In re Phillips, 06-71604 SCS.

Citation362 B.R. 284
Decision Date08 March 2007
Docket NumberNo. 06-71604 SCS.,06-71604 SCS.
CourtUnited States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re Katrina Askew PHILLIPS, Debtor.

Mark T. Domeyer, Miles, Bauer, Bergstrom & Winters, L.L.P., Costa Mesa, CA, for Triad Financial Corporation.

Michael J. Heath, Virginia Beach, VA, for Debtor.

Chester Smith, Virginia Beach, VA, for USA Discounters.

Warren A. Uthe, Jr., Office of George Neal, Trustee, Chesapeake, VA, for George W. Neal.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter came for hearing on February 22, 2007, upon the Objections to Confirmation of the Chapter 13 plan of the Debtor, Katrina Askew Phillips ("Phillips"), by Triad Financial Corporation ("Triad") and George W. Neal, Chapter 13 Trustee ("Trustee"). The Court took the matter under advisement. This Court has jurisdiction over these proceedings pursuant to 28 U.S.C. § § 157(b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. § 1409(a). Upon consideration of the pleadings and the evidence presented by the parties at the hearing, the Court makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

Phillips filed, by counsel, her voluntary petition under Chapter 13 of the Bankruptcy Code on October 28, 2006. Phillips filed her proposed Chapter 13 plan on November 20, 2006 ("Plan"). In her bankruptcy schedules, Phillips listed a 2001 Chrysler Voyager mini-van automobile ("Automobile") with accumulated mileage of approximately 93,300 miles. Phillips placed a value of $6,025.00 on the Automobile as of the date of the filing of her petition. Phillips scheduled the Automobile as subject to a security interest in favor of Triad with a claim in the amount of $11,305.00. Phillips' Plan proposed to pay to Triad $6,025.00 as the full amount of Triad's secured claim on the Automobile, representing Phillips' contention as to the replacement value of the Automobile, together with interest at the rate of nine percent (9%) per annum ("Triad Claim"). The Plan further provides that the amount of Triad's claim in excess of the replacement value of the Automobile would be treated as an unsecured claim and paid on a pro-rata basis along with any other unsecured claims. This proposed Plan treatment is commonly referred to as a "bifurcation" of a secured claim or as a "stripdown" of a lien, meaning the debtor proposes to pay as a secured claim in her Chapter 13 Plan only an amount equal to the replacement value of the collateral that secures the creditor's claim, thus "stripping down" the amount of the lien and "bifurcating" the creditor's formerly solitary secured claim into a secured claim in the amount of the collateral's value and an unsecured claim in the excess of any amount owed the creditor over the value of its collateral. This treatment, if permitted, is done so by the operation of Section 506 of the Bankruptcy Code, which determines the amount of a secured claim in a bankruptcy proceeding to be the value of the collateral securing the claim,1 and Section 1325, which provides the conditions under which a court may confirm a Chapter 13 plan.2 See In re Price, ___ B.R ___, 2007 WL 664534, at *3-4 (Bankr. E.D.N.C. Mar.6, 2007).

This proposed Plan treatment provoked the filing of Objections to Confirmation of the Plan by Triad and the Trustee.3 Triad objects to the Plan on two, principal, bases: (1) the Automobile is subject to a purchase money security interest in its favor, which debt was incurred within 910 days of the filing of the instant bankruptcy, and the Automobile was acquired by the debtor for her personal use; therefore, the provisions of the "hanging paragraph" prohibit the treatment of the Triad Claim proposed in the Plan and require Phillips to pay the entire amount of the Triad Claim (the payoff of which was $10,382.56 as of the petition date) as a secured claim together with interest; and (2) the Plan's proposal to pay interest on the amount of its secured claim at the rate of nine percent (9%) per annum does not reflect the contractual rate of interest of 18.5% and is in violation of the requirements of Section 1325 of the Bankruptcy Code as set forth in the decision of the United States Supreme Court in Till v. SCS Credit Corp. (In re Till), 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004). Objection to Confirmation of Chapter 13 Plan filed by Triad Financial Corporation, filed December 11, 2006, Docket Entry Number 16.

