In re Gray, (Bkrtcy.E.D.Tenn.)

Plans - Security interest was purchase money security interest, as required to prevent claim bifurcation under hanging paragraph.

A Chapter 13 debtor's prepetition retail installment financing agreement for a vehicle applied the cash down payment and rebates to satisfy the negative equity in the vehicle that the debtor was trading in as a part of the transaction, such that no portion of the loan extended to the debtor to buy the new vehicle was used to pay the negative equity. Therefore, under Tennessee's version of the Uniform Commercial Code, the creditor's security interest in the vehicle was entirely a purchase money security interest, as required for the creditor's secured claim to be protected from bifurcation under the plan confirmation statute's hanging paragraph.

In re Lisa Kay Weiser

The Hanging Paragraph of Section 1325(a) protects a purchase money creditor where the loan proceeds were used to not only finance the purchase of a new car, but also to pay off the lien on a separate car being traded in, if the evidence shows that the debtor would not have been able to purchase the new car unless the lien on the trade-in was paid off. Therefore, the creditor's purchase money security interest includes funds used to pay off the old car. In addition, the PMSI covers the portion of the loan used for gap insurance and an extended service warranty, since they represent expenses incurred in connection with acquiring rights in the vehicle.

Date of decision: 12/18/07

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In re Adams Case No: 06-51651

The creditor financed the Chapter 13 debtor's purchase of a vehicle. The creditor's claim was secured by a purchase money security interest in a motor vehicle that was acquired within the 910 days preceding the date the debtor filed for bankruptcy relief. The creditor contended that the vehicle was "acquired for the personal use of the debtor" and that its claim was protected from bifurcation by the hanging paragraph of 11 U.S.C.A. § 1325(a)(5). The court disagreed and held that a vehicle acquired for use by the non-debtor wife was not "acquired for the personal use of the debtor" and that the claim was not protected from bifurcation by the hanging paragraph.

Date of decision: 3/1/07

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In re Spratling Corp. Case No: 06-40614

Creditor Wells Fargo Corp. (Fargo) filed an objection to the confirmation of Debtor's Chapter 13 plan. In his plan, Debtor proposed to bifurcate and cramdown Fargo's undersecured claim using § 506 of the Code as was common practice prior to the enactment of certain provisions of BAPCPA. The "hanging paragraph" of § 1325(a), which was added by BAPCPA and became effective on October 17, 2005, prohibits bifurcation and cramdown where (1) the creditor has a purchase money security interest; (2) the debt was incurred within 910 days preceding the filing of the bankruptcy case; (3) the collateral for the debt is a motor vehicle; and (4) the motor vehicle was acquired for the personal use of the debtor.The Court SUSTAINED Fargo's objection holding that in the context of the retail installment sale of a motor vehicle in Georgia, "price," for purposes of Georgia's purchase money security interest statute, can include monies paid for an extended service contract and gap insurance.

Date of decision: 10/19/07

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In re Sanders Case No: 07-50783

Date of decision: 10/18/07

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In re Acaya Case No: 06-51741

The consumer protection purposes of ASFA suggest that ASFA’s definition of “cash price”
should not be incorporated into the California UCC for purposes of determining a purchase money security interest. Consequently, WFFA’s purchase money security interest does not include amounts used to pay the negative equity in a trade-in vehicle. Instead, the dual status rule provides an appropriate tool in determining the extent of WFFA’s purchase money security interest. For these reasons, the objection of WFFA to confirmation of the debtor’s plan is sustained. Acaya may file an amended plan consistent with this decision.

Date of decision: 5/18/05


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In re Mitchell, 2007 WL 3378229 Bankr. M.D. Tenn. 2007)

Under Tennessee state law definitions, the financing of negative equity in the form of the debtors' trade-in is not part of the “price” and did not “enable” the debtor to acquire the Chevy Trailblazer. According to state law, therefore, FAFCU holds a partially secured PMSI debt and a partially secured non-PMSI debt. Applying FAFCU's state law-defined status to 11 U.S.C. § 1325(a)(*), the court finds that under the unambiguous statute, FAFCU does not qualify for the narrow exception and may be treated as any secured creditor pursuant to 11 U.S.C. § 1325(a)(5). If however, 11 U.S.C. § 1325(a)(*) is ambigious, the court nonetheless finds that statutory construction rules would favor the narrower interpretation of the exception thereby rendering the hanging paragraphy's narrow exception unavailable to FAFCU.

Graupner v. Nuvell Credit Corp., Case No. 4:07-CV-37, 2007 U.S. Dist. LEXIS 46144 (M.D. Ga. June 26, 2007) (Land).

The issue presented by this appeal is whether the "cramdown" provisions of § 506 of the Bankruptcy Code apply under the facts of this case. The resolution of this issue depends solely upon whether the Creditor obtained a purchase-money security interest as contemplated by § 1325 (a) (*) of the Bankruptcy Code when the total amount financed as part of the Debtor's purchase of his motor vehicle included negative equity. ...

