Telephius Letoinne Price and Shawana Denise Price

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
TELEPHIUS LETOINNE PRICE
SHAWANA DENISE PRICE
DEBTORS
CASE NO.
06-00957-5-ATS
ORDER REGARDING OBJECTION TO CONFIRMATION
The matter before the court is the objection filed by Wells Fargo
Financial Acceptance ("Wells Fargo") to confirmation of the plan
proposed by the chapter 13 debtors, Telephius Letoinne Price and
Shawana Denise Price. The issue before the court is whether the
unnumbered paragraph immediately following 11 U.S.C. § 1325(a)(9)
(sometimes referred to as the "hanging paragraph") precludes the
debtors from bifurcating Wells Fargo's secured claim. A hearing was
held in Raleigh, North Carolina on January 16, 2007.
The debtors filed their petition for relief under chapter 13 of
the Bankruptcy Code on June 29, 2006. Wells Fargo filed a proof of
claim in the amount of $18,332.37, which is secured by the debtors'
SO ORDERED.
SIGNED this 06 day of March, 2007.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
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automobile, a 2001 Lincoln LS. The debtors' plan, which states that
Wells Fargo's claim is for $17,869.05, proposes to "strip down" the
claim to $12,475.00, which is the value of the automobile, and to give
Wells Fargo an unsecured claim for the balance. Wells Fargo maintains
that its claim is a purchase money security interest obtained within
910 days preceding bankruptcy, and that pursuant to the "hanging
paragraph" of § 1325(a), its secured claim may not be bifurcated.
The debtors disagree, contending that Wells Fargo does not have
a purchase money security interest because the amount of its claim
includes obligations separate from, and in addition to, the purchase
price of the vehicle. Specifically, the debtors contend that the
installment contract that is the basis of Wells Fargo’s claim includes
sums advanced to purchase "gap insurance" and to pay the balance owed
against the vehicle the debtors traded-in in connection with the
purchase of the Lincoln LS. Wells Fargo agrees that the claim includes
these amounts, but the parties disagree as to the significance of their
inclusion.
Background Facts
On July 16, 2005, the debtors purchased the 2001 Lincoln LS from
Capital Mazda of Cary and financed the purchase pursuant to terms set
forth in an installment sales contract that was subsequently assigned
to Wells Fargo. The contract states that the purchase price of the
vehicle was $14,437.17, and that the debtors made a cash down payment
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of $1,400 and traded in a 1997 Nissan Maxima. The trade-in allowance
given to the debtors by Capital Mazda for the Maxima was $2,861, which
was $2,837.96 less than what the debtors owed against that vehicle.
Additionally, the debtors incurred standard fees and taxes of $426 and
purchased "gap insurance" at a cost of $600.
The total amount financed under the installment sales contract was
$16,901.13. This includes the purchase price of $14,437.17, "negative
trade-in equity" of $2,837.96, $600 for the cost of gap insurance, and
$426 for standard fees and taxes, minus the debtor’s $1,400 cash down
payment. The balance of $16,901.13 was to be secured by the 2001
Lincoln LS and, according to the terms of the installment sales
contract, was to be paid with interest at an annual percentage rate of
19.65% in 72 monthly installments of $401.40. As of the date of the
petition, the net payoff, according to Wells Fargo’s proof of claim,
was $18,332.37 plus interest. The debtors contend that the payoff as
of the petition date is only $17,869.05, but the debtors have not filed
an objection to the claim.
The debtors' chapter 13 plan proposes to bifurcate Wells Fargo’s
claim into two claims: a secured claim to the extent of the value of
the vehicle, which the debtors assert is $12,475.00, and an unsecured
claim for the balance. Wells Fargo maintains that it has a purchase
money security interest acquired within 910 days preceding bankruptcy
in the amount of $18,332.87, and that pursuant to the hanging paragraph
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of § 1325(a), its fully secured claim may not be bifurcated because the
hanging paragraph makes the "strip down" provisions of § 506
inapplicable.
