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In re Peaslee

June 24, 2009

IN THE MATTER OF FAITH ANN PEASLEE, ET AL.
GEORGE M. REIBER, APPELLANT,
v.
GMAC, LLC, FORD MOTOR CREDIT COMPANY, GENERAL MOTORS ACCEPTANCE CORPORATION, SOVEREIGN BANK, HSBC AUTO FINANCE, RESPONDENTS.



The opinion of the court was delivered by: Pigott, J.

This opinion is uncorrected and subject to revision before publication in the New York Reports.

The United States Court of Appeals for the Second Circuit, by certified question, asks us to decide whether "the portion of an automobile retail instalment sale attributable to a trade-in vehicle's 'negative equity' [is] a part of the 'purchase money obligation' arising from the purchase of a new car, as defined under New York's U.C.C.?" We find that it is.

I.

On August 28, 2004, Faith Ann Peaslee entered into a retail instalment contract for the purchase of a 2004 Pontiac Grand Am.*fn1 As part of the transaction, Peaslee traded in her vehicle, which had a negative trade-in value, or negative equity, of $5,980.*fn2 That amount was rolled into the financing of her new car along with other charges, resulting in financing totaling $23,180. The lien against the trade-in was paid off by the dealer, and the dealer's security interest in the new vehicle was assigned to GMAC, LLC.

Nearly two years after purchasing her new vehicle, Peaslee filed for Chapter 13 bankruptcy and a trustee was appointed to handle the estate. As part of her bankruptcy plan, Peaslee proposed that she retain possession of the vehicle and that, pursuant to United States Bankruptcy Code § 506 (a) (1),*fn3 GMAC's secured claim would be reduced to $10,950, representing the alleged retail value of the vehicle. Under Peaslee's proposal, the remaining amount owed to GMAC, $6,954.95, would be treated as an unsecured claim.

GMAC objected to this characterization of its claim and argued that, pursuant to the "hanging paragraph" set forth in Bankruptcy Code § 1325 (a), it was entitled to have the entire $17,904.95 treated as a secured claim. The "hanging paragraph," which was enacted as part of the Bankruptcy Abuse and Consumer Protection Action of 2005, states, in pertinent part, that:

"For purposes of paragraph (5), [Bankruptcy Code] 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 . . ." (emphasis supplied).

The Trustee moved to have the Bankruptcy Court determine that GMAC had a secured claim of $10,950 and only an unsecured claim for the balance. The Bankruptcy Court did just that, and held that the term "purchase money security interest" ("PMSI"), as set forth in New York's Uniform Commercial Code, did not include negative equity (358 BR 545, 558 [WD NY 2006]). The United States District Court for the Western District of New York reached the opposite conclusion (373 BR 252, 258-261 [WD NY 2007]). The Second Circuit, noting that Congress failed to provide a definition of purchase money security interest either in the hanging paragraph or elsewhere, concluded "that state law governs the definition of PMSI in the hanging paragraph" and certified to us the question of whether the New York Uniform Commercial Code considers that portion of a retail instalment sale attributable to the negative equity of a trade-in vehicle to be part of the purchase-money obligation arising from the sale of a new car (547 F3d 177, 184, 186 [2d Cir 2008]).

For the reasons that follow, we answer the question in the affirmative.

II.

"A security interest in goods is a purchase money security interest . . . to the extent that the goods are purchase-money collateral with respect to that security interest" (NY UCC § 9-103 [b] [1]). Purchase-money collateral is defined as "goods or software that secures a purchase-money obligation incurred with respect to that collateral" (NY UCC § 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" (NY UCC § 9-103 [a] [2] [emphasis supplied]). The UCC therefore establishes two ways that a purchase-money obligation may arise:

(1) where the obligor--the debtor-- incurs an obligation as all or part of the "price" of the collateral, or (2) where "value" is given to enable the debtor to acquire the collateral. We conclude that the ...


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