§ 75.3     Only PMSIs Need Apply
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 75.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The hanging sentence added to the end of § 1325(a) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 provides that § 506 “shall not apply” to allowed secured claims provided for by the plan under § 1325(a)(5) when the creditor has a “purchase money security interest” (PMSI) in a motor vehicle2 acquired for the personal use of the debtor3 and the debt was incurred within 910 days of the petition or the collateral is any other thing of value4 and the debt was incurred within a year of the petition. A strong majority of courts have concluded that when a debt falls within the hanging sentence, § 506 is disabled and the debt is treated as if it were fully secured though it can be otherwise modified consistent with § 1322(b)(2).5

[2]

One of the important predicates to application of the hanging sentence is that the creditor must have a “purchase money security interest.”6 The hanging sentence has been uniformly interpreted by the courts to require that the purchase money condition applies to both motor vehicles acquired for the personal use of the debtor within 910 days of the petition7 and to collateral that is any other thing of value8 when the debt was incurred within a year of the petition. In other words, without regard to the kind of collateral or when the debt was incurred, the hanging sentence only applies to PMSIs.

[3]

“Security interest” is defined by the Bankruptcy Code,9 but “purchase money security interest” is not. Because application of the hanging sentence depends on the existence of a purchase money security interest, bankruptcy practitioners and courts must determine whether a PMSI is present and to what extent whenever a creditor asserts that § 506 does not apply because of the hanging sentence. There are daunting issues here with respect to the hanging sentence and state law.

[4]

Perhaps the first issue is that the hanging sentence requires separate analysis of each secured debt to determine whether a PMSI is present. This simple proposition was not so simply presented in In re Sanders.10 A creditor in Sanders had two liens on the same car. The first lien ($5,488.26) was a PMSI incurred within 910 days of the Chapter 13 petition. The same creditor had a second lien in excess of $15,000 that was not purchase money. The value of the car was $10,711.25.

[5]

The trustee in Sanders argued cleverly that the second lien could not be a secured claim because the hanging sentence prevented use of § 506 to determine whether value was available for the junior lien.11 The bankruptcy court disagreed and along the way made the important observation that each lien must be reviewed independently to determine whether the hanging sentence applies. Because the hanging sentence did not apply to the junior lien, the Sanders court held that § 506 applied to determine that some value remained for the second lien. The lien-by-lien analysis in Sanders is a good model.12

[6]

When the whole of a debt is determined to be secured by a PMSI, the hanging sentence seems to instruct that § 506 shall not apply to the entire debt provided for under § 1325(a)(5).13 Can the same be said when a single debt is secured in part by a PMSI and in part by a nonpurchase money lien? This is an issue of statutory construction with respect to the hanging sentence itself and should not be confused with questions that arise under state law when a debt is partially purchase money and partially not.14 In other words, assuming that applicable law allows a security interest to be partially purchase money and partially not, can that mixed security interest fall within the hanging sentence?

[7]

This issue was directly addressed by the Bankruptcy Court for the Eastern District of North Carolina in In re Price.15 Applying North Carolina law, the court in Price first determined that a car lender held a security interest that was purchase money in part and not purchase money in part. The hanging sentence extends protection to a creditor that has “a purchase money security interest securing the debt that is the subject of the claim.”16 The Price court read this phrase to mean that a creditor with a PMSI for part of its debt was protected from claim splitting under § 506 even if part of its debt was secured by a nonpurchase money security interest. The Price court based this conclusion on contrasting language in other sections of the Bankruptcy Code: “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 . . . § 521(a)(6) [and] . . . 1326(a)(4).”17

[8]

Section 521(a)(6) provides a Chapter 7 debtor may not retain possession of personal property when 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 reaffirms or redeems the security within 45 days after the meeting of creditors.18 Section 1326(a)(4) requires a Chapter 13 debtor retaining possession of personal property that is subject to a lease or “securing a claim attributable in whole or in part to the purchase price of such property” to provide evidence of insurance within 60 days of the petition.19 Both of these sections impose responsibilities on consumer debtors when PMSIs are present without regard to whether the debt is purchase money in whole or in part. In contrast, the hanging sentence at the end of § 1325(a) requires a PMSI without reference to debts that are only partially purchase money in character.

[9]

The Price court concluded that the difference in language between the hanging sentence and §§ 521(a)(6) and 1326(a)(4) indicated that partially purchase money security interests could claim the protection of the hanging sentence.20 Equally powerful canons of statutory construction have led others to the opposite conclusion.

[10]

In In re Sanders,21 the bankruptcy court first determined that part of a car lender’s security interest was not a purchase money security interest under Texas law.22 Citing the same Code sections as the bankruptcy court did in Price, the Sanders court held that the hanging sentence was “all or nothing”—any non-PMSI portion of the debt forfeits altogether the protection from § 506:

11 U.S.C. § 1325(a)(*) . . . self-describes its provisions as an exception to the general rule for secured claims set out in § 1325(a)(5), which allows bifurcation . . . . Exceptions to general rules are construed narrowly. . . . Congress could have used different language, such as “to the extent of” or “the extent to which” had it intended that the 910-day rule apply to that portion of the debt that is PMSI . . . . The inclusion of “if” must be construed as an intentional exclusion of “to the extent.” . . . The statute . . . requires “the debt” to be secured by a PMSI—not “a part of” the debt or “any portion of” the debt or “that portion of” the debt, all phrases that would deliver very different outcomes. . . . The 910-day provision is clear and unambiguous. It requires the creditor to hold a purchase money security interest securing the debt—not part of the debt, not any part of the debt, not that portion of the debt, but all of the debt that is the subject of the claim. . . . Just as Congress did not use language such as “any portion of” or “part of” to broaden the coverage of the antimodification provision found in section 1322(b)(2), Congress also failed to include similar broadening language in the 910-day provision.23
[11]

Sanders and Price were both reversed on appeal, but the issue addressed by these bankruptcy courts is hardly put to rest. The hanging sentence is ambiguous with respect to whether partially purchase money security interests are eligible for protection from § 506.

[12]

The next question is where to look for a body of law defining PMSI. As demonstrated below, almost every court that has tackled the choice of law question has concluded that it is appropriate to look to state law to determine whether a secured creditor holds a purchase money security interest for purposes of the hanging sentence.24 Departing from the pack, one brave bankruptcy judge adopted a federal definition of PMSI based on the following extended analysis of “uniformity” considerations:

The issue . . . is whether state or federal law should define the term purchase money security interest as it is used in 11 U.S.C. § 1325(a). . . . The absence of a clear state law definition of purchase money security interest and conflicting state law definitions have resulted in disparate treatment of creditors’ claims. . . . [T]he question should be narrowed to whether it is appropriate to resort to defining the term at the federal level, or whether multiple, varying state law definitions should be used. . . . The first point for consideration under [Dzikowski v. Northern Trust Bank of Florida (In re Prudential of Florida Leasing, Inc.), 478 F.3d 1291 (11th Cir. 2007),] concentrates on uniformity. In this case, the argument for uniformity would encourage adoption of a definition of purchase money security interest to promote similar treatment of debtors and creditors. . . . [A]n appeal for uniformity does not “prove its need.” . . . [T]he fact that debtors and creditors are subjected to different treatments, based on the diverse definitions under state law, does not mandate adoption of federal common law. Rather, courts give regard to uniformity as a key factor when there is a threat that a federal right would be impinged or diminished. . . . No such federal right is at stake in this instance. The next inquiry under Prudential of Florida Leasing involves looking at the core federal policies of the statute and deciding whether the use of state law impermissibly abridges the policies. . . . [T]he Congressional intent behind the hanging paragraph is unclear. . . . The final consideration . . . is . . . “the extent to which application of a federal rule would disrupt commercial relationships predicated upon state law.” . . . The state law standard should not be used for reasons that may be titled as the excluded purpose exception. Excluded purpose means that a state statute should not serve as a federal rule of decision if the federal purpose was excluded from the state law. That is the case in the state law definition of purchase money. The intent of the framers of the Uniform Commercial Code is quite clear: the state law definition of purchase money security interest was not meant to apply to bankruptcy law. Official Comment 8 . . . . [T]here is strong reason to use a federal, and not a state, application in this context. . . . [T]his case presents the confounding problem of applying a state law definition when that definition was specifically left undetermined due to what appears to be the UCC drafters’ intentional non-decision. . . . Simply, state law does not support uniformity or advance the intent of the drafters of either the UCC or the Bankruptcy Code.25
[13]

Concerns about choice of law, uniformity and the meaning of PMSI in the hanging sentence are well-founded. The overwhelming majority of courts have consulted state law to determine whether and to what extent a debt is secured by a PMSI. Unfortunately, state law often delivers gray scale rather than bright lines in this context.

[14]

The hanging sentence addresses claims secured by “motor vehicles” and “any other thing of value.”26 When you look to state law to determine whether a lender has a PMSI in a car, there are sometimes several potential sources of law: the Uniform Commercial Code (UCC) as adopted in the state; a motor vehicle sales or finance act; and a motor vehicle registration law.

[15]

A robust debate has developed with respect to whether courts should look beyond the state UCC to consider motor vehicle finance and registration laws when the purchase money character of a security interest in a car is at issue. Sometimes this debate is characterized as turning on whether the UCC and other state motor vehicle laws are in pari materia. Perhaps because it is sometimes easier for state legislatures to tinker with motor vehicle registration laws than with the state UCC, it is not uncommon for the motor vehicle registration law to contain its own definitions of terms that could be relevant to the meaning of PMSI under state law. On the other hand, because motor vehicle registration laws and finance laws typically address different subject matter than that addressed by the UCC, not all courts are convinced to apply definitions or court interpretations of other laws in the PMSI context.

[16]

For example, in In re Graupner,27 the Bankruptcy Court for the Middle District of Georgia held that both the Georgia Motor Vehicle Sales Finance Act and the Georgia Uniform Commercial Code must be consulted to determine whether the hanging sentence applied to a car lien because the separate statutes identified different components of a car purchase transaction that could generate a PMSI. Under the Georgia Uniform Commercial Code, the Graupner court found that a purchase money obligation extends to the “price” of the collateral. Under the Georgia Motor Vehicle Sales Finance Act, the “cash sale price” may include “any amount paid to the buyer or to a third party on behalf of the buyer to satisfy a lease or a lien on or a security interest in a motor vehicle used as a trade-in.”28 Finding the term “price” in the Georgia UCC to be ambiguous in this context, the bankruptcy court in Graupner looked to the meaning of “cash sale price” in the Motor Vehicle Sales Finance Act:

Even though the MVSFA does not in itself provide the definition of purchase money security interest, its provisions aid the Court in deciding what meaning the term “price,” as it appears in the purchase money security interest statute, should be given in the context of a retail installment sales transaction. The Court, therefore, finds that the MVSFA is sufficiently related to the subject matter of the purchase money security interest statute . . . to justify the Court’s reading of the statutes in pari materia.29
[17]

In contrast, other courts have noted the absence of a state motor vehicle registration act as one reason to confine the hanging-sentence PMSI discussion to the state UCC or have looked at a state motor vehicle registration or finance act and rejected its use to determine the existence or extent of a PMSI for purposes of the hanging sentence. For example, in In re Sanders,30 the bankruptcy court rejected consideration of the Texas Certificate of Title Act because it dealt with the perfection of car liens without regard to purchase money status, and the court refused to look to the Texas Finance Code because it was a consumer protection statute that should not be read in pari materia with the Texas UCC:

[I]n Texas, the application of the doctrine of in pari materia has three pre-conditions that must first be met: the statutes to be construed together must (1) concern the same subject matter; (2) relate to the same person or class of persons; or (3) have the same object or purpose. . . . Texas’ Certificate of Title Act . . . makes notation on a certificate of title the exclusive means for perfecting a security interest in a vehicle. . . . Precisely because the perfection scheme . . . makes the purchase money status of the lien irrelevant, the Certificate of Title Act has nothing to say about the purchase money status of the lien. That Act thus offers no assistance to our interpretative task because it does not concern the same subject matter, or have the same object or purpose. . . . [T]he Texas Finance Code . . . regulates Motor Vehicle Installment Sales contracts. . . . [T]he Finance Code never actually uses the term “purchase money security interest.” In fact, the chapter does not in any meaningful way address the question of security interests, their nature, or their extent. Instead, the Finance Code addresses the unique issues regarding what may be financed, how finance charges are to be computed, and how financing and charges are to be disclosed to retail purchasers of motor vehicles. In short, it is a consumer protection statute.31
[18]

With respect to “any other thing of value,” the source of law for determining the presence and extent of a PMSI is even less certain. This phrase is broad enough to include almost any kind of tangible real or personal property.32 Security interests in the many kinds of property reachable by this part of the hanging sentence could arise under the Uniform Commercial Code, real property law or any other state law that addresses the creation of liens or security interests. There is even the possibility of applicable federal law—for example, some security interests in aircraft and boats are addressed by federal statutes.33 Purchase money for purposes of goods under the UCC in a state may not be the same as purchase money for real property. State law may be silent with respect to some kinds of collateral. Resolving the meaning of purchase money for purposes of the hanging sentence may require some digging when the collateral is any other thing of value.

[19]

For most personal property, the Uniform Commercial Code will be the source of law for the meaning of PMSI in the hanging sentence. When bankruptcy courts look to the UCC for guidance, the next issue will be, What state’s commercial law controls? The answer will not always be obvious because purchase contracts and security interest paperwork often anticipate negotiation, sale or bundling for lenders that have preferences with respect to state law. Choice of law clauses in consumer finance contracts often specify that the contract will be interpreted or disputes resolved under the law of an identified state. When the sale occurred in Tennessee, the contract mandates interpretation under Michigan law and the Chapter 13 case is filed in Chicago, an Illinois bankruptcy court must first determine whose Uniform Commercial Code to apply to determine whether and to what extent a PMSI was birthed.

[20]

Of course, you already know that versions of the Uniform Commercial Code vary, sometimes dramatically from state to state. The 2000 version of Revised Article 9 produced by the National Conference of Commissioners on Uniform State Laws and the American Law Institute is a good reference point, but be warned that your state UCC may differ materially. Section 9-103 of Revised Article 9 (2000) contains the following definitions relevant to PMSIs:

(a) Definitions. In this section:
(1) “purchase-money collateral” means goods or software that secures a purchase-money obligation incurred with respect to that collateral; and
(2) “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.
(b) Purchase-money security interest in goods. A security interest in goods is a purchase-money security interest:
(1) to the extent that the goods are purchase-money collateral with respect to that security interest;
(2) if the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secures a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest[.]
. . . .
(f) No loss of status of purchase-money security interest in non-consumer-goods transaction. In a transaction other than a consumer-goods transaction, a purchase-money security interest does not lose its status as such, even if:
(1) the purchase-money collateral also secures an obligation that is not a purchase-money obligation;
(2) collateral that is not purchase-money collateral also secures the purchase-money obligation; or
(3) the purchase-money obligation has been renewed, refinanced, consolidated, or restructured.
. . . .
(h) Non-consumer-goods transactions; no inference. The limitation of the rules in subsections (e), (f), and (g) to transactions other than consumer-goods transactions is intended to leave to the court the determination of the proper rules in consumer-goods transactions. The court may not infer from that limitation the nature of the proper rule in consumer-goods transactions and may continue to apply established approaches.34
[21]

The following official comments to § 9-103 of Revised Article 9 are relevant to the meaning of PMSI:

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.
. . . .
5. Purchase-Money Security Interests in Goods and Software. Subsections (b) and (c) limit purchase-money security interests to security interests in goods, including fixtures, and software.
. . . .
7. Provisions Applicable Only to Non-Consumer-Goods Transactions.
a. “Dual-Status” Rule. For transactions other than consumer-goods transaction, this Article approves what some cases have called the “dual-status” rule, under which a security interest may be a purchase-money security interest to some extent and a non-purchase-money security interest to some extent. (Concerning consumer-goods transactions, see subsection (h) and Comment 8.) Some courts have found this rule to be explicit or implicit in the words “to the extent,” found in former Section 9-107 and continued in subsections (b)(1) and (b)(2). The rule is made explicit in subsection (e). For non-consumer-goods transactions, this Article rejects the “transformation” rule adopted by some cases, under which any cross-collateralization, refinancing, or the like destroys the purchase-money status entirely.
Consider, for example, what happens when a $10,000 loan secured by a purchase-money security interest is refinanced by the original lender, and, as part of the transaction, the debtor borrows an additional $2,000 secured by the collateral. Subsection (f) resolves any doubt that the security interest remains a purchase-money security interest. Under subsection (b), however, it enjoys purchase-money status only to the extent of $10,000.
. . . .
8. Consumer-Goods Transactions; Characterization Under Other Law. Under subsection (h), the limitation of subsections (e), (f), and (g) to transactions other than consumer-goods transactions leaves to the court the determination of the proper rules in consumer-goods transactions. Subsection (h) also instructs the court not to draw any inference from this limitation as to the proper rules for consumer-goods transactions and leaves the court free to continue to apply established approaches to those transactions.
This section addresses only whether a security interest is a “purchase-money security interest” under this Article, primarily for purposes of perfection and priority. See, e.g., Sections 9-137, 9-324. In particular, its adoption of the dual-status rule, allocation of payments rules, and burden of proof standards for non-consumer-goods transactions is not intended to affect or influence characterizations under other statutes. Whether a security interest is a “purchase-money security interest” under other law is determined by that law. For example, decisions under Bankruptcy Code Section 522(f) have applied both the dual-status and the transformation rules. The Bankruptcy Code does not expressly adopt the state law definition of “purchase-money security interest.” Where federal law does not defer to this Article, this Article does not, and could not, determine a question of federal law.35
[22]

There’s a lot to chew on here that is relevant to identifying PMSIs eligible for hanging-sentence protection from § 506. It is common for security interests in Chapter 13 cases to extend to all manner of collateral in addition to the car, appliance or furniture that the debtor actually purchased. There may be an extended warranty or credit life insurance or “gap” insurance or the payoff of a prior loan. The issue becomes, did the lender successfully acquire a PMSI in all of the collateral described in the loan documents under § 9-103 of the applicable Uniform Commercial Code? If the lender has a PMSI in some respects but not in others, what then is the consequence under state law: Does the entire debt lose its purchase money character, or is part of the debt purchase money for purposes of the hanging sentence?36

[23]

This is not a book about the Uniform Commercial Code, but the gist of § 9-103 is that PMSIs involve “goods” and a PMSI arises from an obligation incurred to enable the debtor to acquire rights in goods only when the loan is actually used for that purpose. Things that aren’t goods (or software) make lousy collateral for § 9-103 purposes—state law will decide the question, but insurance policies, warranties and the like often are not “goods.”

