UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
IN RE:
KENNETH D. KNOWLES
MELISSA ANN KNOWLES
DEBTORS CASE
NO. 00-50795
MEMORANDUM
OPINION
This matter has come before the Court on objections to
the confirmation of the debtors’ Chapter 13 Plan (Doc. #5). Creditor Toyota Motor Credit Corporation
(“TMCC”) filed its Objection to Debtors Plan (Doc. #10) on July 14, 2000. Creditor RentWay, Inc. (“RentWay”), filed
its Objection to Confirmation of Proposed Chapter 13 Plan (Doc. #9) on the same
date. TMCC’s objection is based on its
contention that its collateral, a 1999 Toyota Tacoma truck (“the truck”), is
undervalued in the Plan. RentWay
objects to the treatment of its rental-purchase agreements as security
interests.
The record in this case shows that the debtors filed
their Chapter 13 petition and Plan simultaneously on April 10, 2000. Their Schedule D - Creditors Holding Secured
Claims listed both of the objecting creditors.
The value of the truck is listed there as $13,792.50. The amount of TMCC’s claim is listed as
$22,153.88. The value of RentWay’s
collateral (furniture, a television, and jewelry) is listed as $1,190.00, while
the amount of its claim is listed as $9,578.65. The debtors filed their First Amended Chapter 13 Plan (Doc. #12)
on July 17, 2000. There they set the
value of the truck at $17,812.50. The
value of RentWay’s collateral remained the same. The original Plan and First Amended Plan proposed to pay each
creditor to the extent of the value of its collateral, the so-called “cram
down” allowed by 11 U.S.C. §1325(a)(5)(B).
The Supreme Court in Associates Commercial
Corporation v. Rash, 117 S.Ct. 1879 (1997), held that under 11 U.S.C.
§506(a), the value of property retained because the debtor exercised Chapter
13's “cram down” option is the cost the debtor would incur to obtain a like
asset for the same use, or the “replacement value.” TMCC maintains that pursuant to Rash, if the “proposed
use” of the truck is its use by the debtors, the proper value is the retail
value. TMCC sets out that the N.A.D.A.
base retail value of the truck is $18,625.00.
Options placed on the truck added $1,300.00 for a total of
$19,925.00. TMCC argues that its claim
should be treated as an allowed secured claim for this amount.
The application of the replacement-value standard is
explained in footnote 6 of the Rash opinion:
Our
recognition that the replacement-value standard, not the foreclosure-value
standard, governs in cram down cases leaves to bankruptcy courts, as triers of
fact, identification of the best way of ascertaining replacement value on the
basis of the evidence presented.
Whether replacement value is the equivalent of retail value, wholesale
value, or some other value will depend on the type of debtor and the nature of
the property. We note, however, that
replacement value should not include certain items. For example, where the proper measure of the replacement value of
a vehicle is its retail value, an adjustment to that value may be necessary: A
creditor should not receive portions of the retail price, if any, that reflect
the value of items the debtor does not receive when he retains his vehicle,
items such as warranties, inventory storage, and reconditioning. ... Nor should
the creditor gain from modifications to the property–e.g., the addition
of accessories to a vehicle–to which a creditor’s lien would not extend under
state law.
The
debtors have responded that the Supreme Court gave no direction as to the
determination of replacement value, but as footnote 6 clearly shows, they are
incorrect in that regard. Further, the
Supreme Court specifically enjoined the use of any mechanical mid-point
formula, stating: “Whatever the attractiveness of a standard that picks the
midpoint between foreclosure and replacement values, there is no warrant for it
in the Code.” At 1886.
The debtors propose to employ such an average,
however, and the value they have assigned to the truck represents that
average. The debtors argue that the Sixth Circuit Bankruptcy Appellate Panel
in In re Getz, 242 B.R. 916 (6th Cir.BAP 2000) held that use
of the average of N.A.D.A. wholesale and retail values to obtain replacement
value was proper. They misapprehend Getz,
however, if they believe that it calls for the calculation of the replacement
value of a vehicle by averaging its wholesale and retail values. What the Getz court did say was that
using such an average as a starting point, with appropriate adjustments
consistent with other evidence as to value introduced by the parties, was not
inconsistent with the holding in Rash.
This Court does not agree that the average of wholesale and retail
values is an appropriate starting point, however, and since, as the Getz
court points out, the trial court has “the discretion ... to adopt a rule for
replacement valuation,” the Court declines to use the average of wholesale and
retail values as a starting point.