In a brief filed by Triad prior to the Court commencing hearing on the Objections, Triad took issue with. Phillips' assertion, in an Affidavit filed with the Court on February 5, 2007, (which is set forth in detail below) that her use of the Automobile did not constitute "personal use of the debtor." Triad argues that Phillips' concession that" she uses the Automobile to commute to and from work is an admission of personal use, and that Phillips' assertions that the use of the Automobile to transport her family should be found to constitute personal use as well. Triad further notes that the statute does not contain the requirement that the Automobile be used solely for the debtor's personal use. Triad states that while there are recent cases that stand for the proposition that other, family or household uses eliminate the protections for a secured creditor in the statute, this interpretation nonetheless is not reasonable. First, Triad notes that this position would render the statute void in practice, as any debtor could provide testimony wherein he has carried a passenger or anticipates carrying a passenger, thus negating the protections of the statute. Second, Triad points to case law which has opposed such a strict interpretation of the statute, favoring instead an interpretation in which "personal use" means that at least some portion of the use of the vehicle is for personal use of the debtor. Third, Triad notes the dearth of legislative history which could have otherwise provided insight into the intentions of Congress. Triad focuses on the fact that the overall intention of Congress when enacting BAPCPA was to provide more protection to secured creditors, and therefore, to strictly interpret "personal use" to the exclusion of household or family use would contravene such intent. Reply Memorandum to Debtor's Affidavit in Opposition to Triad's Objection to Proposed Chapter 13 Plan filed by Triad Financial Corporation, filed February 13, 2007, Docket Entry Number 28.

The Trustee's objections to the Plan of Phillips, in pertinent part, mirror those of Triad, in that the Trustee also believes the proposed treatment of the Triad Claim is in contravention of the "hanging paragraph" of Section 1325 of the Bankruptcy Code. The Trustee also asserts that the word "sole" should not be read into the statute with regard to the phrase "personal use" and that a debtor's household and family use should be included as the activities encompassed in this phrase. Regarding the proper rate of interest on the Triad Claim, the Trustee diverts from the assertions of Triad in his aversion that "the use of any interest rate may be inapplicable to claims covered by the `hanging paragraph.'" Amended Objection to Confirmation of Chapter 13 Plan by Chapter 13 Trustee, filed January 22, 2007, Docket Entry 24, at page 2.4

In his brief filed in support of his objection, the Trustee argues that a debtor such as Phillips cannot bifurcate a secured claim which is subject to the "hanging paragraph" under Section 1322(b)(2), which provides that a plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims ...." Under the holding of In re Johnson, 337 B.R. 269 (Bankr. M.D.N.C.2006), the Trustee argues, a debtor cannot bypass the requirements of the "hanging paragraph" and cram down a secured debt under Section 1322, because to do so would be inconsistent with the statutory scheme, thus rendering the "hanging paragraph" meaningless, and would also be in contradiction to the albeit sparse legislative history of the "hanging paragraph." Trustee's Brief in Support of Amended Objection, filed February 20, 2007, Docket Entry 29, at pages 6-7 ("Trustee's. Brief in Support").

The Trustee next addresses the Debtor's argument that, if Section 1322(b)(2) does not apply, the language of the. "hanging paragraph," which requires that the motor vehicle be purchased for the "personal use of the debtor," be interpreted to mean that all other uses, including family and household uses, are excluded. The Trustee argues that the "hanging paragraph" does not specifically use the term "exclusive," and the Court should therefore interpret the phrase "personal use" to encompass both family and household use. Id. at 7. The Trustee points the Court to a passage in In re Solis, 356 B.R. 398 (Bankr. S.D.Tex.2006), which concludes that personal use encompasses family or household use, stating that such terms are not mutually exclusive. The court in Solis also noted the absence of such qualifying words as "`solely,'" and "`exclusively,'" which led the court to conclude that the personal use requirement would be satisfied if the acquirer intended a debtor's personal use to be significant and material.'" Trustee's Brief in Support, at 8 (quoting In re Solis, 356 B.R. at 409). The Trustee then argues that to interpret "personal use of the debtor" to exclude other uses would produce an absurd result, rendering the hanging paragraph meaningless. Specifically, he states that "[t]he only exception where a debtor could not cram down a claim pursuant to the `hanging paragraph' would be a debtor who has no spouse, roommate or significant other; has no dependents; and who does not work." Id. at 9.

With regard to the issues surrounding the interest rate on Triad's Claim, while the Trustee declined to take any official position, he argued that the Court must first make a...

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