[24]

For interesting historical reasons,37 U.C.C. § 9-103(f) quite specifically describes the consequence in a nonconsumer goods transaction when part of a loan is purchase money and part is not. Not only does § 9-103 of the uniform law not express an opinion, § 9-103(h) affirmatively states that the rules in § 9-103(e), (f) and (g) with respect to nonconsumer goods should not be interpreted to pollute the determination by a court of the consequences in consumer goods transactions when only part of the debt can be purchase money.38 Comment 7, reproduced above, explains that § 9-103 approves the “dual-status” rule with respect to nonconsumer goods transactions—supporting the view that a security interest in nonconsumer goods is not completely disabled to be purchase money when part of the transaction fails a condition for purchase money status. Comment 7 states that the “transformation” rule39 adopted by some courts does not apply to nonconsumer goods transactions but leaves open the possibility that a transformation rule would be applied to consumer goods when part of a consumer transaction is purchase money and part is not. This is approximately where § 9-103 of the Uniform Commercial Code leaves us. Some fascinating case law picks up at this point.

[25]

Debtors’ lawyers and Chapter 13 trustees quickly tumbled to the realization that there is much incentive in U.C.C. § 9-103 for careful scrutiny of the documentation lienholders bring into confirmation when the hanging sentence is at issue. To do the job right, the parties have to find the complete purchase contracts and security agreements whereby the debtor acquired whatever “goods” are claimed as collateral by the lienholder. Each security interest has to be carefully examined, including the history of the paper after the original transaction.

[26]

Debtors and their attorneys are interested in this inquiry. If part of the security interest fails to be purchase money, that part is not protected from § 506 by the hanging sentence and at least the nonpurchase money part of the debt will be subject to valuation, bifurcation and cramdown. If the “transformation” rule applies,40 the entire debt may cease to be purchase money if part of the loan fails analysis under U.C.C. § 9-103 (or whatever state law is applicable) and the entire debt becomes subject to ordinary pre-BAPCPA rules with respect to valuation, stripdown of liens and the like.

[27]

Trustees are invested in these same questions because any successful challenge to purchase money status changes the mathematics of confirmation in ways that usually favor distributions to unsecured creditors. If all or part of a lienholder’s debt is not purchase money, then all or part of that debt is not protected from § 506 by the hanging sentence. Some or all of the debt will then move from secured to unsecured and money that would have been required to pay the secured debt with interest becomes available for distribution to unsecured creditors. Chapter 13 trustees have a fiduciary obligation to examine security interests and determine whether purchase money character is present and to what extent.

[28]

A good example of how state PMSI law plays out in the hanging- sentence context is In re Trejos.41 The debtor in Trejos bought a Volkswagen Passat and the seller, Desert Volkswagen, reserved a security interest. Desert Volkswagen then transferred the debt to VW Credit. In the debtor’s Chapter 13 case, VW Credit argued it acquired a PMSI that was not subject to claim splitting under § 506 because of the hanging sentence in § 1325(a).

[29]

The debtor responded that Desert Volkswagen may have held a PMSI, but once that the debt was transferred to VW Credit, purchase money status was destroyed. The bankruptcy court had little trouble disposing of the debtor’s argument, but the logic of the bankruptcy court’s analysis is instructive:

The concept of a “purchase-money security interest” is not defined in the Bankruptcy Code. In those instances in which it has been used, however, courts have looked to state law generally, and the Uniform Commercial Code (UCC) in particular, for definitions.
        [T]he UCC recognizes two types of purchase-money security interest: the security interest that arises when a seller of goods takes back a security interest to secure the deferred part of the goods’ purchase price (or when the seller reserves title in the goods sold until he or she is paid); and the security interest that arises when a lender or other financier extends credit to the debtor to enable the debtor to acquire specific goods.
        There is little doubt that when Desert Volkswagen reserved for itself a security interest in the Passat upon its sale, that security interest was a purchase-money security interest. The obligation was “incurred as all or part of the price of the collateral,” making it a purchase-money obligation, and that obligation was “incurred with respect to that collateral.”
        The question is whether the transfer of the debtors’ obligation from Desert Volkswagen to VW Credit affected the purchase-money status of the security interest debtors granted in the Passat. This question has not arisen under Nevada law, or since 2001, when revisions to Article 9 went into effect nationwide, in any other state. But prerevision law and commentary universally held that transfer of the claim did not destroy purchase-money status.
[I]f seller sells goods and retains a security interest in them, that interest is a PMSI. If the seller perfects the security interest and later assigns that security interest to a third party, the third party becomes the holder of a PMSI.42
[30]

Because transfer of the security interest from seller to financier in Trejos did not destroy purchase money character, the hanging sentence prohibited bifurcating the debt through confirmation of a plan. The Trejos court reached this conclusion by analysis of state law and general UCC commentary—exactly what Chapter 13 practitioners everywhere must do to determine purchase money status when the hanging sentence is at issue.

[31]

Cross-collateralization clauses and future advances clauses can create problems for a lender that wants to have a PMSI for hanging-sentence purposes. Facts may be important. In In re Matthews,43 the bankruptcy court held that cross-collateralization clauses and future advances clauses in an installment sales contract did not forfeit purchase money status when there was no evidence that the lender sought to extend its security interests to preexistent or subsequent debts and the security agreement did not allow the lender to retain its security interest in any one item of collateral once the debtor paid the purchase price for that item.

[32]

Refinancing is even more complicated. The issue came before the bankruptcy court backwards in In re Huddle.44 The plan in Huddle provided for surrender of an RV in full satisfaction of the debt.45 Surrender in full satisfaction of the debt was a significant threat in this context only if the debt secured by the RV met all the conditions of the hanging sentence—including that the debt was secured by a PMSI. The lienholder argued that because it had refinanced the debt, its security interest stopped being a PMSI under state law, thus the hanging sentence did not apply and surrender of the collateral in full satisfaction was not an option. The bankruptcy court gave the following useful summary of the law with respect to whether refinancing forfeits purchase money status:

If the original loan has been refinanced, the Courts of Appeal are split as to whether to apply the transformation rule or the dual status rule. . . . Courts in the First, Fourth, Sixth, Eighth, Ninth, and Eleventh Circuits follow the transformation rule, which states that a purchase money security interest is automatically transformed into a non-purchase money interest when the proceeds of a refinanced loan are used to satisfy the original loan. . . . Courts in the Third, Eighth, Ninth, and Tenth Circuits, by contrast, have followed the dual status rule . . . . Virginia has adopted amendments to Article 9 of the UCC that adopt the Dual Status Rule for non-consumer transactions. . . . For consumer transactions, however, the statute has a savings clause that expressly “leave[s] to the court the determination of the proper rules in consumer-goods transactions.” . . . [T]he Fourth Circuit decision in [Dominion Bank of the Cumberland v. Nuckolls (In re Nuckolls), 780 F.2d 408 (4th Cir. 1985),] remains good law in the consumer-goods context and compels a determination that the purchase-money character of 1st Advantage’s security interest was lost when the original loan was refinanced and a portion of the proceeds used to bring a separate loan current. . . . 1st Advantage’s claim is not a “910 claim,” and the “hanging paragraph” therefore provides no authority for the debtor to surrender the RV in full satisfaction of the debt.46
[33]

There has been an avalanche of challenges to purchase money status at confirmation in Chapter 13 cases based on various items of collateral and diverse state law. Not surprisingly, deep divisions have resulted in which similarly situated debtors and lienholders realize completely inconsistent outcomes from one district to another and even within the same district. The principal battlefields are whether PMSI status extends to amounts financed for warranties or service contracts, for insurance in its many forms, to pay taxes and other “administrative” fees and, perhaps most significantly, to pay off debt on a trade-in that is not worth the amount owed—so-called “negative equity.”

[34]

The bankruptcy court in In re Murray47 had little trouble concluding that the $344 documentary fee and $18 government certificate of title fee included in the purchase price of a car did not forfeit purchase money character because these fees “are clearly ‘expenses incurred in connection with acquiring rights in the collateral,’ easily labeled as finance or administrative charges.”48 Several other courts have reached the same conclusion with respect to sales taxes, license fees, registration fees and the like financed as part of automobile purchase contracts.49 One court refused to extend a car lender’s PMSI to amounts advanced to pay “administrative” fees when the creditor “wholly failed to establish what these . . . fees were for and why they constitute part of the purchase money security interest.”50

[35]

A majority of courts considering the issue have held that service contracts and extended warranties financed as part of a car purchase are included in the car lender’s PMSI. The $700 extended service contract in Murray did not disqualify the security interest from purchase money status because “an extended service contract or warranty is so inextricably related to the collateral that the purchase of these or similar items would be considered part of the price of the collateral.”51

[36]

In contrast, a respectable minority of courts have refused PMSI status to the portion of a loan used to purchase an extended warranty or service contract, typically based on finding that the extended warranty or service contract is not “goods” for purposes of the UCC but is really an insurance policy or executory contract under state law.52

[37]

It is common for car dealers to offer car buyers various forms of insurance at the time of a car purchase. In addition to extended warranties and service contracts just discussed, car dealers often have relationships with insurers to provide credit life, credit accident, credit disability and the ubiquitous “gap” insurance—all rolled up and financed as part of the loan to buy the car. The hanging-sentence question is whether any and all of these insurance policies can be subject to the car lender’s purchase money security interest.

[38]

In In re Price,53 the bankruptcy court considered whether “gap insurance” included in the purchase price of a car was subject to a PMSI under North Carolina law. As explained by the court, “[g]ap insurance covers that part of the damage that exceeds the value of the automobile, up to the outstanding balance of the secured loan.”54 Because gap insurance was not a mandatory part of the purchase price of the car and was not a “value enhancing add-on,” the bankruptcy court held it was not part of the amount financed that could be subject to a PMSI.55

[39]

On appeal, the U.S. Court of Appeals for the Fourth Circuit reversed the bankruptcy court, stating cryptically in a footnote that gap insurance is “tied . . . closely . . . to the purchase of a new car” and was included in both the “price” and “value given to enable” the debtor to acquire rights in the car for purposes of U.C.C. § 9-103.56 The Fourth Circuit in Price addressed not at all the question whether North Carolina law would permit a PMSI in an insurance policy. Instead, the Fourth Circuit treated the gap insurance as an integrated whole with the purchase of the car.

[40]

A majority of reported decisions agree with the bankruptcy court in Price that financing gap insurance is not included in a PMSI for hanging-sentence purposes.57 A respectable minority sides with the court of appeals in Price, holding that gap insurance financing does not forfeit a car lender’s PMSI.58 Few of the minority courts explain with any precision how an insurance policy can be purchase money collateral under state law.

[41]

When the insurance policy included in the car financing relates not at all to the car itself, but rather to the health of the borrower, the courts seem more inclined to find that the car lender’s PMSI does not extend to the insurance policy. Most courts have held that a car lender’s PMSI does not extend to credit life, disability and similar insurance policies that may have been sold as part of the car purchase transaction.59 Somewhat incongruously, one of the courts holding that an insurance policy will not support a purchase money security interest for purposes of the hanging sentence also concluded that financing for an extended warranty was included in the car lender’s PMSI—notwithstanding that the extended warranty was in the nature of an insurance contract.60 Citing the Missouri Uniform Commercial Code, another bankruptcy court concluded that a lender’s purchase money security interest in a car extended to the cost of forced-placed insurance obtained by the lender after the sale.61

[42]

The 800-pound gorilla in this discussion of collateral that can and cannot support a PMSI is the payoff of prior debt—sometimes called the financing of “negative equity.” It is common at the time of purchase of a car to include in the financing package the payoff of any debt remaining on a trade-in. The amount necessary to pay off the trade-in typically is advanced by the new lender and paid directly to the old lender to release the old lender’s lien on the traded-in vehicle. It is often true that the payoff of the prior loan exceeds the actual value of the car traded—hence the moniker, negative equity.

[43]

In negative equity transactions, it is conventional for the seller of the new car to “cover” the payoff of the old car by manipulating the value of the new car, the purchase price of the new car and the amount attributable to trade-in of the old car so that the numbers will justify an inflated new borrowing. The new borrowing, of course, is larger than the true purchase price of the new car by at least the “negative equity” in the trade-in.

[44]

There are rich issues here with respect to PMSI and the hanging sentence. In a comprehensive treatment, the Bankruptcy Court for the Western District of New York concluded in In re Peaslee62 that the payoff of a lien on a trade-in with negative equity was not a purchase money transaction for purposes of the hanging sentence at the end of § 1325(a):

[B]etween 26% and 38% of buyers have negative equity in their trade-in vehicle. . . . [T]he Secured Claim . . . includes debt for which GMAC does not have a purchase money security interest, because it includes amounts loaned to the Debtor to pay off the negative equity that she had in the Blazer, and those amounts were in fact used to pay off and discharge the lien that M & T Bank had on the Blazer, not to pay any part of the actual purchase price of the Grand Am. . . . [T]here does not appear to have been a legal or equitable reason that Congress would have enacted a provision that would transform knowingly refinanced unsecured negative equity debt into secured debt not supported by collateral value, and then require it to be paid in full to the detriment of other unsecured creditors. This would undermine one of the fundamental policies of the Bankruptcy Code, which is equality of distribution among like creditors. . . . [T]here is absolutely no legislative history . . . . Providing a loan to refinance negative equity on a trade-in, which may be a convenient but unnecessary option for a consumer purchasing a replacement vehicle, is not value given to “enable” that consumer to acquire rights in or the use of the replacement collateral. . . . Providing a loan to allow a debtor to pay off a 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 . . . . [T]here are simply two separate financial transactions . . . . [T]he 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.63
[45]

On appeal, the U.S. District Court for the Western District of New York reversed, offering the following different interpretation of § 9-103 of the New York Uniform Commercial Code and finding support in New York’s Motor Vehicle Retail Installment Sales Act for the conclusion that financing negative equity does not forfeit the car lender’s purchase money security interest:

Whether a PMSI exists in the cases at bar . . . turns on whether the negative equity on the debtors’ trade-ins constitutes “part of the price of the collateral,” i.e., part of the price of the “new” vehicles, or, in the alternative, whether it constitutes “value given to enable the debtor[s] to acquire rights in or the use of the collateral[.]” . . . It is not apparent why a refinancing of rolled-in negative equity on a trade-in as part of a motor vehicle sale could not constitute an “expense[ ] incurred in connection with acquiring rights in” the new vehicle. . . . Comment 3 states that “[t]he concept of “purchase-money security interest” requires a close nexus between the acquisition of collateral and the secured obligation[.]” . . . Where the parties to the transaction agree to a “package transaction” in which “[t]he negative equity is inextricably intertwined with the sales transaction and the financing of the purchase,” . . . one could certainly conclude that “[t]his close nexus between the negative equity and this package transaction supports the conclusion that the negative equity must be considered as part of the price of the collateral.” . . . The fact that negative equity and trade-ins do not have to be included in a sale, and that the buyer could, in theory at least, pay off the negative equity by other means does not require a contrary result, if the facts surrounding the particular transaction at issue are such that the negative equity was integral to the sale. . . . This conclusion finds support in New York’s Motor Vehicle Retail Installment Sales Act (“MVRISA”) . . . . [T]he term “price,” as used in U.C.C. § 9-103, should be given the same meaning as MVRISA’s definition of “cash sales price,” which includes negative equity. . . . [T]he result here is also consonant with [legislative intent] which seems to be to protect creditors from the abuse of “cramdown.”64
[46]

On further appeal, the U.S. Court of Appeals for the Second Circuit certified the following question to the New York Court of Appeals: “Is the portion of an automobile retail installment sale attributable to a trade-in vehicle’s ‘negative equity’ a part of the ‘purchase-money obligation’ arising from the purchase of a new car, as defined under New York’s U.C.C.?”65 At this writing, the New York Court of Appeals has yet to respond.

