In re Royal, Bk. No. 17–03499–LA13
| Decision Date | 12 April 2018 |
| Docket Number | Bk. No. 17–03499–LA13 |
| Citation | 586 B.R. 55 |
| Parties | IN RE: Ricol V. ROYAL and Kimberly Royal, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of California |
Daniel Lickel, Law Offices of Daniel Lickel, San Diego, CA, for Debtor.
Timothy J. Silverman, Joshua L. Scheer, Scheer Law Group, LLP, Mission Viejo, CA, for Creditor.
Sol Acceptance, LLC ("SOL") objects to confirmation of the chapter 13 plan of Ricol and Kimberly Royal ("Royal") on the ground that the so-called "Hanging Paragraph" of 11 U.S.C. Section 1325(a)1 prohibits bifurcation and reduction of its secured claim. Royal opposes the objection, arguing that he acquired the vehicle for business; not personal use, making the Hanging Paragraph inapplicable. At issue is whether Royal's vehicle was "acquired for the personal use of the debtor" as it is construed under the Hanging Paragraph, in which case SOL's claim may not be bifurcated. There is no controlling authority in the Ninth Circuit defining what constitutes a vehicle "acquired for personal use."
The Court has jurisdiction to determine this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(L). The following are the Court's findings of fact and conclusions of law as required by Federal Rule Bankruptcy Procedure 7052, made applicable to contested matters by Federal Rule Bankruptcy Procedure 9014.
As discussed more fully below, the Court concludes that after considering the totality of the circumstances, Royal does not carry his burden of proving the vehicle was acquired predominantly for business use with his personal use being merely incidental. For that reason, he is not exempt from application of the Hanging Paragraph and may not bifurcate SOL's claim. SOL's objection to plan confirmation will be sustained and the chapter 13 plan denied confirmation and the case dismissed.
On June 11, 2017, Royal filed a petition under chapter 7 of the Bankruptcy Code and later converted his case to one under chapter 13. In his amended schedule A/B, Royal lists a 2011 Infiniti G37 with 60,000 miles valued at $9,000.00 (the "Vehicle"), derived from a Carmax purchase offer taking into account a prior accident. [ECF No. 43–2] Further, his amended schedule states that the Vehicle was "purchased to be used by debtor in his profession as a recruiter, for which he would have to drive to meet clients and impress them with his vehicle." SOL has filed a proof of claim for $27,946.79 fully secured by a lien on the Vehicle. [POC No. 3]
Prior to Royal's bankruptcy petition, Ricol Royal was employed as a "full desk executive level recruiter (headhunter) within the oil and gas pipeline, aerospace, and structural engineering" industries. [R. Royal Decl., ECF No. 68–3 at ¶ 2] His work involved visiting potential placement candidates and attending lunches and dinners with CEO's and hiring managers of Fortune 500 companies to persuade them to retain his services to fill executive level vacancies at their organizations. [Id. at ¶¶ 3–4] According to Royal, the Vehicle was an essential component to that process. [ Id. at ¶ 5]
Under the terms of the initial chapter 13 plan, Royal proposed to bifurcate SOL's claim by paying SOL $9,000 over the life of the plan on its secured claim without interest; the remaining balance on its claim would be treated as unsecured and receive no distribution. [ECF No. 44, § 3.2.2] Subsequent to the initial chapter 13 plan, Royal filed a first and second amended plan. [ECF Nos. 58, 70]. SOL's treatment was changed slightly under those amended plans to add 7.0% interest on the distributions to its secured claim under the plan. All versions of Royal's chapter 13 plan will be collectively referred to as the "Plan."
At an evidentiary hearing on SOL's objection to confirmation, Royal offered evidence and extensive testimony about his Vehicle search and the circumstances surrounding its acquisition, his job duties, and the Vehicle's role in performing those duties.
