In re Mancini, 1-07-bk-02236 RNO.

• Decision Date: 15 July 2008
• Docket Number: No. 1-07-bk-02236 RNO.,1-07-bk-02236 RNO.
• Citation: 390 B.R. 796
• Parties: Todd M. MANCINI dba Mancini Electric, Debtor. GMAC, Objectant v. Todd M. Mancini dba Mancini Electric, Respondent.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

Page 796

390 B.R. 796

Todd M. MANCINI dba Mancini Electric, Debtor GMAC, Objectant v. Todd M. Mancini dba Mancini Electric, Respondent.

No. 1-07-bk-02236 RNO.

United States Bankruptcy Court, M.D. Pennsylvania.

July 15, 2008.

COPYRIGHT MATERIAL OMITTED

Dorothy L. Mott, Marc Allan Crum, Law Office of Dorothy L. Mott, Harrisburg, PA, for Debtor.

Opinion¹

ROBERT N. OPEL, II, Bankruptcy Judge.

Pending before the Court is GMAC's Objection to the confirmation of Debtor, Todd M. Mancini dba Mancini Electric's, ("Debtor") chapter 13 plan. GMAC objects to the Debtor's attempt to cram down the value of a motor vehicle under 11 U.S.C. § 506(a)(1) and 11 U.S.C. § 1325(a)(5).² GMAC contends that the entire amount financed on the motor vehicle is a purchase money security interest granted within 910 days of the petition, and therefore, is protected from being crammed down by the "hanging paragraph" that was added to § 1325.³ For the reasons stated herein, I find the negative equity on the trade-in vehicle and the gap insurance payment are not part of GMAC's purchase money security interest, and therefore, are not protected from cram down by the hanging paragraph of § 1325. The administrative fees, licensing fees and taxes are part of GMAC's purchase money security interest. I further will employ the dual status rule to reduce the purchase money security interest by the amount of the negative equity and the gap insurance.

Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(B), (K) and (L).

Facts

The facts in this case are undisputed.⁴ On July 12, 2006, the Debtor purchased, for his personal use, a 2006 Chevrolet Avalanche Truck from Chevrolet of Hershey in Hershey, Pennsylvania. In connection with the purchase, the Debtor traded in a 2004 Ford F-150 Truck. The trade-in was subject to a lien. At the time he purchased the new vehicle, the Debtor owed $7,853.63 more on the trade-in vehicle than its value. This amount is the negative equity on the trade-in.⁵ The Debtor paid the dealer a down payment of $2,000.00, which was applied against the negative equity owed on the traded-in vehicle. The dealer agreed to finance the cash price of the new vehicle, the negative equity in the trade-in vehicle, gap insurance, administrative and licensing fees, and taxes. The gap insurance financed was $450.00. The total amount financed was $52,887.60. As part of the transaction, the debt on the trade-in vehicle was paid off. The Debtor signed a retail-installment contract in which he granted the dealer a security interest in the new vehicle. The retailinstallment contract disclosed the financing package total as the "Amount Financed", "Total of Payment", and "Total Sale Price" as mandated by the Federal Truth in Lending Act. The dealer assigned the contract to GMAC, which perfected its security interest by having its name noted as "lienholder" on the Pennsylvania Certificate of Title. The Debtor filed a chapter 13 bankruptcy on July 23, 2007, within 910 days, after purchasing the new vehicle. GMAC filed a proof of secured claim in the amount of $45,978.51. GMAC's valuation of the Chevrolet as of the time of the filing of the petition was $29,250.00.⁶ The Debtor listed the truck on his schedules as having a fair market value of $19,965.00. The Debtor proposed a chapter 13 plan, seeking to pay GMAC only the $19,965.00 that he had determined to be the fair market value of the truck, plus the contract rate of interest.⁷

Analysis

The hanging paragraph of § 1325 provides that:

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 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. § 1325(a)(*).

It is undisputed that the debt was incurred within the 910 days preceding the date of the filing of the petition. It is also undisputed that the collateral consists of a motor vehicle acquired for the personal use of the Debtor. Thus, it must be determined to what extent GMAC has a purchase money security interest in order to discern whether the hanging paragraph will apply to GMAC's claim.

