In re Munzberg, Case # 07-10560 (Bankr.Vt. 6/03/2008)

Decision Date03 June 2008
Docket NumberCase # 07-10560.
CourtU.S. Bankruptcy Court — District of Vermont
PartiesIn re: Marilyn Munzberg and Walter C. Munzberg, Chapter 13 Debtors.

Rebecca Rice, Esq., Rice & Cohen, Rutland, VT, For the Debtors.

Martin A. Mooney, Esq., Deily, Mooney & Glastetter, LLP, Albany, NY For the Creditor.

MEMORANDUM OF DECISION ON CREDITOR'S OBJECTION TO PLAN CONFIRMATION BASED UPON ITS RIGHTS UNDER THE" HANGING PARAGRAPH"

COLLEEN BROWN, Bankruptcy Judge.

The Court is called upon to decide the extent to which the claim of DaimlerChrysler Financial Services Americas LLC (the "Creditor") is protected from bifurcation and cramdown in chapter 13, as a claim secured by a purchase money security interest ("PMSI"), where the claim includes not only the purchase price of a motor vehicle but also the purchase of gap insurance and a service contract, and "negative equity"1 on a trade-in vehicle. This question, arising in the context of an objection to confirmation, requires the Court to interpret and apply the "hanging paragraph," found in 11 U.S.C. § 1325(a). Bankruptcy courts across the country have been bedeviled by this new provision. They have split on the question of whether negative equity and other elements of a vehicle purchase transaction may be secured by a PMSI and, if not, whether the hanging paragraph protects a claim from bifurcation (pursuant to 11 U.S.C. § 506) if only part of it is secured by a purchase money security interest.

In this case of first impression in this District, the Court holds that: (1) the portions of the Creditor's claim allocable to negative equity and gap insurance are not secured by a PMSI and may be crammed down in a chapter 13 plan; (2) the portion of the claim allocable to the purchase of the vehicle and purchase of a service contract is secured by a PMSI and is protected from cramdown2 by the hanging paragraph; (3) it is appropriate to apply the dual-status approach to safeguard the PMSI portion of the security interest; and (4) the Debtors' pre-petition payments shall be allocated pro rata between the purchase-money obligation and the non-purchase-money obligation. Accordingly, the Court sustains, in part, the Creditor's objection to confirmation and will direct the Creditor to amend its proof of claim, and the Debtors to modify their plan, to conform to this decision.

FACTS AND PROCEDURAL HISTORY

The facts in this case are not in dispute. Since the Creditor's Statement of Facts is more detailed, the Court generally adopts it and makes the following findings of fact:

1. On September 25, 2006, the Debtor [Marilyn Munzberg] purchased for her personal use, a 2006 Chrysler PT Cruiser from a dealer in Middlebury, Vermont.

2. In connection with the purchase, the Debtor traded in a 2004 Chrysler Sebring which she owned; the trade-in was subject to a lien. At the time she purchased the new vehicle, the Debtor owed more on the trade-in vehicle than its value.

3. As part of the deal, consistent with standard industry practice, the Debtor requested that the dealer pay off the lien on the trade-in vehicle as an element of the financing on the new vehicle. The negative equity amount was $8,242.11. The Debtor received a manufacturer's rebate of $2,000.00, which was applied against the negative equity in the RISC [retail installment sale contract], reducing the negative equity to $ 6,242.11.

4. The dealer agreed to finance the cash price of the new vehicle, the negative equity in the trade-in vehicle, gap insurance ($495.00), a service contract ($1,805.00), administrative and licensing fees, and taxes. The total amount financed, as defined by the RISFA [Vermont Retail Installment Sales Financing Act, 9 V.S.A. § 2355(f)(1)(D)], was $25,684.81, and included the negative equity, gap insurance and service contract. As part of the transaction, the debt on the trade-in vehicle was paid off and the lien was released.

5. The Debtor signed a retail installment contract by which she granted to the dealer a security interest in the new vehicle and disclosed the financing package total of $32,955.44 (the amount financed plus the finance charges) as the "Total Sale Price," as mandated by the federal Truth in Lending Act.

6. The Dealer assigned the contract to [the Creditor], which perfected its security interest by getting its name noted as lienholder on the Vermont certificate of title.

