In re Look, No. 07-20355.

• Decision Date: 06 March 2008
• Docket Number: No. 07-20355.
• Citation: 383 B.R. 210
• Parties: In re Corrina LOOK, and Justin Look, Debtors.
• Court: U.S. Bankruptcy Court — District of Maine

Page 210

383 B.R. 210

In re Corrina LOOK, and Justin Look, Debtors.

No. 07-20355.

United States Bankruptcy Court, D. Maine.

March 6, 2008.

James F. Molleur, Esq., ,Molleur Law Office, Biddeford, ME, for Debtor.

MEMORANDUM OF DECISION

JAMES B. HAINES, JR., Bankruptcy Judge.

This confirmation contest, submitted for decision on a stipulated record, calls for construction of the so-called "hanging paragraph," added to Bankruptcy Code § 1325(a)(9) by the Bankruptcy Abuse Prevention and Consumer. Protection Act of 2005 (BAPCPA).¹ The critical issue is whether a creditor holding a security interest in a motor vehicle, who otherwise comes within the "anti-bifurcation" protection of the hanging paragraph, is entitled to that protection if its lien secures a debt consisting not only of the sale price of the vehicle, but of the amount required to pay off a lien encumbering a trade-in, as well.

On this point (and others), the hanging paragraph's meaning is not crystalline. As explained below, I conclude that because the secured claim at issue is comprised of both purchase-money and nonpurchase-money components, it is subject to modification in the debtors' Chapter 13 plan.²

The Statutory Context

Before we turn to this case's simple facts, a preliminary precis of statutory context is useful. With it in hand, the essence of the dispute will quickly become clear.

Commonly, bankruptcy rehabilitation includes adjustment of obligations owed to creditors holding liens on a debtor's property. Principally, lien creditors are deemed to hold a secured claim only to the extent of the value of the property their lien encumbers. Beyond that amount, the balance the debtor owes is treated as a separate, unsecured claim. See § 506(a). The concept is commonly dubbed claim "bifurcation." See generally, 4 COLLIER ON BANKRUPTCY ¶ 506.03 (Alan N. Resnick & Henry J. Sommer, eds., 15th ed. rev. 2007).³ The debtor's plan will be confirmed if it provides that the secured claim will receive payments with a present value equal to the value of the collateral. See §§ 1325(a)(5)(B)(ii); 1129(b)(2)(A)(i)(II). To that extent, the lien continues to secure the claim. See §§ 1325(a)(5)(B)(i)(I); 1129(b)(2)(A)(i)(I); see also Brooks v. General Motors Acceptance Corp. (In re Brooks), 340 B.R. 648, 652 n. 5 (Bankr.D.Me.2006)(citing § 1325(a)(5)(B)(i) as an illustration of how, in BAPCPA, "Congress sided with those courts that have found it impermissible for debtors to require secured creditors to release their liens prior to plan completion and discharge."); In re Hopkins, 371 B.R. 324, 326 (Bankr.N.D.Ill.2007)(identifying lien retention requirements found in § 1325(a)(5)(B)(i)(I)(aa)); In re Hill, No. 06-80502, 2007 WL 499622, *3 (Bankr. M.D.N.C. Feb. 12, 2007)("[A] Chapter 13 plan must provide that a secured creditor retain its lien until the payment of the entire underlying debt or the entry of the discharge, not simply until the secured portion of the debt is paid."); In re Northwest Timberline Enterprises, Inc., 348 B.R. 412, 435 (Bankr.N.D.Tex.2006) ("Section 1129(b)(2)(A)(i)(I) requires that holders of secured claims `retain the liens securing such claims ... to the extent of the allowed amount of such claims.'"). This bifurcation power, coupled with the power to cure prepetition arrearages, see §§ 1322(b)(3); 1123(a)(5)(G), provides reorganizing debtors with leverage to negotiate with secured claimants, the ability to confirm a plan paying these creditors less than the total obligation, and, often; to retain encumbered assets.

The bifurcation power is not without exceptions. Although Chapter 13 debtors are generally able to "modify" (read bifurcate) the claims of secured creditors; § 1322(b)(2) precludes modification of the rights of creditors whose claims Are secured "only by a security interest in real property that is the debtor's principal residence " 11 U.S.C. § 1322(b)(2); see, e.g., Lomas Mortgage, Inc., v. Louis, 82 F.3d 1 (1st Cir.1996)(discussing bifurcation and residence).