It is undisputed that the debt in this case was incurred within the 910 days preceding the filing of Debtor's petition for bankruptcy protection and that the collateral for the debt was a motor vehicle acquired for personal use. Therefore, if the Creditor possessed a purchase money security interest securing the debt, the cramdown provisions of § 506 do not apply.

Under Georgia law, "[a] security interest in goods is a purchase money security interest . . . [t]o the extent that the goods are purchase money collateral with respect to that security interest." O.C.G.A. § 11-9-103(b)(1). "'Purchase money collateral' means goods that secure[] a purchase money obligation incurred with respect to that collateral." O.C.G.A. § 11-9-103(a)(1) [*6] . "'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." O.C.G.A. § 11-9-103(a)(2) .

In this case, the Creditor contends that the "price of the collateral" includes the negative equity that was included in the total amount financed. Debtor responds that the "price of collateral" should include only the purchase price of the vehicle, excluding the negative equity, and since the amount financed was not limited to this amount, the Creditor did not obtain a purchase money security interest for the full value of the debt.

The Court finds that under the facts in this case the price of the collateral included the negative equity. The trade-in of the vehicle was an integral part of the sales transaction. The value of that trade-in along with its accompanying debt affected the ultimate price that was paid for the new pick-up truck. The negative equity is inextricably intertwined with the sales transaction and the financing of the purchase. This close nexus between the negative equity and this package transaction [*7] supports the conclusion that the negative equity must be considered as part of the price of the collateral. Accordingly, the Court finds that the Creditor has a purchase money security interest for the full amount of its debt. Thus, § 506 shall not apply to modify the amount of the secured obligation.

In re Jackson, Case No: 06-21044

In Jackson, the Court found that: (1) where the applicable retail installment contract did not itself indicate that negative equity had been refinanced, any interested party objecting to a motor vehicle financer’s secured claim receiving treatment under that Section 1325(a)(9) Hanging Paragraph had the initial burden to demonstrate that the secured claim included debt that was not secured by a purchase money security interest; (2) the objecting party could utilize the appropriate NADA Guide value to meet their initial burden of proof as to the trade-in value of a trade-in vehicle, the retail value of a used replacement vehicle, or manufacturer’s suggested retail price of a new replacement vehicle; (3) notwithstanding a determination by the Court that an interested party using NADA Guide values may have met their initial burden of proof to demonstrate the refinancing of negative equity, so that a motor vehicle financer’s secured claim included debt that was not secured by a purchase money security interest, the motor vehicle financer always retained the right to demonstrate that in fact no negative equity in the trade-in vehicle was refinanced and to request a hearing for the Court to make that determination; and (4) in the event the Court determined that the allowed secured claim of a motor vehicle financer was to be treated under Section 506(a)(1), the motor vehicle financer always retained the right to dispute any alleged retail value for the vehicle in question, and to request a hearing for the Court to determine the actual retail value.

Date of decision: 1/10/07

In re Peaslee, Case No: 2006 WL 3759476 06-21200

In Peaslee, the Court found that Section 506(a)(1), rather than the Section 1325(a)(9) Hanging Paragraph, governs the treatment of the secured claim of a motor vehicle financer, even though the debtor has purchased a replacement motor vehicle within 910 days of the filing of their petition for personal use, where: (1) it is shown that the secured claim includes amounts loaned to the debtor to pay off the debtor’s negative equity in a trade-in vehicle, not to pay any part of the actual purchase price of the replacement vehicle, so that not all of the debt included in the secured claim is secured by a purchase money security interest; and (2) the Court, on all of the facts and circumstances presented in these refinancing of negative equity cases, in the exercise of its discretion, as specifically provided for by Section 9-103(h) of the New York Uniform Commercial Code, determined that a transformation rather than a dual status rule would be in the best interests of all of the parties and the Bankruptcy System.

Date of decision: 12/22/06

In re Barnes Case No: 06-11169

The purchase money obligation is 90% of the total amount financed. So, it would seem that 90% of the remaining amount due should be purchase money obligation, and 10% of the remaining amount due is an unsecured claim.

Date of the decision: 5/8/07

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In re Burt Case No: 07-23193

Plans - Negative equity payoff did not affect "purchase money" status of "910 creditor's" security interest.

A creditor that provided financing to the debtor less than 910 days prior to his Chapter 13 filing to allow the debtor to acquire a motor vehicle for his personal use held a "purchase money security interest" (PMSI) in the vehicle for the entire amount financed, and was thus protected by the "hanging paragraph" from having its claim bifurcated for purpose of "cramming down" a plan. It did not matter that the amount advanced included not only a sum sufficient to pay for the cash price of the new vehicle that the debtor was acquiring, including applicable taxes and fees, but to purchase an extended service contract on the vehicle, to pay for gap insurance, and to pay off the debtor's negative equity in a trade-in vehicle. The negative equity payoff and other charges represented part of the "price" of the new vehicle and were "value given to enable the debtor to acquire rights" in the new vehicle, within the meaning of a Utah statute defining "purchase money" obligations, especially where the parties structured the purchase transaction as a "package deal," and where, because of the debtor's marginal credit, he was required to trade in his old vehicle and to pay off the negative equity in order to qualify for financing on the new vehicle.

Date of decision: 10/24/07

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