Graupner v. Nuvell Credit Corp. (In re Graupner), No. 07-13657 (11th Cir. August 6, 2008) (click here for opinion). In a case of first impression at the Circuit level, the Eleventh Circuit Court of Appeals examined the "hanging paragraph" that comes after 11 U.S.C. §1325(a)(9).
The basic facts of this case are as follows: Debtor purchased a vehicle in June, 2005. As part of the transaction, he traded in another vehicle with a value of less than what was owed on it. The "negative equity" of $6,347 was rolled into the new loan on the new vehicle. The end result was that his new loan was in the amount of $36,384, for a new vehicle with a sale price of $32,929.
Less than a year later, he filed a Chapter 13 petition and sought to bifurcate the creditors claim into secured and unsecured portions pursuant to §506. The creditor objected to the plan, contending that the claim on the Debtor’s "910 vehicle" could not be bifurcated pursuant to the "hanging paragraph" of §1325.
The "hanging paragraph" that comes after 11 U.S.C. §1325(a)(9) provides as follows:
(a) Except as provided in subsection (b), the court shall confirm a plan if—
(9) the debtor has filed all applicable Federal, State, and local tax returns as required by section 1308.
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 of 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
The parties agreed that the debt was acquired within 910 days of filing, and the vehicle was for personal use. The remaining issue was whether the creditor held a purchase money security interest.
The Court first noted that the amendments were clearly intended to benefit creditors:
Although the hanging paragraph has caused significant “confusion and incoherence in the law” and has been rightly criticized for its poor drafting, In re Long, 519 F.3d 288, 292 (6th Cir. 2008); see also In re Carver, 338 B.R. 521, 523 (Bankr. S.D. Ga. 2006), its legislative history leaves little doubt that its “‘architects intended only good things for car lenders and other lienholders.’” See Long, supra, 519 F.3d at 294 (citations omitted)
The Court then noted the split of authority in lower courts –
The first camp holds, as the bankruptcy court held here, that the creditor’s purchase money security interest encompasses all components of the new vehicle purchase, including financing of negative equity. … The second camp holds that certain components of the loan, most notably negative equity in a trade-in vehicle, do not constitute a purchase money security interest….
The latter group of cases lead to a further inquiry on how to treat “partial” purchase money securities, which has caused still more divergences in the law. Some courts have adopted the “dual-status rule” (which allows the court to treat the purchase-money portion as purchase-money, while the non-purchase-money portion remains non-purchase-money), see, e.g., Pajot, supra, 371 B.R. at 139, whereas other courts have adopted the “transformational rule” (which holds that a security interest that is part purchase-money and part non-purchase-money completely loses its purchase-money character and is entirely “transformed” into a non-purchase-money security interest), see, eg. Price, supra, 363 B.R. at 734; see also Lavigne, supra, 2007 WL 3469454, at *9 (noting that courts are “divided” on the issue of whether to apply the dual status or transformational rule and collecting cases on both sides). One court has appropriately described the foregoing as a
“maddeningly inconsistent body of decisions.”
The Court then held that negative equity in a trade-in is properly classified as "purchase money security interest" that prohibits bifurcation into secured and unsecured claims.
So, the question is whether negative equity on a trade-in vehicle is “debt for the money required to make the purchase” of the new vehicle, or whether it is “antecedent debt.” It is, as the split in the decided cases indicates, a close call.
Upon consideration, however, we agree with the bankruptcy court that, when looking to Georgia state law, negative equity is more properly regarded as the former and not the latter. When O.C.G.A. §§ 11-9-103 (UCC) and 10-1- 31(a)(1) (MVSFA) are read in pari materia (which we believe is appropriate for all the reasons stated by the bankruptcy court), it is the only reasonable conclusion to reach. Because this issue was properly considered and analyzed at length by the bankruptcy court, and by certain of the courts in the “first camp” above, we see no reason to duplicate the analysis as the path is by now well-worn. We do add, however, that our decision finds support in the relevant UCC Official Comment
and is consistent with legislative intent…..
Therefore, in applying the hanging paragraph to the facts of this case, we must keep before us the underlying purpose of, and legislative intent behind, the statute. Here, the hanging paragraph ultimately seeks to require a debtor electing to retain a “910 vehicle” to pay the creditor the full amount of the claim and not (as under pre-BAPCPA law) an amount equal to the present value of the car. See In re Trejos, 374 B.R. 210, 220 (9th Cir. BAP 2007) (“[T]he purpose underlying the ‘Hanging Paragraph’” is to ensure that debtors “‘repay in a Chapter 13 the amount they actually agreed to pay for a motor vehicle purchased within
910 days of bankruptcy, instead of the true value of the collateral.’”) (citation omitted). The practice in automobile financing over the years has been to extend the repayment period over longer time frames: from three years in the past up to as much as five years, or more, now. One result of such an extended payment period is that having negative equity in a vehicle is common. The hanging paragraph plainly addresses the negative equity that the Debtor may have in a vehicle at the time of filing, and it seems that the intended purpose was, at least in part, to deal with the negative equity practice….
If Congress did not intend for the hanging paragraph to apply to a trade-in’s negative equity, as the Debtor ultimately contends, it would have the effect of excluding a substantial number of lawful auto finance transactions that were industry practice when BAPCPA was
enacted (a practice that Congress is presumed to have known about). This would
be an absurd result given that it is recognized that the “‘architects [of the hanging
paragraph] intended only good things for car lenders and other lienholders.’”
It would be particularly absurd because a strong argument can be made that “the primary purpose of the hanging paragraph of Code § 1325(a)(9) is, in fact, precisely to take the unsecured negative equity debt which any Chapter 13 debtor has when his or her less than nine hundred and ten day-old vehicle is not worth the outstanding loan balance, and, by
refusing it the Code § 506 treatment, to transform it into secured debt not supported by collateral value, and then require it to be paid in full to the detriment of other unsecured creditors.”
Finally, the Court added the following footnote –
We again emphasize that the facts of this case involve reasonable, bona fide negative
equity in the trade-in vehicle. Because we have dealt here only with a legitimate purchase
transaction, we leave for another day what the result might be if there is evidence of subterfuge relating to an unrelated antecedent debt.