MEMORANDUM OPINION
ROBERT E. NUGENT, Chief Judge.
Before the Court today is the Chapter 13 plan of the debtors and the objection of Ford Motor Credit Corporation (FMCC) to its confirmation.
Debtors appear by their attorney Michael J. Studtmann. FMCC appears by its attorney Thomas J. Lasater. In their plan, the debtors propose to reduce the amount of their debt to FMCC by $7,200, notwithstanding that they incurred the debt, secured by a vehicle, within 910 days of their bankruptcy petition. FMCC objects that this treatment impairs its rights under the notorious “hanging paragraph” created by BAPCPA,
11 U.S.C. § 1325(a)(*), found immediately below § 1325(a)(9), but not numbered or designated as a subsection.
Factual Setting
Although the parties have provided no set of stipulated facts, the Court gleans from the retail installment contract executed by debtors, the parties’ memoranda, and its reading of the debtors’ plan that there are no factual disputes.
Debtors acquired a Ford pickup truck from Rusty
Eck Ford in Wichita, Kansas within 910 days of their filing. According to FMCC’s objection to confirmation, they borrowed nearly $40,000 to buy the pickup and, according to the disclosure statement contained in the retail sales contract between Rusty Eck and the debtors, the cash price of the vehicle was $29,975 and the debtors paid $1,500 as a cash down payment.
Eck also advanced funds to pay a GAP insurance policy premium, an administrative fee, and the sum of $7,200 payable to Central Star Credit Union, which held the hen on debtors’ trade-in vehicle.
This latter amount was the difference between the value of the debtors’ trade-in vehicle ($16,300) and the debt remaining on it ($23,500), the so-called “negative equity.”
Rusty Eck Ford assigned the retail sales contract to FMCC. The debtors’ plan bifurcates FMCC’s claim by treating the negative equity portion as unsecured.
FMCC protests that this bifurcation of its claim denies it the protection of the hanging paragraph and offers this Court the opportunity to weigh-in on the much disputed negative equity question.
Conclusions of Law
The hanging paragraph provides that § 506 shall not apply to a debt incurred within 910 days of the petition date and secured by a purchase money security interest taken in a vehicle.
In broad terms, this means that debtors may not cram down so-called “910-car loans” to the value of the vehicle as previously permitted. Under pre-BAPCPA § 1325(a)(5)(B), a creditor’s allowed secured claim, secured by the vehicle, was only allowed to the extent of the creditor’s interest in the estate’s interest in the vehicle.
By excising 910-car loans from the class of secured claims that are “allowed” under § 506, Congress required debtors who purchased vehicles within 910 days of filing to pay their lenders the contract price without regard to the vehicle’s actual value.
The hanging paragraph makes this protection only applicable to such loans secured by a “purchase money security interest” in vehicles acquired by the debtor for “personal use.” There is no dispute here that the vehicle was acquired within the 910-day period and that it was acquired for person
al use of the debtors. The Court must determine whether and to what extent FMCC has a purchase money security interest (“PMSI”) in the truck. More specifically, this case presents the question of whether the creditor’s PMSI secures the financed negative equity used to pay off the debt against debtors’ trade-in vehicle.
The Court is aware that, as of this writing, this issue is before the Tenth Circuit Court of Appeals
and that a number of bankruptcy and district courts around the country have opined on this point. No other Circuit Court authority has been made known to the Court. At present, the courts are fairly evenly split between holding for the creditors
and holding for the debtors.
In particular, the Court also observes that one district judge and two bankruptcy judges in this District have held that negative equity is not secured by a PMSI when applying the hanging paragraph.
This Court respectfully disagrees.
Because “purchase money security interest” is not a term defined in the bankruptcy code, courts grappling with this issue should look to applicable state law to determine whether the secured transaction in question is a PMSI.
We therefore turn
to Kansas law, specifically Revised Article 9 of the Uniform Commercial Code as adopted in Kansas, Kan. Stat. Ann. § 84-9-103 (2007 Supp.) where a PMSI is defined as a security interest securing the repayment of a “purchase money obligation.” A purchase money obligation is, in turn, defined as—
(2) ... 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.
Purchase-money collateral is defined as “goods or software that secures a purchase-money obligation incurred with respect to that collateral.”
Kan. Stat. Ann. § 84-9-103(b) provides that—
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....
In other words, to the extent that the collateral has been obtained with funds loaned for that purpose by the creditor, the transaction is a PMSI.