The "hanging paragraph" in § 1325(a) provides that
For purposes of paragraph (5)[of section 1325(a)], 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.
11 U.S.C. § 1325(a)("hanging paragraph")(the word "period" after "910-
day" was apparently unintentionally omitted from the statute).
Many courts have struggled to discern the meaning of portions of
the "hanging paragraph." See, e.g., In re Trejos, 352 B.R. 249, 253-54
n.6 (Bankr. D. Nev. 2006). It is not a simple undertaking, and the
problem is that the unnumbered paragraph is subject to several
reasonable but conflicting interpretations. It is the court’s "duty to
make sense of the statute to the extent that is possible, and to give
it an interpretation consistent at least with its semantic sense, if
not consistent with some well-articulated purpose." Trejos, 352 B.R.
at 259.
The debtors concede that the debt was incurred in the relevant
910-day period and that the collateral is a vehicle acquired for
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personal use. But, the debtors contend that Wells Fargo does not have
a purchase money security interest. Alternatively, the debtors argue
that if Wells Fargo does have a purchase money security interest, its
purchase money security interest is for less than the full amount of
its claim ($18,322.37), and the hanging paragraph does not prohibit
strip down.
Issues
There are several questions that must be answered before the court
can rule on Wells Fargo’s objection to confirmation of the debtors'
plan. The most obvious is, does Wells Fargo have a purchase money
security interest for the full amount of its $18,322.37 secured claim?
If not, does Wells Fargo, through application of a "dual status" rule,
have a purchase money security interest for less than the full amount
of its claim? Before deciding the second issue, however, the court
must decide whether the prohibition against "strip down" in the
"hanging paragraph" even applies if the purchase money security
interest is less than the full amount of the claim. If it does not
apply, the debtors may strip down Wells Fargo’s claim whether or not it
is determined that Wells Fargo, pursuant to the "dual status" rule, has
a purchase money security interest in some lesser amount.
Before addressing these issues it may be helpful to define the
unofficial, yet commonly used, bankruptcy terms "cramdown" and "strip
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down" as they apply in chapter 13 cases, and to review the procedural
history that has brought these issues before the court.
Modification, "Cramdown," and "Strip Down"
Section 1322 provides that a chapter 13 plan may modify the rights
of holders of secured claims. Some of the ways that a secured claim
may be modified include reducing the contract interest rate, reworking
the payment terms of the obligation, and "stripping down" the amount of
the secured claim to the value of the collateral. Modifications to a
secured claim may be accomplished through a plan without the consent of
the holder of the secured claim as long as the requirements of §
1325(a)(5) are met. Modification pursuant to § 1325(a)(5) is known as
"cramdown," and § 1325(a)(5) is known as the chapter 13 cramdown
provision.
"Strip down" (bifurcation) of a secured claim is authorized by §
506(a), which provides that a secured claim "is a secured claim to the
extent of the value of such creditor’s interest in the estate’s
interest in such property." 11 U.S.C. § 506(a)(1). A stripped down
claim is bifurcated into two claims: one that is a secured claim equal
to the value of the collateral, and a second claim that is unsecured
for the balance. The strip down of a secured claim in a chapter 13
case can be accomplished in several ways. A debtor or other party in
interest may initiate a separate proceeding to determine the value of
the collateral pursuant to Rule 3012 of the Federal Rules of Bankruptcy
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Procedure. A debtor may also propose a strip down as part of the
debtor’s chapter 13 plan and, if there is an objection, the court may
hold a hearing to determine the value of the collateral in connection
with the confirmation hearing. 11 U.S.C. § 506(a)(1).
There are a number of limitations on a chapter 13 debtor’s ability
to modify a secured claim. Section 1322(b)(2) provides that "a claim
secured only by a security interest in real property that is the
debtor’s principal residence" may not be modified. The United States
Supreme Court has held that the limitation in § 1322(b)(2) prohibits
the bifurcation, or strip down, in a chapter 13 case of a secured claim
that is a claim secured only by a security interest in real property
that is the debtor’s principal residence. Nobleman v. Am. Sav. Bank
(In re Nobleman), 508 U.S. 324, 332, 113 S. Ct. 2106, 2111 (1993).
