We are very much in the early innings on issues involving 910 claims under the hanging paragraph of 11 U.S.C. §1325(a)(9). Until the relief of appellate decisions enters the game, there may not be a lot of uniformity of this bankruptcy law.
Applicability of the Till Interest Rate Analysis
One issue, however, seems resolved at the starting pitch. Lacking the labyrinthine statutory construction problems encrusting most of the hanging paragraph, courts are consistently holding that the standards of Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004), apply to 910 claims in order to provide a creditor with the present value of its claim. In re McCormick, 2006 WL 3499226 (Bankr. E.D. Wis.); see In re Vagi, 351 B.R. 881 (Bankr. N.D. Ohio 2006); In re Robinson, 338 B.R. 70 (Bankr. W.D. Mo. 2006); In re Finnegan (Bankr. M.D. Pa.), No. 1-06-00198 (Opinion Nov. 30, 2006, France, J.). It’s the remaining issues that are being hit all over the ballpark.
“Acquired for the Personal Use of Debtor”
The anti-cramdown protection of the hanging paragraph applies only if the vehicle is “acquired for the personal use of debtor.” It was immediately noted that “personal” use cannot possibly mean the same thing as the formulary “personal, family, household use” used elsewhere in the Bankruptcy Code and consumer protection laws. Courts are struggling with the definition of “personal” use and finding, as did Alice in Wonderland,1 that the word must unavoidably, and at some linguistic cost, mean more than its seemingly simple definition.
Early on it was easily determined that the secured claim in a vehicle purchased by a debtor for nondebtor’s use could be subjected to a cramdown in value. In re Jackson, 338 B.R. 923 (Bankr. M.D. Ga. 2006); In re Lewis, 347 B.R. 769 (Bankr. D. Kan. 2006). In the case of In re Davis, 226 W.L. 3613319 (Bankr. M.D. Ala.) (Slip Opinion), the debtor and her nondebtor husband purchased a vehicle used “exclusively” by the nondebtor husband. Cramdown was permitted. Accord, In re Finnegan, supra (nondebtor husband’s commercial use). So, now we know that “personal use” means “not for the exclusive use by a nondebtor.”
Some courts are yet pushing back the outfield walls, making it harder for a creditor to hit that anti-cramdown homerun the hanging paragraph was purportedly to provide. What happens when only one debtor spouse purchases the vehicle used by the other debtor spouse? In the Northern District of Ohio, cramdown was prohibited as the court read the statute to require that the vehicle be “acquired for the personal use of one of the debtors” [Emphasis added], Vagi, supra at 885, thereby avoiding an issue of whether “personal use” must mean “exclusive” use by the debtor.2 Thus, we have “personal use” mean, “not for the exclusive use by a nondebtor or for the personal use by any debtor.”
The Vagi court rejected the argument that the hanging paragraph should be read as “acquired for the personal use of the acquiring debtor.” Not so the court in In re Press, 2006 W.L. 2734335 (Bankr. S.D. Fla.), 19 Fla. L. Weekly Fed. B 383 2006. This court allowed cramdown on a debt incurred by only the debtor-husband, which was secured by a vehicle purportedly acquired for the “personal” use of the debtor-wife, specifically rejecting the application of the above-cited Rules of Construction. Instead, the Press court found that the acquiring debtor’s intention at the time of the purchase controlled the issue so that even the acquirer-husband’s subsequent extensive use of the vehicle was of no consequence or evidentiary value. The court failed to offer a basis for how it determined the “original intention” of the parties.3 Not that “original intent” analysis is a legally questionable theory given the requirement that the vehicle must have been “acquired” by the debtor. However, it is wholly unclear what the court found convincing. The clearly established fact that this was the family’s sole vehicle, surprisingly, had little weight with the court. Although it did not specifically say so, this court is reading the hanging paragraph as “acquired for the exclusive use of the acquiring debtor.” Modifying “debtor” with “acquiring” and use with “exclusive” will eviscerate the anti-cramdown provision for any reasonably savvy debtor with a spouse or other household user of the vehicle. The court should have provided indicia of the levels of credibility and proof, under the conditions of an enticing retrospective cramdown, that are needed to establish the original intent of the acquiring debtor.
The Finnegan court, supra, found that the debtor had purchased a vehicle for her nondebtor husband’s commercial use and allowed a cramdown. What if the vehicle had been purchased for the exclusive business by a sole-proprietor debtor? The above analysis, based on who uses the vehicle, implies that “personal” can include the commercial use by the sole-proprietor debtor. Or, does the debtor get two chances to defeat “personal” use by establishing that it was either acquired for use by someone else, or that it was acquired for a commercial, albeit exclusive, use by the debtor.
No matter what, “personal” use cannot be determined without adding some modifier giving it some meaning beyond the simply stated word in the statute. Humpty Dumpty is not the only one paying a dearer price for words with more than one meaning.
