In re Trejos, BAP No. NV-06-1400-DES.

• Decision Date: 30 July 2007
• Docket Number: Bankruptcy No. 06-1023.,BAP No. NV-06-1400-DES.
• Parties: In re Gerardo Antonio TREJOS, Jr.; Christina Ann Trejos, Debtors. Gerardo Antonio Trejos, Jr.; Christina Ann Trejos, Appellants, v. VW Credit, Inc.; Rick A. Yarnall, Chapter 13 Trustee, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

374 B.R. 210

In re Gerardo Antonio TREJOS, Jr.; Christina Ann Trejos, Debtors Gerardo Antonio Trejos, Jr.; Christina Ann Trejos, Appellants, v. VW Credit, Inc.; Rick A. Yarnall, Chapter 13 Trustee, Appellees.

BAP No. NV-06-1400-DES.

Bankruptcy No. 06-1023.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on May 17, 2007.

Filed: July 30, 2007.

COPYRIGHT MATERIAL OMITTED

Christopher P. Burke, Esq., Christopher P. Burke & Associates, Las Vegas, NV, for Appellant.

Tyler B. Jones, Esq., Brice, Vander, Linden & Wernick, Dallas, TX, for Appellees.

Before DUNN, EFREMSKY¹ and SMITH, Bankruptcy Judges.

OPINION

DUNN, Bankruptcy Judge.

The bankruptcy court ruled that creditor held by assignment a valid purchase-money security interest in debtors' vehicle purchased within the 910-day period immediately preceding the date debtors filed their voluntary chapter 13² petition, making creditor's claim subject to the anti-cramdown provision in the "Hanging Paragraph" of § 1325(a). As a result, the bankruptcy court held that the debtors were required to pay the full amount of the creditor's claim over the life of their chapter 13 plan, irrespective of the value of the vehicle. We AFFIRM.

I. FACTS

On July 5, 2005, Gerardo Trejos ("Mr.Trejos") executed a Vehicle Retail Installment Contract and Security Agreement ("Contract") pursuant to which Mr. Trejos purchased a 2002 Volkswagen Passat ("Vehicle") from Desert Volkswagen ("Dealer") for the purchase price of $18,701.40, together with interest at the rate of 13.35% per annum.³ The Dealer assigned its interest in the Contract to VW Credit, Inc. ("VW Credit") on July 15, 2005.

Mr. and Mrs. Trejos filed their chapter 13 bankruptcy petition on February 21, 2006 ("Petition Date"), a date less than 910 days after the vehicle purchase. The Trejos included the obligation to VW Credit on their "Schedule D. Creditors Holding Secured Claims," asserting that the amount of VW Credit's claim was $17,000 and that the value of the Vehicle was $10,000. In their chapter 13 plan ("Plan") filed February 23, 2006, the Trejos proposed to pay VW Credit, as a creditor with an allowed secured claim, the full $17,000 the Trejos believed they owed VW Credit, together with interest at 8%.

VW Credit objected on the basis that the Plan provided neither for payment of the full amount of its debt,⁴i.e., $18,802.38, nor interest on that debt at the contract rate of 13.35%, both of which VW Credit believed it was entitled to because of language added to 1325(a) through the enactment of BAPCPA (the "Hanging Paragraph"). The Hanging Paragraph provides:

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 [period] 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, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

In response, the Trejos stated their intent was to pay VW Credit the "fair market value" of the Vehicle, which they intended to prove was less than the $17,000 provided in the Plan, with interest at 8%. In effect, the Trejos announced their intent to "cram down" VW Credit's claim to the value of the Vehicle, and pay that amount, with interest, as an allowed secured claim. The Trejos asserted that any prohibition against "cramdown" incorporated into § 1325(a)(5) by the Hanging Paragraph did not apply to VW Credit's claim because the Dealer's assignment of the Contract to VW Credit destroyed the purchase money character of the security interest under the Contract. The Trejos also argued that 8% is a proper interest rate because BAPCPA did not amend the Bankruptcy Code to overrule Till v. SCS Credit Corp., 541 U.S. 465, 468-69, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004). Alternatively, the Trejos asserted that if VW Credit did have a purchase money security interest in the Vehicle, because the "Hanging Paragraph" made § 506 inapplicable to VW Credit's claim, it thereby precluded VW Credit from having an "allowed secured claim." Instead, the Trejos contended, VW Credit had only an unsecured claim.⁵

