IN RE: JOHN WESLEY FORD, SR., CYNTHIA DAWN FORD, Debtors. JOHN WESLEY FORD, SR., CYNTHIA DAWN FORD, Appellants, v. FORD MOTOR CREDIT CORPORATION, Appellee, AMERICAN FINANCIAL SERVICES ASSOCIATION, THE KANSAS BANKERS ASSOCIATION, Amicus Curiae.
No. 08-3192
UNITED STATES COURT OF APPEALS TENTH CIRCUIT
August 3, 2009
PUBLISH. APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS (B.C. NO. KS-08-049)
Charles R. Hay, Foulston Siefkin LLP, Topeka, Kansas, filed an Amici Curiae brief on behalf of American Financial Services in support of Appellee.
Patricia E. Hamilton, Henson, Hutton, Mudrick & Gragson, LLP, Topeka, Kansas, filed an Amici Curiae brief on behalf of The Kansas Bankers Association, in support of Appellee.
Before MURPHY, SEYMOUR, and TYMKOVICH, Circuit Judges.
MURPHY, Circuit Judge.
I. Introduction
Appellants John Wesley Ford, Sr. and Cynthia Ford appeal an order of the Bankruptcy Court for the District of Kansas rejecting their proposed Chapter 13 bankruptcy plan. The Fords have an outstanding debt to Appellee Ford Motor Credit Company (“Ford Motor Credit“) secured by their automobile. The debt includes the amount paid to discharge the “negative equity” on their trade-in vehicle. Negative equity is the amount owed on a loan in excess of the collateral‘s value. In their proposed bankruptcy plan, the Fords sought to bifurcate their automobile debt to Ford Motor Credit under
II. Background
The underlying facts of this case are not in dispute. The Fords purchased a 2007 Ford F-150 truck from Rusty Eck Ford on February 24, 2007. The Fords made a down payment of $1500 and received $40,168.30 in financing secured by the truck. At the same time, the Fords traded in their 2006 Ford truck. The 2006 truck was valued at $16,300, but the Fords owed $23,500 on it. $11,693.30 in financing covered “[a]mounts paid on [the Fords‘] behalf.” This included taxes, fees, a service contract, gap insurance, and $7200 to pay off the creditor on the 2006 truck for the amount owed on the vehicle in excess of its present value.
The Fords filed for Chapter 13 bankruptcy fewer than four months later. Under their proposed plan, they sought to reduce the secured debt on the 2007 truck by $7200, the amount of negative equity on their trade-in. That amount would be treated as an unsecured claim under the plan. Ford Motor Credit objected to the proposed treatment of its security interest.
Exercising jurisdiction pursuant to
Both parties certified that an immediate appeal to this court was proper pursuant to
III. Discussion
The bankruptcy court‘s interpretation of the Bankruptcy Code is a question of law to be reviewed de novo. In re Lanning, 545 F.3d 1269, 1274 (10th Cir. 2008). When consumers enter Chapter 13 bankruptcy, they are normally permitted, if they wish, to bifurcate each secured debt into two claims: (1) an
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA“). One provision of BAPCPA amended the Bankruptcy Code to remove certain secured consumer debts from bifurcation and cramdown. Pub. L. No. 109-8, § 306(b), 119 Stat. 23, 80 (2005). At the end of
For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph 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 [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor....
The issue of whether, under the hanging paragraph, a creditor has a purchase money security interest in the negative equity on a trade-in vehicle has been litigated extensively throughout the country, and the rulings have not been consistent.2 See In re Graupner, 537 F.3d 1295, 1300 (11th Cir. 2008) (collecting cases). The Tenth Circuit Bankruptcy Appellate Panel recently held creditors have a purchase money security interest in negative equity. In re Padgett, ___ B.R. ___, 2009 WL 2168824 at *5 (10th Cir. B.A.P., Jul. 20, 2009). District courts and bankruptcy courts within this circuit have reached varied results on the question. Compare, e.g., Citifinancial Auto v. Hernandez-Simpson, 369 B.R. 36, 48 (D. Kan. 2007) (holding bifurcation and cramdown are available
The Bankruptcy Code does not define the term purchase money security interest. Property interests referred to in the Bankruptcy Code are generally defined by state law. Butner v. United States, 440 U.S. 48, 54 (1979). This court, therefore, has looked to state law for a definition of the term as it is used
Kansas has adopted the relevant portion of Revised Article 9 of the Uniform Commercial Code (“U.C.C.“), and it also lists the Official U.C.C. Comment in its statutory compilation.