[47]

The bankruptcy court and district court opinions in Peaslee well-frame what has become a tsunami of cases struggling to determine whether financing negative equity will support a PMSI under applicable state law. At this writing, more than 50 courts have ventured into these waters and, for those who count such things, a majority of the reported decisions conclude that financing negative equity is not included in a car lender’s PMSI. A particularly strong statement of the majority position was offered by Bankruptcy Judge Markell on behalf of the Bankruptcy Appellate Panel for the Ninth Circuit in Americredit Financial Services, Inc. v. Penrod (In re Penrod):66

Given that financing negative equity is increasingly common, it was likely not an oversight that the reporters for Article 9 did not include negative equity in Comment 3’s list of “expenses incurred in connection with acquiring rights in the collateral.” . . . [N]egative equity is not of the same “type” or “magnitude” as the expenses listed in Official Comment 3. . . . The result in [In re Sanders, 377 B.R. 836 (Bankr. W.D. Tex. 2007),] and like cases better reflects the goals of chapter 13 and the language of the hanging paragraph. . . . [L]iability for negative equity is not an expense “incurred in connection with acquiring” the car; it is the auto seller’s assumption of one of debtor’s antecedent debts. . . . [T]he provisions of the California Civil Code are part of a regulatory network based on disclosure. Including negative equity in these provisions ensures that consumers know what they are getting into . . . . [L]ooking at the hanging paragraph, . . . the function is starkly different: . . . giving negative equity PMSI status effectively enriches car lenders at the expense of the debtor’s unsecured creditors. With such different effects and goals, the two provisions—one based on disclosure and the other on preference—are not in pari materia. . . . [A] refinance constitutes value to enable debtors to pay off a loan, not to acquire rights in collateral. . . . [T]he financed negative equity is nothing more than a refinancing of the preexisting debt owed on the trade-in. There is no necessary connection between this refinancing and the car’s acquisition. . . . [T]he UCC itself neither prescribes a uniform result, nor is it uniform from state to state . . . . This engenders a need to develop uniform federal standards for the unitary interpretation of the hanging paragraph. . . . [T]he main comment to the relevant UCC section indicates that the terms in that statute were not designed to inform or influence the Bankruptcy Code. . . . [A]n examination of the UCC’s development and use of “purchase-money security interest” reveals a substantially different purpose, both in practice and in drafting, that the same term serves in the hanging paragraph. . . . [T]he UCC has no clear answer on what rule to apply to consumers. . . . Even worse, § 9-103(h) has not been uniformly adopted by the states. . . . [I]n this critical respect, the Uniform Commercial Code is not uniform. . . . From the language of the hanging paragraph itself and its limited legislative history, it appears that the hanging paragraph was designed to combat a particular perceived abuse by debtors in chapter 13: purchasing a car shortly before a chapter 13 bankruptcy filing and then taking advantage of the substantial depreciation that occurs immediately after a new car is driven off the lot. . . . This purpose . . . is a far cry from Article 9’s effort to meet commercial expectations when vendors sell new goods to debtors or to spare the filing system from endless consumer filings.67
[48]

The minority courts—led by the U.S. Courts of Appeals for the Fourth and Eleventh Circuits—typically do not dig as deeply as Penrod into state law or UCC history and policy to conclude that refinancing negative equity is included in a purchase money security interest. In Graupner v. Nuvell Credit Corp. (In re Graupner),68 the Eleventh Circuit put it this way:

[T]he 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. . . . [W]e 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. . . . [O]ur decision finds support in the relevant UCC Official Comment and is consistent with legislative intent. . . . [W]e see no persuasive reason why traditional transaction costs and the refinancing of reasonable, bona fide negative equity in connection with the purchase of the new vehicle should not qualify as “expenses” within the meaning of a comment. . . . We believe there is such a “close nexus” between the negative equity in the Debtor’s trade-in vehicle and the purchase of his new vehicle. The financing was part of the same transaction and may be properly regarded as a “package deal.” . . . If Congress did not intend for the hanging paragraph to apply to a trade-in’s negative equity, . . . 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.’”69
[49]

In cases subsequent to Peaslee, the Bankruptcy Court for the Western District of New York contributed further to the PMSI discussion by addressing burdens of proof and the consequences when part of a car loan cannot be purchase money. In In re Jackson,70 the court explained that the party challenging purchase money status—typically the debtor or Chapter 13 trustee—has the initial burden to prove there was negative equity in the transaction. The extent of this burden is as follows:

In these refinancing of negative equity cases, the party bearing the initial burden to demonstrate that negative equity has been refinanced must only demonstrate that there is at least one dollar ($1.00) of negative equity that has been refinanced. It is not necessary to demonstrate the actual amount of the negative equity refinanced.71

Once the trustee has produced this initial proof, the burden shifts to the lender to request a hearing to either disprove that negative equity was present or to address the consequences of the finding that at least a part of the debt cannot be purchase money under state law.72 Several decisions from courts outside the Western District of New York have applied similar logic to determine that negative equity is or is not present based on the math of individual purchase contracts—sometimes finding that negative equity was not financed after application of rebates and other credits.73

[50]

If the bankruptcy court determines that some of the claim cannot be secured by a PMSI, the issue becomes: does the entire debt forfeit its purchase money status or only the portion which cannot be purchase money? As mentioned above,74 a few courts have held that, as a matter of bankruptcy law, the hanging sentence is an “all or nothing” proposition—if any portion of the debt is not purchase money, then the entire debt is not protected from § 506. Most courts analyzing the hanging sentence treat this as a problem of state law, not federal law, and delve into state law to determine whether a partially purchase money debt is possible. In UCC parlance, this is the “dual-status” versus “transformation” debate mentioned above. And as quoted above, the 2000 revision to U.C.C. § 9-103(b) adopted the dual-status rule with respect to nonconsumer debts but punted to the courts to determine the rule in consumer transactions.

[51]

The hanging sentence thrust the bankruptcy courts into the midst of this unresolved issue of UCC law. Once again, the Bankruptcy Court for the Western District of New York was first out of the box to apply the transformation rule in hanging-sentence cases when part of a claim is ineligible for purchase money status. As explained in Peaslee, because it is difficult or impossible to determine what portion of a car lender’s claim is purchase money when part of the original loan was used to finance negative equity, state law directs the courts toward a transformation rule that forfeits purchase money status for the entire debt:

Section 9-103(h) of the New York Uniform Commercial Code leaves the adoption of a dual status or transformation rule to the Court. . . . [T]he Motor Vehicle Finance Group has successfully persuaded this Court that even after it conducted evidentiary hearings, 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. . . . [A]doption of a transformation rule would best serve the interests of all of the parties when there is a roll-in and refinance of negative equity transaction combined with a replacement vehicle acquisition transaction.75
[52]

As indicated above, the bankruptcy court decision in Peaslee was reversed on appeal.76 The district court held that negative equity financing did not forfeit PMSI—eliminating the predicate for consideration of the transformation rule adopted by the bankruptcy court. The vast majority of other courts when faced with a debt that is partially purchase money and partially not have held that the dual-status rule applies and the purchase money portion is protected from § 506 by the hanging sentence.77

[53]

As revealed in the cases just cited, availability of the dual-status rule under state law when part of the debt fails to be purchase money may turn on proof of an allocation methodology in the purchase contract. For example, in In re Bray,78 the “first-in/first-out” form of U.C.C. § 9-103(e) adopted in Tennessee could not be applied sensibly to the Chapter 13 debtor’s two lines of credit and seven notes, some secured and some unsecured. Because the loan documents provided no method for apportioning the consolidated debt between purchase money and nonpurchase money debt, dual status was not available, the entire debt was nonpurchase money and the hanging sentence did not apply. This discussion from Bray illustrates the complexities in store for Chapter 13 practitioners as state UCC law collides with BAPCPA in the hanging-sentence context:

Upon a preliminary reading of T.C.A. § 47-9-103(e)(2), it appears that the Tennessee legislature intended for courts to continue to use the first-in/first-out rule set forth in repealed T.C.A. § 47-9-107(c) . . . ; however, when a court attempts to analyze a loan consolidation under subsection (e)(2)’s first-in/first-out rule, it becomes apparent that the first-in/first-out rule cannot be applied to cases in which secured debt is consolidated with unsecured debt. . . . The more appropriate rule to use in cases of the consolidation of unsecured and secured notes is the one announced in [Coomer v. Barclays American Financial, Inc. (In re Coomer), 8 B.R. 351 (Bankr. E.D. Tenn. 1980)] . . . (1) a secured creditor will have a purchase money security interest to the extent that the collateral secures all or part of its price; so long as (2) the contract between the parties provides for a method of determining the extent of the security interest and a method for apportioning the payments. . . . If the debtor has not made any payments on the note, then a court may employ the [Slay v. Pioneer Credit Co. (In re Slay), 8 B.R. 355 (Bankr. E.D. Tenn. 1980),] exception to find that the purchase money portion of the debt is the amount owed at the time of consolidation. . . . Because the Tennessee statutes offer courts no guidance on how to determine the extent of a purchase money security interest, it is essential to situations wherein parties consolidate secured and unsecured notes that the loan documents or contracts set forth a method for (1) apportioning the extent of the purchase money security interest and (2) allocating payments among the various parts of a loan. . . . Under the dual-status approach, the Court must engage in a two-step process when determining whether or not the Bank has a purchase money security interest in this case. First, the Court must determine whether or not the Bank has an interest which can qualify as a purchase money security interest as defined in T.C.A. § 47-9-103. If the Court finds that the Bank does have a purchase money security interest, it must then determine the extent of the Bank’s interest using the Coomer and Slay rules. . . . Because the loan documents in this matter did not set forth a method of apportioning the payments between the secured and unsecured portions, there is no way for the Court to determine how much of the Bank’s purchase money security interest carried over . . . . The parties did not provide an allocation method for the payments made and . . . the first-in/first-out rule of T.C.A. § 47-9-103(e)(2) is unusable in this case. . . . [T]he Bank . . . does not have a purchase money security interest in this case.79
[54]

It seems likely that state law will rarely produce a transformation rule when the characteristic that disables purchase money status is less difficult of proof than accounting for negative equity. Imagine, for example, that state law treats an extended warranty as an insurance contract that cannot be subject to a PMSI. The amount included in the “purchase price” of the car that is attributable to the extended warranty may be readily ascertainable from the contract. Proof of the amount of that financing which was paid prior to bankruptcy may also be calculable. If the lender brings proof of how much remaining debt is attributable to the purchase money portion of the original financing, that proof may inspire bankruptcy courts in states where the option is available to apply a dual-status rule for hanging-sentence purposes.

[55]

Also, as you might have guessed, among the nonuniform adoptions of the 2000 version of the UCC, there are states that apply the dual-status rule to both consumer and nonconsumer transactions. In such a state, allocation of purchase money and nonpurchase money debt will be essential for hanging-sentence purposes, and the resulting hybrid debt will fall in and out of § 506 in challenging ways.80

[56]

There is an interesting additional issue, illustrated in In re White,81 when part of a debt is protected from § 506 by the hanging sentence and part is not. In White, part of the car loan was purchase money and part was not. The part that was within the hanging sentence was necessarily treated as fully secured to be paid through the plan with Till82 interest after confirmation.83 Because § 506 did not apply to this portion, the lender was not entitled to interest or charges accruing postpetition and prior to confirmation.84

[57]

But what about the non-PMSI portion of the debt? Section 506 does apply to that portion of the debt. The bankruptcy court in White determined that the PMSI portion fully consumed the value of the collateral, leaving the non-PMSI debt to be treated as an unsecured claim.

[58]

The outcome in White seems correct, and this issue is not directly addressed in other “dual-status” cases cited above. The treatment of the non-PMSI portion after application of § 506 is implicit in every hanging-sentence case in which the debt is not completely PMSI and a dual-status rule is applied. Several decisions discuss how to allocate the purchase money and nonpurchase money portions of the debt, but treatment of the nonpurchase money debt after application of § 506 is the additional step in White that can be important for the design of the plan.

[59]

When you research purchase money status for hanging sentence purposes, remember that this issue is not new to bankruptcy with BAPCPA. Under prior law, § 522(f) provided that debtors could avoid liens on exempt property under certain circumstances, including nonpossessory “nonpurchase-money security interests” in household furnishings and goods.85 There are a few reported bankruptcy court decisions interpreting the nonpurchase money condition for lien avoidance in § 522(f)(1)(B) that may be relevant to interpretation of the hanging sentence at the end of § 1325(a).86


 

1  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

2  See § 451.2 [ Motor Vehicles and Any Other Thing of Value ] § 75.2  Motor Vehicles and Any Other Thing of Value.

 

3  See § 451.4 [ Acquired for Personal Use of Debtor ] § 75.4  Acquired for Personal Use of Debtor.

 

4  See § 451.2 [ Motor Vehicles and Any Other Thing of Value ] § 75.2  Motor Vehicles and Any Other Thing of Value.

 

5  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

6  Hanging sentence at the end of 11 U.S.C. § 1325(a).

 

7  See § 451.2 [ Motor Vehicles and Any Other Thing of Value ] § 75.2  Motor Vehicles and Any Other Thing of Value.

 

8  See § 451.2 [ Motor Vehicles and Any Other Thing of Value ] § 75.2  Motor Vehicles and Any Other Thing of Value.

 

9  See 11 U.S.C. § 101(51) (“The term ‘security interest’ means lien created by an agreement”).

 

10  No. 06-70463, 2006 WL 3386739 (Bankr. C.D. Ill. Nov. 20, 2006) (unpublished).

 

11  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

12  See also In re Hayes, 376 B.R. 655 (Bankr. M.D. Tenn. 2007) (Lundin) (Hanging sentence is “collateral specific”—to determine whether secured claim is protected from § 506, each item subject to a lien must be analyzed separately to determine whether that item of collateral is subject to a purchase money security interest.); In re Stevens, 368 B.R. 5 (Bankr. D. Neb. 2007) (In a “dual-status” state, debt secured by liens on three vehicles must be analyzed on a lien-by-lien basis when part of the lien is purchase money and part is not and debtor proposes to surrender part of the collateral and treat the balance through the plan—part of which will be protected from § 506 and part of which will not.).

 

13  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

14  The “transformation” rule and the “dual-status” rule are discussed below in this section.

 

15  363 B.R. 734 (Bankr. E.D.N.C. 2007), aff’d in part, rev’d in part, No. 5:07-CV-133-BR, 2007 WL 5297071 (E.D.N.C. Nov. 14, 2007) (Britt), rev’d, No. 08-1022, 2009 WL 975796 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory).

 

16  Hanging sentence at the end of 11 U.S.C. § 1325(a).

 

17  363 B.R. at 743.

 

18  See 11 U.S.C. § 521(a)(6) (emphasis added). This is an oversimplification of § 521(a)(6) in Chapter 7 cases.

 

19  See 11 U.S.C. § 1326(a)(4), discussed in §§ 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA and 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4  Preconfirmation Rights of Landlords and Lessors after BAPCPA.

