In re Ford

Decision Date03 August 2009
Docket NumberNo. 08-3192.,08-3192.
Citation574 F.3d 1279
PartiesIn re John Wesley FORD, Sr., Cynthia Dawn Ford, Debtors. John Wesley Ford, Sr., Cynthia Dawn Ford, Appellants, v. Ford Motor Credit Corporation, Appellee, American Financial Services Association, The Kansas Bankers Association, Amicus Curiae.
CourtU.S. Court of Appeals — Tenth Circuit

Thomas D. Lasater, Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, KS (William M. Burke, Costa Mesa, CA, and Lyndon W. Vix, Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, KS, with him on the brief), for Appellee.

Charles R. Hay, Foulston Siefkin LLP, Topeka, KS, filed an Amici Curiae brief on behalf of American Financial Services in support of Appellee.

Patricia E. Hamilton, Henson, Hutton, Mudrick & Gragson, LLP, Topeka, KS, filed an Amici Curiae brief on behalf of The Kansas Bankers Association, in support of Appellee.

Before MURPHY, SEYMOUR, and TYMKOVICH, Circuit Judges.

MURPHY, Circuit Judge.

I. Introduction

Appellants John Wesley Ford, Sr. and Cynthia Ford appeal an order of the Bankruptcy Court for the District of Kansas rejecting their proposed Chapter 13 bankruptcy plan. The Fords have an outstanding debt to Appellee Ford Motor Credit Company ("Ford Motor Credit") secured by their automobile. The debt includes the amount paid to discharge the "negative equity" on their trade-in vehicle. Negative equity is the amount owed on a loan in excess of the collateral's value. In their proposed bankruptcy plan, the Fords sought to bifurcate their automobile debt to Ford Motor Credit under 11 U.S.C. § 506(a) into secured and unsecured claims. The unsecured claim would be the portion of the debt used to discharge the negative equity in the trade-in. Ford Motor Credit objected to the proposed plan, claiming the debt bifurcation was impermissible under the "hanging paragraph" of 11 U.S.C. § 1325(a). The bankruptcy court sustained the objection, and the Fords sought an immediate appeal to this court. We conclude we have jurisdiction to hear this appeal under 28 U.S.C. § 158(d)(2) and AFFIRM the ruling of the bankruptcy court.

II. Background

The underlying facts of this case are not in dispute. The Fords purchased a 2007 Ford F-150 truck from Rusty Eck Ford on February 24, 2007. The Fords made a down payment of $1500 and received $40,168.30 in financing secured by the truck. At the same time, the Fords traded in their 2006 Ford truck. The 2006 truck was valued at $16,300, but the Fords owed $23,500 on it. $11,693.30 in financing covered "[a]mounts paid on [the Fords'] behalf." This included taxes, fees, a service contract, gap insurance, and $7200 to pay off the creditor on the 2006 truck for the amount owed on the vehicle in excess of its present value.

The Fords filed for Chapter 13 bankruptcy fewer than four months later. Under their proposed plan, they sought to reduce the secured debt on the 2007 truck by $7200, the amount of negative equity on their trade-in. That amount would be treated as an unsecured claim under the plan. Ford Motor Credit objected to the proposed treatment of its security interest.

Exercising jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(K), (L), the bankruptcy court concluded the negative equity financing was part of the creditor's purchase money security interest under the "hanging paragraph" in 11 U.S.C. § 1325(a) and thus the debt could not be bifurcated and "crammed down" pursuant to 11 U.S.C. § 506(a). The bankruptcy court sustained Ford Motor Credit's objection to the proposed plan and ordered the Fords to file an amended plan treating the entire Ford Motor Credit debt as secured debt.

Both parties certified that an immediate appeal to this court was proper pursuant to 28 U.S.C. § 158(d)(2)(A) because the appeal presents a question of law as to which there is no controlling decision of this court or the Supreme Court and the question requires resolution of conflicting bankruptcy court decisions. A panel of this court then authorized the appeal to proceed, which satisfied the jurisdictional requirements of 28 U.S.C. § 158(a)(3) and 28 U.S.C. § 158(d)(2)(A) for appeals to this court of interlocutory bankruptcy orders. See Fed. R. Bankr.P. 8003(d).1

III. Discussion

The bankruptcy court's interpretation of the Bankruptcy Code is a question of law to be reviewed de novo. In re Lanning, 545 F.3d 1269, 1274 (10th Cir. 2008). When consumers enter Chapter 13 bankruptcy, they are normally permitted, if they wish, to bifurcate each secured debt into two claims: (1) an amount equal to the present value of the collateral, and (2) any excess. 11 U.S.C. § 506(a)(1). The excess portion is converted into unsecured debt. Id. The plan can then be "crammed down," or confirmed over the secured creditor's objection, so long as the creditor receives a lien securing the claim and the plan provides for payments to the creditor over the life of the plan equal to the present value of the collateral. 11 U.S.C. § 1325(a)(5)(B); Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 957, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). Whether debt is secured or unsecured is significant because secured creditors generally must be repaid in full before unsecured creditors receive anything. 11 U.S.C. § 1325(a)(5), (b)(1).