Surrender in Full Satisfaction of Debt
Rather than simply state that a vehicle purchased within 910 days of the petition for relief must be paid for in full, the hanging paragraph instead states that Bankruptcy Code §506 [relating to determination of secured status] does not apply to a 910 claim. Presumably this was designed to preclude the debtor from bifurcating the claim into secured and an unsecured portions, thereby cramming down the secured claim. This immediately led to the well-established legal theory of “what’s good for the goose…” so that if the debtor could not bifurcate the claim, neither could the creditor. Consequently, surrender of the collateral would be in full and complete satisfaction of the entire obligation and there would be no unsecured-deficiency claim. In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006); In re Maggett, 2006 W.L. 347 8991 (Bankr. D. Neb. 2006); In re Turkowitch, 2006 W.L. 3346156 (Bankr. E.D. Wis.); In re Gentry, 2006 WL 3392947 (Bankr. E.D. Tenn.)
The Bankruptcy Court for the Eastern District of Michigan rules otherwise – namely that the surrender of a 910 vehicle does in fact leave the creditor with an unsecured-deficiency claim. In re Hoffman, 2006 W.L. 3813775 (Bankr. E.D. Mich.); In re Particka, 266 W.L. 3350198 (Bankr. E.D. Mich.); accord, In re Duke, 345 B.R. 806 (Bankr. W.D. Ky. 2006); In re Zehrung, 351 B. R. 675, 2006 W.L. 30599808 (W.D. Wis. 2006).4 These courts hold that with respect to the 910 claim, §506 does not apply to §1325(a)(5) of the Bankruptcy Code. Section 506 applies only to determine the value of collateral if in fact the debtor was to retain it. On the other hand, surrender of the collateral changes the parties’ interest and consequently the impact of §506, which, by its terms, applies only to “an allowed claim of a creditor secured by a lien on property in which the estate has an interest.” Once the vehicle is surrendered, the estate no longer has an interest in it upon confirmation under §1325(a)(5)(C). Thus, if the estate has no interest in the property, there is no reason to use the valuation process of §506 at all. Accordingly, with recourse to state law that allows for deficiency claims, the deficiency remains allowable as an unsecured claim.
Negative Equity
The most recent hot-button issue arises from the fact that a fair number of motor vehicles are purchased by having the debtor trade in a presently owned vehicle and having any debt remaining on that vehicle rolled into the financing for the purchase of the new vehicle. Thus, does the creditor run afoul of the hanging paragraph requirement that the 910 claim be one in which the creditor has a “purchase-money security interest securing the debt?” In re Peaslee, 2006 W.L. 3759476 (Bankr. W.D.N.Y.), is not good news for creditors. When Ms. Peaslee purchased her Pontiac, she traded in a Chevrolet Blazer that had negative equity of $5,980. That amount, along with the usual taxes, etc., was rolled into the financing for the Grand Am [cash price $17,070] for a financed amount of $23,180.
Insofar as the Bankruptcy Code does not define “purchase-money security interest,” the Peaslee Court referenced §9103 of the New York Revised Uniform Commercial Code, which, in all likelihood after the 2000 national UCC revisions, applies to most states with no change in language. The court found that the financing of the negative equity is not what is contemplated by UCC §9103(a)(2) wherein a purchase-money obligation is said to include all of the “value given to enable the debtor to acquire rights in” the collateral. The court on its own decided that financing of negative equity is not necessary to enable the purchase of the vehicle. The court construed a purchase-money obligation under UCC §9103 to mean only “all or part of the price” of the collateral – ignoring the disjunctive phrase “or for value given” – to enable the debtor to acquire rights in that collateral. The new-car lender, having refinanced the negative equity of the old vehicle, did the earlier lender and the selling dealer a favor, but it did not have a purchase-money security interest in the vehicle.
The Peaslee court went beyond simply stating that the claim could be subjected to cramdown but also, on the basis of UCC §9103(g) and (h), exercised discretion not simply to bifurcate the secured claim into a purchase money security interest and an unsecured portion but rather to “transform” the entire transaction into a non-purchase-money security interest. The court felt “it would be impossible to determine the actual amount of negative equity and the purchase-money obligation.”5 It held that the hanging paragraph requires that a motor vehicle financer have a claim secured by a purchase money security interest in which “all,” meaning the “entirety,” of the debt fit within its PMSI definition.6 Accordingly, this lender was held to have a crammed-down secured claim of an amount equal to the value of the vehicle. Yet another case surely to be further litigated.
2 Interestingly, the Vagi court did not reference the helpful Rules of Statutory Construction contained in 11 U.S.C. §102(7), which has the singular, i.e., “debtor,” include the plural, “debtors.”
3 It also more than implies that any subsequent use by someone other than the acquiring debtor, e.g., a newly licensed teen, or a student away at college, or later use in a business venture, is irrelevant to the analysis.
4 Note, Turkowitch, supra, which is from the Eastern District of Wisconsin, decided a month later, disagreed with the Zehrung decision.
5 See Peaslee at *4 and *11.
6 The court went to great pains to assure that its decision did not affect the lien priority and perfection laws contained in the state motor vehicle financing laws.