In re Sanders

• Decision Date: 30 March 2009
• Docket Number: Bankruptcy No. 07-50783-LMC.,Civil Action No. SA-07-CV-1013-XR.
• Parties: In re SANDERS, Debtors. Ford Motor Credit, Appellant, v. Sandy Eugene Sanders, et al., Appellees.
• Court: U.S. District Court — Western District of Texas

403 B.R. 435

In re SANDERS, Debtors.

Ford Motor Credit, Appellant, v. Sandy Eugene Sanders, et al., Appellees.

Bankruptcy No. 07-50783-LMC.

Civil Action No. SA-07-CV-1013-XR.

United States District Court, W.D. Texas, San Antonio Division.

March 30, 2009.

Paul W. Rosenbaum, San Antonio, TX, for debtors.

Marion A. Olson, San Antonio, TX, trustee.

MEMORANDUM OPINION AND ORDER

XAVIER RODRIGUEZ, District Judge.

Before the Court is Ford Motor Credit's ("FMC" or "Appellant") appeal from the Bankruptcy Court's order denying FMC's objection to confirmation of the Debtors' Amended Chapter 13 Plan. The primary issue in this appeal is whether the Bankruptcy Court erred in concluding that FMC's financing of the Debtors' "negative equity" in their trade-in vehicle rendered the "hanging paragraph" codified at 11 U.S.C. § 1325(a) inapplicable to FMC's secured claim in the Debtors' vehicle, such that the claim could be bifurcated under § 506(a). Concluding that the Bankruptcy Court so erred, we reverse and remand to the Bankruptcy Court for proceedings consistent with this opinion.

Background and Procedural History

On December 4, 2004, Sandy Eugene Sanders and Bonnie Jean Chymeryc-Sanders (collectively, "Debtors" or "Appellees") purchased from a dealership for their personal use a new 2005 Ford Explorer. The Debtors agreed to pay $26,523.05 for the Explorer, plus tax, title, license, and fees. The dealer agreed to finance those charges through a simple interest motor vehicle retail installment contract.

The Debtors additionally agreed with the dealer to trade in the Debtors' existing vehicle, a 1999 Chevrolet Tahoe. The parties agreed upon a trade-in value of $8,000 for the Tahoe. At the time of the transaction, however, the Debtors owed $10,324.13 on a secured loan they took out to purchase the Tahoe. Thus, after accounting for the negotiated trade-in value of the Tahoe, the Debtors still owed $2,324.13 on the loan they originally took out to pay for the Tahoe. This amount is referred to as "negative equity." In order to discharge that security interest and to take clear title to the Tahoe, the dealer needed to pay off in full the original loan securing the Tahoe.¹ To make up for the shortfall in value, the Debtors agreed to pay to the dealer $2,324.13, representing the Debtors' remaining liability under the loan originally securing the Tahoe. The parties financed this charge under the same installment contract related to the new Explorer. Thus, the parties agreed that the Debtors would acquire the new Explorer, that the Debtors would trade-in the Tahoe, and that the Debtors would agree to pay the dealer future payments totaling $28,289.72, representing the price of the new Explorer, taxes, fees, and other charges related to the Explorer, and the negative equity related to the Tahoe, less a $2,500 dealer rebate.² The dealer subsequently assigned the contract to FMC.

The Debtors filed a Chapter 13 bankruptcy petition on March 30, 2007. FMC filed a proof of claim in the amount of $19,731.28, representing the remaining amount the Debtors owed under the installment contract. The Debtors' Amended Chapter 13 Plan proposed to bifurcate Ford Motor Credit's claim pursuant to 11 U.S.C. § 506(a), treating it as a secured claim only to the extent of the value of the Explorer and an unsecured claim for the balance. Section 506(a) generally permits this practice and provides in relevant part:

An 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 ... 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.

11 U.S.C. § 506(a). Thus, the Plan proposed that FMC would have a secured claim of only $16,225.00 (the alleged value of the Explorer on the petition date) which would accrue interest at the rate of 10% per annum and would be paid over 60 months for a total payment of $23,641.12. The balance of FMC's claim, $3,506.28, would be treated as unsecured indebtedness and would be paid pro-rata with other unsecured, non-priority claims.

