In re Mitchell

• Decision Date: 13 November 2007
• Docket Number: No. 07-02913.,07-02913.
• Parties: In re Gregory Riley MITCHELL, Suzanne Savage Mitchell, Debtors.
• Court: U.S. Bankruptcy Court — Middle District of Tennessee

379 B.R. 131

In re Gregory Riley MITCHELL, Suzanne Savage Mitchell, Debtors.

No. 07-02913.

United States Bankruptcy Court, M.D. Tennessee.

November 13, 2007.

J. Robert Harlan, J. Robert Harlan & Assoc., Columbia, TN, for Debtors.

Glenn Cox, Columbia, TN, for Creditors.

Henry Edward Hildebrand, III, Office of the Chapter 13 Trustee, Nashville, TN, for Chapter 13 Trustee.

MEMORANDUM

GEORGE C. PAINE, II, Bankruptcy Judge.

This matter is before the court on confirmation of Gregory Riley Mitchell and Suzanne Savage Mitchell's (hereinafter "debtors") proposed chapter 13 plan. Family Advantage Federal Credit Union (hereinafter "FAFCU") filed an objection to the debtors' proposed cramdown of their "910 car" claim pursuant to 11 U.S.C. § 1325(a)'s hanging paragraph¹ and 11 U.S.C. § 506, and also based upon the plan's proposed interest rate. Henry E. Hildebrand III, the Standing Chapter 13 Trustee, filed a brief in support of the debtors' plan and the matter was set for hearing on August 31, 2007. At that time, FAFCU requested until September 10, 2007 to file an additional brief in support of its position. The court took the matter under advisement, and allowed time for the additional brief. For the reasons contained herein, the court OVERRULES FAFCU's objection to confirmation, and orders that an additional hearing be held November 30, 2007, at 9:00 a.m. at the Old Post Office Building in Columbia, TN on FAFCU's remaining objections to confirmation.

Resolution of this matter is a core proceeding. 28 U.S.C. § 157(b)(2). The court has reviewed the testimony from the hearing and the record as a whole. This Memorandum Opinion serves as the Court's findings of facts and conclusions of law. FED. R. BANKR.P. 7052.

The debtors filed a Chapter 13 bankruptcy petition on April 27, 2007. FAFCU filed a claim in the amount of $30,094.99 secured by a 2006 Chevrolet Trailblazer ("the Vehicle"). The Debtors' proposed Chapter 13 plan seeks to treat the claim as secured under the provisions of § 506 to the extent of the value of the vehicle, which the Debtors contend is $19,125.00. FAFCU objects to the bifurcation of the claim, citing 11 U.S.C. § 1325(a)(*) ("the hanging paragraph").

The Retail Buyers Order provides as follows:

                VEHICLE PRICE                                29,663.78
                Including Dealer Installed Options           29,663.78
                DISCOUNT                                        N/A
                Selling Price                                29,663:78
                Trade In: 1998 Lincoln Navigator
                     (Mileage and Serial Number Excluded
                     Here)                                    5,532.95
                BALANCE AFTER TRADE-IN CREDIT                24,130.83
                       Tennessee Sales Tax                    1,694.23
                       Williamson County Sales Tax               80.00
                       Bus. Tax Act Chapter 387.003%             72.39
                

                       Registration — New or Transfer           14.00
                       Customer Service                         N/A
                TOTAL                                        25,991.45
                       Extended Service Contract                N/A
                       Trade In Payoff                       13,113.30
                TOTAL ALL CHARGES                            39,105.15
                     Less; Factory Rebate Assigned to
                     Dealer                                     N/A
                     Less: GM Employee Incentive
                     Assigned to Dealer                       8,180,00
                     Less: Down Payment                         250.00
                       CASH DUE ON DELIVERY                  30,675.15
                     Balance to Be Financed                     N/A
                

The Debtors' trade-in of a 1998 Lincoln Navigator reflects a trade-in credit of $5,532.95 given by the Dealer and a trade-in pay off of $13,113.70 on the Navigator, resulting in "negative equity," in the amount of $7,580.75 ($13,113.70-$5,532.95 = $7,580.75).

The loan instrument, a Loanliner Agreement dated November 22, 2006, indicates a loan in the amount of $30, 823.61. The loan instrument, on its face, does not indicate what portion of the loan was initially secured by the purchase of the Vehicle or how to apportion the payments. The terms of the loan document include cross collateralization language that indicate collateral securing other loans would be used to secure this loan and vice versa. No additional amounts were loaned on this agreement prior to the bankruptcy filing date. The parties have stipulated that the Vehicle was acquired for the personal use of the Debtor.

