August 27, 2008
9th Circuit BAP Rules on "Dual Status" of Purchase Money Loans to Purchase Autos When Previous Auto is "Underwater"
Americredit Financial Services, Inc. v. Penrod (In re Penrod), ---- B.R. ---, 2008 WL 3854465 (9th Cir. BAP July, 2008)
Issue: When an auto lender rolls old debt into the purchase of a new auto, is the debt “purchase money,” all or in part?
Holding: In part. The BAP adopts the “Dual Status Rule.”
Judge Thomas Carlson, San Francisco
Markell, Klein, Jury
Opinion by Markell
This chapter 13 debtor borrowed $31,600 from Americredit to buy a “910 auto,” a Taurus, which she purchased for $25,600. The difference was the negative equity she owed on the car she traded in for the Taurus. When she filed chapter 13 she owed about $25,000. The plan valued the Taurus at $15,000 making the remaining balance unsecured. The plan “reduced” the interest rate on the secured debt to 9%. Americredit did not object to the interest rate but objected to the treatment saying the entire amount owed was protected by the hanging paragraph. The Bankruptcy Court found that the negative equity was not protected by the hanging paragraph but the balance, “some $18,540,” was secured. The court then confirmed the plan on that basis.
The BAP affirmed. Markell starts his very lengthy opinion (48 pages) with the sarcastic comment, “The ‘hanging paragraph’ is found somewhere around § 1325(a).” He says, “Much ink has been spilled over the proper characterization and treatment of negative equity in secured claims subject to the hanging paragraph.” “A leading car lender, General Motors Acceptance Corporation, has stated in defending a similar claim that between 26% and 38% of all its new car financing involves ‘negative equity.’” “[G]iving negative equity PMSI status effectively enriches car lenders at the expense of the debtor’s unsecured creditors.” “[T]he financed negative equity is nothing more than a refinancing of the preexisting debt owed on the trade-in.” He says that some courts use the “Transformation Rule” where the purchase money debt becomes non-purchase money when it includes a refi of other debt. He discusses the “Dual Status Rule” where the loan is part purchase money and part not. The BAP adopts the Dual Status Rule which Markell says recognizes “the substance of the transaction.”
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The Penrod case has been appealed to the Ninth Circuit, 9th Cir. Docket No. 08-15066.
Posted by: andrew fagan | Sep 16, 2008 7:55:41 AM