Memorandum of Decision Re: Car Lease

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re MICHAEL and APRIL PAUL,                                                                       No.. 96-12141        Debtors. ___________________________/
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 (Bkrtcy.D.Idaho 1995).      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                                                         _______________________                                                                                                       Alan Jaroslovsky                                                                                                       U.S. Bankruptcy