In re Riley

• Decision Date: 03 February 2010
• Docket Number: No. 09-41715,09-41715
• Parties: In re Raymond Howard RILEY and Wilma Dean Riley, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

428 B.R. 757

In re Raymond Howard RILEY and Wilma Dean Riley, Debtors.

No. 09-41715.

United States Bankruptcy Court, N.D. Ohio.

Feb. 3, 2010.

Robert A. Ciotola, Canfield, OH, for Debtors.

MEMORANDUM OPINION REGARDING DEBTORS' OBJECTION TO CLAIM # 5 FILED BY TRIAD FINANCIAL CORPORATION

KAY WOODS, Bankruptcy Judge.

This cause is before the Court on Objection to Claim of Triad Financial Corporation, Claim # 5, Filed 5/27/2009 ("Objection to Claim") (Doc. # 23) filed by Debtors Raymond Howard Riley and Wilma Dean Riley ("Debtors") on November 11, 2009. Triad Financial Corporation ("Triad") did not file a response to the Objection to Claim. For the reasons set forth below, Debtors' Objection to Claim will be denied, in part, and sustained, in part.

This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and the general order of reference (General Order No. 84) entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408, and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). The following constitutes the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

I. BACKGROUND

Debtors filed a voluntary petition ("Petition") pursuant to chapter 13 of the Bankruptcy Code on May 12, 2009 ("Petition Date"). On that same date, Debtors filed Original Chapter 13 Plan ("Plan") (Doc.# 2). The Plan does not include any "Secured Claims for Which § 506 Valuation is Not Permitted." (Plan, art. 2 D.) However, the Plan does include a secured claim for "Triad Financial" in the amount of $18,500.00,¹ plus interest at the rate of 4.25%. (Plan, art. 2 F.) The Plan also includes a related general unsecured claim for "Triad Financial" in the amount of $5,500.00 that "shall be paid a dividend of at least 10%." (Plan, arts. 2 A, 2 F.)

The first date set for the meeting of creditors under § 341(a) of the Bankruptcy Code was June 3, 2009. On May 27, 2009, Triad timely filed Proof of Claim No. 5-1 ("Claim 5") ² in the amount of $23,766.75, plus interest at the contract interest rate of 7.59%. (Claim 5 at 1.) Triad asserts that its claim is fully secured by a motor vehicle—"07 Dodge Grand Carava [sic]" ("Dodge Caravan")—and that there is "no cramdown per statute" of its claim. Id.

The Court confirmed the Plan, without objection, pursuant to Confirmation Order entered July 23, 2009 (Doc. # 18). The Confirmation Order states: "Trustee shall pay claims as filed, absent an objection by Debtor or other party in interest. A creditor may file a proof of claim at any time prior to expiration of the bar date for filing proofs of claim in an amount other than as provided in the Plan." (Confirmation Order, ¶ 13.)

In their Objection to Claim, Debtors contend that "the debt to Triad Financial Corporation is partially protected by the 'hanging paragraph' of 11 USC 506 [sic].³ There was a trade-in with a shortfall of $8,731.00 which was forwarded [sic] into the loan[.]" (Obj. to Claim at 1.) Debtors ask the Court to reduce Triad's secured claim to $15,035.75, which they allege was the "actual purchase price" for the Dodge Caravan. Id. Although Debtors fail to articulate the basis for their objection, they appear to contend that: (i) Claim 5 includes negative equity financing (which Debtors call a "shortfall" in the value of the trade-in) in the amount of $8,731.00; ⁴ (ii) the hanging paragraph following 11 U.S.C. § 1325(a) does not apply to negative equity financing; and (iii) the negative equity financing should be treated as an unsecured claim pursuant to 11 U.S.C. § 506. Debtors also assert that the contract interest rate of 7.59% is "excessive and should be 4.25% [prime rate 3.25% plus 1% risk factor]." Id. Accordingly, Debtors' Objection to Claim seeks bifurcation of Claim 5 into: (i) a secured claim in the amount of $15,035.75, plus interest at the rate of 4.25%; and (ii) an unsecured claim in the amount of $8,731.00. Id.

II. BIFURCATION UNDER 11 U.S.C. § 506

The Bankruptcy Code mandates that, in certain instances, secured claims be bifurcated into secured and unsecured portions. Section 506(a)(1) of the Bankruptcy Code states, in pertinent part:

An allowed claim of a creditor secured by a 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, ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

11 U.S.C. § 506 (West 2009). Thus, § 506(a)(1) provides that, when the value of the collateral securing a claim is less than the claim amount, the claim shall be bifurcated into: (i) a secured claim equal to the value of the creditor's interest in the collateral; ⁵ and (ii) an unsecured claim equal to the amount of the claim less the value of the creditor's interest in the collateral. Id.

