In re Sanders

• Decision Date: 18 October 2007
• Docket Number: No. 07-50783-C.,07-50783-C.
• Citation: 377 B.R. 836
• Parties: In re Sandy Eugene SANDERS & Bonnie Jean Chymeryc-Sanders, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

377 B.R. 836

In re Sandy Eugene SANDERS & Bonnie Jean Chymeryc-Sanders, Debtors.

No. 07-50783-C.

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

October 18, 2007.

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

DECISION ON OBJECTION BY FORD MOTOR CREDIT TO CONFIRMATION OF CHAPTER 13 PLAN

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing on August 16, 2007 the foregoing matter. Ford Motor Credit Company LLC objected to confirmation, on grounds that the plan did not accord to it proper treatment of its secured claim on a motor vehicle under the hanging paragraph to section 1325(a).

BACKGROUND FACTS

The facts are not in material dispute, and are largely set out in a single exhibit. The debtors filed their bankruptcy case on March 30, 2007. The debtors purchased a 2005 Ford Explorer from a local dealer on December 4, 2004, 846 days before their bankruptcy case. They financed their purchase with Ford Motor Credit (FMC), using a Texas Simple Interest Motor Vehicle Retail Installment Sales Contract (a form whose format and disclosures are mandated in part by the Texas Finance Code, discussed in further detail infra). According to the contract, the cash price for the vehicle was $26,523.05.

Also, according the contract, the debtors traded in to the dealer their previous vehicle (a Chevy Tahoe), at a trade-in value of $8,000. Unfortunately, the payoff due the lien holder on the trade-in vehicle was $10,324.13, leaving the debtors "negative" on their trade-in by $2,324.13. The trade-in thus contributed nothing to the purchase price of the new Explorer. To the contrary, the trade-in was a liability to the transaction. The dealer of course wanted to sell the vehicle, and so had an interest in facilitating the purchase. The debtors, as buyers, needed to "off-load" the liability associated with the old vehicle in order to buy a new vehicle. The dealer meanwhile needed to pay off the previous lien in order to acquire clear title to the trade-in vehicle, in order to be able to re-sell that vehicle.

The dealer could have absorbed the payoff as a cost of doing business, or the dealer could have required the debtors, as buyers, to come out of pocket up front to pay off the remaining balance due. The deal that was struck, however, has become relatively common in the industry: the dealer arranged¹ for the debtors to reimburse the dealer for the cost of paying off the negative equity, by having the debtors borrow the needed money from the vehicle financer (FMC), and having the debtors pledge the vehicle as collateral for this advance. This advance to pay off the "negative equity" was thus included in the principal balance ultimately financed in this transaction.

The debtors were then credited with a $2,500 rebate from Ford through the dealer, yielding what the retail installment contract calls a down payment of $175.87. Added to the amount to be financed were the dealer's inventory tax, sales tax, registration fees, a certificate of title fee, and document preparation fee, all totaling $1,183.32. This amount was added to what the retail installment contract identifies as the "cash price." The small down payment was subtracted to come up with a principal balance of $27,530.60. The "principal balance" is the amount financed in retail installment contracts in this state, and this contract imposed a finance charge of $583.35 (in this contract, an annual percentage rate of 9%). The total payments due under the contract to repay this total was $28,222.85, to be paid out in 35 payments of $361.61, and a final payment in December 2007 of $15,457.50.²

After the bankruptcy filing, FMC filed a proof of claim on April 10, 2007 for the net balance owing of $19,731.28. The debtors in June 2007 amended their chapter 13 plan. With respect to FMC, the plan recognizes the amount of the claim, but bifurcates the claim into two parts — a secured claim based on the debtors' estimate of current value of the vehicle at $16,225.00, and an unsecured claim for the remaining deficiency in the amount of $3,506.00. The plan then proposes to pay FMC's secured claim at the rate of $394.02 per month, and at an interest rate of 10%. In short, the debtors treat FMC consistent with section 1325(a)(5), and without regard to the hanging paragraph appended to the end of section 1325(a), believing that FMC's claim does not qualify as a "910-day" claim under that hanging paragraph. FMC, of course, objected, on grounds that, in their opinion, their claim does qualify as a "910-day" claim under that hanging paragraph.