A. Is negative equity included in the purchase money security interest amount?

The first question presented in this case is whether the amount of the negative equity on a trade-in vehicle is a purchase money security interest ("PMSI") for purposes of the hanging paragraph of § 1325. Since the passage of BAPCPA, courts around the country have been forced to grapple with this issue. Courts have split on the issue of whether the amount of the negative equity should be considered a purchase money security interest for purposes of the hanging paragraph. Two divergent viewpoints have emerged on the issue. One view holds that negative equity is not included in the PMSI amount for purposes of the hanging paragraph.⁸ The other view holds that negative equity is included in the PMSI amount for purposes of the hanging paragraph.⁹ Courts continue to reach differing conclusions on the issue.¹⁰ No consensus has as yet emerged. It is in the context of these disparate opinions that this Court must decide the issues presented.¹¹

There is no definition of "purchase money security interest" in the Bankruptcy Code. Although not explicitly adopted in the Bankruptcy Code, courts generally look to state law to gain an understanding of the meaning of the term "purchase money security interest" as used in the hanging paragraph. See e.g., In re Hayes, 376 B.R. 655, 667-68 (Bankr.M.D.Tenn.2007); see also GMAC v. Peaslee, 373 B.R. 252, 257 (W.D.N.Y.2007); see also In re Look, 383 B.R. 210, 216-17 (Bankr.D.Me.2008); see also In re Schwalm, 380 B.R. 630, 632 (Bankr.M.D.Fla.2008). The Hayes Court, in justifying why the courts look to state law for the meaning of purchase money security interest, explained that: "[wlhile there is temptation to look for a federal definition of `purchase money security interest,' prominent use of a term of art so closely identified with the Uniform Commercial Code and established state law counsels reference to state law." In re Hayes, 376 B.R. at 667-68. The Hayes Court then cites the pivotal decision in Butner v. U.S., in that "[p]roperty interests are created and defined by state law. Unless some federal interest requires a different result ... The justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests[.]". In re Hayes, 376 B.R. at 668 (citing Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979)).

Pennsylvania law defined a purchase money security interest as part of its adoption of the Uniform Commercial Code, Article 9. Pennsylvania's Uniform Commercial Code ("UCC") defines purchase money security interest in relevant part as "[a] security interest in goods is a purchase-money security interest: (1) to the extent that the goods are purchase-money collateral with respect to that security interest." 13 Pa.C.S.A. § 9103(b). Purchase-money collateral is defined as: "[g]oods or software which secures a purchase-money obligation incurred with respect to that collateral." 13 Pa C.S.A § 9103(a). Purchase-money obligation is defined as: "[a]n 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." 13 Pa.C.S.A. § 9103(a). Comment 3 to § 9103 of the UCC ("Comment 3") further elaborates on the definition of purchase money security interest, purchase money collateral, and purchase money obligation. Comment 3 states that:

Subsection (a) defines "purchase-money collateral" and "purchase-money obligation." These terms are essential to the description of what constitutes a purchase-money security interest under subsection (b). As used in subsection (a)(2), the definition of "purchase-money obligation," the "price" of collateral or the "value given to enable" includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney's fees, and other similar obligations.

The concept of "purchase-money security interest" requires a close nexus between the acquisition of collateral and the secured obligation. Thus, a security interest does not qualify as a purchase-money security interest if a debtor acquires property on unsecured credit and subsequently creates the security interest to secure the purchase price. 13 Pa.C.S.A. § 9103, cmt. 3.

The comment is helpful but does not squarely answer the question of whether negative equity is included as part of the "price" of the collateral or the "value given to enable the debtor to acquire rights in or the use of the collateral ...", such that it should be included in the PMSI amount. See, e.g., In re Mmizberg, 2008 WL 2332267, *5 (Bankr.D.Vt.2008) ("[These two terms) refer to the same non-exclusive list of eleven items as to what obligations may be secured by a PMSI. The two terms are not differentiated or defined in their own right, but are conflated. Moreover, the list does not include negative equity, gap insurance, or a service contract-the items in dispute in the majority of bankruptcy cases addressing the scope of a PMSI under the hanging paragraph. Comment 3 also fails to specify what...