The Official Comment to
[T]he “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.
The issue is whether paying off negative equity in a trade-in car is part of the “price” of the new car or part of the “value given to enable” acquisition of the new car.3 The Fords point out that it is possible to acquire rights in a new car
The Fords’ position has some logic, and it is not surprising that a number of courts have adopted it. On balance, however, it is not as persuasive as the
We conclude the trade-in exchange is essentially a single transaction. The expense incurred in retiring the lien on the trade-in vehicle, therefore, is an “expense[] incurred in connection with acquiring rights” in the new car.
The Fords contend, as does the dissent, that the phrase “expenses incurred in connection with acquiring rights” must be interpreted in light of its proximity to the other examples listed in the Official Comment. This is undoubtedly true, but we discern no significant difference between the expense of discharging negative equity on a trade-in and some of the other examples listed in the Official Comment. The Official Comment lists “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” as expenses that can be part of a purchase-money security interest.
The Fords also argue this result will enable predatory lending on the part of automobile dealers by encouraging them to refinance antecedent debt secured by a new vehicle. For reasons well articulated by the Fourth Circuit, this concern is overstated. See In re Price, 562 F.3d at 627. The reasons for treating the trade of an old vehicle for a newer one as a single transaction include the similarity in function between the new and old vehicles. The vehicle trade-in is a common, established transaction in the automobile industry, and it makes sense for many consumers to discard their old vehicles when they acquire new ones. The discharge of unrelated antecedent debt, however, may not bear the required “close nexus” to the acquisition of a new vehicle.
IV. Conclusion
Under Kansas law, Ford Motor Credit holds a purchase-money security interest in the entire amount owed to it by the Fords. The debt therefore falls within the ambit of the hanging paragraph of
I respectfully dissent because I read the Kansas Uniform Commercial Code, which controls the resolution of this case, as providing a narrower definition of “purchase money security interest” (PMSI) than the majority adopts.
In my view, Kansas law prohibits lenders from using a PMSI to secure a loan for negative equity, even if the loan is bundled with a standard car loan that is itself secured with a PMSI. Therefore, Ford Motor Credit Company does not have a PMSI covering the portion of the Fords’ loan attributable to the $7,200 of negative equity in their truck. And because the hanging paragraph,
I. PMSIs Under Kansas Law
As the majority recognizes, a basic tenet of bankruptcy—and the starting point of this case—is the Butner principle: “Property interests are created and defined by state law.” Butner v. United States, 440 U.S. 48, 55 (1979); see also Raleigh v. Ill. Dep‘t of Revenue, 530 U.S. 15, 20 (2000). The principle arises because generally, bankruptcy law is not designed to fundamentally alter property rights. Instead, “a bankruptcy proceeding is principally a forum in which all of a debtor‘s creditors can gather, assemble the debtor‘s assets, and divide them among themselves, according to the rights that state law gives them.” Douglas G.
The validity of the Butner principle is undisputed here, but it is worth emphasizing because the hanging paragraph employs a state law term of art, PMSI, to define its scope. See
A PMSI is a “special type of security interest” that is created when a secured party (here, Ford Credit) “provides the credit that enables the debtor [the Fords] to obtain the collateral [the Fords’ new truck].” Keith G. Meyer, A Primer on Purchase Money Security Interests Under Revised Article 9 of the Uniform Commercial Code, 50 Kan. L. Rev. 143, 152 (2001). In the consumer goods context, a common example of a transaction that creates a PMSI is a purchase using a store-issued credit card:
Typical credit sales should be relatively familiar to all of us, though we may not always recognize them. Each time we use our Sears Card to buy a drill, a stereo, furniture, etc., we participate in a credit sale. Sears is granting us credit to purchase those items from the store, and we are granting the store a PMSI in that item until it is paid off.