 

20  Price was reversed on appeal on other grounds. See below in this section.

 

21  377 B.R. 836 (Bankr. W.D. Tex. 2007), rev’d, No. SA-07-CV-1013-XR, 2009 WL 844021 (W.D. Tex. Mar. 30, 2009) (Rodriguez).

 

22  See discussion of “negative equity” below in this section.

 

23  377 B.R. at 859–62. Accord In re Look, 383 B.R. 210, 219–20 (Bankr. D. Me. 2008) (Haines) (Citing In re Sanders, 377 B.R. 836 (Bankr. W.D. Tex. 2007), hanging sentence is an all-or-nothing provision that does not apply once any part of security interest is not purchase money. “I agree with the Sanders court that, although we must look to state law to determine the content of the term that triggers the hanging paragraph’s application, it is unnecessary, indeed inappropriate to look to state law to determine the consequences of a determination that a lien is not a purchase money security interest. . . . The decision to employ conditional ‘if’ language rather than ‘to the extent’ language bolsters the conclusion that Congress did not extend such protections in instances where creditors possess partial pmsi’s [sic].”); In re Mitchell, 379 B.R. 131, 141 (Bankr. M.D. Tenn. 2007) (Paine) (Once it is determined that part of debt is not purchase money, protection of hanging sentence is not available to entire debt without resort to state law. “The plain language of the Code simply requires all of the creditor’s claim be secured by the creditor’s purchase money security interest.”).

 

24  See below in this section. See, e.g., In re Johnson, 380 B.R. 236, 240 (Bankr. D. Or. 2007) (Dunn) (“I can appreciate the irony in developing federal common law to interpret a state law code term to aid in the interpretation of a federal law code provision. However, I find it inappropriate to do so. I join with most other courts that have considered the issue and look to state law to determine whether DaimlerChrysler holds a PMSI.”).

 

25  In re Westfall, 376 B.R. 210, 212–19 (Bankr. N.D. Ohio 2007).

 

26  See § 451.2 [ Motor Vehicles and Any Other Thing of Value ] § 75.2  Motor Vehicles and Any Other Thing of Value.

 

27  356 B.R. 907 (Bankr. M.D. Ga. 2006), aff’d, No. 4:07-CV-37CDL, 2007 WL 1858291 (M.D. Ga. June 26, 2007) (unpublished), aff’d, 537 F.3d 1295 (11th Cir. 2008) (Tjoflat, Marcus, Vinson).

 

28  356 B.R. at 922.

 

29  356 B.R. at 922–23. Accord Nuvell Credit Co. v. Muldrew (In re Muldrew), 396 B.R. 915, 924 (E.D. Mich. 2008) (Cohn) (“The new car financing in this case was a ‘package,’ all of which qualifies for PMSI status under the plain language of the Bankruptcy Code, as well as under TILA, Article 9 and MVSFA.”); In re Peaslee, 373 B.R. 252, 260 (W.D.N.Y. 2007) (Applying § 9-103 of New York Uniform Commercial Code and New York Motor Vehicle Retail Installment Sales Act, negative equity is component of price of car and financing negative equity does not forfeit purchase money security interest. “This conclusion finds support in New York’s Motor Vehicle Retail Installment Sales Act (‘MVRISA’) . . . . [T]he term ‘price,’ as used in U.C.C. § 9-103, should be given the same meaning as MVRISA’s definition of ‘cash sales price,’ which includes negative equity.”), question certified by 547 F.3d 177 (2d Cir. 2008) (Calabresi, Straub, Raggi); GMAC v. Horne, 390 B.R. 191, 203 (E.D. Va. 2008) (Payne) (Citing GMAC v. Peaslee, 373 B.R. 252 (W.D.N.Y. 2007), and Graupner v. Nuvell Credit Corp., No. 4:07-CV-37CDL, 2007 WL 1858291 (M.D. Ga. June 26, 2007) (unpublished), “[a] reading of both the UCC and [Virginia Retail Installment Sales Act] suggests that negative equity financing that is integral to the sales transaction may be viewed as part of the price in the sales transaction, and thus as part of creditor’s purchase money security interest.”); In re Smith, 401 B.R. 343 (Bankr. S.D. Ill. 2008) (Applying Illinois UCC and Illinois Motor Vehicle Retail Installment Sales Act, advances for service contract, gap insurance, taxes and negative equity are included in purchase money security interest.); In re Spratling, 377 B.R. 941, 945 (Bankr. M.D. Ga. 2007) (Applying Georgia Motor Vehicle Sales Financing Act and Georgia UCC, extended service contract and gap insurance are included in purchase money security interest. “[T]he service contract fits within the ambit of the MVFSA as a charge for ‘servicing’ the motor vehicle.”); In re Petrocci, 370 B.R. 489, 498–504 (Bankr. N.D.N.Y. 2007) (Rejecting In re Peaslee, 358 B.R. 545 (Bankr. W.D.N.Y. 2006), and relying in part on New York Motor Vehicle Retail Installment Sales Act, financing of negative equity did not forfeit PMSI status for entire 910-day car claim. “[T]he Court holds that the two statutes are in pari materia, and that the term ‘price,’ as used in New York’s UCC § 9-103, must be given the meaning set forth in MVRISA’s definition of cash sales price, which includes negative equity. . . .  New York’s MVRISA provides a means of construing the hanging paragraph of Code § 1325(a)(9) which is in harmony with the Code, UCC § 9-103 and New York’s MVRISA.”).

 

30  377 B.R. 836 (Bankr. W.D. Tex. 2007), rev’d, No. SA-07-CV-1013-XR, 2009 WL 844021 (W.D. Tex. Mar. 30, 2009) (Rodriguez).

 

31  377 B.R. at 848–49. Accord In re Hall, 400 B.R. 516, 519 (Bankr. S.D. W. Va. 2008) (Pearson) (“Unlike New York, West Virginia does not presently have a Motor Vehicle Retail Installment Sales Act.”); In re Crawford, 397 B.R. 461, 466 (Bankr. E.D. Wis. 2008) (Kelley) (“The Wisconsin Consumer Act and the UCC should not be read in pari materia because of their vastly different purposes.”); In re Busby, 393 B.R. 443, 450–52 (Bankr. S.D. Miss. 2008) (Ellington) (“The Eleventh Circuit’s opinion in [Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008),] appears to this Court to rely heavily on reading the definition of ‘cash sale price’ found in the Georgia Motor Vehicle Sales Finance Act (Georgia MVSFA) in pari materia with the UCC. . . . Mississippi’s MVSFL does not have language similar to the Georgia MVSFA.”); In re Brodowski, 391 B.R. 393, 400 (Bankr. S.D. Tex. 2008) (Bohm) (“[T]he definition of price used in the Texas Motor Vehicle Installment Sales Act is not relevant because it is essentially a consumer protection act[.]”); GMAC v. Mancini (In re Mancini), 390 B.R. 796, 804 (Bankr. M.D. Pa. 2008) (Opel) (“[T]he TILA and the MVSFA do not explicitly say anything regarding what constitutes a PMSI. Rather, these two statutes . . . are consumer protection statutes enacted to ensure that proper disclosures are made to consumers.”); In re Lavigne, Nos. 07-30192, 07-31402, 07-31247, 06-32914, 2007 WL 3469454, at *7 (Bankr. E.D. Va. Nov. 14, 2007) (unpublished) (Huennekens) (“Virginia retail installment sales statute offers no guidance for the interpretation of the Uniform Commercial Code.”); In re Honcoop, 377 B.R. 719, 722 (Bankr. M.D. Fla. 2007) (“[R]esort to the Florida Motor Vehicle Sales Finance Act . . . would be improper given that the statute is a consumer protection statute which imposes disclosure requirements on automobile dealers and is not helpful in determining what constitutes a purchase money security interest under the Florida U.C.C.”); In re Blakeslee, 377 B.R. 724, 729 (Bankr. M.D. Fla. 2007) (“[R]esort to the Florida Motor Vehicle Retail Sales Finance Act . . . would be improper given that the statute is a consumer protection statute which imposes disclosure requirements on automobile dealers and is not helpful in determining what constitutes a purchase money security interest.”); In re Curtis, 345 B.R. 756, 762 (Bankr. D. Utah 2006) (“[T]he UCC and not the Motor Vehicle Act . . . determines how a creditor becomes secured and whether the creditor has a purchase money security interest . . . in a motor vehicle.”).

 

32  See § 451.2 [ Motor Vehicles and Any Other Thing of Value ] § 75.2  Motor Vehicles and Any Other Thing of Value.

 

33  See, e.g., 46 U.S.C. §§ 31321 & 31322 (requiring notice filed with Secretary of Transportation to perfect mortgage or related investment in a vessel); 49 U.S.C. §§ 44107 & 44108 (requiring notice filed with FAA Aircraft Registry to perfect security interest in an aircraft).

 

34  U.C.C. § 9-103 (2000).

 

35  U.C.C. § 9-103 Official Comment (2000).

 

36  This is a different question than the debate in Price and Sanders, quoted above, with respect to whether the hanging sentence itself protects partially purchase money security interests.

 

37  See, e.g., Ray Warner, Consumer Avoidance of Non-Purchase-Money Security Interests Under Revised Article 9, 20 Am. Bankr. Inst. J. 22, 22 (Nov. 2001) (noting that “the revised act largely ignores most of the significant consumer issues . . . because consumer groups and the financial services industry were unable to reach a consensus as to the proper approach to take on most consumer issues.” (citing Marion W. Benfield Jr., Consumer Provisions in Revised Article 9, 74 Chi.-Kent L. Rev. 1255, 1255–69 (1999)); Comment, To Be (Transformed), or Not To Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interests Under Kansas’ Former and Revised Article 9, 50 Univ. Kan. L. Rev. 1095 (2002) (discussing the amendments to U.C.C. § 9-103. When adopted by Kansas, the consumer goods exemption was removed from subsections (e), (f) and (g) and subsection (h) was deleted. Five other states—Idaho, Indiana, Maryland, Nebraska and South Dakota—joined Kansas in removing the consumer goods exemption.).

 

38  But see In re Stevens, 368 B.R. 5 (Bankr. D. Neb. 2007) (Nebraska’s version of 2001 amendments to Article 9 approved “dual-status rule” with respect to consumer and nonconsumer transactions.).

 

39  See below in this section.

 

40  See below in this section.

 

41  352 B.R. 249 (Bankr. D. Nev. 2006).

 

42  352 B.R. at 265–66 (internal citations and footnotes omitted) (quoting 9A William D. Hawkland, Hawkland UCC Series § 9-103:1 [Rev.] (Frederick H. Miller ed., 2006)).

 

43  378 B.R. 481 (Bankr. D.S.C. 2007) (Waites).

 

44  No. 06-11076-SSM, 2007 WL 2332390 (Bankr. E.D. Va. Aug. 13, 2007) (unpublished).

 

45  Surrender in full satisfaction when the hanging sentence is applicable is discussed in detail in § 451.5 [ Surrender in Full Satisfaction? ] § 75.5  Surrender in Full Satisfaction?.

 

46  2007 WL 2332390, at *3–*5. See In re Horn, 338 B.R. 110, 113–14 (Bankr. M.D. Ala. 2006) (Refinancing forfeits purchase money character. Chapter 13 debtor’s car loan had been refinanced four times prior to bankruptcy, with the debtor receiving additional cash each time. Citing Snap-On Tools, Inc. v. Freeman, 956 F.2d 252 (11th Cir. 1992), refinancing forfeited whatever PMSI the car lender had. “[T]he creditor is not protected by § 1325(a) . . . . City Finance’s security interest in the debtor’s vehicle is not a purchase-money security interest. State law is controlling on the issue. . . . Horn did not incur the entire debt as all or part of the purchase price of the vehicle. Instead, the debt comprises money loaned for the purchase of the car together with four separate, subsequent, and additional cash advances. Therefore, Horn’s car secures more than the debt for the money to acquire it. As a result, City Finance’s security interest loses its purchase-money character.”). See also § 451.5 [ Surrender in Full Satisfaction? ] § 75.5  Surrender in Full Satisfaction? for further discussion of surrender in full satisfaction.

 

47  346 B.R. 237 (Bankr. M.D. Ga.), on reconsideration, 352 B.R. 340 (Bankr. M.D. Ga. 2006).

 

48  352 B.R. at 347.

 

49  See, e.g., In re Steele, No. 08-40282-DML-13, 2008 WL 2486060 (Bankr. N.D. Tex. June 12, 2008) (Lynn) (For purposes of hanging sentence, sales tax, license and registration fees, inventory tax and document fee are included in purchase money security interest.); GMAC v. Mancini (In re Mancini), 390 B.R. 796, 806 (Bankr. M.D. Pa. 2008) (Opel) (Administrative fees, license fees and taxes are part of PMSI. “Comment 3 to the UCC explicitly includes administrative charges and sales taxes in the amount of a PMSI. This Court finds licensing fees to be precisely the type of ‘similar obligation’ that is listed in Comment 3 as being part of a PMSI.”); In re Burt, 378 B.R. 352, 365 (Bankr. D. Utah 2007) (Thurman) (Amounts advanced to pay for taxes and document preparation fee “fall within the definition of the ‘price’ of the vehicle or ‘Value given to enable’ the Debtor to purchase the vehicle.”); In re Macon, 376 B.R. 778 (Bankr. D.S.C. 2007) (Burris) (Applying South Carolina law, administrative fees financed as part of car purchase did not forfeit purchase money security interest.); In re Ericksen, No. 06-20572, 2006 WL 4846379, at *3 (Bankr. D. Utah July 26, 2006) (unpublished) (Car lender has PMSI that extends to sales and property taxes, document preparation fees and credit report fees. “[A]mounts the Debtors paid for sales and property taxes, the document preparation fee, and the credit report fee would fall into [Comment 3 to U.C.C. § 9-103] and are part of WFS’s purchase money security interest.”).

 

50  In re Miller, No. 08-40935, 2008 WL 5539811, at *5 (Bankr. D. Kan. Dec. 2, 2008) (Karlin).

 

51  352 B.R. at 348. Accord In re Smith, 401 B.R. 343 (Bankr. S.D. Ill. 2008) (Pepper) (Applying Illinois UCC and Illinois Motor Vehicle Retail Installment Sales Act, the cost of service contracts is included in a car lender’s purchase money security interest.); In re Steele, No. 08-40282-DML-13, 2008 WL 2486060 (Bankr. N.D. Tex. June 12, 2008) (Lynn) (Extended warranty is included in purchase money security interest.); In re Munzberg, 388 B.R. 529, 544 (Bankr. D. Vt. 2008) (Brown) (“The service contract follows the car, and increases the car’s value. . . . [A] service contract is properly considered part of the purchase-money obligation.”); In re Jernigan, No. 07-04037-8-JRL, 2008 WL 922346, at *2 (Bankr. E.D.N.C. Mar. 31, 2008) (Leonard) (Extended service contract is included in purchase money security interest for car because “such charges are so tied to the value of the collateral that they fall within the meaning of purchase money obligation under the North Carolina General Statutes.”); In re Riach, No. 07-61645-aer13, 2008 WL 474384, at *5 (Bankr. D. Or. Feb. 19, 2008) (Radcliffe) (“[T]he cost of financing the service and lifetime oil contracts are purchase money obligations.”); In re Schwalm, 380 B.R. 630 (Bankr. M.D. Fla. 2008) (May) (Extended warranty contract is protected from § 506 by hanging sentence. Providing for “future maintenance” has a close nexus to the acquisition of the car.); In re Weiser, 381 B.R. 263 (Bankr. W.D. Mo. 2007) (Federman) (Applying Missouri law, extended service contract is part of purchase money security interest protected from § 506 by hanging sentence.); In re Spratling, 377 B.R. 941, 945 (Bankr. M.D. Ga. 2007) (Applying Georgia Motor Vehicle Sales Financing Act and Georgia UCC, extended service contract is included in purchase money security interest. “[T]he service contract fits within the ambit of the MVFSA as a charge for ‘servicing’ the motor vehicle.”); In re Burt, 378 B.R. 352 (Bankr. D. Utah 2007) (Thurman) (Car loan is entirely PMSI for hanging-sentence purposes notwithstanding $2,425 for service contract.); In re Macon, 376 B.R. 778 (Bankr. D.S.C. 2007) (Burris) (Applying South Carolina law, financing of service contract did not forfeit purchase money security interest.); In re Pajot, 371 B.R. 139 (Bankr. E.D. Va. 2007) (Extended warranty is included in purchase money security interest.).