Except as noted below, a debtor can confirm or "cram down" a chapter 13 plan, over the objection of a secured creditor, so long as: (i) the creditor retains the lien securing its claim; and (ii) the plan provides for payments to the creditor, over the life of the plan, not less than the present value of the collateral. 11 U.S.C. § 1325(a)(5)(B) (West 2009); Assocs. Commercial. Corp. v. Rash, 520 U.S. 953, 956-57, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997). Pursuant to § 506(a), the remainder of the secured creditor's claim—the amount of the claim less the value of the creditor's interest in the collateral—is an unsecured claim. 11 U.S.C. § 506.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), however, created an exception to a debtor's ability to bifurcate a secured claim. BAPCPA includes a paragraph at the end of § 1325(a) that is not given an alphabetic or numeric designation and is commonly known as the "hanging paragraph." The hanging paragraph states, in pertinent part:

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....

11 U.S.C. § 1325. As a consequence, the hanging paragraph prevents bifurcation of a secured claim if: (i) the debt that is the subject of the claim was incurred within the 910-day period preceding the filing of the bankruptcy petition; (ii) the collateral for the debt is a motor vehicle; (iii) the creditor has a purchase money security interest ("PMSI") in the collateral; and(iv) the motor vehicle was acquired for the debtor's personal use. Id. If the requirements of the hanging paragraph are satisfied, "the allowed secured claim is fixed at the amount of the creditor's claim without resort to the 'cramdown' provision mandated by section 506(a)." Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295, 1298 (11th Cir.2008).

In the instant case, the parties dispute the extent to which Claim 5 is subject to the hanging paragraph. Triad asserts that Claim 5 may not be crammed down pursuant to the hanging paragraph and, thus, is fully secured. (Claim 5 at 1.) Debtors assert that: (i) Triad is only "partially protected" by the hanging paragraph; and (ii) only $15,035.75 of Claim 5 constitutes a secured claim. (Obj. to Claim at 1.) Debtors implicitly concede that Triad has a PMSI in a motor vehicle acquired for Debtors' personal use and that the PMSI secures debt incurred within the 910-day period preceding the Petition Date. ⁶ See id. Thus, there does not appear to be any dispute that: (i) the entire debt included in Claim 5 was incurred within the 910-day period preceding the Petition Date; and (ii) the collateral for the debt is a motor vehicle acquired for Debtors' personal use. Debtors dispute only the amount of the PMSI and assert that such security interest is limited to $15,035.75, with the remainder of the debt to be deemed an unsecured claim. Id.

The Court must determine whether the hanging paragraph precludes bifurcation of that portion of a secured claim representing the financing of negative equity. "[I]n a car transaction, [negative equity] refers to the difference between the value of a vehicle that the buyer trades in and the amount of the buyer's preexisting debt on that trade-in." Wells Fargo Fin. Acceptance v. Price (In re Price), 562 F.3d 618, 621 (4th Cir.2009). Debtors fail to articulate any reason to exclude the negative equity financing portion of Claim 5 from the protection of the hanging paragraph. The Court construes Debtors' argument to be that the negative equity financing portion of Claim 5 is not subject to a PMSI and, thus, this amount can be bifurcated from the secured portion of the claim. As a consequence, the question for resolution is whether Triad has a PMSI in the portion of Claim 5 that represents the negative equity financing related to Debtors' trade-in vehicle.

PMSI is not defined in the Bankruptcy Code and is used in only one place other than the hanging paragraph— i.e., 11 U.S.C. § 522(f). However, PMSI is defined in Ohio Revised Code § 1309.103. Because the Bankruptcy Code does not define PMSI, application of the state-law definition of PMSI is appropriate. To date, each of the six circuit courts to consider this issue has used state law to define PMSI. See Reiber v. GMAC, LLC (In re Peaslee), 585 F.3d 53 (2d Cir.2009); Wells Fargo Fin. Acceptance v. Price (In re Price), 562 F.3d 618 (4th Cir.2009); Ford Motor Credit Co. LLC v. Dale (In re Dale), 582 F.3d 568 (5th Cir.2009); Ford Motor Credit Co. v. Mierkowski (In re Mierkowski), 580 F.3d 740 (8th Cir.2009); Ford v. Ford Motor Credit Corp. (In re Ford), 574 F.3d 1279 (10th Cir.2009); andGraupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d...