For consumer debtors, bifurcation has historically enabled them to modify the claims of creditors who financed car purchases and who held liens on the vehicles to secure their claims. As Judge Clark recently explained:

Outside of bankruptcy, of course, a car creditor's being underwater only matters if the creditor actually has to repossess and, sell the car to satisfy its claim. So long as the debtor wants to keep the car, however, the only way for the debtor to get a release of the security interest on the car is to pay off the car debt in full. Inside bankruptcy, however, the debtor is permitted to "mimic" what would happen in the event the lender sold the vehicle to satisfy the debt, but without the consequences of actually losing the car. A court rules what that value would be, without actually exposing the vehicle to sale, and the resulting number becomes the number that ends up being "financed" by way of section 1325(a)(5)(B)(ii). The balance of any debt owed the creditor is then separately treated as unsecured debt, paid pro rata along with other unsecured creditors.

In re Sanders, 377 B.R. 836, 844 (Bankr. W.D.Tex.2007). That ability to bifurcate secured car loans, which was unqualified until BAPCPA's enactment, is now limited by the terms of the hanging paragraph. Although § 1322(b) still empowers a debtor to modify generally secured claims and cure defaults, § 1325(a) now provides:

(a). Except as provided in subsection (b), the court shall confirm a plan if—

* * * * * *

(5) with respect to each allowed secured claim provided for by the plan—

(A) the holder of such claim has accepted the plan;

(B)(i) the plan provides that

(I) the holder of such claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; and

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

(iii) if—

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or

(C) the debtor surrenders the property securing such claim to such holder;

* * * * * *

(9) the debtor has filed all applicable Federal, State, and local tax returns as required by section 1308.

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, 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

11 U.S.C. § 1325(a)(emphasis supplied).

Simply stated (for our purposes)⁴ the hanging paragraph's provisions apply to prevent bifurcation of claims (a) secured by a "purchase money security interest," (2) in a "motor vehicle," (3) "acquired for the personal use of the debtor," (4) within the 4910-day (sic] preceding the date Of the filing of the petition."

But stating the statute's terms is easier than applying them. The hanging paragraph's provisions have spawned multiple issues, including the meaning and proper application of "personal use of the debtor,"⁵ the contours of "purchase money security interest,"⁶ what constitutes a "motor vehicle,"⁷ and what it means to say "section 506 shall not apply."⁸

Facts

Corrine Look purchased a 2005 Subaru Impreza on credit from Patriot Subaru On December 30, 2004, The retail installment contract she signed granted Patriot a first priority security interest in the Subaru, securing all Corrina's payment obligations. Bank of America took assignment of the contract and its accompanying lien. Including a service contract and sales tax, the contract shows the Suberu's "cash price" as $21,796.26.

As part of the deal, Corrine traded in her older car, receiving an allowance of $13,900.00. At the time, however, the loan balance secured by a lien on the trade-in was $21,222.26, resulting in a "negative net trade-in" of $7,322.26. After, applying a $1,500.00 manufacturer's rebate, the "negative net trade-in" was reduced to $5,822.26. Corrine was also charged for gap insurance ($495.00) and documentation ($245.00). Taking all charges and the trade-in into account, the total amount financed in the transaction was $28,35842.⁹ Bank of America retained a lien on the Subaru to secure payment of that sum;

The parties agree that the Subaru is a "motor vehicle," that the car was purchased for Corrina's "personal use," that Bank of America's lien is perfected, and that Corrine incurred the debt secured by the Subaru within 910 days of her chapter 13 filing.

As of Corrina's bankruptcy filing, Corrina owed Bank of America $20,599.13 on the car loan. Her plan proposes to satisfy the bank's secured claim with payment of $12,416.00, at 8.0% interest.¹⁰

Discussion

Bank of America insists that Corrina's plan pay, the entire contract balance as a secured claim because it holds a "purchase Money security interest," thus entitling it to the hanging paragraph's anti-bifurcation protections. Corrine asserts that, since the bank's lien secures obligations other than the...