AmeriCredit Financial Services, Inc. v. Padgett (In Re Padgett)

408 B.R. 374, 69 U.C.C. Rep. Serv. 2d (West) 821, 2009 Bankr. LEXIS 1900, 2009 WL 2168824

• Court: Bankruptcy Appellate Panel of the Tenth Circuit
• Decided: July 20, 2009
• Docket: BAP No. KS-08-069. Bankr.No. 07-41284
• Status: Published

Opinions

OPINION

MICHAEL, Bankruptcy Judge.

Creditor AmeriCredit Financial Services, Inc. (“AmeriCredit”) appeals the bankruptcy court’s order confirming the Chapter 13 plan of Timothy John Padgett and Tracie Arlene Padgett (“Debtors”). AmeriCredit asserts that the bankruptcy court erred when it allowed Debtors to bifurcate and cram down its 910 vehicle claim under 11 U.S.C. §§ 506 & 1325(a)(5), notwithstanding the addition of the “hanging paragraph” to § 1325(a) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). We agree with AmeriCredit, and reverse the bankruptcy court’s confirmation order.

1. BACKGROUND

In this case, the parties filed a joint stipulation of facts (“Joint Stipulation”) which the bankruptcy court adopted.² The following facts are taken from the bankruptcy court’s published opinion.³

On March 22, 2007, Debtors purchased a 2006 Toyota Corolla (the “Corolla”), in part by trading in a 2000 Ford Windstar (the “Windstar”) on which Debtors still owed a significant amount. In connection with this purchase, Debtors entered into a financing agreement and signed a promissory note that is currently held by Aneri-Credit. The contract indicates the price of the Corolla was $16,288, and that Debtors made a $6,000 down payment, resulting in an unpaid balance of $10,288. Under the contract, lender was required to pay, on Debtors’ behalf, a filing fee of $4, gap insurance in the amount of $600, and a net payoff of $11,350 owed on the Windstar (“negative equity”).⁴ Therefore, the total amount financed in the transaction was $22,242. Debtors agreed to pay this amount, together with 18.75% interest, over 72 months, at $516 per month.

Six months after purchasing the Corolla, Debtors filed their Chapter 13 bankruptcy petition and proposed plan (the “Plan”) on September 19, 2007. Although the Plan valued the Corolla at $13,500 as of the date of filing, it proposed to pay AmeriCredit $14,615, plus interest, on its “910 car loan.”⁵ AmeriCredit filed a proof of claim for a secured claim in the amount of $22,470,⁶ to which Debtors objected.

Debtors argued to the bankruptcy court that the amount they must pay AmeriCre-dit as a secured claim through the Plan excludes the negative equity. They contended that the negative equity is not a purchase money obligation, and could thus be “crammed down.” AmeriCredit asserted that the entire amount financed, including the negative equity, constitutes a purchase money obligation and must be paid in full pursuant to the so-called “hanging paragraph” of 11 U.S.C. § 1325(a).⁷ The parties’ Joint Stipulation does not specifically state whether the sale of the Corolla would not or could not have been consummated unless the seller not only took Debtors’ Windstar in trade, but also paid off the negative equity.

The bankruptcy court agreed with Debtors’ position and confirmed their Plan on alternative grounds: 1) the negative equity was not a purchase money obligation and therefore not subject to the anti-bifurcation provisions of the hanging paragraph; and 2) even if the negative equity was a purchase money obligation, AmeriCredit failed to meet its burden of demonstrating that financing the negative equity enabled the Debtors to purchase the vehicle.⁸ Am-eriCredit timely appeals the bankruptcy court’s confirmation order.

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely-filed appeals from final judgments and oi'ders of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.⁹ A decision is considered final “if it ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” ¹⁰ Here, the bankruptcy court’s order confirming the Debtors’ Chapter 13 plan is a final decision for purposes of review.¹¹ Neither party elected to have this appeal heard by the United States District Court for the District of Kansas. The parties have thus consented to appellate review by this Court.

