Ford v. Ford Motor Credit Corp.

FILED
United States Court of Appeals
Tenth Circuit

August 3, 2009
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

IN RE: JOHN WESLEY FORD, SR.,
CYNTHIA DAWN FORD,

Debtors.
____________________________

JOHN WESLEY FORD, SR., CYNTHIA
DAWN FORD,

Appellants,
v. No. 08-3192
FORD MOTOR CREDIT CORPORATION,

Appellee,
____________________________

AMERICAN FINANCIAL SERVICES
ASSOCIATION, THE KANSAS
BANKERS ASSOCIATION,

Amicus Curiae.

APPEAL FROM THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
(B.C. NO. KS-08-049)

Michael J. Studtmann, Law Office of Michael J. Studtmann, P.A., Wichita,
Kansas, for Appellant.
Thomas D. Lasater, Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, Kansas
(William M. Burke, Costa Mesa, California, and Lyndon W. Vix, Fleeson,
Gooing, Coulson & Kitch, L.L.C., Wichita, Kansas, with him on the brief), for
Appellee.

Charles R. Hay, Foulston Siefkin LLP, Topeka, Kansas, filed an Amici Curiae
brief on behalf of American Financial Services in support of Appellee.

Patricia E. Hamilton, Henson, Hutton, Mudrick & Gragson, LLP, Topeka, Kansas,
filed an Amici Curiae brief on behalf of The Kansas Bankers Association, in
support of Appellee.

Before MURPHY, SEYMOUR, and TYMKOVICH, Circuit Judges.

MURPHY, Circuit Judge.

I. Introduction

Appellants John Wesley Ford, Sr. and Cynthia Ford appeal an order of the

Bankruptcy Court for the District of Kansas rejecting their proposed Chapter 13

bankruptcy plan. The Fords have an outstanding debt to Appellee Ford Motor

Credit Company (“Ford Motor Credit”) secured by their automobile. The debt

includes the amount paid to discharge the “negative equity” on their trade-in

vehicle. Negative equity is the amount owed on a loan in excess of the

collateral’s value. In their proposed bankruptcy plan, the Fords sought to

bifurcate their automobile debt to Ford Motor Credit under 11 U.S.C. § 506(a)

into secured and unsecured claims. The unsecured claim would be the portion of

the debt used to discharge the negative equity in the trade-in. Ford Motor Credit

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objected to the proposed plan, claiming the debt bifurcation was impermissible

under the “hanging paragraph” of 11 U.S.C. § 1325(a). The bankruptcy court

sustained the objection, and the Fords sought an immediate appeal to this court.

We conclude we have jurisdiction to hear this appeal under 28 U.S.C. § 158(d)(2)

and AFFIRM the ruling of the bankruptcy court.

II. Background

The underlying facts of this case are not in dispute. The Fords purchased a

2007 Ford F-150 truck from Rusty Eck Ford on February 24, 2007. The Fords

made a down payment of $1500 and received $40,168.30 in financing secured by

the truck. At the same time, the Fords traded in their 2006 Ford truck. The 2006

truck was valued at $16,300, but the Fords owed $23,500 on it. $11,693.30 in

financing covered “[a]mounts paid on [the Fords’] behalf.” This included taxes,

fees, a service contract, gap insurance, and $7200 to pay off the creditor on the

2006 truck for the amount owed on the vehicle in excess of its present value.

The Fords filed for Chapter 13 bankruptcy fewer than four months later.

Under their proposed plan, they sought to reduce the secured debt on the 2007

truck by $7200, the amount of negative equity on their trade-in. That amount

would be treated as an unsecured claim under the plan. Ford Motor Credit

objected to the proposed treatment of its security interest.

Exercising jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(K), (L), the

bankruptcy court concluded the negative equity financing was part of the

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creditor’s purchase money security interest under the “hanging paragraph” in 11

U.S.C. § 1325(a) and thus the debt could not be bifurcated and “crammed down”

pursuant to 11 U.S.C. § 506(a). The bankruptcy court sustained Ford Motor

Credit’s objection to the proposed plan and ordered the Fords to file an amended

plan treating the entire Ford Motor Credit debt as secured debt.

Both parties certified that an immediate appeal to this court was proper

pursuant to 28 U.S.C. § 158(d)(2)(A) because the appeal presents a question of

law as to which there is no controlling decision of this court or the Supreme Court

and the question requires resolution of conflicting bankruptcy court decisions. A

panel of this court then authorized the appeal to proceed, which satisfied the

jurisdictional requirements of 28 U.S.C. § 158(a)(3) and 28 U.S.C. § 158(d)(2)(A)

for appeals to this court of interlocutory bankruptcy orders. See Fed. R. Bankr. P.

8003(d). 1

III. Discussion

The bankruptcy court’s interpretation of the Bankruptcy Code is a question

of law to be reviewed de novo. In re Lanning, 545 F.3d 1269, 1274 (10th Cir.

2008). When consumers enter Chapter 13 bankruptcy, they are normally

permitted, if they wish, to bifurcate each secured debt into two claims: (1) an

1
The Kansas Bankers Association and the American Financial Services
Association have filed briefs as amici curiae along with motions to participate as
amici. The motions are hereby GRANTED.

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amount equal to the present value of the collateral, and (2) any excess. 11 U.S.C.

§ 506(a)(1). The excess portion is converted into unsecured debt. Id. The plan

can then be “crammed down,” or confirmed over the secured creditor’s objection,

so long as the creditor receives a lien securing the claim and the plan provides for

payments to the creditor over the life of the plan equal to the present value of the

collateral. 11 U.S.C. § 1325(a)(5)(B); Assocs. Commercial Corp. v. Rash, 520

U.S. 953, 957 (1997). Whether debt is secured or unsecured is significant

because secured creditors generally must be repaid in full before unsecured

creditors receive anything. 11 U.S.C. § 1325(a)(5), (b)(1).

