In re Hayes

• Decision Date: 01 November 2007
• Docket Number: No. 07-02564.,No. 07-03798.,07-02564.,07-03798.
• Citation: 376 B.R. 655
• Parties: In re Bonnie H. HAYES, Debtor. Steven G. Tucker, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Tennessee

376 B.R. 655

In re Bonnie H. HAYES, Debtor Steven G. Tucker, Debtor.

No. 07-02564.

No. 07-03798.

United States Bankruptcy Court, M.D. Tennessee.

November 1, 2007.

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Bonnie Culp, Harlan & Associates, Murfreesboro, TN, for Debtor.

MEMORANDUM

KEITH M. LUNDIN, Bankruptcy Judge.

The issue in these consolidated Chapter 13 cases is whether CitiFinancial and GMAC hold purchase money security interests to which 11 U.S.C. § 506 "shall not apply" under the hanging sentence at the end of 11 U.S.C. § 1325(a). Because the conditions in the hanging sentence are collateral — specific and these creditors do not claim purchase money security interests in some items of their collateral, the protection from bifurcation in the hanging sentence is not available to portions of the debt in each case. In addition, bundling the sale of credit disability insurance, "GAP" insurance and the payoff of "negative equity" with the sale and financing of cars raises fact questions under state law with respect to the extent these creditors hold purchase money security interests. GMAC and CitiFinancial failed to prove the enabling nature or "close nexus" of some financed amounts to the purchase of cars by the debtors. GMAC and CitiFinancial hold reduced purchase money secured claims for purposes of the hanging sentence. As proposed, the debtors' plans cannot be confirmed. The following constitute findings of fact and conclusions of law. FED. R. BANKR.P. 7054.

I. FACTS

Hayes Case

Bonnie Hayes filed Chapter 13 on April 13, 2007. Within the prior year, Hayes bought a 2006 Chevrolet Malibu from Bill Heard Chevrolet. The Retail Installment Sale Contract provided a "cash price" of $20,009.10. Additional charges were: 1) title, licensing and registration fees of $95; 2) dealership document and processing fees of $399; and, 3) GAP insurance¹ of $599. The Hayes Contract stated that the GAP insurance was purchased through First Colonial Insurance Company. The Contract recited that Hayes was "not required to buy" GAP insurance to obtain credit and that her decision to buy or not to buy GAP insurance "will not be a factor in the credit approval process."

Hayes made a cash down payment of $1,000.00. She received credit for a manufacturer's rebate of $2,500.

The Contract shows that Hayes traded in a 2004 Toyota 4 Runner. A trade in allowance of $21,500.00 was given for the Toyota. Hayes still owed Toyota Motor Credit $26,325.25 on the Toyota. The difference between the allowed value and the debt secured by the Toyota — sometimes called "negative equity" — was $4,825.25.² The total amount owed Toyota Motor Credit Corporation on the 4 Runner was listed as "Pay Off Made By Seller."

The total amount financed under the Hayes Contract was $22,427.35 with interest at 15.95%. As security for the financed amount, the Hayes Contract stated:

Security Interest.

You give us a security interest in:

• The vehicle and all parts or goods installed in it;

• All money or good received (proceeds) for the vehicle;

• All insurance, maintenance, service or other contracts we finance for you; and

• All proceeds from insurance, maintenance, service or other contracts we finance for you. This includes any refunds of premiums or charges from the contracts.

This secures payment of all you owe on this contract. It also secures your other agreements in this contract. You will make sure the title shows our security interest (lien) in the vehicle.

The Hayes Contract includes this provision for payment allocation: "We may apply each payment to the earned and unpaid part of the Finance Charge, to the unpaid part of the Amount Financed and to other amounts you owe under this contact in any order we choose." The Hayes Contract made federal law and Tennessee law applicable.

The Hayes Contract was assigned by Bill Heard Chevrolet to CitiFinancial Auto Corp. CitiFinancial filed a proof of claim in the Hayes Chapter 13 case for $22,080.27.

The Hayes Chapter 13 plan strips down CitiFinancial's secured claim to the value of the Malibu. The Hayes Plan gives Citifinancial a secured claim of $12,450, with interest at 8.25%. The balance of CitiFinancial's claim shares pro-rata with other unsecured creditors.