Both parties argued their positions to the court at the confirmation hearing, presenting both briefing and cases. The chapter 13 trustee took no position on the matter, instead choosing to await the court's ruling on the question, and to then evaluate whether the plan would be feasible depending on that ruling. The court reset the matter for ruling for October 18, 2007.

POSITIONS Or THE PARTIES

FMC claims that its claim qualifies for exclusion from "cram down" because it qualifies as a "910-day" claim under the hanging paragraph which concludes section 1325(a), hereinafter referred to in this decision as the 910-day provision, the "hanging paragraph," or section 1325(a)(*).³ If a claim qualifies as a 910-day claim, then it is excluded from the bifurcation effect of section 506 and so must be handled in a chapter 13 plan as a fully secured claim, regardless the value of the collateral. See 11 U.S.C. § 1325(a)(*); see generally In re Pajot, 371 B.R. 139 (Bankr.E.D.Va.2007) (setting out an extensive and scholarly analysis of the statute and its operation). The debtors say that the claim in question does not qualify as a 910-day claim, even though the vehicle in question was purchased within 910 days of the bankruptcy filing. The debtors base their position on the language of the subsection, which applies the special treatment only if the creditor "has a purchase money security interest securing the debt that is the subject of the claim ... and the collateral for that debt consists of a motor vehicle...." See 11 U.S.C. § 1325(a)(*). Granted, say the debtors, the creditor in this case lent money for the purchase of the vehicle in question, but it also lent money as an advance to pay off the remaining debt owing to the previous creditor that had a security interest on the vehicle used as a trade-in. The latter portion of the loan, say the debtors, was not a purchase money loan. Thus, say the debtors, because the debt owed FMC is not entirely purchase money, the debt does not qualify for the 910-day exclusion from section 506. FMC's claim (or perhaps some portion of it) can therefore be "crammed down" under section 1325(a)(5).

The debtors' argument relies in part on section 9.103(f) of the Uniform Commercial Code, as adopted in Texas,⁴ which addresses purchase money security interests in general. That section states that a purchase money security interest does not lose its status even if the purchase money collateral also secures an obligation that is not a purchase money obligation — but limits that protection to "a transaction other than a consumer-goods transaction...." See TEX. BUS. & COMM. CODE § 9.103(f)(1) (emphasis added). The debtors argue that the highlighted language means that, in the consumer context (including consumer purchases of motor vehicles), purchase money status is an all-or-nothing proposition. They then argue that, because the bankruptcy statute uses a term of art informed by state law, this same all-or-nothing status applies to the term as used there, so that a creditor whose claim includes non-purchase money debt (such as, for example, an advance to pay off negative equity from a trade-in) does not qualify for the 910-day exclusion. Alternatively, and understanding that state common law might permit a court to accord "dual status" in the consumer context — i.e., purchase money status for the portion of the loan representing purchase money, and non-purchase money status for the portion of the loan that does not — the debtors argue that FMC's claim is only a 910-day claim to the extent that the debt is attributable to the purchase money portion of the loan. See In re Pajot, 371 B.R. at 157-58.

FMC counters that state law actually favors treating all of its debt as purchase money in nature, including the part used to pay off negative equity from the trade-in. FMC asks the court to focus on that aspect of section 9.103(a) of the UCC that defines a purchase money obligation as "an obligation ... 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." See TEX. BUS. & COMM CODE § 9.103(a)(2) (emphasis added). Though with somewhat less enthusiasm, FMC also points to the murkier definition of "purchase money security interest" offered in subsection (b)(1), which explains that "a security interest is a purchase money security interest (1) to the extent that the goods are purchase-money collateral with respect to that security interest." Id. § 9.103(b)(1) (emphasis added). FMC notes that, in this case, no one disputes that at least part of the debt in this case was incurred for the purpose of enabling the debtors here to acquire the Explorer. FMC maintains as its primary argument, however, that all of the debt was incurred for that purpose, because the debtors here would not have been able to purchase the new vehicle unless they were able to trade in their old vehicle — and that could not have happened unless the previous creditor released its security interest, which in turn could only have occurred if the previous creditor's debt was paid in full.⁵

Armed with this interpretation, FMC too argues that "purchase money security interest" used in section 1325(a)(*) of the Bankruptcy Code, not otherwise defined in the Code, must be read to import state law interpretation of the term of art —...