In re Crawford

• Decision Date: 28 October 2008
• Docket Number: No. 08-28338-svk.,08-28338-svk.
• Citation: 397 B.R. 461
• Parties: In re Shante D. CRAWFORD, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

397 B.R. 461

In re Shante D. CRAWFORD, Debtor.

No. 08-28338-svk.

United States Bankruptcy Court, E.D. Wisconsin.

October 28, 2008.

COPYRIGHT MATERIAL OMITTED

SUSAN V. KELLEY, Bankruptcy Judge.

MEMORANDUM DECISION ON OBJECTION TO CONFIRMATION

This case involves the now well-known "hanging paragraph" of 11 U.S.C. § 1325(a) and its application to the "negative equity" included in the financing of a vehicle which would otherwise qualify for the protection of the hanging paragraph. One of the most hotly contested issues created by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, this question has sharply divided the courts with many well-reasoned, persuasive decisions on both sides. Dozens of Bankruptcy Courts,¹ a few District Courts and one Bankruptcy Appellate Panel have spoken.² The Eleventh Circuit was the first Court of Appeals to decide the issue;³ cases are presently pending in the Fourth and Ninth Circuit Courts of Appeals;⁴ and the Second Circuit recently certified the question to the New York Court of Appeals.⁵ The Seventh Circuit has not yet considered the issue, but two of my colleagues have confronted it and written thorough and insightful opinions.⁶ After reviewing all of these detailed and scholarly decisions,⁷ this Court cannot hope to offer anything new, but will attempt to reach a result that fairly applies the statute in accordance with Congressional intent.

If the legal analysis is somewhat mind boggling, at least the facts are simple. When Shante Crawford (the "Debtor") purchased a 2006 Honda Accord, she traded in her 2005 Nissan Altima and received a "trade allowance" of $15,000. However, the outstanding loan balance on the Nissan was $18,378.56. Therefore, Honda Finance advanced $3,378.56 (the negative equity) along with the cash price of the Honda.⁸ The Debtor granted Honda Finance a security interest in the Accord to secure this debt. When she filed Chapter 13 bankruptcy within 910 days of purchasing the Honda Accord, the Debtor's plan proposed to strip down Honda Finance's secured claim to the value of the Honda. In response to Honda Finance's objection to confirmation, the Debtor alleged that the hanging paragraph, which prevents such lien stripping, did not apply because of the financing of the negative equity.

The hanging paragraph provides that Bankruptcy Code § 506 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 in the 910-day (sic) preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle ... acquired for the personal use of the debtor." The issue in this case, as in all negative equity cases, is whether the creditor has a purchase money security interest securing the debt that is the subject of its claim.

The Bankruptcy Code contains a comprehensive definitions section, but "purchase money security interest" is not included. See 11 U.S.C. § 101. While there has been some support for a federal standard that would apply to this narrow issue,⁹ the Seventh Circuit Court of Appeals has made clear that State law should apply in this context. See In re Wright, 492 F.3d 829 (7th Cir.2007). The applicable State law that defines purchase money security interests is the Uniform Commercial Code (UCC), which underwent massive revisions that were effective in 2001. Article 9 of the UCC deals with security interests, and § 9-103 of Revised Article 9, enacted in Wisconsin as Wis. Stat. § 409.103, specifically governs purchase money security interests. Revised § 9-103 was derived from former § 9-107. The former Section clearly divided purchase money security interests into two categories: a seller's purchase money security interest and a lender's purchase money security interest. Former § 9-107 provided:

A security interest is a "purchase money security interest" to the extent that it is

(a) taken or retained by the seller of the collateral to secure all or part of its price; or

(b) taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used.

Revised § 9-103(a)(1) combines these definitions in one paragraph:

"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.

Under this definition, a lender's purchase-money obligation consists of (1) the value given to the debtor; (2) that enabled the debtor to acquire rights in the collateral; (3) that the debtor in fact used to acquire the collateral. The requirement that the value be "in fact used" to acquire the collateral means that a purchase money security interest cannot secure antecedent debt. The reason behind the rule is that a creditor with a purchase-money security interest receives priority over other secured creditors. As Judge Easterbrook explained:

Purchase-money security interests usually take priority over earlier security agreements with after-acquired-property clauses. A purchase-money advance brings in a new asset, and because the security interest cannot exceed the value of the asset existing creditors are no worse off.