Section 1325(a)(5) (the chapter 13 cramdown provision) contains
several limitations to modification of secured claims, including
several added by the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 ("BAPCPA"), Pub. L. 109-8, 119 Stat. 23, that
affect strip down. Section 1325(a)(5) provides:
(a) Except as provided in subsection (b), the court shall confirm
a plan if--
* * *
(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--
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(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; and
(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 such holder[.]
11 U.S.C. § 1325(a)(5) (2005) (italics indicate language added by
BAPCPA).
The changes made to § 1325(a)(5) by BAPCPA are not at issue before
the court and those changes will not be discussed. The "hanging
paragraph" was added to § 1325(a) by BAPCPA, and that unnumbered
paragraph’s effect on strip down is the issue before the court for
consideration.
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Chapter 13 "Strip Down" Procedure
The United States Court of Appeals for the Fourth Circuit has
addressed the strip down of claims in chapter 13 on several occasions,
and it is clear that to accomplish strip down of a claim through a
chapter 13 plan, the secured creditor must be given both adequate
notice of the debtor’s intention to strip down the claim and an
opportunity to challenge that treatment. See In re Linkous, 990 F.2d
160 (4th Cir. 1993) (notice must comport with due process
requirements); Cen-Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995)
(discussing notice requirements in context of lien avoidance); see also
In re Deutchman, 192 F.3d 457 (4th Cir. 1999). The most commonly used
procedure to accomplish strip down in a chapter 13 case in this
district is for the debtor to propose bifurcation of the secured claim
in the debtor’s plan. The chapter 13 trustee then reviews the plan,
and if the plan is acceptable, the trustee files a motion to confirm
it. The trustee’s motion, which clearly identifies the treatment
(including any proposed strip down) of all secured claims, is sent to
all creditors, and creditors have an opportunity to file objections to
confirmation. That is the procedure that was followed in this case,
and it is Wells Fargo’s objection to confirmation that is before the
court.
The first determination that the court must make is whether Wells
Fargo has a purchase money security interest securing the full amount
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($18,322.37) of its secured claim. The debtor contends that because
the security interest contains debt unrelated to the purchase price,
Wells Fargo has no purchase money security interest at all.
Purchase Money Security Interest
The term "purchase money security interest" used in the hanging
paragraph of § 1325(a) is not defined by the Bankruptcy Code, but as
the court has previously observed, it is a term that is familiar to
consumer transactions. In re Donald, 343 B.R. 524, 536 (Bankr.
E.D.N.C. 2006). To ascertain the meaning of the term bankruptcy courts
have looked to state law, and in this case the court will rely on the
Uniform Commercial Code as adopted in the state of North Carolina.
North Carolina General Statute § 25-9-103(b)(1) provides that a
"security interest in goods is a purchase-money security interest . .
. to the extent that the goods are purchase-money collateral with
respect to that security interest." North Carolina General Statute §
25-9-103(a)(1) defines "purchase-money collateral" as goods that secure
"a purchase-money obligation incurred with respect to that collateral,"
and North Carolina General Statute § 25-9-103(a)(2) defines "purchase
money obligation" as "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."
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The Official Comments that relate to these definitions provide
helpful guidance as to what types of obligations are included. The
Official Comment to § 25-9-103(a) provides:
3. "Purchase-Money Collateral"; "Purchase-Money Obligation";
Purchase-Money Security Interest." 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.
N.C. Gen. Stat. § 25-9-103 (2005) (Official Comment 3).
The debtors contend that neither the money advanced to pay the
cost of gap insurance nor the amount advanced to fund the negative
equity related to the vehicle that was traded-in come within the
definition of "purchase money obligation," and thus cannot give rise to
a purchase money security interest. The court agrees with the debtors.