III. ISSUE ON APPEAL AND STANDARD OF REVIEW

The issue raised by AmeriCredit on appeal is whether the bankruptcy court properly construed the applicable state law definition of purchase money security interest to exclude negative equity. A question of law is presented because the case was submitted on stipulated facts. The bankruptcy court’s legal conclusions are reviewed de novo,12 as are its determinations of state law.¹³ De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court’s decision.¹⁴

IV. DISCUSSION

Since enactment of BAPCPA in 2005, a multitude of bankruptcy and district courts throughout the country have wrestled with the issue before us on appeal, and have reached divergent and incompatible conclusions.¹⁵ Additionally, two United States Circuit Courts of Appeal have now had an opportunity to tackle the question presented: the Eleventh Circuit in In re Graupner (“Graupner”),16 and the Fourth Circuit in In re Price (“Price”).17 Both the Gmupner court, interpreting Georgia law, and the Price court, interpreting North Carolina law, concluded that negative equity financed in connection with a 910 vehicle loan constitutes a purchase money obligation. The Graupner and Price courts held that, pursuant to the hanging paragraph of § 1325(a), debtors are precluded from bifurcating the debt into secured and unsecured portions and cramming it down through a plan. Critical to both circuit courts’ decisions are their determinations that negative equity financing is an integral part of a debtor’s purchase of a new car, and that such result effectuates Congressional intent.¹⁸ Though we are not bound by these decisions, we find the analysis of the Graupner and Price courts persuasive, and see nothing in Kansas law that compels a different result.¹⁹

A. Applicable Authorities

Section 506(a)(1), which gives rise to bifurcation of claims, 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 ... is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property[.]²⁰

Prior to BAPCPA, this provision, together with § 1325(a)(5)(B) allowed “cram down” of secured claims at confirmation in Chapter 13 cases:

Oversimplified, under § 506(a) an allowed claim was a secured claim to the extent of the value of the collateral. Undersecured claims were split into secured and unsecured components based on the value of the collateral. With or without consent of the lienholder, a Chapter 13 debtor could confirm a plan that proposed to pay the allowed secured claim in full with present value interest and to treat the balance of the debt as an unsecured claim.²¹

However, perceived abuse led to Congressional curtailment of the use of the cram down provision in the case of certain purchase money obligations.²² The crucial hanging paragraph, added by BAPCPA, 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[.]²³

Thus, the question in this case is whether the negative equity part of the 910 vehicle debt constitutes debt secured by a purchase money security interest subject to this anti-bifurcation provision.

“Purchase money security interest” is not defined in the hanging paragraph or elsewhere in the Bankruptcy Code. Therefore, the relevant state law definition is applicable.²⁴ The Kansas version of § 9-103 of the Revised Uniform Commercial Code (“UCC”) provides in pertinent part:

84-9-103. Purchase-money security interest; application of payments; burden of establishing

(a) Definitions. In this section:

(1) “Purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and

(2) “purchase-money obligation” means 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.

(b) Purchase-money security in goods. A security interest in goods is a purchase-money security interest:

(1) To the extent that the goods are purchase-money collateral with respect to that security interest.... ²⁵

We agree with the Grawpuer and Price courts that Official Comment 3 to this section of the UCC is particularly instructive in interpreting the phrases “price” and “value given to enable.”²⁶ Comment 3 explains as follows:

Subsection (a) defines “purchase-money collateral” and “purchase-money obligation.” These terms are essential to the description of what constitutes a purchase-money security interest under subsection (b). As used in subsection (a)(2), the definition of “purchase-money obligation,” the “price” of collateral or the “value given to enable” includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney’s fees, and other similar obligations.

The concept of “purchase-money security interest” requires a close nexus between the acquisition of collateral and the secured obligation. Thus, a security interest does not qualify as a purchase-money security interest if a debtor acquires property on unsecured credit and subsequently creates the security interest to secure the purchase price.²⁷

We must determine, therefore, whether the negative equity is part of the price or value given to enable Debtors to acquire rights in or the use of the Corolla, and whether it has a sufficiently close nexus with acquisition of the Corolla.

B. Negative Equity is Value Given Which Enables and Has a Close Nexus with Acquisition

In this case, the bankruptcy court held that negative equity did not constitute a purchase-money obligation, in part, because it determined that “[p]aying off an antecedent, undersecured loan on another vehicle is not the kind of ‘expense’ to which [Comment 3] appears to be geared.”²⁸ We acknowledge that this question is a close call, one on which intelligent minds can differ, but decline the Debtors’ invitation to strictly limit the term “expenses” as used in Comment 3 to traditional transaction costs only. As pointed out by the Graupner court:

To be sure, as one court has rightly observed, the fact that “attorney’s fees” are listed in Comment 3 “belies the notion that ‘price’ or ‘value’ is narrowly viewed as only those [traditional] expenses that must be paid to drive the car off the lot. Comment 3 expressly ‘includes’ the broad phrase ‘obligalions for expenses incurred in connection with acquiring rights in the collateral’ ” and, consequently, “the definitions of ‘price’ and ‘value’ should be interpreted broadly.” ²⁹