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). One provision of BAPCPA amended the Bankruptcy Code to remove certain secured consumer debts from bifurcation and cramdown. Pub.L. No. 109-8, § 306(b), 119 Stat. 23, 80 (2005). At the end of 11 U.S.C. § 1325(a), Congress added an unnumbered paragraph, now commonly known as the "hanging paragraph," which reads, in relevant part, as follows:

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).

The hanging paragraph protects creditors possessing a "purchase money security interest securing the debt that is the subject of the claim" from § 506(a) bifurcation and cramdown. 11 U.S.C. § 1325(a). The parties agree the collateral in this case is a motor vehicle acquired for the personal use of the debtors and the motor vehicle was acquired within 910 days of the bankruptcy filing. The only issue in dispute is the extent to which Ford Motor Credit has a "purchase money security interest."

The issue of whether, under the hanging paragraph, a creditor has a purchase money security interest in the negative equity on a trade-in vehicle has been litigated extensively throughout the country, and the rulings have not been consistent.2 See In re Graupner, 537 F.3d 1295, 1300 (11th Cir.2008) (collecting cases). The Tenth Circuit Bankruptcy Appellate Panel recently held creditors have a purchase money security interest in negative equity. In re Padgett, 408 B.R. 374, 381-82 (10th Cir. BAP 2009). District courts and bankruptcy courts within this circuit have reached varied results on the question. Compare, e.g., Citifinancial Auto v. Hernandez-Simpson, 369 B.R. 36, 48 (D.Kan.2007) (holding bifurcation and cramdown are available because purchase money security interest does not include negative equity), In re McCauley, 398 B.R. 41, 45-46 (Bankr.D.Colo.2008) (same), and In re Padgett, 389 B.R. 203, 211-12 (Bankr. D.Kan.2008) (same), rev'd, 408 B.R. at 381-82, with In re Ford, 387 B.R. 827, 833 (Bankr.D.Kan.2008) (holding bifurcation and cramdown are unavailable because negative equity is part of purchase money security interest), and In re Austin, 381 B.R. 892, 897 (Bankr.D.Utah 2008) (same). Two circuit courts to date have ruled on the question, both holding the purchase money security interest held by a creditor includes the negative equity on the trade-in vehicle. In re Price, 562 F.3d 618, 628 (4th Cir.2009); In re Graupner, 537 F.3d at 1301. The Second Circuit declined to rule on the issue, instead certifying the question to the New York Court of Appeals. In re Peaslee, 547 F.3d 177, 186 (2d Cir.2008). After certification the New York Court of Appeals concluded purchase money security interests include the negative equity. In re Peaslee, ___ N.E.2d ___, 2009 WL 1766000 (N.Y.2009). The issue previously came before this court, but the case was rendered moot before the court ruled on the merits. In re Hunt, 550 F.3d 1002, 1004 (10th Cir.2008).

The Bankruptcy Code does not define the term purchase money security interest. Property interests referred to in the Bankruptcy Code are generally defined by state law. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). This court, therefore, has looked to state law for a definition of the term as it is used elsewhere in the Bankruptcy Code. In re Billings, 838 F.2d 405, 406 (10th Cir.1988) ("[T]he courts have uniformly looked to the law of the state in which the security interest is created."). When Congress enacts a statute using a phrase that has a settled judicial interpretation, it is presumed to be aware of the prior interpretation. Comm'r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159, 113 S.Ct. 2006, 124 L.Ed.2d 71 (1993). When Congress drafted BAPCPA in 2005, it chose to use the term "purchase money security interest" without defining it. Under settled case law, that term, when used in the Bankruptcy Code, is interpreted with reference to state law. As a consequence, we presume Congress intended that term as used in BAPCPA to be interpreted according to state law.

Kansas has adopted the relevant portion of Revised Article 9 of the Uniform Commercial Code ("U.C.C."), and it also lists the...

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