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer

Protection Act (“BAPCPA”). One provision of BAPCPA amended the

Bankruptcy Code to remove certain secured consumer debts from bifurcation and

cramdown. Pub. L. No. 109-8, § 306(b), 119 Stat. 23, 80 (2005). At the end of

11 U.S.C. § 1325(a), Congress added an unnumbered paragraph, now commonly

known as the “hanging paragraph,” which reads, in relevant part, as follows:

For purposes of paragraph (5), section 506 shall not apply to a claim
described in that paragraph if the creditor has a purchase money
security interest securing the debt that is the subject of the claim, the
debt was incurred within the 910-day [sic] preceding the date of the
filing of the petition, and the collateral for that debt consists of a
motor vehicle (as defined in section 30102 of title 49) acquired for
the personal use of the debtor . . . .

11 U.S.C. § 1325(a).

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 The hanging paragraph protects creditors possessing a “purchase money

security interest securing the debt that is the subject of the claim” from § 506(a)

bifurcation and cramdown. 11 U.S.C. § 1325(a). The parties agree the collateral

in this case is a motor vehicle acquired for the personal use of the debtors and the

motor vehicle was acquired within 910 days of the bankruptcy filing. The only

issue in dispute is the extent to which Ford Motor Credit has a “purchase money

security interest.”

The issue of whether, under the hanging paragraph, a creditor has a

purchase money security interest in the negative equity on a trade-in vehicle has

been litigated extensively throughout the country, and the rulings have not been

consistent. 2 See In re Graupner, 537 F.3d. 1295, 1300 (11th Cir. 2008)

(collecting cases). The Tenth Circuit Bankruptcy Appellate Panel recently held

creditors have a purchase money security interest in negative equity. In re

Padgett, ___B.R.___, 2009 WL 2168824 at *5 (10th Cir. B.A.P., Jul. 20, 2009).

District courts and bankruptcy courts within this circuit have reached varied

results on the question. Compare, e.g., Citifinancial Auto v. Hernandez-Simpson,

369 B.R. 36, 48 (D. Kan. 2007) (holding bifurcation and cramdown are available

2
Although many courts have concluded, as this court does, that the issue is
resolved by interpreting state law, the American Financial Services Association
notes in its amicus brief that Article 9 of the U.C.C. has been adopted, at least in
part, in every state. Therefore, although courts have been interpreting the laws of
different states, they have been interpreting mostly identical statutory provisions.

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because purchase money security interest does not include negative equity), In re

McCauley, 398 B.R. 41, 45-46 (Bankr. D. Colo. 2008) (same), and In re Padgett,

389 B.R. 203, 211-12 (Bankr. D. Kan. 2008) (same), rev’d, 2009 WL 2168824 at

*5, with In re Ford, 387 B.R. 827, 833 (Bankr. D. Kan. 2008) (holding

bifurcation and cramdown are unavailable because negative equity is part of

purchase money security interest), and In re Austin, 381 B.R. 892, 897 (Bankr. D.

Utah 2008) (same). Two circuit courts to date have ruled on the question, both

holding the purchase money security interest held by a creditor includes the

negative equity on the trade-in vehicle. In re Price, 562 F.3d 618, 628 (4th Cir.

2009); In re Graupner, 537 F.3d at 1301. The Second Circuit declined to rule on

the issue, instead certifying the question to the New York Court of Appeals. In re

Peaslee, 547 F.3d 177, 186 (2d Cir. 2008). After certification the New York

Court of Appeals concluded purchase money security interests include the

negative equity. In re Peaslee, ___N.E.2d___, 2009 WL 1766000 (N.Y. 2009).

The issue previously came before this court, but the case was rendered moot

before the court ruled on the merits. In re Hunt, 550 F.3d 1002, 1004 (10th Cir.

2008).

The Bankruptcy Code does not define the term purchase money security

interest. Property interests referred to in the Bankruptcy Code are generally

defined by state law. Butner v. United States, 440 U.S. 48, 54 (1979). This court,

therefore, has looked to state law for a definition of the term as it is used

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elsewhere in the Bankruptcy Code. In re Billings, 838 F.2d 405, 406 (10th Cir.

1988) (“[T]he courts have uniformly looked to the law of the state in which the

security interest is created.”). When Congress enacts a statute using a phrase that

has a settled judicial interpretation, it is presumed to be aware of the prior

interpretation. Comm’r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159

(1993). When Congress drafted BAPCPA in 2005, it chose to use the term

“purchase money security interest” without defining it. Under settled case law,

that term, when used in the Bankruptcy Code, is interpreted with reference to

state law. As a consequence, we presume Congress intended that term as used in

BAPCPA to be interpreted according to state law.

Kansas has adopted the relevant portion of Revised Article 9 of the

Uniform Commercial Code (“U.C.C.”), and it also lists the Official U.C.C.

Comment in its statutory compilation. Kan. Stat. Ann. § 84-9-103. Under Kansas

law, “A security interest in goods is a purchase-money security interest: (1) To

the extent that the goods are purchase-money collateral with respect to that

security interest . . . .” Id. § 84-9-103(b). Purchase-money collateral is defined

as “goods or software that secures a purchase-money obligation incurred with

respect to that collateral.” Id. § 84-9-103(a)(1). A purchase-money obligation is

“an obligation of an obligor incurred as all or part of the price of the collateral or

for value given to enable the debtor to acquire rights in or the use of the collateral

if the value is in fact so used.” Id. § 84-9-103(a)(2). Whether something is a

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purchase-money security interest thus depends upon whether the underlying

obligation was incurred to pay “all or part of the price of the collateral” or covers

“value given to enable the debtor to acquire rights in or the use of the collateral.”

Id. § 84-9-103(a).

The Official Comment to Kan. Stat. Ann. § 84-9-103 provides additional

guidance on what constitutes a purchase-money security interest. It states:

[T]he “price” of collateral or the “value given to enable” includes
obligations for expenses incurred in connection with acquiring rights
in the collateral, sales taxes, duties, finance charges, interest, freight
charges, costs of storage in transit, demurrage, administrative
charges, expenses of collection and enforcement, attorney’s fees, and
other similar obligations.

