In re Jett
In re Jett
Opinion of the Court
ORDER OVERRULING OBJECTION TO CONFIRMATION AND SUSTAINING OBJECTION TO SECURED CLAIM
Before the Court are the Objection to Pre-Petition Secured Claim of Community Bank (Dkt. No, 10) filed by Richard Dana Jett and Janice Laverne Jett and the Objection to Confirmation of Plan (Dkt. No. 32) filed by Community Bank. The Court held a hearing on the objections on October 13, 2016. Dkt. Nos. 50, 51. After the hearing, the Court requested additional briefing from the parties. Having considered the arguments and evidence in this case, the Court finds that the Objection to Claim is sustained and that the Objection to Confirmation is overruled.
I. Jurisdiction
The Court has jurisdiction over the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (L), & (O).
II. Findings of Fact
Richard Dana Jett and Janice Laverne Jett filed a petition for Chapter 13 relief on September 1, 2016. Dkt. No. 1. The Jetts scheduled a 2013 Dodge Avenger valued at $10,012.50 with a secured claim held by Community Bank in the amount of $19,000.00. Dkt. No. 6 at 3, 11. The same day that they filed their petition, the Jetts objected to Community Bank’s secured claim, proposing to cramdown the claim—
On January 14, 2015, prior to filing bankruptcy, the Jetts obtained a loan from Community Bank for $20,915.41 to purchase a 2013 Dodge Avenger and gave Community Bank a security interest
On April 28, 2016, the debtors renewed the original January 14, 2015 loan in the amount of $20,790.50. The renewal loan remained secured by the 2013 Dodge Avenger. Proceeds from the renewal loan in the amounts of $2,037.63 and $2,032.15 were used to pay off the two unsecured loans.
Dkt. No. 60 at 2.
III. Conclusions of Law
The Jetts argue that the second secured loan destroyed the purchase money character of their debt. Community Bank argues to the contrary that the Jetts cannot cramdown the claim to pay only the secured value because it is subject to . the “hanging paragraph” of Section 1325. This section prohibits bifurcation of a claim
if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day period preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle ... acquired for the personal use of the debtor. ...
11 U.S.C. § 1325(a)(*) (2010).
Simply restated, the hanging paragraph prohibits the bifurcation of a claim ... if four requirements are met: (1) the creditor has a purchase money security interest which secures the debt; (2) the debt was incurred within 910 days of the date the petition was filed; (3) the collateral securing the debt is a motor vehicle; and (4) the motor vehicle was acquired for the personal use of the debtor.
In re Busby, 393 B.R. 443, 448 (Bankr. S.D. Miss. 2008). Only the first element is at issue in this case. As a preliminary matter, the Court finds that the first secured loan meets the anti-bifurcation protection of the hanging paragraph, so the Court must determine whether the second secured loan changed the purchase money nature of the loan sufficiently to remove it from operation of this section.
A. Purchase Money Security Interest
The Court turns to Mississippi law to define a purchase money security interest. Ford Motor Credit Co., LLC v.
The Fifth Circuit has previously examined the definition of purchase money security interest. In re Dale, 582 F.3d at 573-75. The Dale court examined Texas statutes which are identical to the Mississippi statutes at issue. See In re Busby, 393 B.R. at 449. In Dale, the Fifth Circuit held that “[t]he definition of ‘purchase-money obligation’ ... contains two prongs: (i) the price of the collateral, and (ii) value given to enable the debtor to acquire rights in or use of the collateral.” In re Dale, 582 F.3d at 573. And regardless of “whether the transaction at issue is one where the seller extends credit, or where the buyer obtains funds from a third-party lender[,]” the creditor need only satisfy one of the prongs to have its debt declared a purchase money obligation. Id. at 573-74. Texas, like Mississippi, adopted the Official Uniform Commercial Code comments
[T]he 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.
The concept of “purchase-money security interest” requires a close nexus between the acquisition of collateral and the secured obligation. Thus, 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.
