MEMORANDUM OPINION ON WELLS FARGO BANK, NjL’s OBJECTION TO CONFIRMATION OF DEBTOR’S AMENDED PLAN
[Docket No. 54]
I. Introduction
Amanda Brodowski (the Debtor) filed an amended Chapter 13 plan which proposes to bifurcate the claim of Wells Fargo Bank, N.A. (Wells Fargo). This claim is related to the 2006 purchase of a new vehicle and the trade-in of a 2004 vehicle. The proposed plan treats the negative equity arising from the trade-in of the 2004 vehicle as an unsecured claim. Wells Fargo objects to this treatment and asserts that it has a fully secured claim, including the portion of the borrowed amount used to pay off the Debtor’s loan on the trade-in vеhicle. This contested matter requires the Court to interpret the so-called “hanging paragraph” which was added to 11 U.S.C. § 1325 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Since the passage of BAPCPA, several dozen bankruptcy courts, and a handful of district courts, have addressed the treatment of negative equity under § 1325. A slight majority of these cases has held that negative equity is not subject to a purchase-money security interest (PMSI). 1 Three of the *396 four bankruptcy courts within the Fifth Circuit to consider this issue have followed this majority position. 2 For the reasons stated herein, this Court joins its sister courts from the Northern, Southern, and Western Districts of Texas in the ranks of the majority.
Although these three cases agree that negative equity should not be included in PMSI and therefore not protected by § 1325, they are split on how to handle the portion of the claim representing negative equity. In
Sanders,
Bankruptcy Judge Leif Clark did not apply the transformation rule, but arrived at an interpretation of § 1325 which results in an identical outcome — none of the claim is subject to a PMSI and therefоre the entire claim is subject to cram down under § 506.
In re Sanders,
II. Findings of Fact
1.On July 24, 2006, the Debtor purchased a 2006 Nissan Altima (“the 2006 car”). In connection with this transaction, the Debtor traded in her 2004 Mazda Rx-8 (“the 2004 car”). In order to complete this transaction, the Debtоr executed a retail installment contract (the “Contract”). [Ex. A / Doc. No. 73-2.]
2. The Contract was subsequently assigned to Wells Fargo, which perfected its interest in the 2006 car by having its lien noted on the title. [Exs. B and C]
3. The cash price of the 2006 car was $20,450.00, plus sales tax of $106.25. [Ex. A.]
4. The Contract reflects a trade-in balance owing on the 2004 car of $29,705.00. [Ex. A.] A trade-in allowance of $17,000.00 was applied to this indebtedness. Thus, the net trade-in value was a negative $12,705.00 (the negative equity). [Id.]
5. The total amount financed in the Contract is $29,239.04 at an annual interest rate of 16.95%. [Ex. A.]
6. On August 4, 2007, thе Debtor filed her Chapter 13 petition. [Doc. No. L]
7. On August 16, 2007, Wells Fargo filed a proof of claim in the amount of $27,577.46. [POC No. 1.]
8. On October 11, 2007, the Debtor filed an Amended Chapter 13 Plan (the Plan) which proposes a strip-down value of $15,537.18 for the 2006 car and an interest rate of 10.25%. [Doc. No. 26.] The Plan *397 classifies the balance of Wells Fargo’s claim as a general unsecured claim. [Id.] The Plan will pay only a 4% dividend to unsecured creditors.
9.On March 10, 2008, Wells Fargo filed an Objection to Confirmation of Debtor’s Amended Plan (the Objection). [Doc. No. 54 .] In the Objection, Wеlls Fargo asserts that, pursuant to 11 U.S.C. § 1325, the Debtor is not permitted to “cram down” its claim; rather, the Debtor must treat the entire claim, including the negative equity, as a fully secured claim. [Id,.]
10. On April 25, 2008, the Debtor filed her Brief in Opposition to the Objection. [Doc. No. 64.] The Debt- or argues that the negative equity included in the Contract is not subject to § 1325 because it is not possible for Wells Fargo to have a PMSI in negative equity. [Id.]
11. On May 21, 2008, the Court held a hearing on the Objection at which counsel for both parties made oral arguments. At the conclusion of the hearing, the Court took this matter under advisement.
III. Conclusions of Law
A. Negative equity may not be secured by a PMSI and is not protected by the hanging paragraph.
The “hanging paragraph,” which is located between § 1325(a)(9) and § 1325(b), states:
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 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 debt- or, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.
