The opinion of the court was delivered by: David G. Larimer United States District Judge
These cases, which have been consolidated for argument and decision, are before the Court on appeal from decisions of Bankruptcy Judge John C. Ninfo, II, entered on various dates in each of the individual cases on appeal.*fn1 Because the controlling issues in each case are the same, appellants, at this Court's direction, have filed a joint brief concerning those issues, as well as individual supplemental briefs in two of the cases addressing issues peculiar to those cases. The Court heard oral argument on these appeals on July 10, 2007.
These cases join a rapidly-growing body of case law that has been generated by a 2005 amendment to § 1325 of the Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). The specific question presented by these appeals involves the extent to which a creditor holds a purchase money security interest (sometimes "PMSI") in connection with a motor vehicle sale in which the seller allows the buyer to "roll in" the "negative equity" on a trade-in vehicle, i.e., the difference between the vehicle's outstanding loan balance and its market value, as part of the purchase price of the new vehicle. Although the cases addressing this question are numerous and quickly growing in number, no clear consensus on that issue has yet emerged. See In re Trejos, 352 B.R. 249, 253 and n. 6 (Bankr. D.Nev. 2006) (stating that "[j]ust what this effect [of the amendment to § 1325] is turns out to be a thorny question of statutory interpretation, upon which many, many bankruptcy judges have already given their views," and commenting on "[t]he number and diversity of these opinions") (collecting cases).
Each of the cases before me involves the treatment of a particular creditor's claim that was secured by a motor vehicle purchased by the Chapter 13 debtor within 910 days (about two and a half years) prior to the filing of the bankruptcy petition. In each case, the debtor's plan provided that the claim in question was to be treated as an allowed secured claim but only to the extent of the then-retail value of the vehicle, to be paid with interest in monthly installments. The balance of the amount due the creditor in connection with the debtor's purchase of the new vehicle would be allowed but only as an unsecured claim. The creditors filed objections to all of the plans, arguing that the entire balance due to the creditors should have been allowed as a secured, purchase money security interest.
The bankruptcy court ruled in each of these cases that the creditor did not have a purchase money security interest in that portion of the amount financed that was used to pay off the outstanding loan balance on the debtor's trade-in vehicle. Applying the so-called "transformation rule," through which the presence of both purchase money and non-purchase money obligations in one transaction transforms the entire transaction into a non-purchase money transaction, the court held that the creditors' claims in these cases were not secured by any PMSI, but instead were secured only to the extent of the value of the collateral, i.e., the then-market value of the newly-purchased vehicle. In re Peaslee, 358 B.R. 545, 554-60 (Bankr. W.D.N.Y. 2006). These appeals followed.
On appeal from a bankruptcy court, the district court will not set aside the bankruptcy court's findings of fact unless they are clearly erroneous. Fed. R. Bankr. 8013. Conclusions of law are subject to de novo review. In re AroChem Corp., 176 F.3d 610, 620 (2d Cir. 1999); In re Bennett Funding Group, Inc., 146 F.3d 136, 138 (2d Cir. 1998). In the cases at bar, the relevant facts are not in dispute, and the only issues before me are issues of law. De novo review is therefore the appropriate standard here.
Under § 506(a) of the Bankruptcy Code, a secured claim may be bifurcated into secured and unsecured components.*fn2 Prior to the adoption of BAPCPA in October 2005, a Chapter 13 debtor could bifurcate a motor vehicle loan under § 506(a), treating the obligation as secured up to the value of the vehicle, with the remainder of the claim listed as an unsecured claim. Thus, the debtor could retain the collateral (the vehicle) over the creditor's objection, as long as the debtor paid the present value of the collateral (the allowed secured claim) over the term of the plan, which could be up to five years.*fn3
At the conclusion of the plan, the debtor could retain the vehicle and any unpaid portion of the debt to the creditor would be extinguished pursuant to the provisions of Chapter 13. This procedure routinely utilized by bankruptcy courts is often characterized as the stripping down of the creditor's claims or, perhaps more pejoratively as a "cramdown." "This procedure is known as a 'cramdown'--the court crams down the creditor's throat the substitution of money for the collateral, a situation that creditors usually oppose because the court may underestimate the collateral's market value and the appropriate interest rate, and the debtor may fail to make all promised payments, so that the payment stream falls short of the collateral's full value." In re Wright, ___ F.3d ___, 2007 WL 1892502, at *1 (7th Cir. 2007).
BAPCPA, however, altered the landscape in this area in a substantial way. A new provision was added to the Bankruptcy Code which provided significant protection for those who finance automobile transactions that occur within a relatively brief period prior to the debtors' filing for Chapter 13 protection.
BAPCPA added to 11 U.S.C. § 1325(a) what has become commonly known as the "hanging paragraph" (because it follows the numbered subsections, but has no numerical designation of its own), which makes § 506 inapplicable to certain claims. If the provisions of this "hanging paragraph" are met, the bankruptcy court is precluded from reducing or stripping- down the creditor's purchase money ...