FMC objected to the Debtors' Amended Chapter 13 Plan, asserting that its claim was protected from bifurcation by virtue of a paragraph added to section 1325(a) of the Bankruptcy Code under the Bankruptcy Abuse Prevention and Consumer Projection Act of 2005 ("BAPCPA"). This new paragraph is unnumbered and is therefore commonly referred to as the "hanging paragraph." The hanging paragraph states:

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,....

11 U.S.C. § 1325(a)(*).³

The Bankruptcy Court overruled FMC's objection and confirmed the Plan. The Bankruptcy Court held that FMC's claim was not protected from bifurcation due to the claim's inclusion of charges for negative equity. Specifically, the Bankruptcy Court ruled that FMC did not have a purchase money security interest ("PMSI") in the amount financed for the negative equity related to the Debtors' trade-in vehicle. Further, since FMC's security interest was not a PMSI to the full extent of its claim, the Bankruptcy Court held that FMC's entire claim was not protected by the hanging paragraph. FMC appeals, seeking reversal of this ruling.

Statement of Jurisdiction

The Court has jurisdiction over this matter because it is an appeal from a final order of the Bankruptcy Court. See 28 U.S.C. § 158; In re Dale, No. H-07-3176, 2008 WL 4287058, at *1 (S.D.Tex. Aug. 14, 2008), appeal docketed, No. 08-20583 (5th Cir. Sept. 15, 2008).

Standard of Review

A bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. In re Morrison, 555 F.3d 473, 479 (5th Cir.2009). According to the parties, there are no disputed factual issues, and this appeal presents only questions of law.

Analysis

The issue presented in this appeal is whether the hanging paragraph of 11 U.S.C. § 1325(a) exempts FMC's claim from the bifurcation provision of section 506. "The appropriate starting point when interpreting any statute is its plain meaning." United States v. Elrawy, 448 F.3d 309, 315 (5th Cir.2006) (citing United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). The text of the hanging paragraph states:

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;....

11 U.S.C. § 1325(a)(*). Bifurcation is thus prohibited where: "(1) the creditor has a purchase money security interest which secures the debt; (2) the debt was incurred within 910 days of the date the petition was filed; (3) the collateral securing the debt is a motor vehicle; and (4) the motor vehicle was acquired for the personal use of the debtor." In re Busby, 393 B.R. 443, 448 & n. 7 (Bankr.S.D.Miss. 2008); see also In re Dunlap, 383 B.R. 113, 114 (Bankr.E.D.Wis.2008). In this appeal, the parties do not dispute that the latter three elements are satisfied. Moreover, the parties do not dispute—and the Bankruptcy Court conceded⁴—that FMC's security interest in the new vehicle is a purchase-money security interest to the extent that it secures the sticker price of the vehicle as well as finance charges and charges for taxes, title, license, and registration fees. The Court thus must decide whether (and to what extent) the additional charge for negative equity, also secured by the new vehicle, renders the hanging paragraph inapplicable to FMC's claim.

The bulk of the parties' briefing addresses whether the portion of the debt which represents the financing for negative equity secured by the new vehicle qualifies as a purchase-money security interest in that vehicle.⁵ Under the facts of this case and the plain meaning of the hanging paragraph, however, the hanging paragraph operates to exempt FMC's entire claim from bifurcation regardless of the nature of the charge for negative equity. The Court agrees with Appellant's first argument that the plain meaning of the hanging paragraph does not require the entire portion of the debt that is the subject of its claim to be secured by a purchase-money security interest. The hanging paragraph applies merely "if the creditor has a purchase-money security interest securing the debt that is the subject of the claim." 11 U.S.C. § 1325(a)(*). The terms of the statute do not limit its application "to the extent" that the creditor has a purchase-money security interest or to the "portion" of the debt secured by a purchase-money security interest. Cf., id. § 506(a) (allowing for bifurcation of claims "to the extent of the value of the underlying collateral securing the claim); id. § 522(f) (permitting avoidance of a non-purchase money security interest in certain consumer goods "to the extent" that the lien resulting from the security interest impairs a debtor's ability to claim an exception). Rather, the plain statutory language is broad and unqualified, applying to situations where, as here, the creditor has a purchase-money security interest which secures the debt.

Indeed, the Southern District of Texas recently resolved a...