Christopher Harry, 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 U. Kan. L. Rev. 1095, 1097 (2002). In this example, the consumer is the debtor, and Sears is the purchase-money lender.
Aside from the benefit conferred by the hanging paragraph (i.e., protection from cram down for some car loans), purchase-money lenders receive additional advantages under the U.C.C. and other law. Most importantly, a purchase-money lender has “super-priority“—the lender‘s claim to the purchase-money collateral
Because of the advantages of PMSIs, lenders sometimes attempt to use them to secure obligations unrelated to purchase-money collateral. Indeed, “overloaded” PMSIs are a recurring concern in the law of secured transactions, and jurisdictions have adopted various mechanisms to prevent them. See Ann E. Conaway Stilson, The ‘Overloaded’ PMSI in Bankruptcy: A Problem in Search of a Resolution, 60 Temp. L. Q. 1, 16 (1987).2
Other jurisdictions, including Kansas, adopt the “dual-status” rule, which preserves an overloaded PMSI “to the extent that it secured the price of the original goods even though the security agreement also secured the price of other items.” Meyer, 50 Kan. L. Rev. at 155–56 & n.64;
These principles underscore that the benefits of PMSIs come with certain limitations. When Congress chose to use the state law term PMSI to confine the scope of the hanging paragraph, it adopted these state law limitations as well and made them applicable in bankruptcy.
B. The Kansas Definition of PMSI
The majority identifies the key Kansas statutory language governing whether negative equity may be secured with a PMSI. As the majority states, “[t]he issue is whether paying off negative equity in a trade-in car is part of the ‘price’ of the new car or part of the ‘value given to enable’ acquisition of the new car.” Maj. Op. at 9. I agree with the majority that under the Kansas U.C.C., these terms include more than just the vehicle‘s sticker price. But I disagree with the majority‘s broad interpretation of these terms. In my view, Comment 3 to
Notably absent from the items contained in Comment 3 is a description of negative equity. Instead, the comment lists items which are part of the “price” of a new car or the “value given to enable” the purchase of a new car. Granted, the list is nonexclusive and includes “other similar obligations.” But Comment 3 tells us that a PMSI “requires a close nexus between the acquisition of collateral and the secured obligation.” Under familiar principles of statutory interpretation, the
other items on Comment 3‘s list shed light on whether negative equity bears the requisite “close nexus” to the acquisition of a new car. See Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307 (1961) (“The maxim noscitur a sociis, that a word is known by the company it keeps, while not an inescapable rule, is often wisely applied where a word is capable of many meanings in order to avoid the giving of unintended breadth to the Acts of Congress.“); State v. Urban, 193 P.3d 515, 518 (Kan. Ct. App. 2008) (employing the maxim to interpret a Kansas statute).The items on Comment 3‘s list—such as sales tax, finance charges, freight charges, costs of storage in transit, attorney‘s fees, and collection costs—are all expenses that will be charged uniformly to any potential purchaser of a vehicle who chooses to finance the purchase. Each item is akin to a transaction cost, a cost that adds no particular value for either the buyer or the seller but is instead simply “the cost of using the price mechanism.” R.H. Coase, The Nature of the Firm, 4 Economica 386, 390 (1937); see also Black‘s Law Dictionary 372 (8th ed. 2004) (defining “transaction cost” as “[a] cost connected with a process transaction, such as a broker‘s commission, the time and effort expended to arrange a deal, or the cost involved in litigating a dispute“); Harold Demsetz, The Cost of Transacting, 82 Q.J. Econ. 33, 35 (1968) (“Transaction cost may be defined as the cost of exchanging ownership titles.“).
