583 B.R. 749
Bankr. W.D. Wash.2018Background
- Debtor bought a 2015 Dodge Ram under a retail installment sale; amount financed was $61,061.76, which included $3,946 for optional gap and maintenance contracts ("Option Contracts").
- Dealer assigned the installment contract to Kitsap Credit Union, which filed a proof of claim asserting a secured claim of $58,230.19. Debtor valued the vehicle at $40,000.
- Debtor filed Chapter 13 within 910 days of purchase and objected to Kitsap's claim, arguing sums financing the Option Contracts are unsecured and the claim must be bifurcated under 11 U.S.C. § 506(a).
- Kitsap argued the vehicle secures the entire financed amount and that prepetition payments should have been applied first to unsecured option items.
- Court applied Ninth Circuit precedent (Penrod II) and Washington UCC law to decide whether Option Contracts are part of the "price" or "value given to enable" such that they are protected by the § 1325(a) "hanging paragraph."
- Court concluded Option Contracts are not part of the PMSI-secured price/value, bifurcated the claim, and apportioned prepetition payments pro rata under the dual-status rule.
Issues
| Issue | Debtor's Argument | Kitsap's Argument | Held |
|---|---|---|---|
| Whether optional gap and maintenance contracts are part of the vehicle "price" or "value given to enable" such that the PMSI and the §1325(a) hanging paragraph protect the full financed amount | Option Contracts are not part of the price/value; they are optional and not necessary to acquire the vehicle, so amounts financing them are unsecured (bifurcation under §506) | Option Contracts were financed as part of the sale and add value; the PMSI secures the entire financed amount | Court held Option Contracts are not part of the PMSI price or value given to enable; hanging paragraph does not protect those sums and claim is bifurcatable under §506(a) |
| Whether the in pari materia or state "sale price" definitions (RCW) require treating Option Contracts as part of the purchase-money price | Debtor: follow Penrod and UCC comment 3 definition of "price," not state retail-installment definitions that do not control UCC PMSI analysis | Kitsap: Washington's RCW retail-installment definition includes gap and servicing, so those items are within sale price | Court held Penrod controls; in pari materia doctrine inapplicable here and UCC definition governs, so Option Contracts are not within PMSI price |
| Whether prepetition payments must be applied first to unsecured Option Contracts per UCC comment/RCW | Debtor: payments should be apportioned pro rata under the dual-status rule; no contract allocation was agreed | Kitsap: payments should have been applied first to unsecured obligations per comment/RCW | Court held prepetition payments were applied to reduce overall balance; absent allocation agreement, payments are allocated pro rata between secured and unsecured portions per the dual-status approach |
| Proper method to allocate prepetition payments between secured and unsecured portions when a loan contains both PMSI and non-PMSI components | Debtor: follow pro rata/dual-status allocation (as in Brodowski) to reduce secured claim | Kitsap: urged different application (payments to unsecured first) | Court applied Brodowski method: determine secured portion of original finance, compute its percentage, and allocate prepetition payments pro rata; resulted in secured claim of $54,468.52 and unsecured claim of $3,761.67 |
Key Cases Cited
- In re Penrod, 611 F.3d 1158 (9th Cir. 2010) (defines "price"/PMSI nexus and holds negative equity is not part of purchase-money price)
- In re Brodowski, 391 B.R. 393 (Bankr. S.D. Tex. 2008) (adopts pro rata allocation of prepetition payments under dual-status rule)
- In re Trejos, 374 B.R. 210 (9th Cir. BAP 2007) (assignment of security interest does not destroy purchase-money status; assignee steps into assignor's rights)