Tex. Bus. & Com. Code Ann. § 9.103, Official Comment 3; see also Miss. Code Ann. § 75-9-103, Official Comment 3 (same). Based on these comments, the Fifth Circuit found that price and value given are not “limited to the price tag of the vehicle standing alone” but may include any debt with “an attenuated connection to the acquisition or maintenance of the vehicle.” In re Dale, 582 F.3d at 574. The Fifth Circuit held that based on these definitions, “[njegative equity financing,
B. Transformation Rule or Dual Status Rule
As already stated, Community Bank’s original interest in the vehicle was a purchase money security interest.
There is a split of authority among the circuits concerning whether a purchase money security interest is extinguished when the original purchase money loan is refinanced through renewal or consolidation with another obligation. In re Short, 170 B.R. 128, 133 (Bankr. S.D. Ill. 1994). One line of cases follows the “transformation rule,” which holds that a purchase money security interest is transformed into a nonpurchase money security interest when the proceeds of a renewal note are used to satisfy the original note because the collateral now secures an antecedent debt rather than a debt for the purchase of the collateral. Id. The other line of cases follows the “dual status rule,” which holds that a lien may be partially purchase money and partially nonpurchase money and that the purchase money aspect of a lien is not automatically destroyed by refinancing or consolidation with another debt. Id.
In re Naumann, No. 09-32092, 2010 WL 2293477, at *2 (Bankr. S.D. Ill. June 8, 2010). The Fifth Circuit has not explicitly held that either the dual status or transformation rule applies in the context of the hanging paragraph.
The Court notes that no published bankruptcy decision within the Fifth Circuit has discussed either rule since the Fifth'Circuit decided In re Dale.
Courts in the First, Fourth, Sixth, Eighth, Ninth, and Eleventh Circuits*211 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, which allows a security interest to have both the status of a purchase money security interest to the extent that it is secured by collateral purchased with loan proceeds, and the status of a general security interest, to the extent that the collateral secures obligations unrelated to its purchase.
In re Huddle, No. 06-11076, 2007 WL 2332390, at *3-4 (Bankr. E.D. Va. Aug. 13, 2007) (citing Gillie v. First State Bank of Morton, Tex. (In re Gillie), 96 B.R. 689, 691-92 (Bankr. N.D. Tex. 1989)).
The majority of cases applying the dual status rule have done so in the context of negative equity.
This interpretation finds support among other courts that have declined to call their decisions an application of the transformation rule by name. See, e.g., Matthews v. Transamerica Fin. Servs. (In re Matthews), 724 F.2d 798, 800-01 (9th Cir. 1984) (collecting cases) (“The vast majority of courts that have considered the issue we face here have held that refinancing or consolidating loans by paying off the old loan and extending a new one extinguishes the purchase money character of the original loan because the proceeds of the new loan are not used to acquire rights in the collateral.”); Snap-On Tools, Inc. v. Freeman (In re Freeman), 956 F.2d 252, 254-55 (11th Cir. 1992) (“A security interest in collateral is ‘purchase money’ to the extent that the item secures a debt for the money required to make the purchase. If an item of collateral secures some other type of debt, e.g., antecedent debt, it is not purchase money.”).
IT IS THERFORE ORDERED THAT
the Objection to Pre-Petition ' Secured Claim of Community Bank (Dkt. No. 10) filed by Richard Dana Jett and Janice Láveme Jett is SUSTAINED.
FURTHER ORDERED THAT the Objection to Confirmation of Plan (Dkt. No. 32) filed by Community Bank is OVERRULED.
SO ORDERED
. Pursuant to Federal Rule of Civil Procedure 52, made applicable here by Federal Rules of Bankruptcy Procedure 9014(c) and 7052, the following constitutes the findings of fact and conclusions of law of the Court.