7. The Debtor filed a Chapter 13 bankruptcy case on August 29, 2007, within 910 days after purchasing the new vehicle.

8. [The Creditor] filed a proof of secured claim in the amount of $22,579.22 plus 8.59% interest. The Debtor's plan proposed to cram down [the Creditor's] claim.

9. The Debtor proposed an Amended Plan seeking to pay [the Creditor] the sum of $11,400.00 plus 9% interest.

10. In response, [the Creditor] objected to confirmation of the Debtor's plan on the ground that its full secured claim qualified for treatment under § 1325(a)(*) [the "hanging paragraph"] of the Bankruptcy Code, and thus could not be modified through a cramdown.

(doc. # 25).

In response to the Creditor's objection, the Debtors filed an Amended Plan that valued the vehicle at $11,400 and paid that sum with 9% interest, in monthly payments of $263.65, and paid the balance of the Creditor's claim a 0.89% dividend as part of the class of general unsecured claims (doc. # 14). On October 18, 2007, the Court held a confirmation hearing and confirmed the Amended Plan, subject to a determination of "whether [the Creditor's] claim can be modified." See confirmation order (doc. # 19). The parties subsequently filed memoranda of law (doc. ## 24, 25), and the Court took the matter under advisement.

JURISDICTION

The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334 and determines this to be a core proceeding under 28 U.S.C. § 157(b)(2)(B).

ISSUES PRESENTED

The Creditor's objection to confirmation raises four distinct issues. First, how is the term "purchase money security interest" defined for purposes of the hanging paragraph? Second, under that definition, does the hanging paragraph protect negative equity, gap insurance, and the service contract elements of a vehicle purchase transaction from cramdown? Third, does the anti-bifurcation protection of the hanging paragraph apply if only part of the Creditor's claim is secured by a PMSI? Finally, if the claim is divided into PMSI and non-PMSI components, how are the pre-petition payments allocated between those two components of the claim, when determining the amount of the Creditor's claim in this case?

STATUTORY FRAMEWORK

The so-called "hanging paragraph" — an unnumbered paragraph added to the end of § 1325(a)(9) by the Bankruptcy Abuse Protection and Consumer Protection Act ("BAPCPA") — provides as follows:

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 . . . acquired for the personal use of the debtor.

§ 1325(a)(*).3 The provision of § 506 pertinent here deals with claim "bifurcation" which, in the bankruptcy context, describes the procedure whereby "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." In re Look, 383 B.R. 210, 212 (Bankr. D.Me. 2008). Section 506 provides:

(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.

§ 506(a)(1).

Prior to BAPCPA, debtors could modify claims of creditors who financed the purchase of a vehicle and who held a lien on the car securing their claim. This "ability to bifurcate secured car loans, which was unqualified until BAPCPA's enactment, is now limited by the terms of the hanging paragraph." Look, 383 B.R. at 213. The hanging paragraph imposes four conditions that, if satisfied, will prevent a debtor from bifurcating the creditor's lien that arose when the debtor purchased a motor vehicle. It applies if the claim is: (1) secured by a "purchase money security interest"; (2) in a "motor vehicle"; (3) "acquired for the personal use of the debtor"; (4) within the "910-day [sic] preceding the date of the filing of the petition." § 1325(a)(*). At that point, "the creditor's claim is deemed fully secured[,] . . . not because the value of the vehicle is equal to the amount of the claim, as required by 11 U.S.C. § 506, but because the hanging paragraph found in 11 U.S.C. § 1325(a) so designates it by stating that 11 U.S.C. § 506 does not apply. . ." General Motors Acceptance Corp. v. Peaslee, 373 B.R. 252, 257 (W.D.N.Y. 2007) (quoting In re Belcher, 369 B.R. 465, 468 (Bankr.E.D. Ark. 2007)).

In this case, the parties do not dispute that the PT Cruiser was a "motor vehicle," "acquired for the personal use of the debtor" within the "910-day [sic] preceding the date of the filing of the petition." The legal issue before the Court is whether the claim is secured by a PMSI. That question, in turn, requires the Court to determine the scope of the PMSI, and in particular,...

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