Thus, although the Fords and their dealer were free to use the new pickup as security for a loan to pay an antecedent debt, that does not mean paying the old debt was part of the “price” of the pickup. Nor does it mean the portion of a loan
One may borrow money to buy something (e.g., a new vehicle), and also borrow additional money for some other purpose (e.g., to pay off the balance of a loan for the trade-in vehicle). The part used to buy something is purchase money obligation. The part used for some other purpose is not.
In re Saunders, 377 B.R. 836, 853 (Bankr. W.D. Tex. 2007), rev‘d, 403 B.R. 435 (W.D. Tex. 2009). In my view, this is a more consistent interpretation of the Kansas U.C.C. than the majority‘s. By interpreting the term “price” in section
C. The Dual-Status Rule
Because I would hold that Ford Credit does not have a PMSI securing its loan for the Fords’ negative equity, I must answer “the question of what to do with that portion of the debt not entitled to purchase-money status.” See In re Penrod, 392 B.R. at 838.
As mentioned above, Kansas has adopted the dual-status rule, which preserves a PMSI to the extent it secures a purchase-money obligation and
This does not resolve the case, however. Another question remains, namely how to adjust Ford Credit‘s claims to account for payments the Fords made on their car loan before entering bankruptcy. Should the payments be applied first to the negative equity portion of the loan, or should they be applied first to the PMSI portion of the loan? Kansas law states that payments must be applied “[i]n accordance with any reasonable method of application to which the parties agree.”
II. Other Approaches
I recognize my conclusion is at odds with the majority‘s reasoning, and with the reasoning of a number of other courts that have addressed the treatment of negative equity under the hanging paragraph. These courts have made numerous arguments, and several common themes have emerged.
Some courts—including the majority—conclude that the financing of negative equity is part of a “package deal” and as such should be protected by the same PMSI that covers the sale price of a new vehicle. See, e.g., In re Graupner, 537 F.3d at 1302. Others utilize the in pari materia canon (i.e., the canon that encourages courts to construe statutes together), holding that the term “price” in the U.C.C. includes negative equity, because this is how other laws define the term “price.” See, e.g., id. at 1301. Finally, some courts rely on the legislative history of the hanging paragraph to conclude Congress intended negative equity to be protected from cram down. See, e.g., In re Price, 562 F.3d at 628.
Though the majority does not make all of these arguments, I take this opportunity to explain why I find them unpersuasive.
One common line of reasoning holds that negative equity is part of a “package deal” and cannot be separated from the remainder of the PMSI. The In re Graupner court, for example, viewed the financing of negative equity as “part of the same transaction” as the purchase of the new vehicle such that it was “properly regarded as a ‘package deal.‘” 537 F.3d at 1302. To the Eleventh Circuit, negative equity was an “integral part” of the purchase and was “inextricably intertwined” with the transaction. Id.; see also In re Price, 562 F.3d at 625 (“All of the Prices’ debt . . . was incurred at the same time, in the same contract, and for the same purpose: acquiring the new car.“). The majority adopts this approach, concluding that “the trade-in exchange is essentially a single transaction.” Maj. Op. at 11.
The intuitive difficulty with this position is that vehicle purchasers—even those that buy on credit—are not required to purchase the new vehicle by trading in an old one. Whether doing so is necessary or even desirable depends on their individual circumstances. Perhaps in this case it is true that the Fords could not have purchased their new pickup without trading in their old one. And perhaps financing the negative equity was “integral” to the Fords completing their purchase, because it was inconvenient or impossible for them to complete the purchase any other way.
Allowing a creditor to transform antecedent debt into a PMSI by refinancing the debt into a new contract amount that includes the purchase price of new collateral would convert the concept of “purchase money” from a defined term to one that can be expanded at the will of the parties. See In re Conyers, 379 B.R. 576, 582 (Bankr. M.D.N.C. 2007) (“Allowing the Debtor to rollover negative equity into the new loan was simply an accommodation. It was an arrangement made as a favor to another.“); In re Westfall, 365 B.R. 755, 762 (Bankr. N.D. Ohio 2007) (providing the extreme example of a “debtor [who] would not have made it to the dealer‘s lot were it not for the emergency appendectomy, [making] payment of the doctor‘s outstanding fee . . . an enabling expense“), rev‘d in part, 376 B.R. 210.
