goods transaction, purchase-money collateral may also secure an obligation that is not a purchase-money obligation. Citing to this subsection, the Debtors argue that Utah law does not provide the same safe harbor for a consumer-goods transaction and the Court should recognize the distinction as grounds to find that negative equity financing does not qualify as a purchase money obligation with respect to a consumer-goods transaction.

Where particular language is found in one section of a statute but omitted in another section of the same statute, it is generally presumed that the disparate inclusion or exclusion was intentional and purposeful. Field v. Mans, 516 U.S. 59, 67, 116 S.Ct. 437, 442, 133 L.Ed.2d 351 (1995). With nothing more, the Court would be guided by the rule of statutory interpretation described in Field to infer that the Utah legislature intended for the opposite to occur with respect to consumer-goods transactions and that negative equity financing does not qualify as a purchase money obligation with respect to a consumer-goods transaction. Such an inference would be a mistake. Utah Code Annotated § 70A-9a-103(8) specifically forbids the court from making such an inference. It leaves the task of determining the proper rules with respect to consumer-goods transactions for the courts, and directs the courts to continue to apply established approaches, stating that:

(8) The limitation of the rules in Subsections (5), (6), and (7) to transactions other than consumer-goods transactions is intended to leave to the court the determination of the proper rules in consumer-goods transactions. The court may not infer from that limitation the nature of the proper rule in consumer-goods transactions and may continue to apply established approaches.

Utah Code Annotated § 70A-9a-103(8).

Given the definition of a purchase money obligation under the Utah Code, Zions' financing may qualify as purchase money financing in one of two ways: 1) if Zions' negative equity...