William B Johnson

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
WILLIAM B. JOHNSON,
DEBTOR
CASE NO.
08-02207-8-RDD
ORDER DENYING DEBTOR’S OBJECTION TO KEYSTONE
EQUIPMENT FINANCE CORPORATION’S CLAIM
Pending before the Court is the Debtor’s Objection to Keystone Equipment Finance
Corporation’s Claim (the “Claim Objection”) filed by William B. Johnson (the “Debtor”) and the
Response of Keystone Equipment Finance Corp. to Debtor’s Objection to Claim and the Brief of
Keystone Equipment Finance Corp. in Opposition to Debtor’s Objection to Claim (collectively, the
“Response”) filed by Keystone Equipment Finance Corp. (“Keystone”). A hearing was held on
January 27, 2009 in Wilson, North Carolina.
The issues before the court are (1) whether Keystone holds a purchase money security
interest in certain collateral of the Debtor which was purchased within one year of the Debtor’s
filing and (2) should the court determine that Keystone holds a purchase money security interest in
certain collateral of the Debtor, does the hanging paragraph in Section 1325(a) prevent the Debtor
from cramming down Keystone’s secured claim under 11 U.S.C. § 506?
SO ORDERED.
SIGNED this 07 day of April, 2009.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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BACKGROUND
On April 1, 2008 (the “Petition Date”), the Debtor filed a voluntary petition for relief
under Chapter 13 of Title 11 of the United States Code (the “Bankruptcy Code.”). The Debtor
listed Keystone as a “Bus[]iness Equipment Finance Provider” on Schedule D with a claim in the
amount of Seventy-Six Thousand Five Hundred Dollars ($76,500.00). The Debtor asserts in its
Claim Objection that the collateral securing Keystone’s claim is valued at Fifty-Two Thousand
Dollars ($52,000.00).
On June 12, 2008, the Minutes of the 341 Meeting and Motion for Confirmation of the
Debtor’s Chapter 13 Plan were filed by Robert J. Browning (the “Trustee”). The Debtor and the
Trustee proposed to bifurcate and cramdown Keystone’s claim, treating Forty-Seven Thousand
Dollars ($47,000.00) as secured based on the Debtor’s valuation of Keystone’s collateral. The
remaining Twenty-Nine Thousand Five Hundred Dollars ($29,500.00) of the claim was to be
treated as unsecured. The Debtor proposed to pay Keystone interest of Seven and Twenty-Five
One Hundredths Percent (7.25%) over the life of the plan.
On July 7, 2008, Keystone filed its Objection to the Chapter 13 Plan and Objection to
Valuation of Collateral. Subsequently on August 4, 2008, Keystone filed a proof of claim
asserting that it held a secured claim in the amount of Seventy-Seven Thousand Nine Hundred
Seventy-One Dollars and Eighty-Four Cents ($77,971.84)(referred to herein as “Claim No. 13").
Keystone asserts the value of the collateral, including a log feller buncher (“Buncher”), a 1989
Kenworth Sleeper Truck, and a 1994 Kent Log Trailer (collectively, the “Collateral”), is Ninety-
Eight Thousand Seven Hundred Thirty-Seven Dollars and Fifty Cents ($98,737.50).
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On August 27, 2008, the Debtor filed its Claim Objection asserting that the Collateral had
a value of Fifty-Five Thousand Dollars ($55,000.00) as of the Petition Date. Keystone filed its
Response objecting to the Debtor’s valuation and asserting that pursuant to the hanging
paragraph in 11 U.S.C. § 1325(a), its claim cannot be crammed down under 11 U.S.C. § 506.
Keystone alleges that it has a properly perfected purchase money security interest in the Buncher
and that its interest was obtained within one year of the Petition Date.
DISCUSSION
Congress, as part of the amendments to the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, made sweeping changes and additions to the confirmation requirements
for a Chapter 13 plan. See 11 U.S.C. § 1325(a). One of those changes included a new provision,
now commonly referred to as the “hanging paragraph.” That paragraph 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 to the claim, the debt was incurred within the 910-day
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.
Section 506 of the Bankruptcy Code allows a debtor to bifurcate a secured creditor’s
claim. Under Section 506, a creditor’s claim is secured only to the extent of the value of the
collateral; any remaining balance of the claim is treated as unsecured. Section 506 essentially
allows a debtor to cramdown the creditor’s secured claim to the value of the collateral.
