Memorandum of Decision Re: Car Lease

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In re LINDA KAY GREEN,                                                                           No. 96-13203        Debtor. ___________________________/
Memorandum of Decision
     There are currently two predominant methods of financing the purchase of a new car. The purchaser can either utilize traditional methods of purchase money financing or lease the vehicle. The latter method has some benefits for the purchaser, in that the amount of cash necessary to drive away in a new car is generally less than the amount needed as a down payment to purchase the car, and the monthly payments are lower.      There is a significant disadvantage to leasing a car when the purchaser has filed a Chapter 13 petition. In that event, a traditional purchaser could use section 1325(a)(5)(B) to pay the lienholder only the value of the car regardless of the amount of the debt. However, a lessee must either perform all of the terms of the lease or surrender the car; there is no option to redeem it for its value.      In this Chapter 13 case, the debtor is a lessee. She argues that the lease is a disguised security transaction, so that she may in fact use section 1325(a)(5)(B) even though she leased her truck.The lessor, Mazda American Credit Company, objects.      The pros and cons of treating a vehicle lease as a disguised security transaction are set forth in exhaustive detail in In re Cole, 100 B.R. 561 (Bkrtcy.N.D.Okl.1989), and In re Thompson, 101 B.R. 658 (Bkrtcy.N.D.Okl.1989), which came out on opposite sides of the issue. Appeals from both decisions were considered by the district court in In re Cole, 114 B.R. 278 (N.D.Okl.1990), which reversed the lower court holding that the leases were disguised security transactions. This rule is generally followed. See, e.g., In re Bumgardner, 183 B.R. 224 (Bkrtcy.D.Idaho 1995).      In fact, of the dozen or so reported cases on the issue, none other than the reversed Oklahoma case has come out on the debtor's side. Courts have pretty much uniformly held that section 1325(a)(5) cannot be used to modify the rights of a vehicle or equipment lessor. See, e.g., In re Johnson, -- B.R. -- (Bkrtcy. S.D.Ga.1996); In re Weske, -- B.R. -- (Bkrtcy.E.D.Wis.1996); In re Murray, 191 B.R. 309 (Bkrtcy.E.D.Pa.1996); In re Winston, 181 B.R. 589 (Bkrtcy. N.D.Ala.1995); In re Wallace, 122 B.R. 222 (Bkrtcy.D.N.J.1990); In re Haigler, 119 B.R. 531 (Bkrtcy. D.S.C.1989); In re Farrell, 79 B.R. 300 (Bkrtcy.S.D.Ohio 1987); et al., all the way back to In re Peacock, 6 B.R. 922 (Bkrtcy.N.D.Tex.1980).      In this case, the debtor argues that because she puts so many miles on her truck, when the lease is over she will owe Mazda American Credit an excess mileage fee of $3,750.00, which is only $340.00 less than her price to purchase the truck. She therefore argues that she falls under section 1201(37)(a)(iv) of the California Commercial Code because she has the option to become the owner of the truck for nominal consideration upon compliance with the lease. She points to subdivision (d)(i) of that section, which provides that consideration is nominal if it is less than the lessee's reasonably predictable cost of performing if the option is not exercised.      The court does not follow the debtor's argument. Using her figures, the option to purchase is still $340.00 more than the cost to her if she does not exercise the option. Moreover, subsection (d)(ii) of the California statute provides that the test is to be applied to the cost reasonably predicted when the lease was made, not the actual cost some years later.      The court recognizes that leasing a vehicle is an alternative method of financing, as the debtor argues. If there were not specific statutes, the court would have no difficulty using its equitable powers to determine that a leased vehicle is subject to the cramdown provisions of section 1325(a)(5) of the Code. However, the extensive applicable statutory law leaves no room for the court to proceed equitably. Accordingly, the debtor's position cannot be sustained.      For the foregoing reasons, the objection of Mazda American to the debtor's plan will be sustained, and confirmation denied. Mazda's motion to assume or reject will be granted, and the debtor will have 30 days from the effective date of an appropriate order to assume the lease or it will be deemed rejected. Mazda's motion for relief from the automatic stay will be granted, effective on the date the lease is deemed rejected. The debtor may have a stay pending appeal, provided that she makes her regular lease payments and maintains insurance on the truck and otherwise performs all her obligations under the lease except those which are already past due.      Counsel for Mazda shall submit appropriate orders regarding plan confirmation, assumption of the lease, and relief from the automatic stay. Counsel for the debtor shall submit an appropriate order regarding the stay pending appeal, if she desires such a stay.
Dated: January 19, 1997                                                                     _______________________                                                                                                            Alan Jaroslovsky                                                                                                            U.S. Bankruptcy