The Debtors' proposed Chapter 13 plan seeks to treat the claim as secured under the provisions of § 506 to the extent of the value of the vehicle, which the Debtor contend is $19,125.00. Specifically, the debtors argue that the negative equity financing of their trade-in destroyed FAFCU's PMSI for the "entire claim" thereby removing this transaction from the hanging paragraph protections as a 910 vehicle.

FAFCU argues that all of the amounts financed by FAFCU were directly connected to the debtors' purchase of the new vehicle. These amounts included (1) the cash price of the new vehicle, (2) the amount needed to pay off the lien on the old vehicle, and (3) other items directly related to the purchase of the motor vehicle. FAFCU has a purchase money security interest in the debtor's new vehicle that covers the entire obligation incurred at the time of the purchase of the vehicle that secures the transaction. While FAFCU contends that there is no negative equity² financed in this transaction, if the court did find negative equity was included, it would still be a secured part of the transaction. More specifically, under Tennessee law and the Bankruptcy Code, negative equity is a part of FAFCU's PMSI because negative equity must be disclosed as part of the "total sale price" of the new vehicle, and is included in the UCC definition PMSI.³ FAFCU's advances as further support the Truth-In-Lending Act and Regulation Z (12 C.F.R. Pt. 26) requiring fees, costs, and charges be included in the disclosure of the amount financed. According to FAFCU, under TILA, auto financing is considered purchase money even though part of the proceeds are used to satisfy the remaining debt owed on a trade-in vehicle, thereby necessarily included in the "price" of the vehicle.⁴

The Chapter 13 Trustee agrees with the debtors that FAFCU does not have a PMSI for the entire contract amount under Tennessee law, and therefore the PMSI protections are completely destroyed.⁵ The Tennessee Uniform Commercial Code provides that a security interest is a purchase money security interest to the extent the goods secure a "purchase money obligation" incurred with respect to that collateral. Tenn. Code Ann. § 47-9-103. In this definition, "purchase money obligation" means: "an obligation ... 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." Tenn.Code Ann. § 47-9-103(a)(2). Under Tennessee state law FAFCU does not have a purchase money security interest in the negative equity because the portion of the contract amount that went to negative equity was not a part of the price of the collateral, nor is the negative equity "value given to enable the debtor to acquire rights in our use of the collateral."

The parties have presented to the court, although on different facts, much of the same issues there were put before Judge Boswell in the case of In re Bray, 365 B.R. 850 (Bankr.W.D.Tenn.2007) in the Bankruptcy Court for the Western District of Tennessee. Judge Boswell's opinion in Bray provides an excellent summary of the law with respect to Tennessee PMSI law.⁶ Tennessee's definition of "purchase money security interest" requires (1) an obligation to be "incurred as all or part of the price of the collateral" or (2) for the loan proceeds to "enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used." T.C.A. § 47-9-103(a). The first question for this court, then, is whether the obligation incurred was part of the "price" of the vehicle.

FAFCU urges the court to find that the "price" of the vehicle includes the payment of negative equity. This court disagrees and instead finds that there are "two separate financial transactions memorialized on a single retail installment contract document for the convenience of some consumers and to allow the auto industry to sell more vehicles, which is good for both parties." In re Price, 363 B.R. 734, 741-42 (Bankr.E.D.N.C.2007). However, "the debt incurred in the separate optional transaction where negative equity is refinanced as part of the combined transaction does not result in a purchase-money security interest." Id.; see also In re Hernandez-Simpson, 369 B.R. 36 (D.Kan.2007) (finding two separate transactions memorialized in a single retail installment contract citing Price); In re Vega, 344 B.R. 616 (Bankr.D.Kan.2006) (same). Judge Leif Clark's recent opinion in In re Sanders, 377 B.R. 836 (Bankr. W.D.Tex.2007) provides an excellent analysis of why the financing of negative equity is not included in the "price of the collateral." Judge Clark concludes that under a straightforward reading of the Texas U.C.C.⁷ "in the context of a retail sale and financing of a motor vehicle to a consumer, `price of the collateral' does not include the amount financed to pay off the negative equity from the vehicle traded in." Id. at 853.⁸

Having determined that the negative equity was not part of the "price," the court must now determine if the negative equity enabled the debtor to acquire rights in or the use of the collateral. The court finds that negative equity does not so enable the debtors. See, e.g., In re Acaya, 369 B.R. 564, 569-70 (Bankr.N.D.Cal. 2007); In re Peaslee, 358 B.R. 545, 557 (Bankr.W.D.N.Y.2006), rev'd, General Motors Acceptance Corp. v. Peaslee, 373 B.R. 252 (W.D.N.Y. Aug.15, 2007); In re Price, 363 B.R. 734, 741 (Bankr.E.D.N.C.2007); In re Westfall, 365 B.R. 755, 762 (Bankr. N.D.Ohio 2007); In re Hernandez-Simpson, 369 B.R. 36, 48 (D.Kan.2007...