The addition of the hanging paragraph in Section 1325(a) prevents a debtor’s right to
cramdown under Section 506 in two situations. The first scenario is where a debtor incurred a
purchase money security debt for a motor vehicle acquired for the personal use of the debtor
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1 As part of the Collateral, the Debtor provided Keystone a security interest in a 1989 Kenworth Sleeper
Truck and a 1994 Kent Log Trailer. These items were used as part of the Debtor’s logging business and not for his
personal use. However, Keystone admits that it did not provide the Debtor purchase money for the additional
collateral. The Court notes that in a transaction such as this one where consumer goods are not at issue, a purchase
money security interest does not lose its purchase money status even if collateral that is not purchase money
collateral is used to secure the purchase money obligation. N.C.G.S. § 25-9-103(f).
2Keystone’s brief submitted in response to the Claim Objection and counsel’s oral argument presumes that
its interest in the Collateral must be a purchase money security interest in order for it to avoid the cramming down of
its Claim under the hanging paragraph. The Debtor does not dispute this requirement.
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within the 910-day period preceding the filing of the bankruptcy case. Wells Fargo Financial
North Carolina 1, Inc. v. Price, No. 5:07-CV-133-BR, 2007 Westlaw 5297071 (E.D.N.C. Nov.
14, 2007). The second scenario focuses on the situation where a debtor incurs a purchase money
security debt within one year of the petition which is secured by collateral of “any other thing of
value.” See In re Ellegood, 362 B.R. 696 (Bankr. E.D. Va. 2007); In re Hickey, 370 B.R. 219
(Bankr. Neb. 2007); In re Curtis, 345 B.R. 756 (Bankr. D. Utah 2006); In re Parish, 2006 Bankr.
Lexis 1205 (No. 05-BK-15702-JAF) (Bankr. M.D. Fl. 2006).
The first scenario does not apply in this case as the Buncher1 is neither a motor vehicle
nor was it purchased for personal use. Keystone argues the second scenario is applicable and
prohibits the Debtor from cramming down a portion of its claim on the basis that its purchase
money2 was used to purchase the Buncher, within the year prior to the Petition Date, and that
such debt is evidenced by a security agreement and properly filed UCC-1. The Debtor alleges
that Keystone does not have a purchase money security interest in the Buncher. The Debtor
asserts that Keystone entered into a refinance transaction with Debtor, not a purchase money
agreement. Without a purchase money security interest, the Debtor asserts that Keystone’s claim
can be crammed down to the value of the Collateral under Section 506.
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In order to determine if Keystone holds a purchase money security interest in the
Buncher, the Court looks to state law, more specifically, the Uniform Commercial Code as
adopted by North Carolina. N.C.G.S. § 25-9-103(a)(1) defines purchase money collateral as the
goods that secure a purchase money obligation incurred with respect to the collateral. Purchase
money obligation is defined in (a)(2) as the obligation incurred as all or part of the price of the
collateral to enable the debtor to acquire use or rights to the collateral if the value is in fact used.
North Carolina General Statute § 25-3-103(b) provides that a purchase money security
interest in goods is “[a] security interest in goods is a purchase-money security interest: (1) [t]o
the extent that the goods are purchase-money collateral with respect to that security interest.”
At the hearing, the Debtor testified that he paid John Woodie Enterprises, Inc. (“JWE”) a
down payment of Five Thousand Dollars ($5,000.00) in December 2006 and took delivery of the
Buncher in January 2007. At the same time as the Debtor purchased the Buncher, he also
purchased a Caterpillar 525 Skidder (the “Skidder”) and a Prentice Log Loader (the “Loader,
collectively referred to herein with the Buncher and Skidder as the “Logging Equipment”). The
Skidder and Loader was also delivered in January 2007.
The Debtor stated the approximate cost of the Skidder was Sixty-Six Thousand Dollars
($66,000.00); the cost of the Buncher was approximately Eighty-Two Thousand Dollars
($82,000.00), and the cost of the Loader was Fifty-Two Thousand Dollars ($52,000.00). The
deposit paid by the Debtor in December 2006 was applied as a down payment on the Logging
Equipment.
The Debtor testified that for eight months he made payments to JWE in the amount of
Two Thousand Dollars ($2,000.00). Mr. Johnson testified that he did not recall signing any
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documents specifically related to JWE financing the sale of the equipment. However, over the
eight months, Mr. Johnson executed certain financing documents from Key Equipment Finance
Inc., Keystone, and Premier Finance for each individual piece of Logging Equipment. Even
though other companies were later involved in the transaction, the insurance policy for the
Logging Equipment lists JWE as the loss-payee.
Mr. Johnson testified that in February 2007, he signed certain documents from Premier
Finance in connection with its financing of the Loader. Subsequently, in May 2007, Mr.
Johnson executed certain documents in favor of Key Equipment Finance Inc. in connection with
the Skidder. Mr. Johnson stated that he was not current with the debt to Key Equipment Finance
and that he was in the process of returning the Skidder.