This Court therefore concludes that the proper
starting point for determining replacement value in the instant matter is the
N.A.D.A. retail value, with appropriate adjustments to be made. Both the debtors and TMCC should have the
opportunity to present evidence concerning the nature and amount of these
adjustments, and it therefore appears that an evidentiary hearing will be
necessary. This Court will therefore
defer a ruling on the value of the truck until such evidence has been
presented. An order setting an
evidentiary hearing will be entered separately.
The Court now considers the objection of RentWay to
the characterization of its rental-purchase agreements with the debtors as
security interests. RentWay maintains
that the various rental-purchase agreements are leases and not security
interests pursuant to KRS 367.976, and, as such, must be assumed or rejected by
the debtors pursuant to 11 U.S.C. §365.
Provision for such assumption or rejection in a Chapter 13 plan is found
in 11 U.S.C. §1322. The definition
section of KRS 367.976, the Rental-Purchase Agreements statute, provides in
pertinent part as follows:
As used
in KRS 367.976 to 367.985, unless the content otherwise requires:
. . . . . .
(7) “Rental-purchase agreement” means an
agreement for the use of personal property by a natural person primarily for
personal, family, or household purposes, for an initial period of four (4)
months or less, whether or not there is any obligation beyond the initial period,
that is automatically renewable with each payment and that permits the consumer
to become the owner of the property.
The term rental-purchase agreement shall not be construed to be, nor be
governed by, any of the following:
. . . . . .
(f) A security interest as defined in KRS
355.1-201(37);
RentWay
contends that the debtors’ Plan attempts to convert lease agreements into
secured transactions and thereby allow them to retain over $12,000.00 worth of
personal property for the payment of $1,190.00.
RentWay has cited a number of cases which generally
support its position. RentWay
represents that all of these cases involved state statutes concerning
rental-purchase agreements similar or identical to Kentucky’s and that all of
them ruled that the agreements under consideration were “true leases” and not
security instruments. Interestingly, at least two courts found that the
agreements were neither, but that they were peculiar creatures of consumer
financing “sufficiently executory to fall within §365.” See In re Stellman, 237 B.R.
759 (Bkrtcy.D.Idaho 1999), at fn. 15. See
also In re Trusty, 189 B.R. 977 (Bkrtcy.N.D.Ala. 1995). In any event, no court applying a state
rental-purchase agreement statute found that such agreements were security
instruments.
The debtors have also cited case law which they
maintain supports their position. One
of these is In re Puckett, 60 B.R. 223 (Bkrtcy.M.D.Tenn. 1986), which
was decided before Tennessee adopted a rental-purchase agreement statute. In addition, the court in Puckett
described a situation in which the creditor led debtors to believe that they
were being offered an alternative method of financing purchases, rather than
rental-purchase agreements, after their credit applications were rejected. Finally, in In re Osborne, 170 B.R.
367 (Bkrtcy.M.D.Tenn. 1994), the court recognized that Tennessee law had
changed with the passage of the Rental-Purchase Agreement Act in 1987, and a
change made to the definition of a “security interest” in §1-201(37) of
Tennessee’s version of the Uniform Commercial Code in 1992 to specifically
exclude rental-purchase agreements.
Since the bankruptcy court was bound to apply state law, the reasoning
and the result in Puckett no longer applied.
The debtors also refer to an unreported decision by
Judge Lee in In re Crawford, Case No. 90-50066,(E.D.Ky., September 23,
1992) which held rental-purchase agreements to be security instruments, the
language of KRS 367.976 notwithstanding.
There, after discussing changes in federal Truth-in-Lending and consumer
leasing law and regulations that excluded rental-purchase agreements from their
protections, Judge Lee went on to conclude that the leases in question were not
terminable without penalty “at any time” by the consumer and thus were “credit
sales” and not leases pursuant to the definition in Regulation Z. The rent was payable in advance, and the
leases provided that lessees were not entitled to cash refunds. If the lessee chose to terminate soon after
paying in advance, no refund would be forthcoming and the lessee would forfeit
the rental payment for that period, thus being assessed a “penalty.” This Court, however, tends to agree with the
courts in Stellman and Trusty that these rental-purchase
agreements are neither true leases nor security instruments, but that they are
“sufficiently executory to fall within §365.”
The debtors must therefore either assume or reject the leases in
question.
An order in conformity with this opinion will be entered
separately and the debtors will be given additional time to modify their plan
in light of this opinion.
Dated:
By
the Court -
Judge
William S. Howard
Copies to:
Kenneth Smee, Esq.
Dean A. Langdon, Esq.
John T. Hamilton, Esq.
Chapter 13 Trustee