In re Westfall, 06-60297.

• Decision Date: 30 March 2007
• Docket Number: No. 06-60297.,06-60297.
• Citation: 365 B.R. 755
• Parties: In re Jamie Allen WESTFALL and Angela Ann Westfall, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

365 B.R. 755

In re Jamie Allen WESTFALL and Angela Ann Westfall, Debtors.

No. 06-60297.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

March 30, 2007.

As Amended May 17, 2007.

Charles C. Butler, Bryan, OH, Lindsey I. Hall, Theodore A. Konstantinopoulos, Javitch, Block & Rathbone, Mark R. Lembright, Shapiro and Felty, L.L.P., Cleveland, OH, for Creditors.

James F. Ciccolini, Medina, OH, for Debtors.

MEMORANDUM OF OPINION

RUSS KENDIG, Bankruptcy Judge.

Before the court are two objections to confirmation of debtors' fourth amended chapter 13 plan. The plan proposed by debtors attempts to cram down (to reduce to a value other than the balance owed) secured liens on two automobiles, each purchased within nine hundred ten (910) days of debtors' filing, where a portion of the loan proceeds was used to pay off negative equity (the amount by which the debt securing the traded vehicle exceeded the trade-in value) on trade-in vehicles. Creditor Nuvell Credit Corporation (hereafter "Nuvell") filed its objection to confirmation on August 28, 2006; Creditor WFS Financial, Inc. (hereafter "WFS")¹ filed its objection on July 28, 2006. Following a hearing, the court established a briefing schedule. The chapter 13 trustee, Toby L. Rosen, and both creditors have filed briefs in support of their positions on the objections to confirmation.

The court has jurisdiction of this case pursuant to 28 U.S.C. §§ 1334 and the general order of reference entered in this district on July 16, 1984. Venue in this district and division is proper pursuant to 28 U.S.C. § 1409. The following constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FACTS

Debtors filed a chapter 13 petition on March 13, 2006. In the fourth amended plan, filed July 9, 2006, debtors proposed to pay WFS a secured value of $ 18,874.03, plus interest at 8%, on a 2005 Chevrolet Impala. WFS's proof of claim, filed April 6, 2006, alleges the total amount owed on the loan is $25,631.03. Debtors obtained a loan on the Impala on or about May 31, 2005, in the amount of $26,189.49, plus interest at 12.29% annually. The sales contract indicates that part of the loan was used to pay $6,757.62 for negative equity on a 2003 Chevrolet Cavalier traded in by debtors. The WFS loan is secured by a lien on the title to the vehicle.

Nuvell is a secured creditor by virtue of a lien on the title to debtors' 2005 Chevrolet Silverado. The Nuvell debt was incurred on or about May 31, 2005 when debtors borrowed approximately $18,723.65 for the Silverado, related expenses, and approximately $3,588.47 of negative equity on a Chevrolet Blazer traded by debtors. Nuvell filed a proof of claim on March 15, 2006 alleging it is owed $18,289.89. Debtors propose to pay Nuvell $14,701.89, plus interest at 7%; for the 2005 Chevrolet Silverado under debtors' fourth amended plan.

The parties do not dispute that the vehicles were purchased within the 910 days prior to debtors' filing, nor is there a dispute that the vehicles were purchased for debtors' personal use.

LEGAL BACKGROUND AND PARTIES' ARGUMENTS

In order to confirm a plan, chapter 13 debtors must abide by the directives set forth in 11 U.S.C. § 1325. Included in section 1325(a) are guidelines for treatment of secured claims:

(5) with respect to each allowed secured claim provided for by the plan—

(A) the holder of such claim has accepted the plan;

(B) (i) the plan provides that —

(I) the holder of such claim retain the lien securing such claim until the earlier of —

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

(iii) if —

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or

(C) the debtor surrenders the property securing such claim to holder.

11 U.S.C. § 1325.² In accordance with this section, a court can confirm a plan in one of three instances: the creditor accepted the plan; the creditor is receiving payment on its secured claim in accordance with 11 U.S.C. § 1325(a)(5)(B), or the debtor surrenders the collateral. In this case, the creditors have not agreed to the plan, nor does the plan propose to surrender the collateral. Therefore, the court must find that the plan conforms to the required payments set forth in section 1325(a)(5)(B) before a confirmation order is entered.

Section 1325(a)(5)(B) also involves three considerations: retention of the lien, payment of at least the allowed amount of the claim, and equal monthly payments constituting adequate protection. In the cases presently before the court, there are no arguments regarding subsections (i) or but the issue raised involves subsection (ii). The trustee argues that debtors' proposed cramdown is payment in full of the allowed claim. WFS and Nuvell, for the reasons discussed below, argue that the plan does not pay the allowed amount of their respective claims.

In addition to the three requirements found in section 1325(a)(5)(B), there is also language, following 1325(a)(9) and now commonly referred to as the "hanging paragraph," which offers further explanation of secured claims falling under section 1325(a)(5) which are referred to as "910 claims." The hanging paragraph states, in its entirety:

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

Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (hereafter "BAPCPA"), debtors could, under authority of 11 U.S.C. § 506, bifurcate claims into secured and unsecured portions based on the value of the collateral. To the extent the claim was undersecured, debtor could pay that portion of the claim as an unsecured claim. This is commonly, referred to as the "cramdown" of a claim.

Following enactment of BAPCPA, many courts have had an opportunity to expound on the meaning and effect of the hanging paragraph. See In re Trejos, 352 B.R. 249, 253 (Bankr.D.Nev.2006) (citing myriad cases in footnote 6). It is clear that the hanging paragraph prevents bifurcation of certain claims under the authority of 11 U.S.C. § 506. To be excepted from section 506 bifurcation, a vehicle claim must: (1) be a purchase money security interest; (2) arise from a debt incurred within the 910-day period preceding the bankruptcy filing; and (3) secure collateral purchased for the personal use of the debtor. Here, there is no dispute that the vehicles were purchased for the personal use of debtors in the 910 day period preceding the bankruptcy filing. Consequently, the crux of the matter is whether a purchase money security interest secures the debt. The inquiry focuses on what constitutes a purchase money security interest, and more specifically whether payment of negative equity from a trade is part of the purchase money security interest.

It is trustee's position that creditors do not have a purchase money security interest in the amount used to pay off the negative equity on the trade-in. Trustee's view is that the purchase money security interest only extends to the amount used to purchase the vehicle. According to the trustee, two separate transactions took place with execution of each of the retail sales installment contracts: the sale of debtors' used vehicle and the purchase of the new vehicle. Trustee points to O.R.C. § 1309.103, and the comments thereto, and argues that the purchase money security interests only arise to the extent that the value given by a creditor has a "close nexus" to the procurement of the collateral. Under this view, the amounts paid on the negative equity did not constitute value extended by creditors' for the new vehicle, purchases.

Trustee argues that the amount paid for the purchase represents the purchase money security interest and the amount paid on the negative equity is the nonpurchase money interest. Since there are both nonpurchase money security interests and purchase money security interests involved in the transaction, the claim can be divided into secured and unsecured positions. Under trustee's argument, the secured, or purchase money position, is not subject to cramdown. However, the unsecured, or nonpurchase money, portion is subject to cramdown. Further, trustee argues that prepetition payments should have been applied pro rata to each position, which affects the unsecured and secured claim amounts for the debts.

WFS and Nuvell argue that they have a purchase money security interest for the entire claim in the respective vehicles, making the hanging paragraph applicable to prevent the bifurcated treatment proposed by debtors in the plan. According to creditors, debtors would not have been able to obtain the loans unless the existing vehicle loans were paid off, so any money used to...