"Gap insurance," as described at the hearing by Wells Fargo, is
insurance that protects the debtor and, indirectly, the secured
creditor. Gap insurance covers that part of the damage that exceeds
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the value of the automobile, up to the outstanding balance of the
secured loan. It is neither mandatory, a component of the loan
agreement, nor a value-enhancing add-on, and thus is dissimilar to the
examples listed in the Official Comment to the North Carolina statute
defining a purchase money security interest. The court finds that gap
insurance is not part of the purchase price of the collateral. See In
re White, 352 B.R. 633, 639 (Bankr. E.D. La. 2006)("gap insurance" not
part of purchase price because contract is separate asset, independent
of vehicle purchase, and cost is paid to third party separate from
seller).
The court also finds that funds advanced to pay off the balance
of the debt owed on the vehicle that was traded-in are not part of the
purchase price. The funds loaned to satisfy the negative equity are
"not a component of the price of the collateral or the value given to
enable the debtor to acquire rights in the collateral," and are
significantly and qualitatively different from the fees, freight
charges, storage costs, taxes, and similar expenses that are typically
part of an automobile sale. Wells Fargo argues that the funds advanced
to pay the negative equity essentially "enabled" the debtors to
purchase the vehicle and should be counted as part of the purchase
price. The court disagrees, as did the court in In re Peaslee, -- B.R.
--, 2006 WL 3759476 (Bankr. W.D.N.Y. 2006).
Providing a loan to refinance negative equity on a trade-in,
which may be a convenient but unnecessary option for a
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consumer purchasing a replacement vehicle, is not value
given to "enable" that consumer to acquire rights in or the
use of the replacement collateral. The term "enable" refers
to what it has always referred to, which is the value given
to allow the debtor to pay, in whole or in part, the actual
price of a new item of collateral being acquired, in these
cases the replacement vehicles themselves.
Providing a loan to allow a debtor to pay off the lien on a
trade-in to the extent that there is negative equity, and
then rolling-in and refinancing that loan in the replacement
vehicle acquisition transaction, is not value used to
acquire rights in or the use of the replacement vehicle
collateral and in fact so used, within the meaning of [New
York UCC] Section 9-103(a)(2). That portion of the loan
provided is in fact used to pay off the lien on the trade-in
vehicle.
* * *
In the Peaslee Case and in the other cases in question,
there are simply two separate financial transactions
memorialized on a single retail installment contract
document for the convenience of some consumers and to allow
the auto industry to sell more vehicles, which is good for
both parties. However, the debt incurred in the separate
optional transaction where negative equity is refinanced as
a part of the combined transaction does not result in a
purchase money obligation and the resulting security
interest taken for that debt is not a purchase money
security interest.
Peaslee, 2006 WL 3759476 at *9 (footnote omitted); but see In re
Graupner, -- B.R. --, 2006 WL 3759457 (Bankr. M.D. Ga. 2006)
(notwithstanding "the seemingly obvious conclusion" that the creditor
"does not hold a purchase money security interest," the court, by
reading the Georgia version of the Uniform Commercial Code together
with Georgia’s Motor Vehicle Sales Finance Act, found that funds
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advanced to pay negative equity must be included in the purchase
price).
Consequently, Wells Fargo does not have a purchase money security
interest for the full amount of its claim.
Wells Fargo’s alternative argument is that if it does not have a
purchase money security interest for the full amount of the debt, it at
least has a purchase money security interest, under the "dual status"
rule, for that portion of the debt (excluding gap insurance and funds
advance to pay the negative equity) that can be attributed to the
actual purchase price.
The debtors argue that even if under the dual status rule Wells
Fargo has a purchase money security interest in the debtors' vehicle,
the limitations on claim bifurcation in the hanging paragraph do not
apply because the entire debt ($18,332.37) is not subject to the
purchase money security interest. According to the debtors, the
hanging paragraph limits strip down if the creditor "has a purchase
money security interest securing the debt that is the subject of the
claim." 11 U.S.C. § 1325(a)("hanging paragraph"). The debtors
maintain that if only part of a debt is secured by a purchase money
security interest, the limitation does not apply; it applies only when
the creditor holds a claim that is entirely secured by a purchase money
security interest. To hold otherwise, the debtors reason, would be to
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1Notwithstanding its ruling that the limitation on strip down did
not apply, the court in Peaslee proceeded to address the dual status
and transformation rules. Also, the same court in a subsequent case
suggested that the dual status/transformation analysis might be
appropriate in some circumstances. In re Jackson, -- B.R. --, 2007 WL
63582 at *2 n.5. (Bankr. W.D.N.Y. 2007).