Salem Nat'l Bank v. Smith, 890 F.2d 22 (7th Cir.1989). However, if antecedent debt or loans given to enable the debtor to conduct business are given purchase-money status, "virtually all secured loans would be secured by purchase money security interests," neither an intended nor desirable consequence. In re Woodworks Contemporary Furniture, Inc., 44 B.R. 971, 973 (Bankr.W.D.Wis.1984) quoting Nw. Nat'l Bank v. Lectro Sys., Inc., 262 N.W.2d 678, 680 (Minn.1977). As a priority provision, the requirements of a purchase-money security interest should be strictly construed. See generally In re Flight Transp. Corp. Sec. Litig., 874 F.2d 576, 581 (8th Cir.1989) (statutes that may diminish distributions to other creditors are strictly construed); Matthews v. Transamerica Fin. Servs. (In re Matthews), 724 F.2d 798, 801 (9th Cir.1984) ("Purchase money security is an exceptional category in the statutory scheme that affords priority to its holder over other creditors, but only if the security is given for the precise purpose as defined in the statute. And we should not lose sight of the fact that the lender chooses the form."); First Nat'l Bank v. United States, 13 Cl.Ct. 385 (Cl.Ct.1987) (collecting cases strictly construing former UCC § 9-107).

By its nature, antecedent debt that existed prior to the purchase of the collateral is not a right in the collateral. And negative equity, as a debt owed on a previous purchase, is clearly antecedent debt. In re Munzberg, 388 B.R. 529, 539 (Bankr. D.Vt.2008); In re Johnson, 380 B.R. 236, 243 (Bankr.D.Or.2007) (the liability for negative equity is not an expense "incurred in connection with acquiring" a vehicle; it is an antecedent debt). This Court finds Judge Brown's explanation in Munzberg especially compelling:

Comment 2 to UCC § 9-107 (the precursor to UCC § 9-103) explicitly provided that a purchase money security interest could not secure a pre-existing claim or antecedent debt. See In re Billings, 838 F.2d 405, 407 (10th Cir. 1988); Dominion Bank of Cumberlands, NA v. Nuckolls, 780 F.2d 408, 413 (4th Cir.1985); In re Matthews, 724 F.2d 798, 800-01 (9th Cir.1984); In re Penny, 15 B.R. 124, 127 (Bankr.E.D.Va.1981). The current Official Comment 5 to 9A V.S.A. § 9-103 states that § 9-103(b), which describes when a security interest in goods and software is a PMSI, is limited to goods and software, but "[o]therwise, no change in meaning from former section 9-107 is intended." As a consequence, it appears that the definition of PMSI under former UCC § 9-107 has essentially not changed, and that Comment 2 to former § 9-107 is currently applicable, although that Comment was not retained in the Official Comments to the Revised Article 9. See Lavigne, 2007 Bankr.LEXIS 4187, 2007 WL 3469454 at * 6 (Bankr.E.D.Va.2007) (citing cases under former § 9-107 Comment 2 as still applicable to show that antecedent debt could not be PMSI).

Munzberg, 388 B.R. at 539-40. Section 9-103 of Revised Article 9 as enacted in Wisconsin, including the Official Comments, is identical to that enacted in Vermont. Accordingly, the analysis would be the same: a purchase money security interest cannot secure an antecedent debt; negative equity is an antecedent debt; therefore a purchase money security interest cannot include negative equity. See also Americredit Fin. Servs., Inc. v. Penrod (In re Penrod), 392 B.R. 835, 849 (9th Cir. BAP 2008) (negative equity is antecedent debt).

This Court respectfully disagrees with the Eleventh Circuit's determination that negative equity is not antecedent debt. Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295, 1301 (11th Cir. 2008). Antecedent debt is typified in Coomer v. Barclays Am. Fin., Inc. (In re Coomer), 8 B.R. 351 (Bankr.E.D.Tenn. 1980).¹⁰ In Coomer, the debtor took out a loan from Merit Finance to purchase furniture. Merit loaned the debtor (1) money to purchase the furniture and (2) money to pay off a prior loan the debtor had with Merit. As collateral for the entire loan, Merit took a security interest in the furniture. While struggling with how to allocate the non-purchase money portion and the purchase money portion of the remaining debt, the Coomer court had no trouble finding that the prior loan was antecedent debt, and not part of the purchase money security interest. See also Matthews v. Transamerica Fin. Servs. (In re Matthews), 724 F.2d 798, 801 (9th Cir.1984) (refinance constitutes value to enable debtor to pay off loan, not acquire rights in collateral). The negative equity here is no different than the prior loan in Coomer.

Graupner and many...