 

52  See, e.g., GMAC v. Horne, 390 B.R. 191, 205–06 (E.D. Va. 2008) (Payne) (Extended warranty or service contract is not included in PMSI for hanging-sentence purposes. “[T]he extended warranties and service contracts are neither part of the price of the collateral or the value given to enable the debtor to acquire rights in, or the use of, the collateral. . . . [E]xtended warranties and service contracts are unrelated, incidental obligations, and like the insurance obligations, they do not fulfill the close nexus requirement.”); In re Dale, No. 07-32451-H5-13, 2007 WL 5493483, at * 4 (Bankr. S.D. Tex. Sept. 17, 2007) (Brown) (Amounts advanced for extended warranty will not support purchase money security interest for purposes of hanging sentence. “The . . . extended warranty purchased by debtor and financed under the retail installment contract . . . [is] not ‘goods’ . . . . Consequently, the . . . extended warranty cannot be the subject[ ] of a purchase money security interest . . . . [T]he charge[ ] for . . . extended warranty [is] not the type of charge[ ] described in Official Comment 3 which may be included in a purchase money obligation.”), rev’d, No. H-07-3176, 2008 WL 4287058 (S.D. Tex. Aug. 14, 2008) (Miller); In re Miller, No. 08-40935, 2008 WL 5539811, at *4 (Bankr. D. Kan. Dec. 2, 2008) (Karlin) (PMSI in hanging sentence does not include amounts advanced for service contract. “[T]he service contract also does not fit within the type of item that falls within a purchase money obligation, as enumerated in the Official Comment to the Kansas Uniform Code.”); In re Lavigne, Nos. 07-30192, 07-31402, 07-31247, 06-32914, 2007 WL 3469454, at *12 (Bankr. E.D. Va. Nov. 14, 2007) (unpublished) (Huennekens) (Amounts advanced for extended warranty are not purchase money obligations. “Parties cannot maintain a purchase money security interest in [extended service contracts] because they are not purchase money collateral. . . . The contracts involve a commitment to render future services. Extended service contracts are executory in nature and the Creditors do not have a purchase money security interest in them.”); In re White, 352 B.R. 633 (Bankr. E.D. La. 2006) (Extended warranty was a policy of insurance under Louisiana law that would not support a PMSI.).

 

53  363 B.R. 734 (Bankr. E.D.N.C. 2007), aff’d in part, rev’d in part, No. 5:07-CV-133-BR, 2007 WL 5297071 (E.D.N.C. Nov. 14, 2007) (Britt), rev’d, No. 08-1022, 2009 WL 975796 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory).

 

54  363 B.R. at 741.

 

55  363 B.R. at 741.

 

56  Wells Fargo Fin. Acceptance v. Price (In re Price), No. 08-1022, 2009 WL 975796, at *5 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory).

 

57  See GMAC v. Horne, 390 B.R. 191, 205 (E.D. Va. 2008) (Payne) (Gap insurance is not included in PMSI for hanging-sentence purposes. Gap insurance does not “fit within the plain, accepted meaning of the price paid for (or asked for) the collateral. Nor does Official Comment 3 support such a construction.” Neither is gap insurance “inextricably intertwined with the ‘value given to enable’” the debtor to acquire the car.); In re Dale, No. 07-32451-H5-13, 2007 WL 5493483, at * 4 (Bankr. S.D. Tex. Sept. 17, 2007) (Brown) (Amounts advanced for gap insurance will not support purchase money security interest for purposes of hanging sentence. “The gap insurance . . . purchased by debtor and financed under the retail installment contract . . . [is] not ‘goods’ . . . . Consequently, the gap insurance . . . cannot be the subject[ ] of a purchase money security interest . . . . [T]he charges for gap insurance . . . are not the type of charges described in Official Comment 3 which may be included in a purchase money obligation.”), rev’d, No. H-07-3176, 2008 WL 4287058, at *4 (S.D. Tex. Aug. 14, 2008) (Miller); In re Miller, No. 08-40935, 2008 WL 5539811, at *4 (Bankr. D. Kan. Dec. 2, 2008) (Karlin) (PMSI in hanging sentence does not include amounts advanced for gap insurance. “[T]he funds that FMCC advanced for the purchase of the GAP policy are not of the type that can be included in its purchase money security interest in Debtors’ automobile.”); GMAC v. Mancini (In re Mancini), 390 B.R. 796, 806 (Bankr. M.D. Pa. 2008) (Opel) (Gap insurance is not part of PMSI for purposes of hanging sentence. “GAP insurance is not part of the ‘price’ of the collateral, nor is it part of the value ‘given to enable the debtor to acquire rights in or the use of the collateral.’”); In re Munzberg, 388 B.R. 529, 543 (Bankr. D. Vt. 2008) (Brown) (Gap insurance is not part of purchase money security interest. “[G]ap insurance is not part of the purchase price of the collateral[.]”); In re Jernigan, No. 07-04037-8-JRL, 2008 WL 922346 (Bankr. E.D.N.C. Mar. 31, 2008) (Leonard) (Gap insurance is not included in purchase money security interest in car.); In re Austin, 381 B.R. 892 (Bankr. D. Utah 2008) (Clark) (Four hundred ninety-five dollars for gap insurance is not part of car lender’s purchase money security interest.); In re Lavigne, Nos. 07-30192, 07-31402, 07-31247, 06-32914, 2007 WL 3469454, at *12 (Bankr. E.D. Va. Nov. 14, 2007) (unpublished) (Huennekens) (Amounts advanced for gap insurance policies are not purchase money obligations. “Creditors cannot have purchase money security interests in debtors’ insurance policies because they are not purchase money collateral.”); In re Hayes, 376 B.R. 655 (Bankr. M.D. Tenn. 2007) (Lundin) (Car lenders did not have purchase money security interests in gap insurance for purposes of hanging sentence at the end of § 1325(a). By contract, car lenders took security interests in gap insurance but did not claim purchase money security interest. Because hanging sentence is “collateral specific,” debts were not protected from § 506 to extent money was advanced to purchase insurance.); In re Honcoop, 377 B.R. 719, 723 (Bankr. M.D. Fla. 2007) (Money advanced to purchase gap insurance is not part of purchase money security interest. “Clearly GAP insurance does not fit . . . as the sole purpose of GAP insurance is to protect the owner of the vehicle in instances in which the portion of the damage done to the vehicle is greater than its value. . . . GAP insurance does not involve the overall enhancement of the vehicle, it cannot be properly construed as part of the purchase price nor does the Court find the requisite close nexus between the inclusion of GAP insurance and the acquisition of the vehicle.”); In re Blakeslee, 377 B.R. 724, 729 (Bankr. M.D. Fla. 2007) (Gap insurance is not part of purchase money security interest of car lender. “GAP insurance is not part of the ‘price’ of a vehicle and is not ‘value given to enable’ a debtor to acquire rights in a vehicle. . . . GAP insurance does not involve the overall enhancement of a vehicle[.]”); In re Pajot, 371 B.R. 139 (Bankr. E.D. Va. 2007) (Gap insurance is not included in purchase money security interest.); In re Ericksen, No. 06-20572, 2006 WL 4846379, at *3 (Bankr. D. Utah July 26, 2006) (Car lender does not have PMSI for $599 loaned to purchase gap insurance policy. “WFS admitted at the hearing on this matter . . . that it would have sold the Stratus to the Debtors even if they had not purchased the insurance policy. Therefore, the insurance policy would not fall into this category and this portion of WFS’s security interest does not have purchase money status.”); In re White, 352 B.R. 633 (Bankr. E.D. La. 2006) (Deficiency insurance is a policy of insurance under Louisiana law and is not subject to purchase money security interest.).

 

58  See In re Smith, 401 B.R. 343 (Bankr. S.D. Ill. 2008) (Pepper) (Applying Illinois UCC and Illinois Motor Vehicle Retail Installment Sales Act, advances for gap insurance do not deprive the lender of a purchase money security interest.); In re Schwalm, 380 B.R. 630, 634 (Bankr. M.D. Fla. 2008) (May) (Car loan is protected from § 506 by hanging sentence at the end of § 1325(a) notwithstanding financing of purchase of GAP insurance. “[T]he items included in the amount financed do have a close nexus to the acquisition of the car, consistent with the explanation of the concept of price in Comment 3.”); In re Weiser, 381 B.R. 263, 270–71 (Bankr. W.D. Mo. 2007) (Federman) (Applying Missouri law, gap insurance is part of purchase money security interest protected from § 506 by hanging sentence. “Community America also financed . . . gap insurance . . . . I find that Community America has a purchase money security interest securing those portions of the debt under § 9-103 because they were expenses incurred in connection with the Debtor’s acquiring rights in the Pontiac. Since the Debtor would have had no reason to purchase these items had she not been purchasing the Pontiac, I find that there is a close nexus between those items and the Pontiac.”); In re Spratling, 377 B.R. 941, 946 (Bankr. M.D. Ga. 2007) (Applying Georgia Motor Vehicle Sales Financing Act and Georgia UCC, gap insurance is included in purchase money security interest. “[T]he gap insurance would not exist without the vehicle. . . . [T]he only function of the gap insurance is to protect debtor’s investment in the vehicle. Therefore, the court holds that there is a sufficiently close nexus between the acquisition of the car and the gap insurance, and gap insurance should be considered part of the PMSI.”); In re Burt, 378 B.R. 352 (Bankr. D. Utah 2007) (Thurman) (Car loan is PMSI for hanging-sentence purposes notwithstanding $500 for gap insurance.); In re Macon, 376 B.R. 778 (Bankr. D.S.C. 2007) (Burris) (Applying South Carolina law, gap insurance did not forfeit purchase money security interest.).

 

59  See GMAC v. Horne, 390 B.R. 191, 205 (E.D. Va. 2008) (Payne) (Disability insurance is not included in PMSI. Disability insurance does not “fit within the plain, accepted meaning of the price paid for (or asked for) the collateral. Nor does Official Comment 3 support such a construction.” Disability insurance is not “inextricably intertwined with the ‘value given to enable’ . . . . Therefore, the obligation[ ] for such expense[ ] do[es] not possess the requisite close nexus with the collateral and thus cannot qualify as value given to enable.”); In re Steele, No. 08-40282-DML-13, 2008 WL 2486060 (Bankr. N.D. Tex. June 12, 2008) (Lynn) (Financing of insurance is not included in PMSI for purposes of hanging sentence.); In re Lavigne, Nos. 07-30192, 07-31402, 07-31247, 06-32914, 2007 WL 3469454, at *12 (Bankr. E.D. Va. Nov. 14, 2007) (unpublished) (Huennekens) (Amounts advanced for insurance policies are not purchase money obligations. “Creditors cannot have purchase money security interests in debtors’ insurance policies because they are not purchase money collateral.”); In re Hayes, 376 B.R. 655 (Bankr. M.D. Tenn. 2007) (Lundin) (Car lenders did not have purchase money security interests in credit disability insurance for purposes of hanging sentence at the end of § 1325(a).).

 

60  See In re Steele, No. 08-40282-DML-13, 2008 WL 2486060 (Bankr. N.D. Tex. June 12, 2008) (Lynn).

 

61  See In re Townsend, 387 B.R. 817, 823–25 (Bankr. D. Kan. 2008) (Somers) (Applying Missouri law, “when collateral is in the secured party’s possession, reasonable expenses incurred in preservation of the collateral automatically becomes [sic] part of the debt secured by the collateral. Since such expenses automatically become part of the debt, they must also become part of the purchase-money debt. . . . [T]he cost of forced-placed insurance is included in the purchase-money obligation for the purpose of the definition of the purchase-money security interest, when the insurance was purchased by a secured party because the purchaser breached a contractual duty to insure the property and, upon such breach, the agreement allowed the seller to purchase the insurance at debtor’s cost. . . . For purposes of § 1325(a)(*), this Court finds no federal interest requiring a result different from the Missouri UCC.”).

 

62  358 B.R. 545 (Bankr. W.D.N.Y. 2006), rev’d, 373 B.R. 252 (W.D.N.Y. 2007), question certified by 547 F.3d 177 (2d Cir. 2008) (Calabresi, Straub, Raggi).

 

63  358 B.R. at 553–58.

 

64  373 B.R. at 258–61.

 

65  547 F.3d at 186.

 

66  392 B.R. 835 (B.A.P. 9th Cir. 2008) (Markell, Klein, Jury).

 

