In re Matthews

• Decision Date: 28 August 2007
• Docket Number: C/A No. 07-01846-JW.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re Glenda Kay MATTHEWS, Debtor(s).

378 B.R. 481

In re Glenda Kay MATTHEWS, Debtor(s).

C/A No. 07-01846-JW.

United States Bankruptcy Court, D. South Carolina.

August 28, 2007.

COPYRIGHT MATERIAL OMITTED

D. Nathan Davis, Charleston, SC, for Debtor(s).

ORDER

JOHN E. WAITES, Bankruptcy Judge.

This matter comes before the Court for confirmation of Glenda Kay Matthews' ("Debtor") chapter 13 plan. South Carolina Federal Credit Union ("Credit Union") objects to confirmation on grounds that Debtor's chapter 13 plan impermissibly values its purchase money security interest in two automobiles. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (L), and (0). Pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding by Fed. R. Bankr.P. 7052, the Court makes the following Findings of Fact and Conclusions of Law.¹

FINDINGS OF FACT

1. On October 12, 2005, the Credit Union loaned $17,883.00 to Debtor for the purchase of a 2005 Chrysler Sebring (the "Sebring"). Debtor's agreement to repay the Credit Union for the Sebring is memorialized by a Motor Vehicle Purchase Agreement and Disclosure (the "Sebring Note"). The Sebring Note grants the Credit Union a security interest in the Sebring, which interest was perfected by the Credit Union having its security interest reflected on the Sebring's certificate of title.

2. On November 30, 2005, the Credit Union loaned $20,836.00 to Debtor and her mother, Glenda Jacobs, for the purchase of a 2005 Chrysler Pacifica (the "Pacifica"). Debtor's agreement to repay the Credit Union for the Pacifica is memorialized by a Motor Vehicle Purchase Agreement and Disclosure (the "Pacifica Note"). The Pacifica Note grants the Credit Union a security interest in the Pacifica which interest was perfected by the Credit Union having its security interest reflected on the Pacifica's certificate of title. Debtor and her mother are jointly listed as owners of the Pacifica on the Pacifica's certificate of title.

3. The Sebring Note and the Pacifica Note each provide for the following:

a. that the Credit Union will allocate payments first to the accrued finance charges and then to the amount financed under those respective notes;

b. that the Credit Union will return the certificates of title for each vehicle when Debtor repays the amount borrowed under those respective notes;

c. that "[t]his security agreement shall include and cover future advances or other indebtedness that you may owe us or we may elect to make to you during the continued existence of this agreement;"

d. that Debtor is giving the Credit Union "a security interest in the goods or property being purchased and all shares now or hereafter on deposit with the creditor named above;" and

e. that the Credit Union may waive any right under those respective notes.

4. Debtor commenced this case on April 5, 2007 by filing a petition under chapter 13 of the Bankruptcy Code.

5. Debtor's indebtedness to the Credit Union under the Sebring Note and the Pacifica Note was incurred within 910 days of her petition date.

6. As of the date of the petition, Debtor was obligated on other debts to the Credit Union. On April 19, 2007, the Credit Union filed the following proofs of claim:

a. an unsecured claim in the amount of $2,799.29 for a signature loan obtained by Debtor on September 29, 2005;

b. an unsecured claim in the amount of $10,524.42 for a credit card obtained by Debtor on September 1, 2003;

c. an unsecured claim in the amount of $236.24 for an over-withdrawal from Debtor's checking account;

d. a secured claim in the amount of $14,413.19 for the Sebring; and

e. a secured claim in the amount of $18,695.90 for the Pacifica.

7. According to the Credit Union's proofs of claim, the debts owed by Debtor are each segregated into separate accounts.

8. Debtor filed her chapter 13 plan (the "Plan") on April 5, 2007. The Plan proposes to bifurcate Credit Union's security interest in the Sebring and the Pacifica by paying the Credit Union $10,000.00 as a secured claim for the Sebring and $15,000.00 as a secured claim for the Pacifica. The remaining balances on these debts would be treated as unsecured claims.

9. The Credit Union filed a timely objection to confirmation of Debtor's Plan. The Credit Union asserts that the hanging paragraph of 11 U.S.C. § 1325(a) prohibits Debtor from valuing its security interests because the security interests are purchase money and the debts were incurred within 910 days of the petition date.