The concept of “purchase-money security interest” requires a close
nexus between the acquisition of collateral and the secured
obligation.

Id. § 84-9-103 cmt. 3.

The issue is whether paying off negative equity in a trade-in car is part of

the “price” of the new car or part of the “value given to enable” acquisition of the

new car. 3 The Fords point out that it is possible to acquire rights in a new car

3
The Official Comment does not differentiate between “price” and “value
given to enable” in explaining what constitutes a purchase-money obligation.
See Kan. Stat. Ann. § 84-9-103 cmt. 3. In the U.C.C.’s pre-revision Article 9, the
“price” prong explicitly referred to security interests held by the seller of the
item, while the “value” prong referred to security interests held by any “person”
who incurred an obligation enabling a buyer to acquire collateral. U.C.C. app. O
§ 9-107. Thus, the “value” prong allowed third parties to acquire purchase money
security interests if they advanced money to enable the acquisition of consumer
(continued...)

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without paying off the negative equity in the old one. The debtor’s rights in the

two vehicles are distinct. The Fords further argue the trade-in encompasses two

separate transactions: the transfer of rights in the trade-in vehicle and the transfer

of rights in the new vehicle. They claim negative equity is different than the

expenses listed in the Official Comment. In opposition to this position, Ford

Motor Credit emphasizes that vehicle trade-ins are commonplace. It further

argues that many vehicle trade-ins involve negative equity on the old vehicle and

cites a study by J.D. Power and Associates estimating that approximately thirty-

eight percent of new car buyers have negative equity at trade-in. It argues the

trade-in of the old vehicle is directly related to the purchase of the new vehicle,

and the former would not have occurred absent the latter. The Kansas Bankers

Association, as amicus curiae, argues the Fords’ position artificially breaks a

single, package transaction into two parts.

The Fords’ position has some logic, and it is not surprising that a number

of courts have adopted it. On balance, however, it is not as persuasive as the

3
(...continued)
goods. Id. cmt. 2. Revised Article 9 has retained the “price” and “value” prongs
in its definition of a purchase-money obligation, although neither the text nor the
Official Comment mention the distinction between credit granted by sellers or
third parties. See Kan. Stat. Ann. § 84-9-103(a)(2), cmt. 3. Because the Official
Comment gives no indication that “price” and “value given to enable” have
distinct meanings, see id. cmt. 3, this court interprets the statute such that, as in
the pre-revision Article 9, the two terms are equivalent and refer respectively to
obligations incurred by sellers and third parties.

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position advanced by Ford Motor Credit. It may be theoretically possible to split

the exchange of vehicles into two separate transactions, but that is not how the

parties treated the deal. They signed a single agreement encompassing the trade-

in of the old vehicle and the sale of the new vehicle. This type of transaction,

moreover, is very common in the automobile industry. The very name “trade-in”

implies the two vehicle exchanges are linked. The entire exchange would

undoubtedly be a single transaction if the Fords did not have negative equity on

the trade-in vehicle and the two parties were simply swapping items of value. As

indicated by the data cited by Ford Motor Credit, the existence of negative equity

on the trade-in vehicle has not prevented consumers from continuing to trade-in

old vehicles for new ones, and it should not turn the swap into two separate

transactions. As the Bankruptcy Court recognized, discharging negative equity is

necessary to complete the trade-in because otherwise the dealer would take the

old vehicle subject to a lien exceeding the vehicle’s value. In re Ford, 387 B.R.

at 831.

We conclude the trade-in exchange is essentially a single transaction. The

expense incurred in retiring the lien on the trade-in vehicle, therefore, is an

“expense[] incurred in connection with acquiring rights” in the new car. Kan.

Stat. Ann. § 84-9-103 cmt. 3. There is also the requisite “close nexus” between

the acquisition of the new vehicle and the secured obligation. Id. The entire debt

incurred by the debtors is therefore a “purchase-money obligation,” the new

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vehicle is “purchase-money collateral” for the entire obligation, and the security

interest in the entire debt is a purchase-money security interest under Kansas law.

Id. § 84-9-103(a)-(b). Because Ford Motor Credit has a purchase-money security

interest in the full amount of the debt, it is entitled to the protection of the

hanging paragraph. 11 U.S.C. § 1325(a). The Bankruptcy Court was correct,

therefore, in sustaining Ford Motor Credit’s objection to the proposed plan.

The Fords contend, as does the dissent, that the phrase “expenses incurred

in connection with acquiring rights” must be interpreted in light of its proximity

to the other examples listed in the Official Comment. This is undoubtedly true,

but we discern no significant difference between the expense of discharging

negative equity on a trade-in and some of the other examples listed in the Official

Comment. The Official Comment lists “sales taxes, duties, finance charges,

interest, freight charges, costs of storage in transit, demurrage, administrative

charges, expenses of collection and enforcement, attorney’s fees, and other similar

obligations” as expenses that can be part of a purchase-money security interest.

Kan. Stat. Ann. § 84-9-103 cmt. 3 (emphasis added). Collection and enforcement

expenses and attorney’s fees are costs incurred so that the creditor may realize the

value of the security interest. The discharge of negative equity clears the title of

the trade-in vehicle, permitting the creditor to realize the value of the vehicle it

receives as part of the trade. Both categories of expenses allow the creditor to

realize its benefit of the bargain. The dissent argues collection and enforcement

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expenses are distinguishable from negative equity because such expenses are

transaction costs. Dissenting Op. at 7-8. The term “transaction costs,” however,

is entirely absent from the statute and the Official Comment. Had the drafters of

the U.C.C. intended to limit a purchase-money security interest to cash price plus

transaction costs, they could easily have done so. Instead, we are left with the

language the drafters actually used, which we conclude is broad enough to

encompass negative equity on trade-in vehicles.

