In re Padgett

• Decision Date: 27 May 2008
• Docket Number: No. 07-41284.,07-41284.
• Citation: 389 B.R. 203
• Parties: In re Timothy John PADGETT and Tracie Arlene Padgett, Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

Page 203

389 B.R. 203

In re Timothy John PADGETT and Tracie Arlene Padgett, Debtors.

No. 07-41284.

United States Bankruptcy Court, D. Kansas.

May 27, 2008.

Joseph I. Wittman, Topeka, KS, for Debtors.

MEMORANDUM ORDER AND OPINION DENYING OBJECTION TO CONFIRMATION UNLESS AMERICREDIT CONTENDS CAR WORTH MORE THAN $14,615

JANICE MILLER KARLIN, Bankruptcy Judge.

AmeriCredit Financial Services, Inc. ("AmeriCredit") objects to confirmation of Debtors' plan¹ because the plan bifurcates its claim, which is secured by a vehicle purchased by Debtors for their personal use within 910 days of filing bankruptcy.

The parties have filed a Joint Stipulation of Facts,² which the Court adopts, and have also filed briefs on this issue. The Court has jurisdiction to decide this matter,³ and it is a core proceeding.⁴

I. FINDINGS OF FACT

Debtors purchased a 2006 Toyota Corolla on March 22, 2007. In connection with this purchase, Debtors entered into a financing agreement arid signed a promissory note that is currently held by Ameri-Credit. The contract shows that the actual price of the Toyota was $16,288, and that Debtors paid $6,000.00 down on the purchase of the car, resulting in a $10,288 unpaid balance. The contract also required the lender to pay, on Debtors' behalf a filing fee of $4, a net payoff of $11,350 owed on a 2000 Ford Windstar,⁵ which Debtors traded in (which this Court will refer to as "negative equity"), and gap insurance in the amount of $600.00, bringing the total amount financed $22,242. Debtors agreed to pay 18.75% interest over 72 months, at $516 per month.

Six months later, Debtors filed their Chapter 13 bankruptcy petition and plan on September 19, 2007. The plan values the Toyota at $13,500 as of the date of filing, but nevertheless proposes to pay AmeriCredit $14,615, plus interest, on its "910 car loan."⁶ AmeriCredit filed a proof of claim in this case reflecting a secured claim in the amount of $22,257.

Debtors contend that the amount they are required to pay AmeriCredit as a secured claim through their Chapter 13 plan excludes the payoff amount on the vehicle they traded in. They contend that this amount is not a purchase money obligation, and can thus be crammed down. AmeriCredit claims that the entire amount financed, including the amount that was used to pay off the negative equity in Debtors' trade-in, constitutes a purchase money obligation and must be paid in full pursuant to the hanging paragraph in 11 U.S.C. § 1325(a).⁷ Finally, both parties agreed to be bound by their stipulation of facts, and that stipulation contains no agreement that the sale would not or could not have been consummated unless the retail seller was willing not only to take Debtors' vehicle in trade but also to pay off the negative equity on that vehicle.

Additional facts will be discussed below, when necessary.

II. ANALYSIS

Before the enactment of BAPCPA, secured creditors' claims could be bifurcated into secured and unsecured portions, based on the value of the collateral securing the debt. The accepted vernacular for such bifurcated claims was that the claim was "crammed-down" to the value of the collateral, and the secured value was the amount required to be paid over the life of the Chapter 13 plan, with interest at the rate mandated by the Supreme Court's decision in Till v. SCS Credit Corp.⁸

BAPCPA opted to differentiate between the treatment required for creditors who loaned money for a debtor to purchase a motor vehicle, for personal use, within 910 days preceding the filing date, and other creditors. It did so by inserting an unnumbered paragraph at the end of § 1325(a)(9), which clearly appears not to be a part of—or even related to subsection (9) (which conditions confirmation on debtor's compliance with the duty to file required tax returns), but instead appears related to § 1325(a)(5). The hanging paragraph which is oftentimes cited as § 1325(a)(*) in judicial opinions, states, in pertinent part, 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 (as defined in Section 30102 of title 49) acquired for the personal use of the debtor...."