The bankruptcy court held that the purchase money character of the security interest in the Vehicle was not lost when the Dealer assigned the Contract to VW Credit. Consequently, VW Credit's claim was subject to the "Hanging Paragraph," with the result that the Plan had to be modified to pay VW Credit's allowed secured claim of $18,802.38 in full. The bankruptcy court further held that the Till formula, not the Contract, determined the applicable rate of interest, in this case 8%. The Trejos appealed the confirmation order with respect to the bankruptcy court's determination of the allowed amount of VW Credit's secured claim. VW Credit did not appeal the bankruptcy court's interest rate determination.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(1) and (b)(2)(K), (L), and (0). We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158.

III. ISSUES

Whether the bankruptcy court erred in holding that VW Credit has a purchase money security interest in the Vehicle.

Whether the bankruptcy court erred in holding that the "Hanging Paragraph" prevented the Trejos from limiting VW Credit's secured claim to the value of the Vehicle.

IV. STANDARDS OF REVIEW

We review issues of statutory construction and conclusions of law, including interpretation of provisions of the Bankruptcy Code, de novo. Einstein/Noah Bagel Corp. v. Smith (In re BCE W., L.P.), 319 F.3d 1166, 1170 (9th Cir.2003).

V. DISCUSSION

A. Section 1325(a)(5) and the "Hanging Paragraph"

The requirements for confirmation of a chapter 13 plan are found in § 1325. With respect to secured creditors, § 1325(a)(5) requires generally that a chapter 13 plan must provide one of three alternative treatments: treatment to which the secured creditor consents; retention of collateral by the debtor with a stream of payments to the secured creditor; or surrender of the collateral to the secured creditor. In this case, the Trejos have elected to retain the Vehicle and to provide VW Credit with a stream of payments. This option requires further compliance with § 1325(a)(5)(B), such that the plan (1) must provide that VW Credit retain its lien until the earlier of payment of the underlying debt pursuant to non-bankruptcy law or the issuance of the Trejos' discharge, (2) distribute to VW Credit the present value of its claim as of the Petition Date, and (3) provide for equal monthly payments in an amount sufficient to provide adequate protection to VW Credit.

As noted above, BAPCPA added the following additional text to § 1325(a):

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 [period] 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, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

Although this language was not placed in § 1325(a)(5), its location in § 1325(a) and its internal reference to paragraph (5) strongly suggest that it relates specifically to the treatment of secured claims under the plan.⁶ This construction is reinforced by reference to the BAPCPA legislative history.⁷

Protections for Secured Creditors. S. 256's protections for secured creditors include a prohibition against bifurcating a secured debt incurred within the 910-day period preceding the filing of a bankruptcy case if the debt is secured by a purchase money security interest in a motor vehicle acquired for the debtor's personal use. ...

H.R.Rep. No. 109-31, pt. 1 at 17 (2005), as reprinted in E-2 Collier on Bankruptcy at App. Pt. 10-268 (15th rev. ed.2007).

The language of the "Hanging Paragraph"

... requires that certain conditions exist before the full amount of the claim must be treated as secured.. These conditions are as follows:

• The creditor must have a purchase-money security interest; and

• The purchase-money security interest must secure the debt that is the subject of the claim; and

• That debt must be incurred no more than 910 days before the date of the debtor's filing; and

• The collateral for the debt must be a "motor vehicle;" and

• That motor vehicle must have been acquired for the personal use of the debtor.

In re Trejos, 352 B.R. 249, 264 (Bankr. D.Nev.2006). The Trejos concede that with one exception, VW Credit's claim meets all of the foregoing conditions. Specifically, the Trejos assert that VW Credit does not hold a purchase-money security interest because the security interest lost its purchase-money character when the Dealer assigned it to VW Credit.

B. VW Credit is Entitled to the Protection of the "Hanging Paragraph"

To determine whether VW Credit holds a purchase-money security interest, we must look to state law. See Philip Morris Capital Corp. v. Bering Trader, Inc. (In re Bering Trader, Inc.), 944 F.2d 500, 502 (9th Cir.1991). Under NEV. REV. STAT. § 104.9103.1(b), the Trejos' debt to the Dealer was a "purchase money obligation" since it was an "obligation of an obligor 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." Further, the Vehicle constituted "purchase money...