The Fords also argue this result will enable predatory lending on the part of

automobile dealers by encouraging them to refinance antecedent debt secured by a

new vehicle. For reasons well articulated by the Fourth Circuit, this concern is

overstated. See In re Price, 562 F.3d at 627. The reasons for treating the trade of

an old vehicle for a newer one as a single transaction include the similarity in

function between the new and old vehicles. The vehicle trade-in is a common,

established transaction in the automobile industry, and it makes sense for many

consumers to discard their old vehicles when they acquire new ones. The

discharge of unrelated antecedent debt, however, may not bear the required “close

nexus” to the acquisition of a new vehicle. Id.; Kan. Stat. Ann. § 84-9-103 cmt.

3. An automobile dealer who attempted to refinance unrelated antecedent debt

and secure the new debt with the new car would present a question wholly

different from the question presented here. See In re Vega, 344 B.R. 616, 617-18,

622 (Bankr. D. Kan. 2006) (refusing to apply hanging paragraph to portion of car

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dealer’s loan used to extinguish debt on previous car loan when consumer did not

trade in the old vehicle).

IV. Conclusion

Under Kansas law, Ford Motor Credit holds a purchase-money security

interest in the entire amount owed to it by the Fords. The debt therefore falls

within the ambit of the hanging paragraph of 11 U.S.C. § 1325, and the Fords

may not bifurcate the debt for the purpose of a cramdown under 11 U.S.C. §

506(a). The interlocutory order of the Bankruptcy Court is therefore

AFFIRMED and the case is remanded to the Bankruptcy Court for further

proceedings consistent with this opinion.

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Ford v. Ford Motor Credit Co. (In re Ford), No. 08-3192

TYMKOVICH, Circuit Judge, dissenting.

I respectfully dissent because I read the Kansas Uniform Commercial Code,

which controls the resolution of this case, as providing a narrower definition of

“purchase money security interest” (PMSI) than the majority adopts.

In my view, Kansas law prohibits lenders from using a PMSI to secure a

loan for negative equity, even if the loan is bundled with a standard car loan that

is itself secured with a PMSI. Therefore, Ford Motor Credit Company does not

have a PMSI covering the portion of the Fords’ loan attributable to the $7,200 of

negative equity in their truck. And because the hanging paragraph, 11 U.S.C.

§ 1325(a)(*), applies only to PMSIs, the $7,200 is not protected from cram down.

Even so, Kansas’s dual-status rule preserves PMSI status for the remaining

portion of the Fords’ loan and that portion is therefore immune from cram down.

I. PMSIs Under Kansas Law

As the majority recognizes, a basic tenet of bankruptcy—and the starting

point of this case—is the Butner principle: “Property interests are created and

defined by state law.” Butner v. United States, 440 U.S. 48, 55 (1979); see also

Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 20 (2000). The principle arises

because generally, bankruptcy law is not designed to fundamentally alter property

rights. Instead, “a bankruptcy proceeding is principally a forum in which all of a

debtor’s creditors can gather, assemble the debtor’s assets, and divide them

among themselves, according to the rights that state law gives them.” Douglas G.
Baird, Bankruptcy Procedure and State-Created Rights: The Lessons of Gibbons

and Marathon, 1982 Sup. Ct. Rev. 25, 35.

The validity of the Butner principle is undisputed here, but it is worth

emphasizing because the hanging paragraph employs a state law term of art,

PMSI, to define its scope. See 11 U.S.C. § 1325(a)(*). Though “Congress of

course may do what it likes with entitlements in bankruptcy,” Raleigh, 530 U.S.

at 21, it chose not to alter the state law definition of PMSI as it relates to the

hanging paragraph. Therefore, the resolution of this case turns on whether

Kansas law allows a creditor to secure a loan for negative equity with a PMSI.

See Billings v. AVCO Colo. Indus. Bank (In re Billings), 838 F.2d 405, 406 (10th

Cir. 1988) (“For [the definition of PMSI], the courts have uniformly looked to the

law of the state in which the security interest is created.”); see also In re Price,

562 F.3d 618, 624 (4th Cir. 2009); Graupner v. Nubell Credit Corp. (In re

Graupner), 537 F.3d 1295, 1298 (11th Cir. 2008). 1

1
While I recognize Kansas’s U.C.C. provisions are similar to those in most
states, that does not change the fundamental tenet that we interpret Kansas law
consistent with the holdings of Kansas courts. As one judge put it, interpreting
the U.C.C. to advance bankruptcy policy (assuming we can identify the correct
policy at play here), “will becloud the clarity and predictability that the authors of
Article 9 were seeking in enacting the statutes governing PMSIs.” In re Peaslee,
– N.E.2d –, 2009 WL 1766000, 2009 N.Y. Slip Op. 05197, at *9 (N.Y. June 24,
2009) (Smith, J., dissenting). Congress, of course, remains free to establish a
uniform definition of PMSI applicable to cases governed by the hanging
paragraph.

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 A. PMSIs Generally

A PMSI is a “special type of security interest” that is created when a

secured party (here, Ford Credit) “provides the credit that enables the debtor [the

Fords] to obtain the collateral [the Fords’ new truck].” Keith G. Meyer, A Primer

on Purchase Money Security Interests Under Revised Article 9 of the Uniform

Commercial Code, 50 Kan. L. Rev. 143, 152 (2001). In the consumer goods

context, a common example of a transaction that creates a PMSI is a purchase

using a store-issued credit card:

Typical credit sales should be relatively familiar to all of
us, though we may not always recognize them. Each time
we use our Sears Card to buy a drill, a stereo, furniture,
etc., we participate in a credit sale. Sears is granting us
credit to purchase those items from the store, and we are
granting the store a PMSI in that item until it is paid off.

Christopher Harry, Comment, To Be (Transformed) or Not To Be: The

Transformation Versus Dual-Status Rules for Purchase-Money Security Interests

Under Kansas’ Former and Revised Article 9, 50 U. Kan. L. Rev. 1095, 1097

(2002). In this example, the consumer is the debtor, and Sears is the purchase-

money lender.

