In re Madrid-Baskin

619 B.R. 710

IN RE: Denice Patricia MADRID-BASKIN, Debtor.

Bankruptcy Case No. 20-10069 TBM

United States Bankruptcy Court, D. Colorado.

Signed August 25, 2020

Stephen E. Berken, Sean Cloyes, Denver, CO, for Debtor.

ORDER DENYING CONFIRMATION OF DEBTOR'S AMENDED CHAPTER 13 PLAN

Thomas B. McNamara, United States Bankruptcy Judge

I. Introduction.

In 2017, Debtor Denice Patricia Madrid-Baskin (the "Debtor") bought a used Honda Accord (the "Car"). She agreed to pay a total of $14,626. Such amount covered the price of the Car plus some additional assorted charges, including $295 for "gap waiver or gap coverage insurance" (the "GAP Insurance"). She put $3,250 down and borrowed the rest under a loan secured by the Car. And, she committed to pay off the principal balance, plus interest, to the assignee of the loan: Westlake Services, LLC d/b/a Westlake Financial Services ("Westlake Financial").

A few years later, the Debtor filed for protection under Chapter 13 of the Bankruptcy Code. Westlake Financial submitted a secured proof of claim for $10,537. Then, the Debtor filed a Chapter 13 Plan. She proposed to pay Westlake Financial only the "confirmation value" of the Car (which she contends is $7,665), plus interest at 5% per annum over five years. In bankruptcy vernacular, the Debtor wants to bifurcate and cram down Westlake Financial's secured claim to the current value of the Car, stripping $2,872 from Westlake Financial's secured claim and leaving the balance unsecured and unpaid.

The Chapter 13 Trustee, Douglas B. Kiel (the "Chapter 13 Trustee"), objected to the treatment of Westlake Financial under the Chapter 13 Plan. The Chapter 13 Trustee contends that under the Bankruptcy Code's¹ so-called "hanging paragraph" (located between 11 U.S.C. §§ 1325(a)(9) and (b)(1) ), the Debtor cannot strip down Westlake Financial's claim because she purchased the Car within 910 days prior to filing for bankruptcy and Westlake Financial has a purchase money security interest in the Car to the full extent of the balance of the loan (excepting only $295 attributable the GAP Insurance). According to the Chapter 13 Trustee, the Debtor must pay Westlake Financial without cramming down the debt.

The Debtor asks the Court to confirm the Chapter 13 Plan anyway. She concedes that she borrowed $11,376 but notes that $295 of the loan proceeds were used to purchase the GAP Insurance. She contends that Westlake Financial cannot have a purchase money security interest in the Car for the GAP Insurance part of the loan. Even the Chapter 13 Trustee agrees. But then the Debtor makes a huge leap. She argues that because the transaction involved $295 in GAP Insurance, Westlake Financial's purchase money security interest in the Car has been destroyed altogether so that the Debtor may cram down the entire debt.

The Debtor presents an aggressive and technical legal argument. However, the Court concludes that the Debtor cannot strip down the debt. Even if a portion of the loan proceeds were used to pay for the GAP Insurance, such use does not transform the entire loan into a non-purchase money obligation under Colorado law. Instead, Colorado law permits dual status: the GAP Insurance part of the loan may be considered a non-purchase money obligation, while the balance of the loan retains its character as a purchase money obligation. Thus, the Debtor cannot invoke cram-down and the Chapter 13 Plan cannot be confirmed.

II. Jurisdiction and Venue .

This Court has jurisdiction to enter final judgment on the issues presented in this bankruptcy case pursuant to 28 U.S.C. § 1334. The plan confirmation dispute is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the estate), (b)(2)(L) (confirmation of plans), and (b)(2)(O) (other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

III. Procedural Background.

A. The Bankruptcy Filing and Westlake Financial's Proof of Claim.

The Debtor filed for protection under Chapter 13 of the Bankruptcy Code on January 6, 2020.² Contemporaneously, she filed her Statement of Financial Affairs and Schedules.³ Only 15 creditors filed proofs of claim in her bankruptcy case. On January 27, 2020, Westlake Financial filed Proof of Claim No. 3-1 in the amount of $10,537, plus interest at the rate of 20.90% per annum, based on an automobile loan (the "Westlake Financial Claim"). The Westlake Financial Claim is the single largest claim filed against the Debtor's bankruptcy estate. Westlake Financial asserts that the debt is secured by the Car. The Debtor has not objected to the Westlake Financial Claim.