10. Debtor argues that the cross-collateralization and the future advance clauses in the Sebring Note and the Pacifica Note alter the purchase money nature of the Credit Union's security interests in her vehicles. Debtor also testified that the Pacifica was purchased for the benefit of Debtor's mother and therefore that vehicle is not subject to the hanging paragraph of 11 U.S.C. § 1325(a).

CONCLUSIONS OF LAW

I. 11 U.S.C. 1325(a)(*) Prevents the Bifurcation of the Claims of Certain Creditors.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Reform Act") amended 11 U.S.C. § 1325. As amended, the final paragraph of 11 U.S.C. § 1325(a) now states:

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....

11 U.S.C. § 1325(a)(*).

This hanging paragraph of 11 U.S.C. § 1325(a) prevents the bifurcation of a creditor's secured claim that fits within the protection offered by this section. See In re Turner, 349 B.R. 437, 441-442 (Bankr. D.S.C.2006). This section is intended to benefit those creditors that hold a purchase money security interest. See id. at 442. For debts secured by motor vehicles, the section is limited to motor vehicles acquired for the personal use of the Debtor, The issues raised under the facts of this case involve issues of first impression in this District as the Court must determine whether the Credit Union holds a qualifying purchase money security interest in light of certain cross-collateralization and future advance clauses² and, if so, whether the Pacifica was acquired for the personal use of Debtor.

II. The Credit Union Holds Purchase Money Security Interests Under South Carolina Law.

Whether the Credit Union's security interests are purchase money security interests is a matter of state law. See Rosen v. Associates Financial Services Co., 18 B.R. 723, 724 (Bankr.D.S.C.19812) (aff'd 17 B.R. 436 (D.S.C.1982)); In re Pajot, 371 B.R. 139, 147, 2007 WL 2109892, *5 (Bankr.E.D.Va.2007) (noting that the Bankruptcy Code does not define "purchase money" and therefore using Virginia law to determine if the creditor's security interest was purchase money). South Carolina adopted the revised version of Article 9 in 2001, which is codified at S.C.Code Ann. § 36-9-101 et seq. (West 2003) (hereinafter the "U.C.C."). The U.C.C. provides that "[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." See S.C.Code Ann. § 36-9-103(b)(1) (West 2003), The term "goods" is defined as "all things that are moveable when a security interest attaches," which is a term that includes Debtor's vehicles. See id. § 36-9-102(44). "Purchase money collateral" refers to goods that secure "a purchase money obligation incurred with respect to that collateral." See id. § 36-9-103(a)(1). A "purchase money obligation" is in turn defined as "an obligation of an obligor ... 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." See id. § 36-9-103(a)(2). Thus, a security interest is purchase money if a debtor incurs debt to obtain certain goods and the creditor lends money to the debtor to enable the debtor to obtain those goods.

Under the facts of this case, it appears that the Credit Union's security interests fit within the criteria of purchase money security interests. For the following reasons, the purchase money nature does not appear destroyed by the mere presence of certain contractual clauses.³ First, there is no evidence in the record that the Credit Union actually extended its security interests in Debtor's vehicles to secure Debtor's pre-existing and subsequent debts with the Credit Union. It also does not appear that the Credit Union exercised the cross-collateralization or future advance clauses.⁴ To the contrary, the claims filed by the Credit Union each indicate that the Credit Union did not assert that Debtor's other debts were secured by Debtor's vehicles. See In re Delta Resources, Inc., 162 B.R. 562, 571-572 (Bankr.N.D.Ala.1993) (holding a creditor invoked a cross-collateralization provision by filing proofs of claim indicating that non-purchase money debt was secured with purchase money goods). Therefore it appears that the interests continue to qualify as purchase money security interests under South Carolina law. See In re Hughes, 230 B.R. 213, 223-224 (Bankr.M.D.Ga.1998) (discussing events that would constitute the exercise of a cross-collateralization clause). 1 Furthermore, the Credit Union's course of conduct indicates that it may have exercised its right to waive whatever right it had to secure Debtor's other debts with the Credit Union with the vehicles. See Dooley v. Weil (In re Garfinkle), 672 F.2d 1340, 1347 (11th Cir.1982) (holding a creditor may waive its right to a security interest); In re Workman, 373 B.R. 460 (Ba...