Tucker Case

Steven and Melissa Tucker filed Chapter 13 on May 31, 2007. Within the prior year, Steven Tucker bought a 2006 GMC Sierra from Neill-Sandler Buick-Pont-GMC Truck, Inc. The Tucker Contract provided a "cash price (including any accessories, services, and taxes)" of $30,933.69. Additional charges were: 1) government certificate of title fees of $24.50; 2) dealership document fees of $75.00; 3) "Ownerguard" or GAP insurance of $595.00; and, 4) credit disability insurance of $1,489.89. The GAP insurance was purchased through Virginia Surety; the disability insurance through Life Investors. The Tucker Contract stated with respect to these insurance policies:

Insurance: You may buy the physical damage insurance this contract requires (see back) from anyone you choose who is acceptable to us. You are not required to buy any other insurance to obtain credit. Your decision to buy or not buy other insurance will not be a factor in the credit approval process. * * *

Credit life insurance and credit disability insurance are not required to obtain credit. Your decision to buy or not buy credit life insurance and credit disability insurance will not be a factor in the credit approval process. They will not be provided unless you sign and agree to pay the extra cost.

Tucker made no cash down payment, but traded in an unencumbered 1997 Chevrolet Camaro for which he was given $1,500. After credit for a rebate of $6,750, the amount due for the Sierra was $22,683.69. The total amount financed under the Tucker Contract was $24,868.08 with interest at 11.49%.

As security for the financed amount, the Tucker Contract stated:

Security Interest. You give us a security interest in

1. The vehicle and all parts or goods installed in it,

2. All money or good received (proceeds) for the vehicle,

3. All insurance, maintenance, service or other contracts we finance for you, and

4. All proceeds from insurance, maintenance, service, or other contracts we finance for you. This includes any refunds of premiums.

This secured payment of all you owe on this contract It also secured your other agreements in this contract You will make sure the title shows our security interest (lien) in the vehicle.

The Tucker Contract included this provision on payment allocation: "We will apply each payment first to the earned and unpaid part of the Finance Charge, and then to the unpaid part of the Amount Financed." The Tucker Contract made federal and Tennessee law applicable.

The Tucker Contract was assigned by Neill-Sandler to General Motors Acceptance Corp. GMAC filed a proof of claim for $25,325.71.

The Tucker Chapter 13 plan strips down GMAC's secured claim to the value of the Sierra. The Tucker Plan gives GMAC a secured claim of $18,550.00, with interest at 8.25%. The balance of GMAC's claim is treated as unsecured to receive not less than 20% over the life of the plan.

II. ARGUMENTS BY PARTIES

CitiFinancial objects to strip down of its secured claim.³ In a refrain familiar throughout current Chapter 13 practice, Citifinancial asserts that it holds a qualifying purchase money security interest for the full amount of its debt as contemplated by the hanging sentence at the end of § 1325(a), precluding application of § 506 and insulating its claim from strip down in the Hayes Plan.

With respect to the extent of its purchase money security interest, CitiFinancial states the parties engaged in one transaction, in one document, involving the sale/purchase of one vehicle. The "negative equity" and GAP insurance were "incorporated into the `value given to enable the debtor to acquire rights in the ... collateral.'" As characterized by CitiFinancial, there was a "close nexus" between its purchase money security interest in the car and the money it advanced Hayes to purchase GAP insurance and to pay off Hayes' debt at Toyota Motor Credit. Citi-Financial asserts that absent financing of negative equity, Hayes would have been unable to purchase the Malibu.

CitiFinancial cites TENN.CODE ANN. § 47-14-120(b) to support including negative equity in the amount secured by the Malibu. This provision of Tennessee law identifies the amount paid, to discharge a lien on a trade-in as a component of "time price" for purposes of charging interest. CitiFinancial also refers to Comment 3 of UCC § 9-103, adopted by Tennessee in connection with Revised Article 9.

GMAC objects to strip down of its secured claim.⁴ GMAC asserts that it holds a qualifying purchase money security interest for the full amount of its debt as contemplated by the hanging sentence at the end of § 1325(a), precluding strip down in the Tucker Plan.

GMAC argues that use of the phrase purchase money security interest in the hanging sentence indicates Congressional intent to incorporate the UCC definition of purchase money security interest as well as state law interpretation of the concept. GMAC says advances for insurance premiums fall within both prongs of the state law definition of purchase money obligation: "price" and "value given to enable." Comment 3 to UCC § 9-103 explains that these words include "obligations for expenses incurred in connection with acquiring rights in the collateral," which GMAC contends includes GAP insurance and credit disability insurance. GMAC characterizes GAP and disability insurance as "expenses of collection and enforcement" identified by Comment 3 as elements of a purchase money obligation.

GMAC also claims support for full protection of its claim by reference to the Truth In Lending Act and Regulation Z (12 CFR Pt. 26). Regulation Z was amended in 1999 to require that fees, costs and charges for insurance and the like be included in disclosure of the amount...