The applicable subsection of § 506 is § 506(a)(1), which provides that "[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property....

Accordingly, the language contained within the hanging paragraph makes the value of the collateral irrelevant in determining the allowed amount of a claim secured by a purchase money security interest ("PMSI") in a vehicle acquired for the personal use of the debtor within 910 days of the bankruptcy filing. And unless the amount of the claim is subject to reduction for reasons other than collateral value, the creditor's allowed secured claim is fixed at the amount of the underlying debt under nonbankruptcy law. For secured claims that are not within the confines of the hanging paragraph, § 506(a)(1) still governs, and those secured claims can be crammed down to the value of the collateral in the Chapter 13 plan.

As a result, this Court cannot confirm a plan that attempts to cram down the claim of a creditor that extended credit to a debtor for the purpose of purchasing a vehicle for a debtor's personal use when that purchase occurred within two and one-half years of the date of filing. Here, Debtors argue they are not cramming down that part of AmeriCredit's claim that is represented by the purchase price of the vehicle purchased within 910 days. Their plan proposes to pay more than the net purchase price of that vehicle, after deduction of the down payment, plus interest over the life of the plan. Instead, what Debtors' plan attempts to do is cram down that portion of AmeriCredit's claim that is based upon paying off the remaining debt on Debtors' trade-in vehicle, claiming that portion of AmeriCredit's claim is not a PMSI. Conversely, AmeriCredit argues that the entire amount it loaned Debtors constitutes purchase money, and that no portion of its claim may be crammed down.

The first sentence of the "hanging paragraph" specifically states that "[f]or purposes of paragraph (5) [of § 1325(a) ], 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 ...."⁹ Whether a creditor has a purchase money security interest securing a debt is a matter of state law;¹⁰ the law of the state of Kansas is, therefore, applicable here, since the stipulated documents show the transaction occurred in Topeka, Kansas.

Revised § 9-103(b) of the Uniform Commercial Code, as adopted and modified in Kansas, defines a "purchase-money obligation" as "an 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."¹¹ In other words, to have a PMSI, an otherwise secured party has the burden of proof¹² to satisfy two key elements: 1) that the money loaned or credit extended made it possible for the debtor to obtain the collateral, and 2) that debtor used the funds supplied to acquire rights in the collateral. Under Kansas law, a security interest in collateral may be both a purchase money security interest and a non-purchase money security interest.¹³

The key issue in this case is, therefore, whether AmeriCredit's PMSI in Debtors' automobile includes the amount AmeriCredit paid to retire the debt on the Windstar that Debtors traded, or whether the PMSI is limited to the actual cost of the new vehicle, along with transactional items such as taxes and title fees. This Court has already addressed this issue, albeit on somewhat different facts, in In re Vega.¹⁴ In Vega, the debtors obtained a loan to purchase a newer vehicle from the same lender that had financed another vehicle purchase, which earlier loan remained unpaid at the time of the second transaction. In addition to financing the actual purchase price of the new vehicle, the lender required debtors borrow additional funds, as part of the same transaction, to retire the debt on prior loan; the other vehicle was not being traded in. Like in this case, that original loan was significantly undersecured by the value of the first vehicle.

The Vegas then filed for bankruptcy protection within 910 days of purchasing the new vehicle. They proposed to pay the lender the full amount of its claim pursuant to § 1325(a)(*), with the exception of the amount of the claim that resulted from paying off the debt on the other vehicle. The debtors argued that the "rolled over" portion of the claim did not constitute a purchase money interest, and was not subject to the hanging paragraph. This Court agreed, holding that under the Kansas version of the Uniform Commercial Code, only that portion of the claim that is directly attributable to the actual purchase of the new vehicle is a purchase money obligation, and any portion of the claim representing payment of an antecedent debt is not a purchase money obligation.

This issue was also recently addressed by the United States District Court for the District of Kansas in Citifinancial Auto v. Hernandez-Simpson.¹⁵ Hernandez-Simpson presented facts that are essentially indistinguishable from our facts. The debtors, in connection with the purchase of a new vehicle, desired to trade in a vehicle in which they owed more than the vehicle's value. The lender financing the new purchase agreed to pay off the debt on the vehicle being traded in as...