Appeal from a judgment of the United States District Court for the Western District of New York reversing a decision of the Bankruptcy Court and holding that negative equity on a trade-in vehicle is included in the purchase money security interest accompanying a new car's purchase and is therefore protected from cramdown by the Hanging Paragraph of Section 1325 of the Bankruptcy Code. Because we found that this case raised an important and recurring question of New York state law-whether negative equity is included in a purchase money security interest under New York's interpretation of the Uniform Commercial Code ("U.C.C.")-we certified that question to the New York Court of Appeals. The Court of Appeals answered the question in the affirmative. Accordingly, we now AFFIRM.
Argued: September 25, 2008
Before: CALABRESI, STRAUB, and RAGGI, Circuit Judges.
This consolidated appeal raises the question of whether the portion of an automobile retail instalment sale obligation attributable to a trade-in vehicle's "negative equity" (i.e., debt owed above and beyond the current collateral value of the traded-in vehicle) should be considered part of the purchase-money security interest arising from the sale of a vehicle, and therefore protected from cramdown by the "hanging paragraph" of Section 1325 of the Bankruptcy Code. We assume familiarity with the facts and the procedural history of this case as outlined in our prior opinion, see In re Peaslee, 547 F.3d 177 (2d Cir. 2008), which in turn drew from the Bankruptcy Court and District Court opinions in this case, see Gen. Motors Acceptance Corp. v. Peaslee, 373 B.R. 252 (W.D.N.Y. 2007); In re Peaslee, 358 B.R. 545 (Bankr. W.D.N.Y. 2006).
As we explained previously, car buyers purchasing new cars often engage in what are called purchase-money transactions in which a seller retains an interest in the good sold (i.e., the car) to secure payment of all or part of its price. This interest is known as a "purchase-money security interest," or PMSI. See In re Peaslee, 547 F.3d at 180. Not infrequently, when car buyers trade in old cars, the value of the debt the buyer owes on the old car exceeds the car's street value. "Adjusting the sales contract for a new vehicle to account for this deficiency is known as 'rolling in' the negative equity." Id. Whether this negative equity is part of the PMSI becomes a matter of significance because of 11 U.S.C. § 1325(a)(*), the so-called "hanging paragraph." While a Chapter 13 debtor may generally establish a plan that allows her to retain a vehicle and bifurcate a creditor's claims into secured and unsecured portions based on the value of that vehicle in what is called a cramdown, see 11 U.S.C. § 1325(a)(5)(B), the hanging paragraph establishes an exception. This provision prohibits the cramdown of PMSIs secured by an automobile purchased within 910 days of the debtor's bankruptcy filing. See 11 U.S.C. § 1325(a)(*).*fn1
A PMSI is not defined in the hanging paragraph or elsewhere in the federal Bankruptcy Code, and we have previously held that state law governs its definition. See In re Peaslee, 547 F.3d at 184. Specifically, we found that the definition of PMSI was controlled by the proper construction of "purchase-money obligation," which Section 9-103(a)(2) of the U.C.C. describes as an obligation "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." N.Y.
U.C.C. § 9-103(a)(2).*fn2 Recognizing both that this issue had not been addressed by any court of the State of New York and that it was certain to recur, see In re Peaslee, 547 F.3d at 183--84, we certified the following question to the New York Court of Appeals:
Is the portion of an automobile retail instalment sale attributable to a trade-in vehicle's "negative equity" a part of the "purchase-money obligation" arising from the purchase of a new car, as defined under New York's U.C.C.?
The New York Court of Appeals accepted certification and, in a divided opinion issued on June 24, 2009, answered the question in the affirmative. On July 16, 2009, we invited the parties to submit letter briefs on the effect of the Court of Appeals' decision. We now resolve the case before us by AFFIRMING the judgment of the District Court.
In its interpretation of N.Y. U.C.C. § 9-103(a)(2), the New York Court of Appeals explained that there are 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." In re Peaslee, 13 N.Y.3d at 80. The court concluded that negative equity fits within either definition, id.,and found further, as Comment 3 to § 9-103 of the U.C.C. requires, that there was a "close nexus between the acquisition of collateral and the secured obligation" because the financing of negative equity is integral to the completion of the sale of a new car, id. at 82. As a result, the Court of Appeals concluded that the portion of an automobile retail instalment sale attributable to a trade-in vehicle's negative equity does constitute a purchase-money obligation under New York's U.C.C. Id.
The New York Court of Appeals' answer to our certified question is determinative of the case before us. We now know that, under New York law, negative equity is considered a purchase-money obligation and therefore included in a PMSI. Accordingly, because the other conditions for avoiding cramdown under the hanging paragraph were not contested by the parties,*fn3 debtor-appellants' entire claims, including those portions attributable to the payoff of negative equity on their trade-in vehicles, must be treated as secured claims. As a result, creditor-appellees are immune from cramdown and ...