The question then is whether that part of the loan paid to Central Star to cover the negative equity in the debtors’ trade-in vehicle was an obligation incurred as “part or all of the price” or “value given to enable” debtors to acquire the pickup truck.
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MEMORANDUM OPINION
ROBERT E. NUGENT, Chief Judge.
Before the Court today is the Chapter 13 plan of the debtors and the objection of Ford Motor Credit Corporation (FMCC) to its confirmation.
Debtors appear by their attorney Michael J. Studtmann. FMCC appears by its attorney Thomas J. Lasater. In their plan, the debtors propose to reduce the amount of their debt to FMCC by $7,200, notwithstanding that they incurred the debt, secured by a vehicle, within 910 days of their bankruptcy petition. FMCC objects that this treatment impairs its rights under the notorious “hanging paragraph” created by BAPCPA,
11 U.S.C. § 1325(a)(*), found immediately below § 1325(a)(9), but not numbered or designated as a subsection.
Factual Setting
Although the parties have provided no set of stipulated facts, the Court gleans from the retail installment contract executed by debtors, the parties’ memoranda, and its reading of the debtors’ plan that there are no factual disputes.
Debtors acquired a Ford pickup truck from Rusty
Eck Ford in Wichita, Kansas within 910 days of their filing. According to FMCC’s objection to confirmation, they borrowed nearly $40,000 to buy the pickup and, according to the disclosure statement contained in the retail sales contract between Rusty Eck and the debtors, the cash price of the vehicle was $29,975 and the debtors paid $1,500 as a cash down payment.
Eck also advanced funds to pay a GAP insurance policy premium, an administrative fee, and the sum of $7,200 payable to Central Star Credit Union, which held the hen on debtors’ trade-in vehicle.
This latter amount was the difference between the value of the debtors’ trade-in vehicle ($16,300) and the debt remaining on it ($23,500), the so-called “negative equity.”
Rusty Eck Ford assigned the retail sales contract to FMCC. The debtors’ plan bifurcates FMCC’s claim by treating the negative equity portion as unsecured.
FMCC protests that this bifurcation of its claim denies it the protection of the hanging paragraph and offers this Court the opportunity to weigh-in on the much disputed negative equity question.
Conclusions of Law
The hanging paragraph provides that § 506 shall not apply to a debt incurred within 910 days of the petition date and secured by a purchase money security interest taken in a vehicle.
In broad terms, this means that debtors may not cram down so-called “910-car loans” to the value of the vehicle as previously permitted. Under pre-BAPCPA § 1325(a)(5)(B), a creditor’s allowed secured claim, secured by the vehicle, was only allowed to the extent of the creditor’s interest in the estate’s interest in the vehicle.
By excising 910-car loans from the class of secured claims that are “allowed” under § 506, Congress required debtors who purchased vehicles within 910 days of filing to pay their lenders the contract price without regard to the vehicle’s actual value.
The hanging paragraph makes this protection only applicable to such loans secured by a “purchase money security interest” in vehicles acquired by the debtor for “personal use.” There is no dispute here that the vehicle was acquired within the 910-day period and that it was acquired for person
al use of the debtors. The Court must determine whether and to what extent FMCC has a purchase money security interest (“PMSI”) in the truck. More specifically, this case presents the question of whether the creditor’s PMSI secures the financed negative equity used to pay off the debt against debtors’ trade-in vehicle.
The Court is aware that, as of this writing, this issue is before the Tenth Circuit Court of Appeals
and that a number of bankruptcy and district courts around the country have opined on this point. No other Circuit Court authority has been made known to the Court. At present, the courts are fairly evenly split between holding for the creditors
and holding for the debtors.
In particular, the Court also observes that one district judge and two bankruptcy judges in this District have held that negative equity is not secured by a PMSI when applying the hanging paragraph.
This Court respectfully disagrees.
Because “purchase money security interest” is not a term defined in the bankruptcy code, courts grappling with this issue should look to applicable state law to determine whether the secured transaction in question is a PMSI.
We therefore turn
to Kansas law, specifically Revised Article 9 of the Uniform Commercial Code as adopted in Kansas, Kan. Stat. Ann. § 84-9-103 (2007 Supp.) where a PMSI is defined as a security interest securing the repayment of a “purchase money obligation.” A purchase money obligation is, in turn, defined as—
(2) ... 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.
Purchase-money collateral is defined as “goods or software that secures a purchase-money obligation incurred with respect to that collateral.”
Kan. Stat. Ann. § 84-9-103(b) provides that—
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....
In other words, to the extent that the collateral has been obtained with funds loaned for that purpose by the creditor, the transaction is a PMSI.