Aside from the benefit conferred by the hanging paragraph (i.e., protection

from cram down for some car loans), purchase-money lenders receive additional

advantages under the U.C.C. and other law. Most importantly, a purchase-money

lender has “super-priority”—the lender’s claim to the purchase-money collateral

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trumps the claims of other secured creditors. See Matthews v. Transamerica Fin.

Servs. (In re Matthews), 724 F.2d 798, 801 (9th Cir. 1984) (“Purchase money

security is an exceptional category in the statutory scheme that affords priority to

its holder over other creditors . . . .”). Additionally, unlike other security

interests, PMSIs in household goods cannot be “avoided” (i.e., extinguished) in

bankruptcy. See 11 U.S.C. § 522(f)(1)(B); see also In re Billings, 838 F.2d at 406

(“[I]f the security interest . . . retains its status as a purchase money security

interest . . . then debtors may not avoid the security interest under § 522(f).”). In

the household goods context, PMSIs have yet another benefit: Federal Trade

Commission regulations prohibit lenders from taking “a nonpossessory security

interest in household goods other than a purchase money security interest.” 16

C.F.R. § 444.2(a)(4) (emphasis added).

Because of the advantages of PMSIs, lenders sometimes attempt to use

them to secure obligations unrelated to purchase-money collateral. Indeed,

“overloaded” PMSIs are a recurring concern in the law of secured transactions,

and jurisdictions have adopted various mechanisms to prevent them. See Ann E.

Conaway Stilson, The ‘Overloaded’ PMSI in Bankruptcy: A Problem in Search of

a Resolution, 60 Temp. L. Q. 1, 16 (1987). 2

2
Several federal circuit cases from the 1980s addressed the treatment of
overloaded PMSIs in bankruptcy, with respect to the anti-avoidance provision in
§ 522(f). See In re Billings, 838 F.2d at 408 (suggesting that an obligation can
“be considered only partly a purchase money debt,” and therefore a security
(continued...)

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 Some jurisdictions eliminate PMSI status if a lender attempts to secure a

loan that exceeds the amount required for the debtor to obtain the collateral. See

Marion W. Benfield, Jr., Consumer Provisions in Revised Article 9, 74 Chi-Kent

L. Rev. 1255, 1292 (1999). Under this so-called “transformation” rule, “a

security interest that was originally a purchase money interest loses that status

entirely if the debt is restructured and an additional nonpurchase money advance

is made.” Id.; see also In re Matthews, 724 F.2d at 801 (applying the

transformation rule under California law).

Other jurisdictions, including Kansas, adopt the “dual-status” rule, which

preserves an overloaded PMSI “to the extent that it secured the price of the

original goods even though the security agreement also secured the price of other

items.” Meyer, 50 Kan. L. Rev. at 155–56 & n.64; Kan. Stat. Ann. § 84-9-103(f)

(2007) (“[A] purchase-money security interest does not lose its status as such,

even if: . . . the purchase-money collateral also secures an obligation that is not a

purchase-money obligation.”); see also Snap-On Tools, Inc. v. Freeman (In re

Freeman), 956 F.2d 252, 254–55 (11th Cir. 1992) (“A security interest in

collateral is ‘purchase money’ to the extent that the item secures a debt for the

2
(...continued)
interest can still be considered a PMSI with respect to the portion that is not
overloaded (emphasis added)); Pristas v. Landaus of Plymouth, Inc. (In re
Pristas), 742 F.2d 797, 801 (3d Cir. 1984) (adopting “pro tanto preservation of
purchase-money security interests,” but invalidating overloaded portions of
PMSIs); In re Matthews, 724 F.2d at 801 (holding that when a creditor refinances
a purchase money obligation, the PMSI is extinguished).

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money required to make the purchase. If an item of collateral secures some other

type of debt, e.g., antecedent debt, it is not purchase money.”).

These principles underscore that the benefits of PMSIs come with certain

limitations. When Congress chose to use the state law term PMSI to confine the

scope of the hanging paragraph, it adopted these state law limitations as well and

made them applicable in bankruptcy.

B. The Kansas Definition of PMSI

The majority identifies the key Kansas statutory language governing

whether negative equity may be secured with a PMSI. As the majority states,

“[t]he issue is whether paying off negative equity in a trade-in car is part of the

‘price’ of the new car or part of the ‘value given to enable’ acquisition of the new

car.” Maj. Op. at 9. I agree with the majority that under the Kansas U.C.C.,

these terms include more than just the vehicle’s sticker price. But I disagree with

the majority’s broad interpretation of these terms. In my view, Comment 3 to

U.C.C. § 9-103 provides the limiting framework.

Notably absent from the items contained in Comment 3 is a description of

negative equity. Instead, the comment lists items which are part of the “price” of

a new car or the “value given to enable” the purchase of a new car. Granted, the

list is nonexclusive and includes “other similar obligations.” But Comment 3 tells

us that a PMSI “requires a close nexus between the acquisition of collateral and

the secured obligation.” Under familiar principles of statutory interpretation, the

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other items on Comment 3’s list shed light on whether negative equity bears the

requisite “close nexus” to the acquisition of a new car. See Jarecki v. G.D. Searle

& Co., 367 U.S. 303, 307 (1961) (“The maxim noscitur a sociis, that a word is

known by the company it keeps, while not an inescapable rule, is often wisely

applied where a word is capable of many meanings in order to avoid the giving of

unintended breadth to the Acts of Congress.”); State v. Urban, 193 P.3d 515, 518

(Kan. Ct. App. 2008) (employing the maxim to interpret a Kansas statute).

The items on Comment 3’s list—such as sales tax, finance charges, freight

charges, costs of storage in transit, attorney’s fees, and collection costs—are all

expenses that will be charged uniformly to any potential purchaser of a vehicle

who chooses to finance the purchase. Each item is akin to a transaction cost, a

cost that adds no particular value for either the buyer or the seller but is instead

simply “the cost of using the price mechanism.” R.H. Coase, The Nature of the

Firm, 4 Economica 386, 390 (1937); see also Black’s Law Dictionary 372 (8th ed.

