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.

Update Nov. 14, 2007 –  But see In re Mitchell, 2007 WL 3378229 Bankr. M.D. Tenn. 2007) (under Tennessee law, negative equity is not included in PMSI).

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.