The evidence at trial is that on June 6, 2015, Royal signed a retail purchase contract with Carmart, LLC to purchase the Vehicle. [Trial Ex. 2] He also signed a credit application to finance its purchase. [Trial Ex. 1] Royal's uncontroverted testimony is that he negotiated the purchase and financing of the Vehicle over the phone, telling the salesperson that he was looking for a business class vehicle, preferably an import, preferably black, with leather interior. He was looking for a vehicle that was more "upscale." He told the salesperson it was for business use in his job as an executive recruiter in that it would be used for entertaining clientele and candidates to be hired by Fortune 500 companies. [Trial Tr. Apr. 11, 2018, Pg. 12:6–12] He testified that he wanted a vehicle that could create "a persona" that he was a successful recruiter who could be trusted with the substantial retainer he would be asking them to pay up front.
Royal further testified that when the salesperson located a vehicle with the correct specifications and arranged the financing, Royal traveled to the dealership to sign the paperwork that had been prepared from information he had provided over the phone. [ Id. at Pg. 9:23–28] Royal testified that all the paperwork was ready for his signature when he arrived to pick up the Vehicle. In the section titled "Primary Use for Which Purchased," the purchase contract contained pre-printed language stating that the Vehicle was being purchased for "[p]ersonal, family or household [use] unless otherwise indicated below." The box below to designate the use as "business or commercial" was left unchecked. [Trial Ex. 2] Royal testified, without contradiction, that he questioned the salesperson about this section and was told that if he were purchasing the Vehicle through his business or company, the box could be checked; otherwise, it was considered a personal purchase. [Trial Tr. Apr. 11, 2018, Pg. 14:4–14] Taking the salesperson at her word, Royal completed the transaction without altering the contract. [ Id. at Pg. 14:14–16]
Royal testified extensively about his job duties at Newport Group where he was employed at the time of the Vehicle's purchase. He started with Newport in August 2014 in the oil and gas pipeline field. At the beginning, he was mostly tethered to his desk, telephone and computer attempting to find candidates for placement or find companies seeking employees to fill these high level positions. When the oil and gas industry suffered financial collapse, sometime in May, 2015, he and his employer decided to shift his duties to aerospace and structural engineering placements. That shift changed the nature of his duties from full-time in-office work to, essentially, half in-office work—emails and phone calls, computer searches, etc.; and half out-of-office work—making office visits to potential candidates, taking them to lunch or visiting the executive assistants of the hiring managers, trying to secure appointments with their bosses. [ Id. at Pg. 50:25–28; 51:1–7]
Royal testified that it was when this shift in responsibilities occurred, he determined he needed a better vehicle to perform his new duties, which included transporting potential candidates or executive assistants to lunches, dinners and other outings. [ Id. at Pg. 51:9–12; 51:19–20] In June, 2015, Newport agreed to loan him $3,000 at 0% interest, to be repaid by withholding a portion of his commissions until paid in full. The loan agreement states: "Employee understands that this is not compensation but is a personal loan extended by NSS for Employee's personal reasons. " [Trial Ex. H (emphasis added) ] Royal used the loan for a down payment on the Vehicle.
Although Royal testified at length about his efforts to generate new business, unfortunately, the new Vehicle was not much assistance in generating new placements. Faced with a declining draw from Newport, in November, 2015, he left Newport and joined Cyber Coders, an executive recruiter in Irvine, CA. Then Royal's circumstances took a drastic change: In March, 2016, his Vehicle was rear-ended while stopped in traffic on the freeway and he suffered serious neck, spine and head injuries
. As a result of the accident, Royal was and is unable to work because he is unable to sit at a desk and work at a computer or drive to make sales calls. He is subsisting on County Cash Aid and gifts from family and friends. He is living rent-free with relatives, and he is using the County aid to make his chapter 13 payments.
When cross-examined about his business use of the Vehicle before the accident, Royal admitted the following:
Whether Royal acquired the Vehicle for personal use such that the provisions of 11 U.S.C. § 1325(a)'s Hanging Paragraph apply to prohibit bifurcation and reduction of the SOL's secured claim under 11 U.S.C. § 1325(a)(5)(B)(ii).
In a chapter 13 case, the debtor bears the burden of proof on each element required for confirmation under section 1325(a). In re Welsh, 465 B.R. 843, 847 (9th Cir. BAP 2012). In this case, Royal proposes to exercise the "cram-down" power under section 1325(a)(5)(B) —that is, bifurcating the secured creditor's debt under 11 U.S.C. § 506(a) into a secured and unsecured debt because the collateral is worth less than the...
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