15
essentially write the words "some portion of the debt" into the statute
where they do not now exist.
The debtors' reading of the "hanging paragraph" comports with the
statute’s plain meaning and is a reasonable interpretation. It is the
interpretation that was reached by the bankruptcy court for the Western
District of New York in the Peaslee decision. The court in that case
held that the hanging paragraph "requires that the debt included in the
claim must be secured by a purchase money security interest, so that if
all of the debt included in the claim is not so secured, the exception
provided in the Section is not applicable." Peaslee, 2006 WL 3759476
at *7. Furthermore, the court stated that the "plain meaning of the
statute certainly does not result in an absurd disposition." Peaslee,
2006 WL 3759476 at *7. The hanging paragraph "addresses the debt
included in a secured claim, which in this Court's view must be
entirely secured by a purchase money security interest, not just a
portion of it." Peaslee , 2006 WL 3759476 at *10.1
In addition to being a reasonable interpretation, it is also
supported by the rule of statutory construction that where Congress
uses different language in different sections of a statute it is
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presumed that the difference is intentional and suggests that the
different phrases have different meanings. This court has found that
rule to be helpful in several cases interpreting amendments to the
Bankruptcy Code made by BAPCPA. See, e.g., In re Paschal, 337 B.R. 274
(Bankr. E.D.N.C. 2006); In re Jones, 339 B.R. 360 (Bankr. E.D.N.C.
2006); In re Donald, 343 B.R. 524 (Bankr. E.D.N.C. 2006).
In Paschal the court considered the meaning of Congress' choice
of different language to effect termination of the automatic stay under
§ 362(c)(3)(A), as compared to § 362(c)(4)(A)(i). Congress described
termination of aspects of the automatic stay very differently in the
two sections, and the court endeavored to give full effect to Congress'
presumably intentional choice of different language, based on the
following rationale:
The Court of Appeals for the Fourth Circuit recently
observed that the use of a particular phrase in one statute
but not in another "merely highlights the fact that Congress
knew how to include such a limitation when it wanted to."
[In re Coleman, 426 F.3d 719, 725 (4th Cir. 2005)]. The
Coleman court also quoted the Supreme Court's clear
directive on this topic: "Where Congress includes particular
language in one section of a statute but omits it in
another, it is generally presumed that Congress acts
intentionally and purposely in the disparate inclusion or
exclusion." Keene Corp. v. United States, 508 U.S. 200,
208, 113 S. Ct. 2035, 2040, 124 L. Ed. 2d 118 (1993)
(internal quotation marks and alterations omitted), quoted
in Coleman, 426 F.3d at 725-6.
Paschal, 337 B.R. at 279.
In Jones the court again considered a question under 11 U.S.C.
362(c)(3)(A), and concluded, applying the same line of statutory
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analysis employed in Paschal, that "the words 'with respect to the
debtor' encompass 'actions taken' against the debtor, [and] against
property of the debtor, but do not include 'actions taken' against
property of the estate." Jones, 339 B.R. at 363.
In Donald, the court in construing § 521(a)(6) held that "[a]
plain meaning construction of the term 'claim for the purchase price'
indicates a claim for the full purchase price." Donald, 343 B.R. at
536. Further,
[a] claim for the full purchase price is not the same as a
claim for "a purchase-money obligation" or a claim secured
by a "purchase-money security interest." It is also not the
same as a claim for "any portion of the purchase price" or
a claim "attributable in whole or in part to the purchase
price." Had Congress meant any of these other types of
claims, it would have identified them as it has in other
sections of the Bankruptcy Code.
Donald, 343 B.R. at 536.
