Valuing a car just got easier in the Middle District of Florida

26 Sep Valuing a car just got easier in the Middle District of Florida

In my previous article, I discuss the fact that, in a Chapter 13 bankruptcy, the debtor can “value” the merchandise securing a purchase money security interest (PMSI), paying the creditor only an amount equal to the fair market value. Any remaining amount owed would be treated as an unsecured claim. This process is known as “cramdown.”

Prior to BAPCA, the only limitation to valuing collateral was that the collateral could not be land upon which the debtor resides. Since BAPCA, an automotive financier can avoid cramdown if four conditions are satisfied: (1) the creditor has a PMSI; (2) the debt was incurred within 910 days preceding the filing of the petition; (3) the collateral for the debt is a motor vehicle; and (4) the motor vehicle was acquired for the personal use of the debtor. Usually, all but the first condition are easily determined, and the recent cramdown litigation surrounds the issue of whether the creditor has a PMSI.

In the Middle District of Florida, Jacksonville Division, we know the answer, thanks to local bankruptcy litigator, Bryan K. Mickler, EsquireMr. Mickler filed a Motion to Value Collateral in two different cases.  In one case, In re Blakeslee, the creditor wrapped negative equity from a trade-in into the loan securing the purchase of a car. In the other case, In re Honcoop, the creditor included gap insurance (insurance protecting the vehicle owner in the instance when damage to the vehicle is greater than its value) into the loan securing the car purchase. Both Motions were heard by the Honorable Jerry Funk.

Judge Funk, in two separate rulings, employed a two step analysis. First he determined whether negative equity and gap insurance were part of the “price” of the car. This is an important distinction because Florida Statutes § 679.1031 defines a 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. In other words, a creditor is lending the debtor the money to buy the very thing securing the loan. However, when a creditor loans more than the actual “price” of the goods, this may not qualify as a PMSI, and in such instances, the court moves on to the second part of the analysis.

In Part One of his analysis, Judge Funk determined that financing negative equity from a trade-in is not a prerequisite to enable the debtor to obtain legal interest in the purchased vehicle; it is merely an “accommodation to facilitate the transaction.” In layman’s terms, negative equity from a trade-in is not part of the vehicle’s “price.” The seller finances negative equity to sell more cars. Similarly, Judge Funk concluded that gap insurance is not an add-on that improves the value of the vehicle, and accordingly, it is not part of the vehicle “price. Once Judge Funk determined that part of the debtor’s obligation was not a PMSI, he was left to determine the extent to which the creditor had a PMSI.

Part Two of the analysis required Judge Funk to apply either the “dual status rule” or the “transformation rule” to negative equity and gap insurance. The dual status rule provides that the secured lender retains a PMSI to the extent the amount financed relates to the price of the vehicle. The transformation rule provides that, by including non-PMSI items in the financing, the transaction is not a PMSI at all. Remember, if it is not a PMSI, the first condition is not met, and the debtor can value the vehicle down to the fair market value.

Judge Funk noted that when a buyer trades in his old car for a new one, it is nearly impossible to tell what the true trade-in value is and what the true purchase price is. As a result of this reality, Judge Funk applied the transformation rule to negative equity financing. Therefore, when the financing of negative equity occurs, a Chapter 13 debtor can file a Motion to Value, and the court will enter an order requiring the debtor to repay only the fair market value of the car! This can save debtors thousands of dollars in Chapter 13 and reduce plan payments.

Unlike the negative equity financing, Judge Funk applied the dual status rule to gap insurance. It can be inferred from his reasoning that gap insurance is much more easily identified than negative equity, and it would not be fair to make the entire transaction a non-PMSI. Rather, Judge Funk reduced the balance of the loan by the cost of the gap insurance (in this case $500).

So, if there is only gap insurance in the financing, a Motion to Value will result in lowering the balance of the secured claim by the cost of the insurance. However, if negative equity is financed, then a Motion to Value will result in cramming the secured claim down to the fair market value of the car.

Debtor attorneys practicing in the Jacksonville Division (including this author) owe a debt of gratitude to Bryan Mickler, Esquire for his superior litigation skill and legal analysis. Thanks, Bry!

UPDATE: PLEASE READ ABOUT A SUBSEQUENT 11TH CIRCUIT RULING THAT COULD EFFECTIVELY CHANGE THIS LAW

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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