Broadly interpreting “value given to enable” also comports with the factual realities of the industry practice of financing negative equity. As depicted by the Price court:

[T]he value given by [seller] to pay off the [debtors’] negative equity “enabled” the [debtors] to acquire the new vehicle. That is because the negative equity financing was 'integral to the whole transaction in which the new vehicle was purchased. All of the [debtors’] debt to [creditor] was incurred at the same time, in the same contract, and for the same purpose: acquiring the new car. In other words, the negative equity financing enabled the purchase of the new car because the negative equity financing and the purchase were a “package deal.”³⁰

Because the negative equity is inextricably intertwined with the sales transaction, it also meets the close nexus requirement:

Payment of the trade-in debt was tantamount to a prerequisite to consummating the sales transaction, and utilizing the negative equity financing was a necessary means to accomplish the purchase of the new vehicle.... [T]he negative equity was an “integral part of,” and “inextricably intertwined with,” the sales transaction.³¹

The negative equity enabled Debtors to acquire the Corolla, and it has a sufficiently close nexus to the acquisition. Accordingly, it constitutes a purchase money obligation.

C. Affording Anti-Bifurcation Protection to Negative Equity is Consistent with Congressional Intent

Additionally, we agree with the Graup-ner and Price courts that holding negative equity to be a purchase money obligation likely comports with Congressional intent. Though the legislative history is sparse, one commentator has declared, “no one doubts that the hanging-[paragraph] architects intended only good things for car lenders and other lienholders.”³² In fact, section 306 of BAPCPA, which added the hanging paragraph, was entitled “Giving-Secured Creditors Fair Treatment in Chapter 13.... Restoring the Foundation for Secured Credit.”³³ “Thus, whatever else may be said about the hanging paragraph, it seems clear that by it ‘Congress intended to take away the right of debtors to reduce their secured obligations on retained 910 vehicles to the value of the vehicles.’ ”³⁴ Negative equity financing was common prior to enactment of BAPC-PA, and continues to be so. As a result, we, like the Pnce court, think it unlikely that Congress intended the hanging paragraph to be interpreted in such a way as to deny its protections to a large percentage of claims held by car lenders.³⁵

V. CONCLUSION

We conclude that the negative equity is debt secured by a purchase money security interest. Therefore, the hanging paragraph of § 1325(a)(5) prevents Debtors from cramming down AmeriCredit’s 910 vehicle claim through their Plan. Accordingly, we REVERSE the bankruptcy court’s order confirming the Debtors’ Plan.

2 . Joint Stipulation of Facts, in Appellant's App. at A65-67.

3 . In re Padgett, 389 B.R. 203 (Bankr.D.Kan.2008).

4 . The debt on the traded-in Windstar was $14,100. The dealer agreed to pay $2,750 for the trade-in, leaving a balance due to the Windslar's lender of $11,350. This is the amount financed and paid off by the new lender under the contract, which the Court will refer to hereafter as "negative equity.”

5 . A "910 car loan” is a purchase money loan made for a vehicle that is for the personal use of the debtor within 910 days of the filing of a bankruptcy petition. See 11 U.S.C. § 1325(a)(*). There is no dispute that the debt was incurred within 910 days of the filing of the petition, that the collateral is a covered motor vehicle, and that it was acquired by Debtors for their personal use.

6 . Joint Stipulation, in Appellant’s App. at A65.

7 . See Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295, 1296 n. 1 (11th Cir.2008) for an explanation of the terminology "hanging paragraph.” Unless otherwise indicated, all future statutory references in text are to the Bankruptcy Code, Title 11 of the United States Code.

8 .Specifically, the bankruptcy court stated:

The Court ... finds that the negative equity payoff obligation is not necessary to the transaction, is not of the same type or magnitude as the other items listed in Official Comment 3, and there is an insufficiently close nexus between retiring the antecedent debt on the trade-in vehicle and acquiring a new vehicle to constitute purchase money. As an alternative basis, the Court finds that AmeriCredit did not meet its burden of demonstrating, under the stipulated facts of this case, that the negative equity financing ‘‘enabled” Debtors to purchase this vehicle. That proof was not forthcoming because the parties' stipulation of facts is entirely silent on that issue. Accordingly, even if the Court is incorrect in finding that the negative equity financing is not part of the price or did not "enable” Debtors to acquire the vehicle, the fact that AmeriCredit did not carry its burden of proof on these particular facts is enough to conclude that the nega-live equity was not part of the PMSI transaction in this case.