2004) (defining “transaction cost” as “[a] cost connected with a process

transaction, such as a broker’s commission, the time and effort expended to

arrange a deal, or the cost involved in litigating a dispute”); Harold Demsetz, The

Cost of Transacting, 82 Q.J. Econ. 33, 35 (1968) (“Transaction cost may be

defined as the cost of exchanging ownership titles.”).

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 Negative equity is different. It is not a transaction cost, but a transfer of

money for value. 3 Much like a home equity loan used to pay a preexisting credit

card debt, the portion of the auto loan attributed to negative equity is not used for

the purchase of some new piece of collateral or the costs inherent in the purchase.

It is used for another purpose altogether. See AmeriCredit Fin. Servs., Inc. v.

Penrod (In re Penrod), 392 B.R. 835, 852 (9th Cir. B.A.P. 2008) (“[N]egative

equity is nothing more than a refinancing of the preexisting debt owed on the

trade-in. There is no necessary connection between this refinancing and the car’s

acquisition.”). Unlike the other expenses listed in Comment 3, the amount (and

even the existence) of negative equity depends upon circumstances completely

unrelated to the price of the new vehicle and its financing or the costs associated

with transfer of title. Indeed, negative equity differs vastly for each purchaser,

depending in large part on the purchaser’s past choices.

Thus, although the Fords and their dealer were free to use the new pickup

as security for a loan to pay an antecedent debt, that does not mean paying the old

debt was part of the “price” of the pickup. Nor does it mean the portion of a loan

3
The Fourth Circuit has suggested that negative equity is, indeed, a
transaction cost because it is an expense incurred during the purchase of a new
car. See In re Price, 562 F.3d at 627. I respectfully disagree. The Fourth
Circuit’s approach equates any secured refinancing with a transaction cost. The
term cannot bear such a broad definition. See Demsetz, 82 Q.J. Econ. at 35
(noting the problems inherent in a broad definition of “transaction cost”). That a
loan for negative equity usually occurs in connection with the purchase of a new
vehicle does not render it a transaction cost.

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used to pay off the old debt was a purchase money security interest. As a Texas

bankruptcy court stated:

One may borrow money to buy something (e.g., a new
vehicle), and also borrow additional money for some other
purpose (e.g., to pay off the balance of a loan for the
trade-in vehicle). The part used to buy something is
purchase money obligation. The part used for some other
purpose is not.

In re Saunders, 377 B.R. 836, 853 (Bankr. W.D. Tex. 2007), rev’d, 403 B.R. 435

(W.D. Tex. 2009). In my view, this is a more consistent interpretation of the

Kansas U.C.C. than the majority’s. By interpreting the term “price” in section

84-9-103(a)(2) to mean the actual price of the vehicle plus amounts akin to

transaction costs, the limits of PMSIs are easily discernible. In contrast, allowing

a creditor to create a PMSI for any money advanced at the same time as a sale

enables the creditor to overload the PMSI and defeats the limitations imposed by

state law.

C. The Dual-Status Rule

Because I would hold that Ford Credit does not have a PMSI securing its

loan for the Fords’ negative equity, I must answer “the question of what to do

with that portion of the debt not entitled to purchase-money status.” See In re

Penrod, 392 B.R. at 838.

As mentioned above, Kansas has adopted the dual-status rule, which

preserves a PMSI to the extent it secures a purchase-money obligation and

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destroys it to the extent the PMSI is overloaded. Kan. Stat. Ann. § 84-9-103(f)

(2007); see also Harry, 50 U. Kan. L. Rev. at 1121–22 (noting that, unlike the

standard version of Article 9, the Kansas version expressly adopted the dual-

status rule for all transactions, including consumer transactions); see also In re

Gibson, 16 B.R. 257, 268–69 (Bankr. D. Kan. 1981) (applying Kansas law and

adopting the dual-status rule in the consumer context). 4 Consistent with the

Butner principle, I would hold that the Kansas dual-status rule applies: part of

Ford Credit’s claim is a PMSI protected from cram down, and part is merely a

standard secured claim which may be subject to cram down.

This does not resolve the case, however. Another question remains, namely

how to adjust Ford Credit’s claims to account for payments the Fords made on

their car loan before entering bankruptcy. Should the payments be applied first to

the negative equity portion of the loan, or should they be applied first to the PMSI

portion of the loan? Kansas law states that payments must be applied “[i]n

accordance with any reasonable method of application to which the parties agree.”

Kan. Stat. Ann. § 84-9-103(e)(1) (2007). In the absence of such an agreement,

Kansas law requires courts to consider “any intention of the obligor manifested at

4
Some courts have held that regardless of state law, federal policy requires
the dual-status approach in the context of the hanging paragraph. See In re
Penrod, 392 B.R. at 859 (“[W]e are persuaded that the Dual Status Rule should be
applied as the federal rule.” (footnote omitted)); see also In re Hargrove, 400
B.R. 616, 620 (Bankr. M.D. Tenn. 2008) (noting that the dual-status rule is
“consistent with the purpose of” the hanging paragraph). But selectively applying
the Butner principle, as these cases do, defeats its purpose.

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or before the time of payment.” Id. § 84-9-103(e)(2). Finally, if no such intent

was manifested, payments go first to the PMSI, then to the non-PMSI. See id.

§ 84-9-103(e)(3); In re Kellerman, 377 B.R. 302, 304 (Bankr. D. Kan. 2007). I

would remand this case, instructing the bankruptcy court to apply these rules to

determine the amount of Ford Credit’s claims.

II. Other Approaches

I recognize my conclusion is at odds with the majority’s reasoning, and

with the reasoning of a number of other courts that have addressed the treatment

of negative equity under the hanging paragraph. These courts have made

numerous arguments, and several common themes have emerged.