. The Court notes that Community Bank has only produced documentary proof of the security interest taken in the first secured loan and of some of its contracts. See Dkt. No. 32-1. Because the claims deadline has not run and because the Jetts did not contest the facts as presented by Community Bank, the Court accepts them as true for purposes of this opinion. Fed. R. Civ. P. 56(e)(2) ("If a party fails to properly support an assertion of fact ..., the court may: ... consider the fact undisputed for purposes of the motion. ... ”); see also Fed. R. Bankr. P. 7056 (applying Federal Rule of Civil Procedure 56 to adversary proceedings); Fed. R. Bankr. P. 9014 (applying Federal Rule of Bankruptcy Procedure 7056 to contested matters).
. The Fifth Circuit reiterated in Dale that “Official UCC Comments are 'by far the most useful aids to interpretation and construction.’ ” In re Dale, 582 F.3d at 574 (quoting Weathersby v. Gore, 556 F.2d 1247, 1256 (5th Cir. 1977)).
. "The term negative equity is a term of art and is not defined in the Bankruptcy Code,
.Other courts have decided similar cases without resort to this choice. For example, courts in the Seventh Circuit apply a renewal or novation test looking at “the degree to which the original obligation of the debtor has changed” to determine whether a purchase money security interest survives a refinancing of the debt. In re Naumann, No. 09-32092, 2010 WL 2293477, at *3 (Bankr. S.D. Ill. June 8, 2010).
. "Preceding the inception of the ‘hanging paragraph’ in 2005, the Fifth Circuit Court of Appeals ... adopted what has since become known as the transformation rule, although not using that term.” In re Spears, No. 16-00575, slip op. at 6 (Bankr. S.D. Miss. Sept. 6, 2016) (citing Roberts Furniture Co. v. Pierce (In re Manuel), 507 F.2d 990 (5th Cir. 1975)). Courts that have examined In re Manuel “have unanimously concluded that the Fifth Circuit applied the transformation rule.” Id. slip op. at 6-7 (listing cases).
. Some unpublished decisions have discussed the two rules without acknowledging the Fifth Circuit decision. See, e.g., In re Spears, No. 16-00575, slip op. at 6-10.
.Since the Huddle decision, the Ninth Circuit Bankruptcy Appellate Panel has adopted the dual status rule, Americredit Fin. Serves, Inc. v. Penrod (In re Penrod), 392 B.R. 835, 860 (9th Cir. BAP 2008), but, on appeal, the Ninth Circuit Court of Appeals affirmed the decision without ‘'address[ing] whether the dual status rule or the transformation rule should apply” and noting some criticism of the Bankruptcy Appellate Panel’s choice, 611 F.3d 1158, 1160 n.2 (9th Cir. 2010). A review of the cases supporting the inclusion of the Eighth Circuit in both lists shows that only lower courts in that Circuit have addressed the question, coming to different conclusions, but the Eighth Circuit itself has not held whether the dual status or transformation rule should apply-
. One case that examined the hanging paragraph in the context of negative equity rejected the dichotomy of the two rules and held that the hanging paragraph applies only where the entire debt is a purchase money obligation. In re Sanders, 377 B.R. 836, 858 (Bankr. W.D. Tex. 2007). This case was reversed by the district court which found this interpretation of the handing paragraph to be in error. 403 B.R. 435, 444-45 (W.D. Tex. 2009).
. The Texas Consumer Credit Code, the statutes relied on by the Palmer and Crispin courts, has since been repealed and replaced with the Texas Finance Code. See Bally Total Fitness Corp. v. Jackson, 53 S.W.3d 352, 353 (Tex. 2001) (noting the recodification); see also Tex. Fin. Code Ann. §§ 345.051-345.083.
. In fact, the only other state that appears to have a similar statute is Illinois. See 815 Ill. Comp. Stat. Ann. §§ 405/1-405/33.
. The Manuel court seems to recognize that a purchase money security interest can exist in such a transaction but only as to a new good purchased with that additional money. In re Manuel, 507 F.2d at 993. The Shaw court interpreted Manuel this way and allowed a purchase money security interest in only the most recent purchase on a revolving credit account. In re Shaw, 209 B.R. at 397.
Reference
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- IN RE: Richard Dana JETT and Janice Laverne Jett, Debtors
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