Padgett, 389 B.R. at 212 (footnotes omitted).

9 . 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr.P. 8002.

10 . Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945)).

11 . Interwest Bus. Equip. Inc. v. United Stales Trustee (In re Interwest Bus. Equip., Inc.) 23 F.3d 311, 315 (10th Cir.1994).

12 . In re Osborn, 24 F.3d 1199, 1203 (10th Cir.1994).

13 . Id. at n. 5.

14 . Salve Regina Coll. v. Russell, 499 U.S. 225, 238, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991).

15 . See Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295, 1300 (11th Cir.2008) (collecting cases). In fact, the Kansas bankruptcy district has an internal split of authorities. Unlike Judge Karlin in this case, in In re Ford, 387 B.R. 827 (Bankr.D.Kan.2008), Kansas Bankruptcy Judge Nugent concluded that the negative equity portion of a 910 vehicle debt is protected from cram down in a Chapter 13 plan.

16 . Graupner, 537 F.3d 1295.

17 . In re Price, 562 F.3d 618 (4th Cir.2009). In re Ford, supra note 15, at 378, is currently on direct appeal before the Tenth Circuit Court of Appeals in Case No. 08-3192. Additionally, it appears that the issue is now pending before the Second, Fifth, Sixth, Eighth, and Ninth Circuits. See Clarks’ Secured Transactions Monthly, March 2009.

18 . Price, 562 F.3d at 621; Graupner, 537 F.3d at 1302.

19 . Given the plethora of published decisions expounding upon this issue, the following analysis is guided by the principle that sometimes less is more. For an extensive discussion of this and other issues arising under the hanging paragraph, see Robin Miller, Annotation, Effect of “Hanging’’ or “Anti-Cram-down" Paragraph Added to II U.S.C.A. § 1325(a) by BAPCPA, 19 A.L.R. Fed.2d 157 (2007).

20 . 11 U.S.C. § 506(a)(1).

21 . Graupner at 1297 (quoting Keith M. Lun-din, Chapter 13 Bankruptcy, at 445-1 (3d ed. 2000 & Supp.2007-1)). The term “cram down" is used because this oplion does not require the consent of the claim holder. See In re Jones, 530 F.3d 1284, 1288 n. 1 (10th Cir.2008) (citing Till v. SCS Credit Corp., 541 U.S. 465, 468-69, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004)). Alternatively, the term “strip down” is used to describe the same process. See Price, 562 F.3d at 623.

22 . Graupner at 1297. See also Price, 562 F.3d at 628 (BAPCPA's enactment protected car lenders by forcing would-be Chapter 7 debtors into Chapter 13).

23 . 11 U.S.C. § 1325(a)(*) (emphasis added).

24 . Price, 562 F.3d at 624.

25 . Kan. Stat. Ann. § 84-9-103(a) & (b)(1) (West 2001) (“Kan.Stat.Ann.”) (emphasis added). The Georgia and North Carolina versions of the above quoted portion of UCC § 9-103 are identical. See Ga.Code Ann. § 11-9-103 (West 2001) and N.C. Gen.Stat. Ann. § 25-9-103 (West 2001).

26 . Graupner, 537 F.3d at 1301 n. 4; Price, 562 F.3d at 626.

27 . Kan. Stat. Ann. § 84-9-103, cmt. 3 (emphasis added).

28 . In re Padgett, 389 B.R. 203, 209.

29 . Graupner, 537 F.3d at 1302 (quoting In re Myers, 393 B.R. 616, 620-21 (Bankr.S.D.Ind.2008) (emphasis omitted)). See also Price, 562 F.3d at 626.

30 . Price, 562 F.3d at 625 (citing Graupner, 537 F.3d at 1302).

31 . Graupner, 537 F.3d at 1302.

32 . Keith M. Lundin, Chapter 13 Bankruptcy, at 451.5-1 (3d ed. 2000 & Supp.2007-1).

33 . See Pub.L. No. 109-8, § 306, 119 Stat. 23, 80 (2005).

34 . Graupner, 537 F.3d at 1297-98 (quoting In re Rodriguez, 375 B.R. 535, 548 (9th Cir.BAP 2007)).

35 . Price, 562 F.3d at 628-29.