Thus, the hanging paragraph of § 1325 prohibits the bifurcation of a claim under § 506 if the following four requirements are satisfied: (1) the creditor holds a purchase-money security interest which secures a debt; (2) the debt was incurred within 910 days of the filing of the petition; (3) the collateral securing the debt is a motor vehicle; and (4) that motor vehicle was acquired for the personal use of the debtor. In the case at bar, the parties agree that the final three of these requirements are present, and that the only disputed issue is whether the meaning of the phrase “a purchase money security interest securing the debt that is the subject of the claim” includes negative equity. 3
Since the Bankruptcy Code does not define the term “purchase-money security interest,” courts have turned to state
*398
law to find a meaning of purchase-money security interest, particularly their respective states’ version of the Uniform Commercial Code (UCC).
See, e.g., Sanders,
Comment 3 to § 9.103 states that, for purposes of § 9.103(a)(2), “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.” Comment 3 further states that “[t]he concept of ‘purchase-money sеcurity interest’ requires a close nexus between the acquisition of collateral and the secured obligation.” Tex. Bus. & Com.Code Ann. § 9.103, cmt. 3.
A frequent refrain in the cases holding that negative equity is not part of a PMSI is that the payment of old loans by the new lender is “merely an accommodation which facilitates each transaction” rather than “value given to enable the debtor to acquire rights in or the use of the collateral.”
In re Westfall,
The Court also agrees with the line of cases rejecting the argument that these two separate transactions — the purchase of the second car and the refinancing of the negative equity — share a “close nexus” as required by Comment 3 to § 9.103.
In re Pajot,
Generally, the cases that have relied upon the UCC for a definition of PMSI have expressly refused to consider any other state statutes under the doctrine of
in pari materia.
4
See, e.g., Blakeslee,
In the case at bar, Wells Fargo requests this Court to read Chapter 348 of the Texas Finance Code, which regulates Motor Vehicle Installment Sales,
in pari materia
with § 9.103 of the UCC. This exact argument regarding the same provision of the Texas Finance Code was also made by the creditor in
Sanders.
Judge Clark refused to consider this statute because.it does not concern the same subject matter as the UCC. “[T]he 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.”
Sanders,
The structure of section 348.006 employed by the Texas Legislature thus *400 favors the debtors’ view rather than [the creditor’s] — a retail installment contract may include (and properly disclose) financing for two separate items: (1) the price of the vehicle being purchased, and (2) the cost of paying off any negative equity from the trade-in. That, in turn, favors a conclusion that ‘price оf the collateral,’ roughly equivalent to ‘cash price of the motor vehicle,’ does not include the amount advanced to pay off negative equity, even though that amount is allowed to be financed.
Sanders,
The Court concurs with Judge Clark’s analysis in both respects. Chapter 348 of the Texas Finance Code is essentially a consumer protection act and therefore should not be read in pari materia with thé UCC. Moreover, even if it were appropriate to consider, the text of Chapter 348 does not support a finding that negative equity should be included as part of the price of the collateral.
Finally, many courts have concluded that negative equity is not similar to the types of obligations expressly listed in Comment 3 to § 9.103 (“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”);
Sanders,
To review, the Court concludes that negative 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. Throughout the *401 discussion so far, the Court has been in agreement with the casеs from the Northern, Western, and Southern Districts of Texas. 5 However, in Sanders, the Western District’s analysis diverges in a direction that this Court cannot follow.
B. The dual-status rule should be applied to the negative equity.
Since the Court has found that the negative equity is not protected as part of the PMSI securing the vehicle, the next issue is how should that negative equity be addressed. The Court’s analysis above relied heavily upon cases from bankruptcy courts within Texas, but cited to cases in many other states because each of those cases analyzed рrovisions of nearly identical state UCC statutes and vehicle installment sales acts. Here, however, the Court is exclusively focused on cases from within Texas because the decision of whether to apply the dual-status rule or the transformation rule is heavily influenced by Texas state court decisions.
Comment 3 to § 9.103 describes the dual-status rule as follows: “[a] security interest may be a purchase-money security interest to some extent and a non-purchase-money security interest to some extent.” For non-consumer goоds transactions, § 9.103(f) explicitly adopts this rule and rejects the alternative transformation rule. Under the transformation rule, “any cross-collateralization, refinancing, or the like destroys the purchase-money status entirely.” Tex. Bus. & Com.Code Ann. § 9.103, cmt. 3. Section 9.103(h) states that in consumer goods transactions, which include the subject vehicle purchase in this ease, the UCC intends to allow courts to determine whether to apply the transformation or dual-status rule.
Sanders
does not actually stand for the proposition that the transformation rulе should be applied, but the end result is identical to the result under that rule. Judge Clark argues that the decision between these rules is appropriate only in a state law context and is inapplicable to the interpretation of hanging paragraph.
