I’ve been thinking about snowballs lately. Not the icy sweet things that we ate sitting by the pool this past summer. And not the icy packed things that we’ll throw at each other this winter.
I’ve been thinking about the “snowball effect,” when something starts small and then gets bigger and bigger as it gains momentum. That is what’s been happening in the bankruptcy arena with decisions on whether a creditor that finances negative equity can still be the holder of a purchase-money security interest and have its claim protected from cramdown.
The financing of negative equity has been a hot topic in bankruptcy cases for several years. Remember that not long after the 2005 bankruptcy amendments, debtors started arguing that vehicle-secured creditors that financed negative equity were not entitled to the protection from cramdown set out in the amendments, even though they financed vehicle purchases for personal use within 910 days of the car buyer’s bankruptcy filing. The argument was that one of the requirements for cramdown protection – that the secured creditor hold a purchase-money security interest – was not satisfied where the creditor financed negative equity in addition to the purchase price of the car.
Many bankruptcy courts accepted this argument, finding that negative equity is not a purchase-money obligation because it is not part of the price of the collateral or value to enable the buyer to acquire rights in the collateral. These courts concluded that a creditor that finances negative equity is not eligible for protection from cramdown under the Bankruptcy Code.
Other bankruptcy courts disagreed. They found that
(1) “price” is a broad enough concept under retail installment sales acts and the Uniform Commercial Code to include negative equity, and
(2) the purchase of a car and the financing of negative equity on the buyer’s trade-in are one transaction. These courts concluded that a creditor that finances negative equity is still eligible for protection from cramdown under the Bankruptcy Code.
Then we started seeing district court and bankruptcy appellate panel decisions on this issue. Eventually, in 2008, we saw our first circuit court opinion and became cautiously optimistic. In In re Graupner (Graupner v. Nuvell Credit Corporation), 537 F.3d 1295 (11th Cir. (M.D. Ga.) 2008), the Eleventh Circuit held that a creditor does not lose its status as the holder of a purchase-money security interest by financing negative equity. The small snowball was formed.
Then, the Fourth Circuit (in In re Price (Wells Fargo Financial Acceptance v. Price), 2009 U.S. App. LEXIS 7750 (4th Cir. (E.D.N.C.) April 13, 2009) and the Tenth Circuit (in In re Ford (Ford v. Ford Motor Credit Corporation), 2009 U.S. App. LEXIS 17198 (10th Cir. (Bankr. D. Kan.) August 3, 2009) followed suit, creating a somewhat larger snowball. The Second Circuit certified the question to the New York Court of Appeals, which agreed that negative equity is part of a creditor’s purchase-money security interest. The snowball was getting bigger.
Well, this fall, the snowball reached a much larger size with much greater momentum. Noting that it strives to maintain uniformity among circuits, the Eighth Circuit, in In re Mierkowski (Ford Motor Credit Company v. Mierkowski), 2009 U.S. App. LEXIS 20055 (8th Cir. (Bankr. E.D. Mo.) September 8, 2009), sided with the Tenth, Fourth, and Eleventh Circuits. It found that the amount financed to pay off negative equity is part of the price of the newly purchased car, as evidenced by the Missouri Motor Vehicle Time Sales Act, which includes negative equity as part of a vehicle’s time-sale price.
In another opinion handed down the following day, In re Callicott (Nuvell Credit Company, LLC v. Callicott), 2009 U.S. App. LEXIS 20068 (8th Cir. (E.D. Mo.) September 9, 2009), the Eighth Circuit concluded that negative equity financing, when coupled with a car sale, is part of a creditor’s purchase-money security interest where the parties, as in this case, agreed to include the negative equity as part of the price of the newly purchased vehicle.
On the same day as the Eighth Circuit’s first opinion, the Fifth Circuit, in In re Dale (Ford Motor Credit Company LLC v. Dale), 2009 U.S. App. LEXIS 20065 (5th Cir. (S.D. Tex.) September 8, 2009), determined that negative equity financing, gap insurance, and extended warranties are expenses incurred in connection with a buyer acquiring rights in the newly purchased car and thus fall within the creditor’s purchase-money security interest.
A month later, after having its question answered by the New York Court of Appeals, the Second Circuit, in In re Peaslee (Reiber v. GMAC, LLC), 2009 U.S. App. LEXIS 22236 (2d Cir. (W.D.N.Y.) October 9, 2009), affirmed the decision of the district court that negative equity on a trade-in vehicle is included in the purchase-money security interest accompanying a new car’s purchase.
Now, the snowball is now almost too large to hold. These new cases will hopefully signal to debtors’ attorneys that the fight is over and they might as well just draft the Chapter 13 plan to provide for payment in full to the creditor, at least where it’s clear that the vehicle was purchased for personal purposes within 910 days of the car owner’s bankruptcy filing.
Shelley Fowler is an attorney in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Shelley at 410-865-5406 or by email at rfowler@hudco.com.