Cram down in Florida is in trouble

In September of 2007, I wrote about a great decision from Judge Jerry Funk of the Middle District of Florida that allows for the valuation of cars that were purchased by debtors within 910 days of filing bankruptcy.  That decision is in serious jeopardy as a result of a recent appellate decision from the 11th Circuit Court of Appeals.

Previously, Judge Funk determined in In re Blakeslee that Florida Statutes § 679.1031 defines a purchase money security interest (PMSI) as a creditor’s security interest in goods obtained by a debtor through the creditor’s financing of all or part of the price of those goods.  However, when a creditor loans extra money to pay off negative equity, this is more than the actual price of the goods, and the entire transaction is transformed into a non-PMSI.  This means that the debtor can seek to repay only the fair market value of the car in a Chapter 13 bankruptcy.

On August 6, 2008, the 11^th Circuit, in Graupner v. Nuvell Credit Corporation, (Case No. 07-13657), upheld a Georgia bankruptcy judge’s determination that a negative equity trade was part of the purchase price of a car.  The Graupner Court stated:

Comment 3 [of the Uniform Commercial Code] further states that a purchase money security interest “requires a close nexus between the acquisition of collateral and the secured obligation.” We believe there is such a “close nexus” between the negative equity in the Debtor’s trade-in vehicle and the purchase of his new vehicle. The financing was part of the same transaction and may be properly regarded as a “package deal.” Payment of the trade-in debt was tantamount to a prerequisite to consummating the sales transaction, and utilizing the negative equity financing was a necessary means to accomplish the purchase of the new vehicle. As the district court held in affirming the bankruptcy court, the negative equity was an “integral part of,” and “inextricably intertwined with,” the sales transaction. To hold otherwise would not be a fair reading of the UCC.

However, bankruptcy attorney Edward Jackson, Esquire reasons that the Graupner case may be limited to Georgia.  Jackson argues:

The court cited the Georgia Motor Vehicle Sales Finance Act to support its view that negative equity rollover was still purchase money and thus did not disqualify a motor vehicle from 910 protection.  To support its opinion, the court points out that Georgia’s MVSFA includes rollover negative equity in its definition of cash sales price.  A review of Florida’s Motor Vehicle Sales Finance Act shows that our definition of cash price does not include negative equity rollover. (Fl. Stat. 520.02(2)).  Hopefully, this difference is enough to protect Judge Funk’s recent decision, In re Blakeslee, which provided that negative equity rollover converts the entire debt to non-purchase money and thus allows cram down.

The Graupner decision was only able to come to that conclusion “when O.C.G.A. §§ 11-9-103 (UCC) and 10-1-31(a)(1) (MVSFA) are read in pari material”.  Unfortunately, the loose language at the end of the opinion about the intent of Congress may mean that the 11th circuit may rule against debtors and unsecured creditors regardless of Florida law.

With legal decisions like Graupner and arbitrary policy decisions like jacking up the Chapter 13 trustee’s administrative fee, it is becoming increasingly difficult for the honest debtor to obtain a fresh start in bankruptcy court.