B. The Debtor's Chapter 13 Plan.

On April 1, 2020, the Debtor filed an Amended Chapter 13 Plan (the "Chapter 13 Plan").⁴ In the Chapter 13 Plan, the Debtor proposes to make monthly payments to the Chapter 13 Trustee of $365 for 58 months, yielding total payments of $21,170. With respect to the Westlake Financial Claim, the Debtor proposes to cram down the debt based upon the "confirmation value" of the Car.⁵ The Debtor asserts that the "confirmation value" of the Car is $7,655. Thus, she contends that she should pay only that amount ($7,655) plus 5% interest per annum over 58 months which results in a "total amount payable" to Westlake Financial of $8,494.⁶ In the Chapter 13 Plan, the Debtor also explained (in bankruptcy-speak): "Debtor proposes to ‘cram down’ her vehicle. She purchased gap insurance on the vehicle, as such, the vehicle is not all PMSI and may be crammed."

C. The Confirmation Process.

The Debtor sent the Chapter 13 Plan to all creditors. Westlake Financial did not object to its treatment. However, the Chapter 13 Trustee did.⁷ In the Objection, the Chapter 13 Trustee stated:

Part 7.4.A of the plan provides for Westlake Financial['s Claim] ... as a claim subject to "cram down" under 11 U.S.C. § 506 .... Debtor purchased a motor vehicle for personal use on October 27, 2017. Therefore, the vehicle was purchased within 910 days prior to filing the Petition and cannot be crammed down pursuant to 11 U.S.C. § 1325(a)(9).

Part 12 of the plan states that Debtor "purchased additional gap insurance on the vehicle, as such, the vehicle is not all PMSI and may be crammed." The portion of the claim attributable to gap insurance may not be a purchase money security interest (PMSI) and not protected by the hanging paragraph of 11 U.S.C. § 1325. However, under the "dual status" rule applied by the court in In re McCauley , 398 B.R. 41, 46-47 (Bankr. D. Colo. 2009 [2008]), a secured obligation is divided into a PSMI and non-PSMI and the hanging paragraph of 11 U.S.C. § 1325 prevents "cram down" of the PMSI portion of the claim.⁸

The Court conducted two non-evidentiary hearings on confirmation.⁹ Ultimately, the Debtor and the Chapter 13 Trustee framed the dispute as primarily "legal" (as opposed to factual) and agreed to present the Court with a set of stipulated facts rather than taking the matter to an evidentiary hearing. True to their word, the Debtor and the Chapter 13 Trustee thereafter submitted fifteen "Stipulated Facts"¹⁰ plus an attachment, Exhibit 1.¹¹ They also reaffirmed that both parties "consent to a ruling by the Court on the pleadings only and no evidentiary hearing is necessary."¹² Consistent with the foregoing consents, the Court determines that no evidentiary hearing is required. Instead, for evidence, the Court will rely exclusively on the Stipulated Facts. The Court also appreciates that both the Debtor and the Chapter 13 Trustee submitted helpful briefing on the legal issues.¹³ Thus, the confirmation dispute is ripe for decision.

IV. Findings of Fact.

Based on the Stipulated Facts, the Court makes the following findings of fact under Fed. R. Civ. P. 52(a)(1), as incorporated by Fed. R. Bankr. P. 7052.

On October 27, 2017, the Debtor purchased the Car (a used 2012 Honda Accord) from Mister Auto.¹⁴ To complete the purchase of the Car, Mister Auto (as Seller) and the Debtor (as Buyer) entered into and executed a "Retail Installment Contract and Security Agreement," dated October 27, 2017 (the "Contract").¹⁵ According to the Contract, the "Cash Price" of the Car, including sales tax, was $13,994.65.¹⁶ As part of the transaction, the Debtor also agreed to pay a few additional charges including: (1) "filing fees" paid to "public officials" of $37.20; (2) a "delivery and handling fee" of $299.00; and (3) "gap waiver or gap coverage insurance" of $295.00 from Knight Management Insurance Services.¹⁷ Thus, the total "all-in" amount charged by Mister Auto for the "Cash Price" of the Car and additional charges was $14,625.85.¹⁸

The Debtor made a down payment of $3,250.00, leaving an unpaid balance of $11,375.85.¹⁹ The Court received no evidence as to how the down payment was applied (i.e. , as against the "Cash Price" of the Car or toward the additional charges). In any event, Mister Auto financed the unpaid balance for the Debtor through the Contract. As part of the Contract, the Debtor agreed to pay Mister Auto "the principal amount of $11,375.85" plus interest at the rate of 20.90% per annum all through 52 payments of $337.27 per month.²⁰ To secure her obligations to Mister Auto under the Contract, the Debtor gave Mister Auto a security interest in the Car.²¹

In terms of governing law, Mister Auto and the Debtor agreed that the Contract would be governed "by the law of Colorado and applicable federal law and regulations." ²²

Furthermore, the parties agreed "to make this Contract subject to [the Colorado Uniform Consumer Credit Code], so that for purposes of the UCCC this is a consumer credit transaction ...."²³ The transaction closed in Colorado.

With respect to the GAP Insurance purchased by the Debtor, the Contract states:

Additional Protections. You may buy any of the following voluntary protection plans. They are not required to

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