The question then is whether that part of the loan paid to Central Star to cover the negative equity in the debtors’ trade-in vehicle was an obligation incurred as “part or all of the price” or “value given to enable” debtors to acquire the pickup truck. This Court cannot see how it can be deemed anything other than but “all or part of the price” of the pickup or a part of the value given to enable its purchase. A part of the consideration for the sale of the pickup truck to the debtors was the trade-in of their old vehicle. That trade-in was valueless because of the negative equity. In order for Rusty Eck to realize on the trade-in, either the debtors or Rusty Eck had to pay off the outstanding lien against it. As the Official UCC Comment states—
[T]he ‘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.
Costs incurred in the release of the lien on the debtors’ trade-in are “expenses incurred in connection with acquiring rights in the collateral ...” and are, as such, within the expenses enumerated, without limitation, by the drafters in the Official Comment. Likewise, this Court notes the further statement of the drafters that there must be a “close nexus” between the acquisition of the collateral and the secured obligation.
That nexus is apparent here. The vehicle the debtors traded in was part of the consideration for the vehicle they bought. Unless and until Rusty Eck paid the debt on it, the vehicle was negative consideration. The Court therefore concludes that the financed negative equity falls within the definition of a purchase money obligation under § 84-9-103(a)(2).
In reaching this conclusion, the Court adopts the view and reasoning expressed
by a bankruptcy court sitting in Utah in
In re Burt.
In
Burt,
the court looked to the Utah UCC to determine whether or not the negative equity portion of the debtor’s car debt was part of the purchase money obligation—
[T]he transaction with the Debtor was a package deal that included the purchase and financing of taxes, documentary fees, and negative equity, all of which were necessary to complete the transaction. Furthermore, the courts that have addressed the issue of whether the financing of a service contract and other fees prevents application of the hanging paragraph have held that the inclusion of these additional costs in the financing transaction did not prevent the creditor from taking a PMSI in the new vehicle.
As a result, the
Burt
court held that the negative equity was part of the price of the new vehicle and that funds expended to repay the negative equity constituted value given to enable the debtor to acquire rights in the new vehicle.
As such the negative equity satisfied the definition of a PMSI and the entire debt was a purchase money obligation.
The Court finds further support for its conclusion that negative equity is part of the price or value given to enable acquisition of the collateral in Barkley Clark’s Article 9 treatise.
Professor Clark devotes a subsection in his treatise to this issue and concludes that repayment of negative equity “fit[s] snugly into
both
prongs [price and value to enable]” of the definition of a purchase-money obligation.
The Court agrees.
Having concluded that the negative equity is a component of the purchase money obligation and therefore is secured by FMCC’s PMSI, this Court need not consider the impact of the “dual-status” rule in this case. Indeed, the debtors concede in their plan that FMCC’s lien is a PMSI, except to the extent it covers the negative equity component and, were the negative equity not a part of the purchase money obligation, that concession would be entirely consistent with state law. Kan. Stat. Ann. § 84-9-103(b)(1) provides that “to the extent” goods are purchase money collateral, the security interest in them is purchase money. Kan. Stat. Ann. § 84-9-103(f), as enacted in Kansas, provides that a purchase money lien does not lose that status even if it secures an obligation that is not purchase money. Because this Court concludes that the entire obligation is a purchase money obligation, no resort to the dual status rule is required.
Finally, the Court also agrees with the
Burt
court that the federal Truth in Lending Act (TILA) does not aid or control its decision and therefore, the Court does not address the TILA’s definition of “total sales price” in the context of this case.
The TILA does not determine whether a PMSI is created by the credit transaction. The TILA is a federal disclosure law, requiring creditors to make certain disclosures to consumer-borrowers concerning the cost of credit.
A PMSI, on the other hand, is determined in accordance with
state law.
Here, that state law is Revised Article 9, as adopted in Kansas, which defines a PMSI.
This Court concludes that the debtors’ negative equity in a trade-in vehicle, financed by the lender, is a part of the price of the collateral and constitutes value given to enable the debtors to acquire the collateral. As such, the financing of negative equity qualifies as a purchase money obligation secured by a PMSI and is subject to the hanging paragraph of § 1325(a)(*). Accordingly, debtors’ plan cannot be confirmed as proposed and FMCC’s objection to confirmation under the hanging paragraph is SUSTAINED. Debtors shall have 30 days from the entry of this order to file an amended plan to propose treatment of FMCC’s claim in accordance with this opinion.