If Congress intended the hanging paragraph to provide for the
disparate treatment of a claim that is only partially secured by a
purchase money security interest, it could easily have done so as it
had in other sections of the Code. For example, 11 U.S.C. § 521(a)(6)
(2006) (the section that the court discussed in Donald) states that an
individual debtor in a chapter 7 case may "not retain possession of
personal property as to which a creditor has an allowed claim for the
purchase price secured in whole or in part by an interest in such
personal property" unless the debtor complies with the requirements of
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that statute. See also 11 U.S.C. § 1326(a)(4) (referring to personal
property "securing a claim attributable in whole or in part to the
purchase price of such property").
Obviously, the rule that Congress' use of different language in
different sections of a statute is presumed to be intentional, thereby
suggesting that the different phrases have different meanings, is often
helpful, but the rule is not absolute. It should not be used in all
circumstances. In Paschal, the rule was useful because there was
different language in parallel sections enacted at the same time
dealing with virtually the same subject. Paschal, 337 B.R. at 278-79.
In Jones, the analysis involved the well-established and well
understood terms "debtor," "property of the debtor," and "property of
the estate." Jones, 339 B.R. at 363. And in Donald, there was
different usage that occurred within the same sentence of the statute.
Donald, 343 B.R. at 537.
Although one can find these instances in the Bankruptcy Code where
this rule of statutory construction provides much-needed illumination,
that does not necessarily mean that Congress intended by its
inconsistency to preclude the application of a dual status rule where
the full amount of the secured claim was not secured by the purchase
money security interest. When factors like those present in Paschal,
Jones, and Donald are not present, the disparity in language may well
be attributed to an inattention to detail and an indifference to
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2For an excellent review of the legislative reform initiative
leading to passage of BAPCPA, see Susan Jensen, A Legislative History
of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
79 Am. Bankr. L.J. 485 (2005); for a discussion of the events leading
to passage of the automobile provisions of BAPCPA, see William C.
Whitford, A History of the Automobile Lender Provisions of BAPCPA, 2007
U. Ill. L. Rev. 143 (2007).
19
consistency. One commentator has suggested that the rule should not be
applied with respect to sections added by BAPCPA because "such
arguments rely on the omnicompetence of congressional drafting, a
premise somewhat in doubt after BAPCPA." David Gray Carlson, Cars and
Homes in Chapter 13, 14 Am. Bankr. Inst. L. Rev. 301, 350 (2006).
Wells Fargo argues that the debtors’ interpretation of the statute
is incorrect and that the debt referred to in the hanging paragraph may
be something less than the full amount of the secured claim. Wells
Fargo contends that the hanging paragraph’s strip down limitation
applies where the court determines under the dual status rule that a
secured creditor has a purchase money security interest in an amount
less than the full amount secured. It is not unreasonable to read the
hanging paragraph to mean that the debt referred to is less than the
full amount of the secured claim. Unfortunately, the conflict between
these two reasonable readings of the statute cannot be resolved by
reference to legislative history, because in this instance, the
legislative history merely repeats the statute and provides no guidance
to the statute’s meaning.2
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"[I]f a plain reading of the statute does not produce a settled
meaning, then further examination of the context of the statute is
required." Trejos, 352 B.R. at 261. To understand the meaning of the
hanging paragraph it is essential to examine the relationship between
the hanging paragraph and the two sections, § 1325 and § 506, to which
the hanging paragraph refers.
The court agrees with the bankruptcy court in In re White, which,
although analyzing the hanging paragraph in a different context,
observed that "the treatment of the purchase money security interest
claim is entirely dependent upon the rights provided in § 1325(a)(5)."
White, 352 B.R. at 644. The debt referred to in the hanging paragraph
is not necessarily the full amount of the creditor’s secured claim, but
is the amount of the secured debt dealt with in the chapter 13 plan
pursuant to § 1325(a)(5). This reading of the statue is preferable to
that proposed by the debtors because it incorporates and gives effect
to both § 1325(a)(5) and § 506.
