IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
MICHAEL and APRIL PAUL, No.. 96-12141
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 debtors are lessees. They argue that the lease is a disguised
security transaction, so that they may in fact use section 1325(a)(5)(B) even though they leased
their car. The lessor, Ford Motor 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
The court recognizes that leasing a vehicle is an alternative method of financing, as debtors
argue. If the evidence before the court was that there was no economic difference between a
lease and a security transaction, or that Ford Motor Credit Company was intentionally
encouraging purchasers to lease in order to avoid the effects of section 1325(a)(5)(B), it would
rule in the debtors' favor. However, the evidence establishes that there are differences between
leases and traditional financing. There is no evidence that FMCC uses lease transactions as a
means of frustrating debtors' rights under the Bankruptcy Code. Accordingly, the court will
follow the appellate decision in Cole
and sustain the position of FMCC, which shall also have
relief from the automatic stay.
Counsel for FMCC shall submit appropriate forms of order.
Dated: October 7, 1996 _______________________