Some courts—including the majority—conclude that the financing of

negative equity is part of a “package deal” and as such should be protected by the

same PMSI that covers the sale price of a new vehicle. See, e.g., In re Graupner,

537 F.3d at 1302. Others utilize the in pari materia canon (i.e., the canon that

encourages courts to construe statutes together), holding that the term “price” in

the U.C.C. includes negative equity, because this is how other laws define the

term “price.” See, e.g., id. at 1301. Finally, some courts rely on the legislative

history of the hanging paragraph to conclude Congress intended negative equity

to be protected from cram down. See, e.g., In re Price, 562 F.3d at 628.

Though the majority does not make all of these arguments, I take this

opportunity to explain why I find them unpersuasive.

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 A. The “Package Deal” Approach

One common line of reasoning holds that negative equity is part of a

“package deal” and cannot be separated from the remainder of the PMSI. The In

re Graupner court, for example, viewed the financing of negative equity as “part

of the same transaction” as the purchase of the new vehicle such that it was

“properly regarded as a ‘package deal.’” 537 F.3d at 1302. To the Eleventh

Circuit, negative equity was an “integral part” of the purchase and was

“inextricably intertwined” with the transaction. Id.; see also In re Price, 562 F.3d

at 625 (“All of the Prices’ debt . . . was incurred at the same time, in the same

contract, and for the same purpose: acquiring the new car.”). The majority adopts

this approach, concluding that “the trade-in exchange is essentially a single

transaction.” Maj. Op. at 11.

The intuitive difficulty with this position is that vehicle purchasers—even

those that buy on credit—are not required to purchase the new vehicle by trading

in an old one. Whether doing so is necessary or even desirable depends on their

individual circumstances. Perhaps in this case it is true that the Fords could not

have purchased their new pickup without trading in their old one. And perhaps

financing the negative equity was “integral” to the Fords completing their

purchase, because it was inconvenient or impossible for them to complete the

purchase any other way.

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 The definition of PMSI, however, does not encompass any and every

expense that might enable a particular purchaser to complete the purchase in the

most convenient manner. If the Fords were unable to drive themselves to the

dealership, we would not consider the cost of a taxi as part of the price of the new

truck, even if the dealer were willing to pay for it and fold it into the sales

contract. If the Fords did not qualify for a car loan because their resources were

strained by too much credit card debt at high interest rates, they could not fold

those debts into the PMSI for a new car even if the attendant lower interest rate

solved their credit problem and enabled them to obtain the car loan.

Allowing a creditor to transform antecedent debt into a PMSI by

refinancing the debt into a new contract amount that includes the purchase price

of new collateral would convert the concept of “purchase money” from a defined

term to one that can be expanded at the will of the parties. See In re Conyers, 379

B.R. 576, 582 (Bankr. M.D.N.C. 2007) (“Allowing the Debtor to rollover negative

equity into the new loan was simply an accommodation. It was an arrangement

made as a favor to another.”); In re Westfall, 365 B.R. 755, 762 (Bankr. N.D.

Ohio 2007) (providing the extreme example of a ‘debtor [who] would not have

made it to the dealer’s lot were it not for the emergency appendectomy, [making]

payment of the doctor’s outstanding fee . . . an enabling expense”), rev’d in part,

376 B.R. 210.

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 Congress confined the hanging paragraph to PMSIs, and I cannot conclude

the hanging paragraph protects any and every loan secured by an automobile.

B. The In Pari Materia Argument

Another approach is to apply the in pari materia doctrine. Courts

employing this argument look to other statutes that use the term

“price”—frequently, state motor vehicle financing statutes—and, when these

other statutes explicitly include negative equity within the definition of price,

interpret the U.C.C. in pari materia. See, e.g. In re Graupner, 537 F.3d at 1301

(finding support in the definition of “cash sale price” in Georgia’s Motor Vehicle

Sales Financing Act); Gen. Motors Acceptance Corp. v. Peaslee, 373 B.R. 252,

260 (W.D.N.Y. 2007) (analyzing the definition of “cash sale price” in New

York’s Motor Vehicle Retail Installment Sales Act).

But at least some other courts have considered this a dubious application of

the in pari materia doctrine, as the vehicle financing statutes are concerned more

with disclosure than regulation and therefore do not cover the same subject

matter. For example, the Second Circuit disapproved of a bankruptcy court’s

reliance on the New York Motor Vehicle Retail Installment Sales Act in

interpreting the U.C.C.’s definition of “price.” Peaslee v. GMAC, LLC (In re

Peaslee), 547 F.3d 177, 186 (2d Cir. 2008) (“But it is not manifest that ‘price’ in

N.Y. U.C.C. § 9-103(a)(2), or ‘expense’ in Comment 3 to that provision, should

be given the same meaning as ‘cash sale price’ in the MVRISA.”). The Second

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Circuit noted the New York motor vehicle statute was aimed primarily at

disclosure and served different purposes from the U.C.C., making an in pari

materia interpretation of the term “price” suspect. Id.

I agree with the Second Circuit insofar as it views the in pari materia

doctrine as inapplicable. Indeed, here the use of the in pari materia doctrine is

even less helpful because the parties have pointed to no other Kansas statute

defining the term “price.” Ford Credit points mainly to the federal Truth in

Lending Act (TILA), 15 U.S.C. § 1601 et seq.—or, more specifically, to the

Federal Reserve Board’s interpretation of that Act in Regulation Z, which

requires disclosure of negative equity as part of the total sale price of an

automobile. See 12 C.F.R. § 226.18(b)(2) & (j). But the manner in which a

federal agency has interpreted the term “price” in a federal statute sheds little

light on what the Kansas legislature meant when it employed the term in its

version of the U.C.C. But see GMAC v. Horne, 390 B.R. 191, 202–03 (E.D. Va.

2008) (adopting TILA’s definition of “total sales price” as the meaning of “price”

under the Virginia U.C.C.).

I acknowledge that in its Uniform Consumer Credit Code, the Kansas

legislature referred to both TILA and Regulation Z when it empowered an

administrator to “adopt rules and regulations necessary to carry out the provisions

and terms of the uniform consumer credit code which are consistent with or no

less restrictive than the truth-in-lending act . . . and regulation Z.” Kan. Stat.