B. The In Pari Materia Argument
Another approach is to apply the in pari materia doctrine. Courts employing this argument look to other statutes that use the term “price“—frequently, state motor vehicle financing statutes—and, when these other statutes explicitly include negative equity within the definition of price, interpret the U.C.C. in pari materia. See, e.g., In re Graupner, 537 F.3d at 1301 (finding support in the definition of “cash sale price” in Georgia‘s Motor Vehicle Sales Financing Act); Gen. Motors Acceptance Corp. v. Peaslee, 373 B.R. 252, 260 (W.D.N.Y. 2007) (analyzing the definition of “cash sale price” in New York‘s Motor Vehicle Retail Installment Sales Act).
But at least some other courts have considered this a dubious application of the in pari materia doctrine, as the vehicle financing statutes are concerned more with disclosure than regulation and therefore do not cover the same subject matter. For example, the Second Circuit disapproved of a bankruptcy court‘s reliance on the New York Motor Vehicle Retail Installment Sales Act in interpreting the U.C.C.‘s definition of “price.” Peaslee v. GMAC, LLC (In re Peaslee), 547 F.3d 177, 186 (2d Cir. 2008) (“But it is not manifest that ‘price’ in N.Y. U.C.C. § 9-103(a)(2), or ‘expense’ in Comment 3 to that provision, should be given the same meaning as ‘cash sale price’ in the MVRISA.“). The Second
I agree with the Second Circuit insofar as it views the in pari materia doctrine as inapplicable. Indeed, here the use of the in pari materia doctrine is even less helpful because the parties have pointed to no other Kansas statute defining the term “price.” Ford Credit points mainly to the federal Truth in Lending Act (TILA),
I acknowledge that in its Uniform Consumer Credit Code, the Kansas legislature referred to both TILA and Regulation Z when it empowered an administrator to “adopt rules and regulations necessary to carry out the provisions and terms of the uniform consumer credit code which are consistent with or no less restrictive than the truth-in-lending act . . . and regulation Z.”
Additionally, even if I were to apply the in pari materia doctrine, it does not suggest negative equity is part of the “price” of a new vehicle. Under Kansas tax law, the term “sales or selling price” does not include “the amount equal to the allowance given for the trade-in of property.”
C. Legislative History
First, legislative history is “often murky, ambiguous, and contradictory,” and we should resort to it only when a statute‘s plain language is unclear. See United States v. Hinckley, 550 F.3d 926, 947 (10th Cir. 2008) (Gorsuch, J., concurring) (quoting Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 568 (2005)), cert. denied, 129 S. Ct. 2383 (2009). Indeed, the Supreme Court has “repeatedly held[ that] the authoritative statement is the statutory text, not the legislative history or any other extrinsic material.” Exxon Mobil Corp., 545 U.S. at 568. Here, the statutory language is far from ambiguous. It expressly states that only PMSIs are protected from cram down in bankruptcy. Whether this state law term of art is itself ambiguous is another story. Case law (including this very opinion) shows that courts can reasonably disagree on the meaning of the term under various state laws. But the plain language of the hanging paragraph is clear, making resort to its legislative history unnecessary and potentially misleading.
Second, the legislative history of the hanging paragraph provides no pat answer to whether negative equity is protected from cram down. As Ford Credit
Congress ultimately settled on protecting only purchase money security interests from cram down. See
Ford Credit argues that the legislative history supports their position and implies that Congress intended to broadly protect car lenders, regardless of how loan proceeds are used. Other courts agree with this reading, assuming that the “architects of the hanging paragraph intended only good things for car lenders and
Congress specifically chose to use the term “purchase money security interest” instead of something broader. I believe the most prudent practice is to assume Congress meant what it said.
III. Conclusion
I conclude that negative equity is neither “all or part of the price of” a new car, nor “value given to enable the debtor to acquire rights in or the use of” a new car. Thus, I would hold that the Fords’ negative equity is not part of Ford Credit‘s PMSI under Kansas law, and it is therefore not protected from