Lastly, Mr. Johnson testified that in August of 2007, an employee of JWE visited him on
the jobsite requesting that he sign certain documents relating to the Buncher. Mr. Johnson stated
he believed those documents were to refinance the balance due on the Buncher to JWE under
their agreement. 	He testified that he signed the documents without carefully reviewing them.
The Debtor stated that he believed that JWE financed his original transaction and that his
monthly payments of Two Thousand Dollars ($2,000.00) were paid to JWE towards the balance
due. However, the Debtor failed to provide any financing documents such as a note or security
agreement for the benefit of JWE. Furthermore, the Debtor did not present any evidence, such as
a bill of sale to provide that he was in fact the owner of the Logging Equipment upon its delivery
in January 2007.
Keystone alleges that JWE leased the Logging Equipment to the Debtor while JWE
sought viable financing options for Mr. Johnson. Counsel for Keystone introduced an affidavit
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of John Woodie, admitted solely for the purpose of impeaching of the Debtor’s testimony.
Woodie averred that JWE leased the Buncher to the Debtor and that the monthly lease payments
were used as part of the down payment to Keystone, and other financiers, once the transactions
were finalized in 2007.
Furthermore, attached to the Proof of Claim, Keystone provided a copy of a Commercial
Promissory Note, signed by the Debtor on August 10, 2007, in the amount of Seventy-Six
Thousand Five Hundred Dollars ($76,500.00) to be paid in Forty-Eight (48) equal monthly
installments of Two Thousand Two Hundred Ninety-Nine Dollars and Fifty-Nine Cents
($2,299.59) (the “Note”). The Note reflects that an initial down payment of Four Thousand Five
Hundred Ninety-Nine Dollars and Eighteen Cents ($4,599.18) was received by Keystone. The
Debtor did not dispute his signature on the Note. In addition, Keystone provided the Court with
a copy of a Security Agreement signed by the Debtor evidencing the underlying Note and
granting Keystone a security interest in the Collateral. The Debtor does not dispute that
Keystone holds a security interest in the Collateral and that the documents were executed on
August 10, 2007.
Keystone also presented the Court with a copy of the Bill of Sale dated August 9, 2007
from JWE to the Debtor. The Bill of Sale provides the sale price of the Buncher was Eighty-
Two Thousand Dollars ($82,000.00). Mr. Johnson acknowledges his signature on this
document.
Based on the foregoing, the Court finds that pursuant to N.C.G.S. § 25-9-103, Keystone
holds a purchase money security interest in the Buncher. The Debtor does not dispute that he
executed the Note, Bill of Sale, or other documents signed in August 2007. The Debtor has
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failed to provide any contradictory documentary evidence that JWE sold him the Buncher prior
to the execution of the agreements with Keystone. The Bill of Sale in the amount of Eighty-Two
Thousand Dollars ($82,000.00) is consistent with the terms of the Note. Mr. Johnson testified
that he was making one payment to JWE for all three pieces of equipment, thus resulting in a
pro-rata amount being distributed to each of the three lenders at the time the Debtor executed the
financing documents. The monthly payments are also consistent with Keystone’s and JWE’s
contention that the equipment was being leased until JWE located financing for the Debtor.
Wherefore, based on the Court’s finding that Keystone holds a purchase money security interest
in the Buncher, Keystone also satisfies the first requirement of the hanging paragraph.
As to the second requirement, the parties do not dispute that the Buncher would be
considered “any other thing of value.” The original dispute between the parties focused on the
actual value of the Buncher. Therefore, the Court finds based on the parties admissions that the
Buncher is “any other thing of value;” thus, satisfying the second requirement of the hanging
paragraph.
Lastly, the evidence presented to the Court reflects that the Debtor executed the Note and
Security Agreement on August 10, 2007. That date establishes the date of Keystone’s purchase
money security interest and it is within one year of the Petition Date, April 1, 2008. As such,
Keystone has satisfied the last requirement set forth in the hanging paragraph.
Based on the fact that Keystone holds a purchase money security interest in the Buncher
and that the remaining requirements of the hanging paragraph of Section 1325(a) have been
satisfied, the Court finds that the limitations set forth in the hanging paragraph apply to the
Debtor and the Debtor is prevented from cramming down Keystone’s secured claim to the value
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3Based on the Court’s finding that the hanging paragraph in Section 1325(a) applies and that Keystone’s
claim may not be crammed down, the Court declines to consider the valuation arguments presented by counsel. The
issue of valuation of the Buncher is not relevant based on the facts in this case.
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of the Collateral under 11 U.S.C. § 506. The Debtor’s Objection to Keystone’s Proof of Claim is
DENIED and Keystone’s claim is secured in the amount of Claim No. 13.3
SO ORDERED.
END OF DOCUMENT
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