Sanders,
While there are similarities between the carve-outs in the hanging paragraph and § 1322(b)(2), the Court cannot agree that these similarities are sufficient to find that the “plain meaning” of the hanging paragraph requires courts to apply a functional equivalent of the transformation rule, particularly when § 1322(b)(2) contains the word “only” and the hanging paragraph contains no such modifying phrase.
See Steele,
Dale
notes that several Texas courts have adopted the transformation rule in the context of a consumer goods transaction. Slip op. at 8-9 (citing
Borg-Warner Acceptance Corp. v. Tascosa Nat’l Bank,
Accordingly, the Court concludes, as Judge Brown did in
Dale,
that application of the transformation rule is unnecessary because there is no after-acquired property clause and the collateral will not secure later indebtedness.
See Borg-Warner,
*403 C. Calculations under the dual-status rule
Finally, the Court must use the dual-status rule to calculate the actual amount which is protected from bifurcation by the hanging paragraph. Several courts have prorated the prepetition reduction of principal by determining what percentage of the total amount originally financed qualified as a purchase-money obligation.
Steele,
The total amount financed under the Contract was $29,239.04. [FOF No. 5.] This amount already includes a deduction for the Debtor’s cash down payment and a manufacturer’s rebate. Of this amount, $12,705.00 represents the negative equity owed on the 2004 car, which this Court has concluded is not protected under the hanging paragraph. [FOF No. 4.] Thus, the total amount that constituted a purchase-money obligation was $16,534.04 ($29,-239.04-$12,705.00) — which represents 56.5% of the total amount financed. As of the petition date, Wells Fargo was owed $27,577.46. [FOF No. 7.] Therefore, $15,581.26 (i.e.$27,577.46 x .565) of Wells Fargo’s claim is protected under thе hanging paragraph. The Plan lists Wells Fargo’s secured claim as only $15,537.18. While the difference between these two amounts (i.e. between $15,581.26 and $15,537.18) may seem de minimis, the hanging paragraph is clear that the Debtor has no power to strip down debt secured by a PMSI on the 2006 car by even one cent. Therefore, the Court sustains Wells Fargo’s objection to confirmation. The Debtor shall have ten days from the entry of this Memorandum Opinion to amend the Plan and list Wells Fargo’s claim as secured in the amount of $15,581.26.
IV. Conclusion
In
Sanders,
Judge Clark astutely paraphrased а quintessentially Texan rule: courts are to be governed by rules of common sense.
The act of refinancing negative equity in one transaction with a new car purchase is not an abuse that the hanging paragraph was designed to address. The increаsing pervasiveness of negative equity in this industry supports such a finding. This is not a new practice that has arisen since October 2005 when BAPCPA became effective. Congress was clearly aware that such a practice existed and could have included more explicit language in BAPC-PA if it so desired; it did not do so. Thus, in light of the general goal of the hanging paragraph and the arguments outlined herein, the Court finds that the most equitable solution to this problem is to exclude negative equity from the protection of the hanging paragraph and tо apply the dual- *404 status rule to protect the proper amount of the PMSI held by the lender. An Order consistent with this Memorandum Opinion shall be entered on the docket simultaneously with the entry of this Memorandum Opinion.
Notes
. In preparing this Memorandum Opinion, the Court reviewed the holdings in 38 opinions from various jurisdictions. Of these opinions, 20 found that negative equity was not part of the PMSI. While this is only a portion of all published opinions on the issue, the sample size is sufficiently large that the Court is confident in describing this position as the "slight majority.”
See In re Hernandez,
.
In re Sanders,
. The term negative equity is not defined in the Bankruptcy Code, the Uniform Commercial Code, or Black’s Law Dictionary. It is a term commonly used in the automobile lending industry to describe the difference between the balance owing on a trade-in vehicle and the value of that vehicle.
Peaslee,
. In pari materia is "a canon of construction that statutes that are in pari materia may be construed together, so that inconsistencies in one statute may be resolved by looking at another statute on the same subject.” Black’s Law Dictionary 794 (7th Ed. 1999).
. The Court has not extensively discussed
Steele
from the Northern District of Texas. This is not an oversight or a slight to Judge Lynn. The bulk of
Steele
is focused on the second issue. Since
Dale
and
Sanders
are essentially in agreement as to the first point,
Steele
does not delve into the first issue other than to say it generally agrees with the analysis in both cases. One interesting point that
Steele
does make regarding the first issue is that "the added recovery provided to a car financier by reason of the [the hanging paragraph] will, in some cases, be at the expense not of the debtor but rather of general unsecured creditors.”
Steele,
. After rejecting the
Sanders
reading of the hanging paragraph,
Steele
applies the dual-status rule without any discussion of the transformation rule.
Steele,