67  392 B.R. at 848–59. Accord In re Price, 363 B.R. 734, 741–46 (Bankr. E.D.N.C. 2007) (Applying North Carolina law, car lender does not have purchase money security interest to extent funds advanced to pay off negative equity on trade-in were included in purchase price. “[F]unds advanced to pay off the balance of the debt owed on the vehicle that was traded in are not part of the purchase price. . . . Providing a loan to refinance negative equity on a trade-in, which may be a convenient but unnecessary option for a consumer purchasing a replacement vehicle, is not value given to ‘enable’ that consumer to acquire rights in or the use of the replacement collateral.”), aff’d in part, rev’d in part, No. 5:07-CV-133-BR, 2007 WL 5297071, at *3 (E.D.N.C. Nov. 14, 2007) (Britt) (Financing of negative equity was not part of “sales price” and was not included in purchase money security interest. “[T]he bankruptcy court correctly concluded that negative equity . . . [does] not come within the definition of ‘purchase money obligation,’ and thus cannot give rise to a purchase money security interest.”), rev’d, No. 08-1022, 2009 WL 975796 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory); In re Sanders, 377 B.R. 836, 852–57 (Bankr. W.D. Tex. 2007) (Negative equity is not part of purchase money security interest of car lender under Texas law. “[A] portion of this loan is actually an advance . . . to pay off the negative equity from the trade-in. Retiring this overhang from the old vehicle may effectuate the transaction, but effectuating the transaction does not make this portion of the transaction part of the purchase price of the new vehicle that the debtors in this case purchased. . . . [W]ere the dealer prepared to pay off some of the debtor’s credit card debt to help the debtor qualify for the car loan, that too, following FMC’s logic, would be ‘value given to enable the debtor to acquire rights in the vehicle,’ as the debtor could be said not to be able to obtain the financing necessary to buy the vehicle unless other debt was first paid down. . . . The UCC does not require a close nexus between a part of the transaction (i.e., the negative equity) and the transaction itself. What is required is a close nexus between the acquisition of collateral (i.e., the new vehicle) and the obligation tied directly to the collateral (i.e., the funds going toward the purchase of the new vehicle). . . . While  . . . the negative equity was a crucial part of the transaction that brought both parties to the table, it is simply not the case that the portion of the loan that paid off the negative equity from the trade-in has a ‘close nexus’ to the acquisition of the new vehicle itself. . . . [T]his transaction entailed giving more value than was necessary for the debtor to acquire rights in the new vehicle. All that was required for the debtor to actually acquire rights in the new vehicle was value sufficient to pay for the new vehicle. Clearing the title on the old vehicle is a separate matter, one which redounded to the benefit of both the debtor purchaser and the dealer seller. This part of the transaction is value given by the debtor to the dealer, but it was clearly not used to acquire rights in the new collateral—it was used to pay off the balance on the old vehicle, to the ultimate advantage to the dealer seller. . . . The funds used to pay off the negative equity in the vehicle traded-in are neither part of the price of the collateral, nor are they value given by FMC that was actually used to enable the debtors to acquire rights in the collateral.”), rev’d, No. SA-07-CV-1013-XR, 2009 WL 844021 (W.D. Tex. Mar. 30, 2009) (Rodriguez); In re Callicott, 386 B.R. 232, 236 (Bankr. E.D. Mo. 2008) (Surratt-States) (Financing negative equity does not support purchase money security interest. “[N]o evidence exists that Creditor financing the payoff of Debtor’s traded-in Chrysler was essential to Debtor acquiring the Chevrolet. . . . [T]he Chrysler was traded-in, and there was no collateral for that portion of the loan. Therefore, a close nexus does not exist between the acquisition of the Chevrolet and the loan provided by Creditor to pay off the traded-in Chrysler[.]”), aff’d, 396 B.R. 506, 508–09 (E.D. Mo. 2008) (Perry) (Declining to follow Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008), portion of car loan attributable to payoff of negative equity is not purchase money debt and can be treated as unsecured in a Chapter 13 case. “Most state laws . . . do not contemplate the creation of security interests in assets that are no longer available for collection of a debt, such as the traded-in Chrysler here. . . . [T]his was a loan to pay off an antecedent debt, and . . . there is no PMSI in the trade-in’s negative equity. . . . The money advanced to Callicott to pay off the debt on her old Chrysler was not part of the price of the new Chevrolet, and the close nexus required is missing.”); In re Dale, No. 07-32451-H5-13, 2007 WL 5493483, at * 4 (Bankr. S.D. Tex. Sept. 17, 2007) (Brown) (Amounts advanced for payoff of negative equity on trade-in will not support purchase money security interest for purposes of hanging sentence. “[T]he sum Ford advanced to pay-off debtor’s 2003 trade-in is not the type of charge described in Official Comment 3. . . . [T]he sum necessary to pay off the debt . . . was an antecedent debt.”), rev’d, No. H-07-3176, 2008 WL 4287058 (S.D. Tex. Aug. 14, 2008) (Miller); Citifinancial Auto v. Hernandez-Simpson (In re Hernandez-Simpson), 369 B.R. 36 (D. Kan. 2007) (Negative equity financed as part of car purchase is not included in resulting PMSI.); In re Hall, 400 B.R. 516, 520 (Bankr. S.D. W. Va. 2008) (Pearson) (Applying West Virginia law, financing of negative equity is not purchase money debt for purposes of hanging sentence. “[N]egative equity financing is not value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. Negative equity is antecedent debt.”); In re Miller, No. 08-40935, 2008 WL 5539811, at *3 (Bankr. D. Kan. Dec. 2, 2008) (Karlin) (PMSI in hanging sentence does not include amounts advanced for negative equity. “[M]oney loaned to repay the note on the borrower’s trade-in vehicle is not a purchase money obligation, but merely payment of an antecedent debt.”); In re McCauley, 398 B.R. 41, 45–46 (Bankr. D. Colo. 2008) (Campbell) (Negative equity is not part of PMSI for purposes of hanging sentence. “While the financing of negative equity . . . , in a broad sense of the word, ‘enable[d]’ the Debtors to acquire the Yukon, to interpret negative equity financing of a trade-in as a purchase-money obligation goes too far. Such a reading of the UCC’s PMSI definition ignores the evident intent of the UCC drafters to confine a PMSI to financing of the payment of the purchase price of collateral and incidental necessary expenses connected with that purchase. . . . The financing of the payoff of a trade-in makes the purchase of a new car more convenient for a buyer, but it is not a necessary part of the cost to acquire the new car from the seller. Such convenience fails to satisfy the ‘close nexus’ concept.”); In re Crawford, 397 B.R. 461, 465–68 (Bankr. E.D. Wis. 2008) (Kelley) (Rejecting Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008), negative equity is antecedent debt that is not included in PMSI for purposes of hanging sentence. “[I]f antecedent debt or loans given to enable the debtor to conduct business are given purchase-money status, ‘virtually all secured loans would be secured by purchase money security interests,’ neither an intended nor desirable consequence. . . . This Court respectfully disagrees with the Eleventh Circuit’s determination that negative equity is not antecedent debt. . . . The Wisconsin Consumer Act and the UCC should not be read in pari materia because of their vastly different purposes.”); In re Mierkowski, No. 08-44196-399, 2008 WL 4449471, at *3–*5 (Bankr. E.D. Mo. Sept. 29, 2008) (Schermer) (Financing negative equity is not included in PMSI for purposes of hanging sentence. “[M]oney advanced by the Creditor to repay debt on the Trade-In Vehicle is not part of the price of the New Vehicle. There is no close nexus between the unsecured balance of the debt on the Trade-In Vehicle and the purchase price of the New Vehicle. . . . [T]here is no evidence that the Debtors could not have acquired the New Vehicle without trading in the Trade-In Vehicle and the Creditor paying off the balance on the Trade-In Vehicle.”); In re Busby, 393 B.R. 443, 450–52 (Bankr. S.D. Miss. 2008) (Ellington) (Adopting logic of In re Brodowski, 391 B.R. 393 (Bankr. S.D. Tex. 2008), and distinguishing Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008), negative equity is not part of purchase money security interest for purposes of hanging sentence. “‘[N]egative equity is not an obligation which can be secured by a PMSI for the foregoing reasons: (1) refinancing the negative equity does not ‘enable’ the debtor to acquire rights in the collateral (i.e. the second vehicle); (2) as such, the two transactions do not share a ‘close nexus’ as required by Comment 3 to § 9.103; (3) the definition of price used in the Texas Motor Vehicle Installment Sales Act is not relevant because it is essentially a consumer protection act; and (4) negative equity is not sufficiently similar to the enumerated list in Comment 3 to § 9.103[.]’ . . . Wells Fargo has a PMSI in the price of the vehicle, the sales tax, service contract, inspection fee and filing fee . . . which represents 81.1% of the total amount financed. Pursuant to its proof of claim, . . . $21,335.97 ($26,308.22 x .811) of Wells Fargo’s claim is a PMSI and protected under the hanging paragraph. . . . The Eleventh Circuit’s opinion in Graupner appears to this Court to rely heavily on reading the definition of ‘cash sale price’ found in the Georgia Motor Vehicle Sales Finance Act (Georgia MVSFA) in pari materia with the UCC. . . . Mississippi’s MVSFL does not have language similar to the Georgia MVSFA. . . . The hanging paragraph was a specific remedy to a perceived abuse by debtors who purchased a new vehicle shortly before filing bankruptcy, and then upon filing, stripped the secured claim down to the value of the vehicle. This is not the situation in the case at bar.”); In re Bandura, No. 08-50378, 2008 WL 2782851 (Bankr. E.D. Ky. July 15, 2008) (Lee) (Financed negative equity is not part of PMSI for purposes of hanging sentence at end of § 1325(a).); In re Steele, No. 08-40282-DML-13, 2008 WL 2486060, at *4 (Bankr. N.D. Tex. June 12, 2008) (Lynn) (For purposes of hanging sentence, financing of negative equity is not included in purchase money security interest. “The negative equity Wells Fargo here rolled into the debt against the Vehicle is not the sort of indebtedness Congress was aiming at when it enacted the Unnumbered Paragraph.”); In re Brodowski, 391 B.R. 393, 400 (Bankr. S.D. Tex. 2008) (Bohm) (Agreeing in part with In re Sanders, 377 B.R. 836 (Bankr. W.D. Tex. 2007), negative equity is not part of PMSI for purposes of hanging sentence at end of § 1325(a). “[N]egative equity is not an obligation which can be secured by a PMSI for the foregoing reasons: (1) refinancing the negative equity does not ‘enable’ the debtor to acquire rights in the collateral . . . ; (2) . . . the two transactions do not share a ‘close nexus’ as required by Comment 3 to § 9.103; (3) the definition of price used in the Texas Motor Vehicle Installment Sales Act is not relevant because it is essentially a consumer protection act; and (4) negative equity is not sufficiently similar to the enumerated list in Comment 3 to § 9.103.”); GMAC v. Mancini (In re Mancini), 390 B.R. 796, 805 (Bankr. M.D. Pa. 2008) (Opel) (Negative equity is not part of PMSI for purposes of hanging sentence. “I cannot equate paying off negative equity to paying sales tax, freight charges, storage costs, or other similar charges. The payoff concerns a different vehicle and, usually, a different lender. Nothing in the UCC or its comments leads me to believe that the payment of an antecedent debt, such as negative equity, should be included as part of a creditor’s purchase money security interest.”); In re Padgett, 389 B.R. 203, 209–10 (Bankr. D. Kan. 2008) (Karlin) (Agreeing with Citifinancial Auto v. Hernandez-Simpson, 369 B.R. 36 (D. Kan. 2007), reaffirming In re Vega, 344 B.R. 616 (Bankr. D. Kan. 2006), and rejecting In re Ford, 387 B.R. 827 (Bankr. D. Kan. 2008), negative equity advanced to pay off trade-in does not support a purchase money security interest under Kansas law. “The Court . . . disagrees with those courts that hold that refinancing thousands of dollars of negative equity easily or logically fits within the ‘expenses incurred in connection with acquiring rights in the collateral’ provision. ‘The collateral’ referenced is the new car—not the trade-in. . . . [T]he payoff of the negative equity in the trade-in is not necessary to acquire rights in the new car in the same manner as the items listed in the Official Comments.”); In re Hernandez, 388 B.R. 883, 884 (Bankr. C.D. Ill. 2008) (Fines) (Adopting “majority view,” because Illinois law “defines a purchase money security interest in a much narrower way than it defines collateral,” negative equity is not part of PMSI and debt can be bifurcated under § 1325(a).); In re Munzberg, 388 B.R. 529, 539 (Bankr. D. Vt. 2008) (Brown) (Negative equity is not part of purchase money security interest. Applying Vermont law, “[n]egative equity is antecedent debt . . . . [N]egative equity is also unsecured debt[.]”); In re Look, 383 B.R. 210, 219 (Bankr. D. Me. 2008) (Haines) (Applying state law, financing of negative equity is not a purchase money transaction. “The value advanced by Patriot Subaru enabled Corrina Look to refinance the obligation secured by her trade-in. And, as a consequence, Patriot Subaru obtained clear rights to the trade-in. It did not ‘enable’ Corrina to purchase her new car.”); In re Jernigan, No. 07-04037-8-JRL, 2008 WL 922346 (Bankr. E.D.N.C. Mar. 31, 2008) (Leonard) (Negative equity is not included in purchase money security interest in car.); In re Johnson, 380 B.R. 236, 242–47 (Bankr. D. Or. 2007) (Dunn) (Negative equity will not support a PMSI under Oregon law. “In some states, the definition of ‘cash sale price’ explicitly includes negative equity financed as part of the sale transaction. . . . I agree that ‘price of the collateral’ does not include negative equity. Negative equity is not similar in nature or scope to the other ‘expenses incurred in connection with acquiring rights in the collateral’ contemplated by Official Comment 3. . . . [L]iability for negative equity is not an expense ‘incurred in connection with acquiring’ the Vehicle; it is an antecedent debt. . . . This definition of ‘cash sale price’ does not explicitly include negative equity, as do similar statutes in New York, Georgia, and California. . . . [B]ecause the ‘cash sale price’ is the price the Johnsons would have paid the Dealer in a cash transaction, it logically cannot include negative equity. . . . Given that financing negative equity is increasingly common, it was not an oversight that the legislature did not include negative equity in the list of ‘expenses incurred in connection with acquiring rights in the collateral’ set forth in Official Comment 3 . . . . [N]egative equity is not of the same ‘type’ or ‘magnitude’ as the expenses listed in Official Comment 3. . . . [T]he financed negative equity is nothing more than a refinance of the pre-existing debt owed on the Trade-In. Accordingly, it does not create the requisite close nexus between ‘value given’ and the Johnsons’ acquisition of rights in the Vehicle.”); In re Riach, No. 07-61645-aer13, 2008 WL 474384, at *5 (Bankr. D. Or. Feb. 19, 2008) (Radcliffe) (“The cost of financing the trade-in’s negative equity is not a purchase money obligation under Oregon’s Article 9. It is excluded from the [hanging paragraph’s] protection.”); In re Wear, No. 07-42537, 2008 WL 217172, at *3 (Bankr. W.D. Wash. Jan. 23, 2008) (Snyder) (Applying Washington law, security interests in cars are not purchase money to extent negative equity was financed. “‘[P]rice of the collateral’ does not include negative equity: Negative equity is not similar in nature or scope to the other ‘expenses incurred in connection with acquiring rights in the collateral’ contemplated by Official Comment 3. . . . [T]he liability for negative equity is not an expense ‘incurred in connection with acquiring’ the Vehicle; it is an antecedent debt.”); In re Tuck, No. 06-10886-DHW, 2007 WL 4365456, at *2–*3 (Bankr. M.D. Ala. Dec. 10, 2007) (unpublished) (Williams) (“[N]egative equity is not a part of the price of the collateral. . . . [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. . . . Negative equity from a trade-in is not an expense directly related to the purchase of the second vehicle nor incidental to that purchase. It is not an obligation ‘similar’ to those on the list. Neither does it bear a ‘close nexus’ between the acquisition of the collateral and secured obligation. The negative equity represents a prior obligation in connection with a prior vehicle. It is not an expense ‘incurred in connection with acquiring rights in the [current] collateral.’”); In re Lavigne, Nos. 07-30192, 07-31402, 07-31247, 06-32914, 2007 WL 3469454, at *6–*8 (Bankr. E.D. Va. Nov. 14, 2007) (unpublished) (Huennekens) (Amounts advanced for negative equity are not purchase money obligations. “Negative equity is antecedent debt. . . . [R]efinancing negative equity by rolling it into a new purchase money loan does not thereby create a purchase money obligation at least to the extent of the antecedent debt that was refinanced. . . . Virginia retail installment sales statute offers no guidance for the interpretation of the Uniform Commercial Code. . . . The liability for negative equity was not incurred in connection with acquiring the vehicle. . . . The pre-existing indebtedness was simply rolled into the new car loan. . . . [T]he negative equity was not ‘value given to enable’ because it is not an ‘expense’ of sale. . . . The elimination of prior indebtedness, while it may be a condition for securing approval of needed financing, is simply not essential to the acquisition of a new motor vehicle.”); In re Conyers, 379 B.R. 576, 581–82 (Bankr. M.D.N.C. 2007) (Carruthers) (Financing negative equity forfeits purchase money status under North Carolina law. “[T]he payoff of negative equity is not part of the ‘price of the collateral.’ . . . The examples given in Comment 3 are items that are directly associated with the purchase and retention of a new vehicle or other collateral. The court does not believe that payment of a pre-existing debt secured by other collateral is similar to those items, that is, ‘value given to enable the debtor to acquire rights in or the use of the collateral.’ . . . While paying off the preexisting debt on the old vehicle was value, it was not value given to enable the Debtor to acquire rights in the collateral. Because the funds used to pay negative equity is [sic] not a component of the price of the collateral or value given to enable the debtor to acquire rights in the collateral, the court concludes that those funds are not secured by a purchase money security interest.”); In re Mitchell, 379 B.R. 131, 136–41 (Bankr. M.D. Tenn. 2007) (Paine) (Financing of “negative equity” is not included in “price” of a car and does not “enable” debtor to buy car. “[T]here are ‘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 part of the combined transaction does not result in a purchase-money security interest.’ . . . [T]he negative equity was not part of the ‘price’ . . . . [N]egative equity financing does not ‘enable’ the debtors to acquire rights in or use of the collateral as was intended in the Tennessee statute. . . . [T]he PMSI is destroyed under the hanging paragraph where there is an advance to pay negative equity in the otherwise PMSI purchase of a vehicle.”); In re Blakeslee, 377 B.R. 724, 729 (Bankr. M.D. Fla. 2007) (Negative equity is not part of purchase money security interest of car lender. “[F]inanced negative equity is not part of the ‘price of the collateral’ . . . . [N]egative equity is not used to enable a debtor to acquire rights in the collateral. . . . [T]he payoff of negative equity by the creditor is not a prerequisite to enable the debtor to obtain a legal interest in the vehicle’s payoff, but merely an accommodation to facilitate the transaction. . . . [N]egative equity is not of the same ‘type’ or ‘magnitude’ as the items listed in Comment 3.”); In re Kellerman, 377 B.R. 302 (Bankr. D. Kan. 2007) (Debt from previous vehicle refinanced with purchase of new car is not included in protected 910-day PMSI car claim.); In re Hayes, 376 B.R. 655 (Bankr. M.D. Tenn. 2007) (Lundin) (Financing of negative equity was not part of purchase price, did not enable debtor to purchase car and was not in “close nexus” with purchase of car for purposes of state PMSI analysis. Car lender failed to prove that amounts advanced to pay off prior debt enabled debtor to purchase new car or were in close nexus to that purchase.); In re Westfall, 376 B.R. 210 (Bankr. N.D. Ohio 2007) (Adopting federal definition of PMSI, negative equity financed as part of car purchase is not a purchase money obligation.); In re Pajot, 371 B.R. 139, 147–54 (Bankr. E.D. Va. 2007) (“[T]he portion of the transaction corresponding to negative equity is not considered a purchase money security interest under Virginia law. . . . [T]he portion of each creditor’s claim relating to negative equity is a non-purchase-money security interest, and may be bifurcated into a secured and unsecured portion in accordance with 11 U.S.C. § 506. . . . This court agrees with the finding in [In re Peaslee, 358 B.R. 545 (Bankr. W.D.N.Y. 2006),] that the term [price of the collateral] means nothing more than ‘the actual price of the collateral being acquired.’ . . . It is clear that negative equity is a large component of an increasingly large number of financing transactions. Where such a significant alleged component of purchase-money security interests is not included explicitly in the text of the U.C.C. or its official comments, the court does not see a textual justification for placing it amongst a list in which it would be the proverbial elephant in the room. . . . Comment 3 also provides a ‘close nexus’ limitation on purchase-money security interests . . . .‘[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.’ . . . [T]he ‘close nexus’ requirement prevents creditors from rolling in financing from sources such as student loans or credit card debts into a vehicle financing transaction. . . . [T]his court does not see the dividing line differentiating between vehicle negative equity and such ‘unrelated’ debt forms. . . . The deficiency—the amount the first creditor’s debt exceeds collateral value as determined at the time of the trade—is the negative equity. This deficiency is unsecured just as it would be if the first creditor had foreclosed. Therefore, the substance of the transaction, though instantaneous, is that the second creditor is paying off the debtor’s unsecured deficiency debt on the first vehicle. . . . The court sees no distinction between the substance of this transaction and paying off and rolling in any other unsecured debt that may be held by the debtor. . . . [I]t is not clear that there is a close nexus between the negative equity payoff and the acquisition of the new vehicle. Negative equity is not similar to or encompassed by any of the items specified in Comment 3. It follows that negative equity is not ‘value given to enable the debtor to acquire rights’ in the collateral.”); In re Acaya, 369 B.R. 564, 570 (Bankr. N.D. Cal. 2007) (Applying California version of U.C.C. § 9-103 and California Automobile Sales Finance Act, “the amount used to pay the negative equity does not constitute part of the price of the collateral or value given to acquire rights in the collateral . . . . Because financing the negative equity in a trade-in vehicle does not give rise to a purchase money security interest, the hanging paragraph does not apply to this portion of WFFA’s secured claim.”); In re Bray, 365 B.R. 850, 861–62 (Bankr. W.D. Tenn. 2007) (“The . . . [amount] the Bank lent to the debtor to payoff [sic] the previous unsecured note . . . would not be included in the purchase money portion of the Bank’s security interest. That portion of the loan was not incurred by the debtor as part of the purchase price of the car nor did it enable the debtor to acquire any rights in the car. . . . When negative equity is financed in with a new transaction, courts typically find that the negative equity is not included within a party’s purchase money security interest for purposes of 11 U.S.C. § 1325(a)’s hanging paragraph. . . . The Court finds this to be a sound decision and rules that [the] portion of the debt which represented the negative equity . . . would not be included in the Bank’s purchase money security interest.”); In re Vega, 344 B.R. 616, 622–23 (Bankr. D. Kan. 2006) (Loan proceeds used to pay off a prior loan are not purchase money for purposes of the hanging sentence at the end of § 1325(a). “Whether a creditor has a purchase money security interest securing a debt is a matter of state law . . . . Revised § 9-103(b) of the Uniform Commercial Code . . . defines a ‘purchase-money obligation’ . . . . [T]o have a PMSI, an otherwise secured party has the burden of proof to satisfy two key elements: 1) that the money loaned or credit extended made it possible for the debtor to obtain the collateral, and 2) that debtor used the funds supplied to acquire rights in the collateral. . . . UAC has not, and cannot, show . . . that the entire $8,789.98 loaned in 2005 made it possible for the debtor to purchase the 1996 Intrepid. Clearly, only $6,763.98 was loaned for that purpose. . . . UAC has not, and cannot, meet its second burden to show that Debtors used the entire $8,789.98 loaned to acquire rights in the Intrepid. . . . [T]he extent of UAC’s purchase money security interest in the Intrepid is limited to the purchase price of that vehicle . . . . [T]he excess $2,123 . . . is an unsecured antecedent debt, which is not entitled to purchase-money treatment under § 1325(a).”).