In this case, the debtors propose to modify Wells Fargo’s secured
claim under § 1325(a)(5) by stripping down the secured claim under §
506 to the value of Wells Fargo’s collateral. The amount of the
secured claim dealt with under § 1325(a)(5) is $12,475, and that is the
amount of "the debt that is the subject of the claim" for purposes of
the hanging paragraph. Because the secured claim addressed by §
1325(a)(5) is less that the amount of the purchase money security
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interest that Wells Fargo maintains it would have if a dual status
analysis is used, the court must decide whether in the circumstances of
this case a dual status or transformation approach is appropriate.
Dual Status or Transformation Rule
When a security interest includes components that relate to the
purchase of the collateral and components that do not, the extent of
the secured creditor’s purchase money security interest is determined
by the application of either the dual status or transformation rule.
Under the dual status rule the secured lender has a purchase money
security interest to the extent that the amount financed relates to the
purchase price, but under the transformation rule the secured creditor
has no purchase money security interest because the non-purchase money
component transforms the entire claim into a non-purchase money
security interest.
Under the Uniform Commercial Code as adopted in North Carolina,
a dual status rule is generally required if a security interest
involves non-consumer goods, but where the collateral is consumer
goods, as in the case before the court, the parties agree that it is
within the court’s discretion to apply either the dual status or
transformation rule. N.C. Gen. Stat. §§ 25-9-103(e), (f), and (h).
Wells Fargo contends that under the dual status rule it should
have a purchase money security interest for the purchase price stated
in the contract, $14,437.17 plus the standard fees and taxes of $426.
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The debtors contend that under the transformation rule Wells Fargo
should have no purchase money security interest.
Faced with a similar situation in the case of In re Peaslee, the
bankruptcy court for the Western District of New York chose the
transformation rule because "it would be virtually impossible for the
Court to determine either the actual amount of the negative equity or
the actual amount of the purchase money obligation, in large part
because the trade-in vehicle would in most cases not be available for
inspection and valuation." Peaslee, 2006 WL 3759476 at *10.
Although the sales contract clearly states that the amount of the
purchase price is $14,437.17, the true purchase price and the amount of
the negative equity would be difficult to compute. As anyone who has
purchased an automobile involving the trade-in of another automobile
can readily appreciate, the actual purchase price is a mystery. The
true purchase price is affected by the allowance given by the seller
for the vehicle being traded-in. Although a purchase contract may
state a purchase price, that price in reality may be a high price
because of an unreasonably low amount assigned by the seller to the
vehicle being traded-in. The fact that a customer paid too much for a
vehicle may not affect the amount of the creditor’s purchase money
security interest where the traded-in vehicle is not subject to a lien,
but where negative equity is present the secured creditor has the
burden of establishing the difference between the purchase price and
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advances to pay the debt related to the vehicle being traded-in. The
court agrees with the bankruptcy court in Peaslee that that is a
virtually impossible task. It is especially difficult where, as in
this case, the vehicle being purchased is a used vehicle. Not only
must the court factor in the value of the vehicle being traded-in and
the value of the automobile being sold, it must also ascertain how pre-
bankruptcy payments should be allocated to the purchase money and non-
purchase money components of the secured debt.
The court agrees with the bankruptcy court in Peaslee, that
generally when negative equity is involved, the appropriate rule is the
transformation rule. There may be exceptions to that general rule, but
those exceptions will be rare. The court will employ the
transformation rule in this case, and, accordingly, Wells Fargo’s claim
is not secured by a purchase money security interest in any amount.
Consequently, the limitation against strip down in the hanging
paragraph does not apply and the debtors may strip down Wells Fargo’s
claim to the value of the collateral, $12,475.
Wells Fargo shall have a secured claim in the amount of $12,475
and an unsecured claim for the balance, $5,857.37. The debtors’
proposed "cramdown" and "strip down" of Wells Fargo’s secured claim
pursuant to § 1325(a)(5) and § 506 is not precluded by the "hanging
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paragraph" and Wells Fargo’s objection to confirmation of the debtors’
plan is DENIED.
SO ORDERED.
END OF DOCUMENT
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