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Ann. § 16a-6-117 (2007). Even so, there is no reason to believe that in doing so,

the Kansas legislature meant to suggest the terms in its other statutes should now

be interpreted as identical to an agency interpretation of a federal disclosure law.

The Uniform Consumer Credit Code does not even use the word “price,” and I

fail to see how the in pari materia canon can be helpful in determining what the

legislature meant by “price” in Kan. Stat. Ann. § 84-9-103 (2007).

Additionally, even if I were to apply the in pari materia doctrine, it does

not suggest negative equity is part of the “price” of a new vehicle. Under Kansas

tax law, the term “sales or selling price” does not include “the amount equal to

the allowance given for the trade-in of property.” Kan. Stat. Ann. § 79-

3602(ll)(3)(D) (2007). Here, the “allowance given for the trade-in of property”

was the $7,200 of negative equity in the Fords’ old truck. Kansas tax law

excludes this amount from the sale price of the Fords’ new truck, and the in pari

materia doctrine would therefore suggest the negative equity was not part of the

sale price under the Kansas U.C.C. I doubt Kansas tax law—like other states’

motor vehicle financing statutes—tells us anything about the Kansas U.C.C. But

a comparison to Kansas tax law illustrates that the in pari materia doctrine, even

if applicable, does not offer much guidance in this case.

C. Legislative History

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 Finally, some courts examine the legislative history of the hanging

paragraph and, despite its inconsistencies, find that it unambiguously supports the

conclusion that negative equity is included in the state law definition of PMSI.

See, e.g., In re Price, 562 F.3d at 628; In re Graupner, 537 F.3d at 1303 & n.5.

This is problematic for two reasons.

First, legislative history is “often murky, ambiguous, and contradictory,”

and we should resort to it only when a statute’s plain language is unclear. See

United States v. Hinckley, 550 F.3d 926, 947 (10th Cir. 2008) (Gorsuch, J.,

concurring) (quoting Exxon Mobile Corp. v. Allapattah Servs., Inc., 545 U.S. 546,

568 (2005)), cert. denied, 129 S. Ct. 2383 (2009). Indeed, the Supreme Court has

“repeatedly held[ that] the authoritative statement is the statutory text, not the

legislative history or any other extrinsic material.” Exxon Mobile Corp., 545 U.S.

at 568. Here, the statutory language is far from ambiguous. It expressly states

that only PMSIs are protected from cram down in bankruptcy. Whether this state

law term of art is itself ambiguous is another story. Case law (including this very

opinion) shows that courts can reasonably disagree on the meaning of the term

under various state laws. But the plain language of the hanging paragraph is

clear, making resort to its legislative history unnecessary and potentially

misleading.

Second, the legislative history of the hanging paragraph provides no pat

answer to whether negative equity is protected from cram down. As Ford Credit

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explains in its brief, one legislative proposal predating the enactment of the

hanging paragraph was narrow and protected from cram down only the “unpaid

balance of the purchase price of the personal property.” H.R. Rep. No. 105-794,

at 25 (1998) (Conf. Rep.) (emphasis added). This language, if enacted, arguably

would not have protected amounts such as title fees, taxes, or negative equity.

But Ford Credit dismisses this language and emphasizes a competing version of

the bill, which was broader and would have protected “an allowed claim that is

secured under applicable non-bankruptcy law.” S. Rep. No. 105-253, at 7 (1998)

(emphasis added). This language seems to encompass negative equity, which is

part of a lender’s secured claim.

Congress ultimately settled on protecting only purchase money security

interests from cram down. See 11 U.S.C. § 1325(a)(*). This might have reflected

a Congressional compromise to protect certain fees that are properly considered

part of a purchase-money loan—i.e., fees akin to transaction costs—and not to

protect negative equity. But we are not privy to Congress’s internal deliberations,

and this is why we ordinarily must confine our inquiry to the language of statutes

as enacted. See Exxon Mobile Corp., 545 U.S. at 568.

Ford Credit argues that the legislative history supports their position and

implies that Congress intended to broadly protect car lenders, regardless of how

loan proceeds are used. Other courts agree with this reading, assuming that the

“architects of the hanging paragraph intended only good things for car lenders and

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other lienholders.” In re Graupner, 537 F.3d at 1303 (internal alterations and

quotation marks omitted) (quoting AmeriCredit Fin. Servs. v. Long (In re Long),

519 F.3d 288, 294 (6th Cir. 2008)). These courts fail to recognize, however, that

Congress must reconcile many competing interests when drafting legislation.

Presuming Congress resolved all policy questions in favor of one constituency is

simplistic and likely inaccurate. See Circuit City Stores, Inc. v. Adams, 532 U.S.

105, 120 (2001) (“We ought not attribute to Congress an official purpose based

on the motives of a particular group that lobbied for or against a certain

proposal—even assuming the precise intent of the group can be determined, a

point doubtful both as a general rule and in the instant case. It is for the

Congress, not the courts, to consult political forces and then decide how best to

resolve conflicts in the course of writing the objective embodiments of law we

know as statutes.”).

Congress specifically chose to use the term “purchase money security

interest” instead of something broader. I believe the most prudent practice is to

assume Congress meant what it said.

III. Conclusion

I conclude that negative equity is neither “all or part of the price of” a new

car, nor “value given to enable the debtor to acquire rights in or the use of” a new

car. Thus, I would hold that the Fords’ negative equity is not part of Ford

Credit’s PMSI under Kansas law, and it is therefore not protected from

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bifurcation and cram down under the hanging paragraph. Under the dual-status

rule, only the purchase price of the Fords’ new car and related fees that are akin

to transaction costs are secured by a PMSI. Though I recognize my view is at

odds with the conclusions of several other courts, including the Fourth and

Eleventh Circuits, I believe my interpretation comports more closely with the

meaning of purchase money security interest under the Kansas U.C.C. than does

the opposing view.

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