 

68  537 F.3d 1295 (11th Cir. 2008) (Tjoflat, Marcus, Vinson).

 

69  537 F.3d at 1300–03. Accord Wells Fargo Fin. Acceptance v. Price (In re Price), No. 08-1022, 2009 WL 975796, at *4–*6 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory) (Citing Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008), and rejecting Wells Fargo’s invitation to construct a federal definition of PMSI, and instead applying North Carolina law, negative equity is included in PMSI for purposes of the hanging sentence. “We think the Eleventh Circuit’s view persuasive. Under a natural reading of state law, the negative equity financing here created a purchase-money obligation because that financing enabled the Prices to acquire rights in their new car. . . . [T]he negative equity financing was integral to the whole transaction in which the new vehicle was purchased. . . . The trade-in itself was essential to the over-all transaction because trading in the old car allowed the Prices to obtain value to put toward the new car. . . . Official Comment 3 supports the determination that negative equity financing of an automobile purchase gives rise to a purchase money security interest. . . . [B]ecause paying off the Prices’ negative equity was integral to their acquisition of the new car, it would be difficult to conclude that the negative equity financing failed [the] ‘close nexus’ requirement.”); Nuvell Credit Co. v. Muldrew (In re Muldrew), 396 B.R. 915, 924–25 (E.D. Mich. 2008) (Cohn) (Citing Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008), negative equity is part of PMSI for purposes of hanging sentence. “The new car financing in this case was a ‘package,’ all of which qualifies for PMSI status under the plain language of the Bankruptcy Code, as well as under TILA, Article 9 and MVSFA. . . . The necessary or incidental costs ‘which the seller contracts to pay on behalf of the buyer’ would include the outstanding loan amount[.]”); GMAC v. Horne, 390 B.R. 191, 203 (E.D. Va. 2008) (Payne) (Citing GMAC v. Peaslee, 373 B.R. 252 (W.D.N.Y. 2007), and Graupner v. Nuvell Credit Corp., No. 4:07-CV-37CDL, 2007 WL 1858291 (M.D. Ga. June 26, 2007) (unpublished), financing of negative equity is included in purchase money security interest for purposes of hanging sentence. “A reading of both the UCC and [Virginia Retail Installment Sales Act] suggests that negative equity financing that is integral to the sales transaction may be viewed as part of the price in the sale transaction, and thus as part of creditor’s purchase money security interest.”); In re Carlton, No. 08-10624-DHW, 2008 WL 5045908, at *3 (Bankr. M.D. Ala. Nov. 24, 2008) (Williams) (Citing Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008), and notwithstanding absence of an Alabama counterpart to Georgia’s Motor Vehicle Sales Finance Act, negative equity is part of purchase money security interest for purposes of hanging sentence. “[T]his court is convinced that the Graupner court would hold similarly in cases arising even under Alabama law, which has no counterpart to Georgia’s MVSFA. The in pari materia reading of Georgia’s UCC with its MVSFA merely bolstered the court’s decision to accord purchase money status to the negative equity in the amount financed. More fundamentally, the court found that negative equity was equivalent to the types of expenses listed in Official Comment 3 which would not affect the purchase money character of the transaction.”); In re Harless, No. BK 07-71959-CMS-13, 2008 WL 3821781, at *2 (Bankr. N.D. Ala. Aug. 13, 2008) (Stilson) (Citing Graupner v. Nuvell Credit Corp. (In re Graupner), No. 07-13657, 2008 WL 2993570 (11th Cir. Aug. 6, 2008), and without discussion of Alabama law, “the inclusion of negative equity on a trade in vehicle does not destroy the creditor’s purchase money security interest in the entire transaction and therefore World Omni is protected from having its collateral valued by the hanging paragraph of 11 U.S.C. Section 1325(a).”); In re Smith, 401 B.R. 343 (Bankr. S.D. Ill. 2008) (Pepper) (Applying Illinois UCC and Illinois Motor Vehicle Retail Installment Sales Act, the financing of negative equity does not deprive the lender of a purchase money security interest.); In re Hampton, No. 07-14990, 2008 WL 5749718, at *4 (Bankr. S.D. Ohio June 16, 2008) (Perlman) (“[T]he hanging paragraph prohibits application of § 506, even though negative equity was present in the purchase transaction for that was within the intent of the enactment.”); In re Shockley, No. 07-15884, 2008 WL 5747423 (Bankr. S.D. Ohio Apr. 29, 2008) (Aug) (Purchase money security interest for purposes of hanging sentence includes negative equity financing.); In re Myers, 393 B.R. 616, 621 (Bankr. S.D. Ind. 2008) (Metz) (Financing of negative equity does not forfeit purchase money security interest for purposes of the hanging sentence. “[I]t is difficult to see how the funds used to pay the negative equity here could not be viewed as an expense incurred in connection with acquiring rights in the Vehicle . . . . Where parties agree to a ‘package transaction’ in which the negative equity [is] inextricably intertwined with the sales transaction and the financing of the purchase, the ‘close nexus’ exists and . . . the financing of the negative equity must have been considered as part of the ‘price of the collateral’.”); In re Vinson, 391 B.R. 754, 758 (Bankr. D.S.C. 2008) (Burris) (“The negative equity was an item rolled into the contract and financed to assist the Debtors in the ultimate goal of taking the car home, and it did not destroy the purchase money nature of the debt.”); In re Ford, 387 B.R. 827, 831 (Bankr. D. Kan. 2008) (Nugent) (Disagreeing with Citifinancial Auto v. Hernandez-Simpson, 369 B.R. 36 (D. Kan. 2007) (Robinson), In re Kellerman, 377 B.R. 302 (Bankr. D. Kan. 2007) (Berger), and In re Vega, 344 B.R. 616 (Bankr. D. Kan. 2006) (Karlin), financing negative equity does not forfeit PMSI in car. Applying state law, “[a] part of the consideration for the sale of the pickup truck to the debtors was the trade-in of their old vehicle. That trade-in was valueless because of the negative equity. . . . Costs incurred in the release of the lien on the debtors’ trade-in are ‘expenses incurred in connection with acquiring rights in the collateral’ . . . . The vehicle the debtors traded in was part of the consideration for the vehicle they bought. . . . [T]he financed negative equity falls within the definition of a purchase money obligation under [state law].”); In re Dunlap, 383 B.R. 113, 117–18 (Bankr. E.D. Wis. 2008) (Shapiro) (Negative equity is included in purchase money security interest of car lender for hanging-sentence purposes. “[I]f a party finances the purchase of a new car by means of negative equity financing, the lender holds a PMSI for the full amount of its loan, which includes the entire negative equity. . . . [T]he debtor and Nissan entered into a single transaction for the purchase and sale of a new car, utilizing negative equity financing as the method to accomplish this goal. The payment of the balance due on the trade-in car was a prerequisite to consummating this transaction. . . . There is a close nexus in this case between the acquisition by the debtors of the new car and the entire secured obligation, including the negative equity portion.”); In re Austin, 381 B.R. 892 (Bankr. D. Utah 2008) (Clark) ($3,000 advanced to pay negative equity on trade-in is purchase money obligation based on testimony that debtor could not qualify for loan without trade-in and lender would not have made loan without also paying off debt on trade-in.); In re Schwalm, 380 B.R. 630, 633–34 (Bankr. M.D. Fla. 2008) (May) (Car loan is protected from § 506 by hanging sentence at the end of § 1325(a) notwithstanding financing of negative equity. Citing GMAC v. Peaslee, 373 B.R. 252 (W.D.N.Y. 2007): “the items complained of here are lawfully permitted to be included in the ‘amount financed’ in a motor vehicle retail installment contract. When viewed in this way—as a ‘packaged’ transaction to dispose of the old car, insure the new loan amount, and provide for future maintenance—the items included in the amount financed do have a close nexus to the acquisition of the car, consistent with the explanation of the concept of price in Comment 3.”); In re Brei, No. 4:07-BK-01354-JMM, 2007 WL 4104884, at *1 (Bankr. D. Ariz. Nov. 14, 2007) (unpublished) (Marlar) (“The Debtor maintains that the 910-day rule does not apply, and relies on an argument concerning the trade-in value of a previous automobile, to create something she refers to as ‘negative equity.’ However, the record presented does not clearly reflect any facts to support the argument. . . . The court agrees with the Bank that the entire amount which was lent was for the purpose of acquiring a vehicle, regardless of whether some portion thereof was used to pay off a previous lien on the trade-in. As such, the entire obligation was a purchase money transaction.”); In re Burt, 378 B.R. 352, 363 (Bankr. D. Utah 2007) (Thurman) (Car loan is entirely PMSI for hanging-sentence purposes notwithstanding negative equity of $11,021.68. “[T]he financing transaction was a package deal where the negative equity in the trade-in was paid off by the dealer as part of its retail installment sale of the new vehicle and the related obligation was included in the Contract with the Debtor. . . . Ford Motor Credit would not have financed the total purchase price had the Debtor not agreed to all of the terms of the Contract including the negative equity and the add-on transaction costs. The Court, therefore, concludes that because of this close nexus between the negative equity and the financing of the Debtor’s new vehicle, the entire transaction qualifies as a PMSI.”); In re Wall, 376 B.R. 769, 771 (Bankr. W.D.N.C. 2007) (Financing negative equity does not forfeit purchase money status for purposes of hanging sentence. Citing GMAC v. Peaslee, 373 B.R. 252 (W.D.N.Y. 2007), and Graupner v. Nuvell Credit Corp., No. 4:07-CV-37CDL, 2007 WL 1858291 (W.D. Ga. June 26, 2007), “[t]his court concludes that the financing of a motor vehicle that includes negative equity in a trade-in vehicle may constitute a ‘purchase money security interest’ that is not subject to modification by the debtors’ Chapter 13 Plan.”); In re Cohrs, 373 B.R. 107, 109–10 (Bankr. E.D. Cal. 2007) (Applying California law, when debtor traded-in prior car as part of value given to acquire new car, payoff of prior car is part of a purchase money transaction and new debt is protected by hanging sentence. “The logical place to look for a definition [of purchase money security interest] is the nonbankruptcy law applicable to the contract between the parties. . . . The phrase, ‘value given to enable the debtor to acquire rights in’ purchase money collateral is broad enough to include the ‘negative equity’ financed by a lender like Americredit. . . . This court reads section 9103 and Comment 3 to require only a ‘close nexus’ between the acquisition of the property and the secured obligation. That is, it must be part of a single transaction and all components of the obligation incurred must have been for the purpose of acquiring the property securing the new obligation. So, if a debtor borrows money both to finance a new vehicle and to pay off a debt encumbering his or her existing vehicle, but does not trade in that vehicle to the seller, this court would conclude that the inclusion of the pay-off amount in the loan destroys its purchase money character. But here, the debtor traded in his existing vehicle to the seller as part of the value given to acquire the truck.”); In re Petrocci, 370 B.R. 489, 498–504 (Bankr. N.D.N.Y. 2007) (Rejecting In re Peaslee, 358 B.R. 545 (Bankr. W.D.N.Y. 2006), and relying in part on New York Motor Vehicle Retail Installment Sales Act, financing of negative equity did not forfeit PMSI status for entire 910-day car claim. “[T]he Official Comment 3 to UCC § 9-103, in a rather wide-ranging and open-ended attempt to define ‘price’ in the purchase money security interest context, explicitly states that the ‘price’ of the collateral may include much more than what the Peaslee court calls ‘the actual price of the collateral being acquired.’ This makes it difficult to accept the Peaslee court’s conclusion that the word ‘price’ as used in UCC § 9-103 ‘has the same meaning that it has always had . . . which is the actual price of the collateral being acquired.’ . . . [T]he Court holds that the two statutes are in pari materia, and that the term ‘price,’ as used in New York’s UCC § 9-103, must be given the meaning set forth in MVRISA’s definition of cash sales price, which includes negative equity. . . . [I]t is the existence of other items of collateral which leads to a ‘mixed’ transaction, not the existence of an additional debt component or expense (financed at the time of purchase), which, as we have seen, Comment 3 to UCC § 9-103 explicitly allows to be included in the ‘price’ of the one piece of (purchase money security interest) collateral. . . . [T]he Court declines to gag at the gnat of a UCC ambiguity in order to swallow whole a camel-like contravention of BAPCPA. This is especially so when New York’s MVRISA provides a means of construing the hanging paragraph of Code § 1325(a)(9) which is in harmony with the Code, UCC § 9-103 and New York’s MVRISA.”).

 

70  358 B.R. 560 (Bankr. W.D.N.Y. 2007).

 

71  358 B.R. at 565.

 

72  See In re Grant, 359 B.R. 438, 440–41 (Bankr. W.D.N.Y. 2007) (Applying In re Peaslee, 358 B.R. 545 (Bankr. W.D.N.Y. 2006), and In re Jackson, 358 B.R. 560 (Bankr. W.D.N.Y. 2007): “Trustee has met his initial burden of proof . . . that the two separate financial transactions evidenced by the applicable Retail Installment Contract included the separate transaction where Webster Ford loaned the Debtor Shane Grant, money to refinance the negative equity she had in the Freestar for the following reasons: . . . Webster Ford gave the Debtor, Shane Grant, a $23,911.00 allowance for the Freestar, even though the NADA Guide trade-in value for the Freestar was only $16,175.00.” Subject to car lender’s right to request a hearing, because negative equity was refinanced, allowed claim of car lender must be reduced for confirmation purposes notwithstanding hanging sentence in § 1325(a).). Accord In re VanManen, 362 B.R. 620 (Bankr. W.D.N.Y. 2007); In re Rodwell, 362 B.R. 616 (Bankr. W.D.N.Y. 2007); In re Phillips, 362 B.R. 612 (Bankr. W.D.N.Y. 2007); In re Freeman, 362 B.R. 608 (Bankr. W.D.N.Y. 2007); In re Colombai, 362 B.R. 605 (Bankr. W.D.N.Y. 2007); In re Martinez, 362 B.R. 600 (Bankr. W.D.N.Y. 2007); In re Cassidy, 362 B.R. 596 (Bankr. W.D.N.Y. 2007).

 

73  See, e.g., In re Hargrove, 400 B.R. 616 (Bankr. M.D. Tenn. 2008) (Harrison) (No negative equity was financed for purposes of hanging sentence after credit for value of trade-in and rebate; cost of gap insurance is not part of purchase money security interest, and dual-status rule applies to render part of debt unprotected from § 506.); In re Myers, No. 07-34148, 2008 WL 821994 (Bankr. E.D. Tenn. Mar. 26, 2008) (Stair) (When contract indicated trade-in allowance of $11,600 and payoff on trade-in of $11,600, there was no “negative equity” that might threaten purchase money security interest of car lender.); In re Gray, 382 B.R. 438 (Bankr. E.D. Tenn. 2008) (Stinnett) (Without reaching “broader” question whether financing negative equity forfeits protection from § 506 in the hanging sentence at the end of § 1325(a), because contract used cash down payment and rebates to eliminate negative equity, no portion of loan was used to pay negative equity and remaining debt is purchase money obligation.).

 

74  See above in this section.

 

75  358 B.R. at 559–60. Accord In re Price, 363 B.R. 734, 745–46 (Bankr. E.D.N.C. 2007) (“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 . . . . 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, . . . it is within the court’s discretion to apply either the dual status or transformation rule. . . . [W]here negative equity is present the secured creditor has the burden of establishing the difference between the purchase price and advances to pay the debt related to the vehicle being traded-in. . . . [T]hat is a virtually impossible task. It is especially difficult where . . . 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 [In re Peaslee, 358 B.R. 545 (Bankr. W.D.N.Y. 2006)], that generally when negative equity is involved, the appropriate rule is the transformation rule. . . . [A]ccordingly, 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.”), aff’d in part, rev’d in part, No. 5:07-CV-133-BR, 2007 WL 5297071, at *3 (E.D.N.C. Nov. 14, 2007) (Britt) (Financing of negative equity and gap insurance are not part of “sales price” and are not included in purchase money security interest; dual-status rule applies, and remand is necessary to calculate portion of debt that is purchase money. “[T]he bankruptcy court correctly concluded that negative equity and gap insurance do not come within the definition of ‘purchase money obligation,’ and thus cannot give rise to a purchase money security interest.”), rev’d, No. 08-1022, 2009 WL 975796 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory); In re Blakeslee, 377 B.R. 724, 730 (Bankr. M.D. Fla. 2007) (“[T]he Court . . . does have the discretion as to whether to apply the dual status or the transformation rule . . . [and] finds that with respect to negative equity, the transformation rule is the appropriate rule to be applied. . . . [T]he amount of negative equity is difficult to compute and is in fact a ‘mystery’ . . . . The Court declines the task of ‘unwind[ing] the manipulations’ which would be foisted upon it were it to apply the dual status rule to the financing of negative equity in retail installment contracts.”); In re Huddle, No. 06-11076-SSM, 2007 WL 2332390, at *5 (Bankr. E.D. Va. Aug. 13, 2007) (unpublished) (“[T]he Fourth Circuit decision in [Dominion Bank of the Cumberland v. Nuckolls (In re Nuckolls), 780 F.2d 408 (4th Cir. 1985),] remains good law in the consumer-goods context and compels a determination that the purchase-money character of 1st Advantage’s security interest was lost when the original loan was refinanced and a portion of the proceeds used to bring a separate loan current.”).

 

76  See GMAC v. Peaslee, 373 B.R. 252 (W.D.N.Y. 2007) (Larimer), discussed above in this section.

 

77  See Americredit Fin. Servs., Inc. v. Penrod (In re Penrod), 392 B.R. 835, 859 (B.A.P. 9th Cir. 2008) (Markell, Klein, Jury) (Dual-status rule prevents application of § 506 to the portion of the debt that is purchase money. “The state law Dual Status Rule recognizes that PMSIs may be divided, and that a secured obligation may be fractionalized . . . . Bankruptcy law treats claims similarly. . . . [T]he Dual Status Rule should be applied as the federal rule. The Dual Status Rule gives lenders a PMSI equal to the new value financed (or at least its value at filing) and a regular security interest for the balance.”); In re Callicott, 386 B.R. 232 (Bankr. E.D. Mo. 2008) (Surratt-States) (Dual-status rule preserves intent of hanging sentence to extent collateral is purchase money.), aff’d, 396 B.R. 506 (E.D. Mo. 2008) (Perry); Wells Fargo Fin. N.C. 1, Inc. v. Price, No. 5:07-CV-133-BR, 2007 WL 5297071 (E.D.N.C. Nov. 14, 2007) (Britt) (Dual-status rule applies and remand is necessary to calculate portion of debt that is purchase money.), rev’d, No. 08-1022, 2009 WL 975796 (4th Cir. Apr. 13, 2009) (Wilkinson, King, Gregory); Citifinancial Auto v. Hernandez-Simpson (In re Hernandez-Simpson), 369 B.R. 36 (D. Kan. 2007) (Dual-status rule permits car lender to have partially purchase money security interest to extent of purchase price of new car plus interest and minus any payments made prior to Chapter 13 case.); In re Hall, 400 B.R. 516, 521 (Bankr. S.D. W. Va. 2008) (Pearson) (Dual-status rule applies. “[I]n adopting the dual status rule, the objectives of Congress in passing the hanging paragraph are best served.”); In re McCauley, 398 B.R. 41 (Bankr. D. Colo. 2008) (Campbell) (Dual-status rule applies.); In re Mierkowski, No. 08-44196-399, 2008 WL 4449471, at *5 (Bankr. E.D. Mo. Sept. 29, 2008) (Schermer) (“[O]ne can determine how much of the debt was purchase money and how much was not. Therefore application of the dual status rule is appropriate.”); In re Busby, 393 B.R. 443 (Bankr. S.D. Miss. 2008) (Ellington) (Dual-status rule applies.); In re Steele, No. 08-40282-DML-13, 2008 WL 2486060 (Bankr. N.D. Tex. June 12, 2008) (Lynn) (Hanging sentence is not all or nothing—debt is appropriately prorated to allow partial protection from § 506.); In re Brodowski, 391 B.R. 393 (Bankr. S.D. Tex. 2008) (Bohm) (Dual-status rule is applied by prorating prepetition reduction of principal.); In re Munzberg, 388 B.R. 529 (Bankr. D. Vt. 2008) (Brown) (Dual-status rule applies.); In re Jernigan, No. 07-04037-8-JRL, 2008 WL 922346 (Bankr. E.D.N.C. Mar. 31, 2008) (Leonard) (Applying dual-status rule, prepetition payments are allocated proportionally.); In re Wear, No. 07-42537, 2008 WL 217172 (Bankr. W.D. Wash. Jan. 23, 2008) (Snyder) (Because aggregate value of installment contracts exceeds $40,000, transactions are nonconsumer and dual-status rule applies.); In re Johnson, 380 B.R. 236, 250 (Bankr. D. Or. 2007) (Dunn) (Dual-status rule allows part of car lender’s claim to be protected from § 506 by hanging sentence. “In light of that clear purpose behind the Hanging Paragraph, it does not make sense to apply the transformation rule and deprive the creditor of the benefit under BAPCPA of its vehicle PMSI entirely because the creditor financed some negative equity in its transaction with the debtor. I find that applying the dual purpose rule is more consistent with congressional intent.”); In re Tuck, No. 06-10886-DHW, 2007 WL 4365456, at *3–*4 (Bankr. M.D. Ala. Dec. 10, 2007) (unpublished) (Williams) (“This jurisdiction employs the dual status rule in consumer transactions . . . . [U]nder the dual status approach, the purchase-money character of the balance of the debt is not destroyed as long as the contract provides a method for allocation of payments between the portion representing the purchase price and the portion representing the negative equity. This the contract failed to do, and as a result, National lost its purchase-money status.”); In re Dale, No. 07-32451-H5-13, 2007 WL 5493483 (Bankr. S.D. Tex. Sept. 17, 2007) (Brown) (Dual-status rule applies. Because purchase money portion of debt is readily ascertainable and underlying policy of transformation rule—preventing overreaching by creditors—is not applicable, dual-status rule applies.), rev’d, No. H-07-3176, 2008 WL 4287058 (S.D. Tex. Aug. 14, 2008) (Miller); In re Conyers, 379 B.R. 576, 582–83 (Bankr. M.D.N.C. 2007) (Carruthers) (Dual-status rule is applied and payments are credited pro rata. “[I]t is within the court’s discretion to apply either the dual status or transformation rule. . . . [T]he dual status rule is a compromise between the two extremes . . . . [A]pplying the transformation rule would ‘re-enable debtors to cram down the secured claim to the collateral value.’ . . . [T]he most equitable manner of allocating payments is pro-rata.”); In re Honcoop, 377 B.R. 719, 723–24 (Bankr. M.D. Fla. 2007) (Money advanced to purchase gap insurance is not part of purchase money security interest; dual-status rule renders part of debt protected from § 506. “[T]he Court has the discretion as to whether to apply the dual status rule or the transformation rule to a partial purchase money security interest. . . . [T]he equitable rule to be applied is the dual status rule.”); In re Kellerman, 377 B.R. 302, 304 (Bankr. D. Kan. 2007) (To determine amount of claim that is protected from cramdown, cash price of vehicle is starting point and then prepetition payments are applied pursuant to parties’ agreement; in absence of an agreement, “the prepetition payments shall be applied to the unsecured negative equity first, then to the PMSI.”); In re Hayes, 376 B.R. 655 (Bankr. M.D. Tenn. 2007) (Lundin) (Dual-status rule applied under Tennessee law. The hanging sentence is not an “all or nothing” statute with respect to purchase money character. State law combined with contract provisions for allocation of payments permit part of debts to be protected from bifurcation.); In re Pajot, 371 B.R. 139, 147–64 (Bankr. E.D. Va. 2007) (“Because the purchase money security interest does not encompass the entire financing transaction, the court finds the dual status rule compelling and applicable . . . . Although the court follows the dual status rule on these facts, it reserves the discretion to apply the transformation rule in cases where the negative equity right has been obfuscated by creditors’ methods of accounting for vehicle trade-ins. . . . [T]he dual status rule preserves the purpose of the hanging paragraph for vehicle lending transactions—protecting the creditor from having its secured claim reduced by rapid depreciation of collateral—whereas the transformation rule would completely undermine the hanging paragraph whenever negative equity was rolled in. . . . [T]here are several different theoretical ways to apply the dual status rule. . . . The court concludes that the most appropriate and realistic default method of allocating payments under the dual status rule is to allocate them proportionally, according to the ratio of the non-purchase-money portion to the total amount financed. . . . With the facts presented in these cases, the court can determine the net amount of payments made in each case and apply those proportionally to the non-purchase-money and the purchase-money portions of the transaction. . . . [I]f a negative equity transaction is structured such as to obfuscate transaction details or otherwise abuse the dual status rule, this court will not hesitate to discretionarily apply the more stringent transformation rule allowing bifurcation of the entire transaction.”); In re Acaya, 369 B.R. 564, 570–71 (Bankr. N.D. Cal. 2007) (“California UCC § 9103(h) leaves to the court’s discretion whether to apply the dual status rule or the transformation rule to the treatment of the secured claim. . . . In this case, . . . the [Automobile Sales Finance Act] imposes such stringent requirements upon California automobile dealers for disclosure and itemization of costs that the portion of the secured debt attributable to the purchase price of the vehicle is easily traceable. In light of the traceability, I adopt the dual status rule for determination of the treatment of WFFA’s claim.”); In re Ericksen, No. 06-20572, 2006 WL 4846379, at *3 (Bankr. D. Utah July 26, 2006) (unpublished) (Utah would use dual-status rule.).

 

78  365 B.R. 850 (Bankr. W.D. Tenn. 2007) (Boswell).

 

79  365 B.R. at 859–63.

 

80  See, e.g., In re Stevens, 368 B.R. 5, 8–9 (Bankr. D. Neb. 2007) (Because Nebraska’s version of 2001 amendments to Article 9 approved “dual-status rule” with respect to consumer and nonconsumer transactions, secured claim holder with liens on three vehicles has a protected 910-day PMSI claim with respect to part of its debt and an ordinary secured claim that is subject to § 506 with respect to part of its debt; debtor can surrender 910-day PMSI portion of the collateral in full satisfaction and keep part of the collateral by paying in full the portion of the claim attributable to the retained collateral. Collateral was a 1995 Ford van, a 2001 Chevrolet pickup and a 2005 Harley-Davidson motorcycle. Original purchase money loan for Chevrolet was more than 910 days before Chapter 13 case. Debtor proposed to surrender Ford and Chevrolet in full satisfaction of portion of debt attributable to those vehicles and to retain Harley-Davidson. “[P]art of the Loan was used to purchase the Ford at the time of the consolidated loan in September 2005. The rest of the loan was used to refinance two prior purchase-money obligations, one of which was outside the 910 days pre-filing period. . . . [W]hen Nebraska adopted the 2001 amendments to Article 9 of the UCC, the legislature intentionally deleted proposed language leading into subparagraph (f) which limited its applicability to transactions which are not consumer goods transactions. Thus, as enacted, this section applies to both consumer and non-consumer transactions. . . . [T]he portions of the claims of LincOne representing funds advanced for the Ford and the Harley within 910 days of filing are not subject to bifurcation into secured and unsecured portions . . . . [Section] 1325(a)(9) applies to the portion of LincOne’s claim representing purchase-money security interests incurred within 910 days of filing; that is, the portion of the debt representing the purchase-money security interests for the Harley and the Ford. Debtor may either pay those portions in full under the plan or surrender the Harley and/or Ford for full satisfaction of the applicable claim amount. The remaining portion (secured by the Chevrolet) was a purchase-money security interest incurred outside of the 910-day window, so § 506 applies to such amount. Debtor may surrender such vehicle but valuation under § 506 will determine if LincOne retains an unsecured deficiency claim. Further, nothing in § 1325 appears to prevent Debtor from surrendering one vehicle with bifurcation of its value into secured and unsecured portions under § 506, and under § 1325(a)(9) surrendering another in full satisfaction of the portion of the claim attributable to such vehicle and paying in full the portion of the claim attributable to the retained vehicle. The loan documents attached to LincOne’s proof of claim show the allocation of the funds among the three portions, so determining the current balance due on each portion at this time should be relatively easy.”). See also In re Wear, No. 07-42537, 2008 WL 217172 (Bankr. W.D. Wash. Jan. 23, 2008) (Snyder) (Applying Washington law, security interests in cars are not purchase money to extent negative equity was financed; because aggregate value of installment contracts exceeds $40,000, transactions are nonconsumer and dual-status rule applies.).

 

81  In re White, 352 B.R. 633 (Bankr. E.D. La. 2006) (Magner).

 

82  Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004).

 

83  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

84  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

85  11 U.S.C. § 522(f)(1), discussed beginning at § 49.1  Available in Chapter 13 Cases.

 

86  See § 51.1 [ Limitations on Lien Avoidance ] § 49.3  Limitations on Lien Avoidance.