The U.S. Court of Appeals for the Ninth Circuit recently affirmed the decision of the Bankruptcy Appellate Panel that a creditor does not have a purchase money security interest in the negative equity of a vehicle traded in at the time of a new vehicle purchase. A copy of the opinion is attached.
The debtor in a Chapter 13 bankruptcy case brought in
In a decision that creates a circuit split with eight other circuits, the Ninth Circuit affirmed the ruling of the Bankruptcy Appellate Court, declining to adopt the reasoning of its sister circuits. In doing so, the Ninth Circuit looked to the “hanging paragraph” provision of the Bankruptcy Code. By way of background, and as you may recall, in 2005, Congress amended Chapter 13 of the Bankruptcy Code by adding the "hanging paragraph" (so called because the paragraph is unnumbered), which prevents the bifurcation of a secured claim potentially into secured and unsecured portions when the creditor has a "purchase money security interest" in a motor vehicle acquired for the debtor’s personal use within 910 days of the debtor’s bankruptcy filing. At issue in this case is whether there was a PMSI in the negative equity in the trade-in vehicle.
The Court noted that the key issue of the appeal is the meaning of “price” for the purposes of a PMSI, given that a purchase money obligation, as defined in the Uniform Commercial Code, 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” and the Official Comment of the UCC defines “price” to include “obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest … and other similar obligations.”
The Court disagreed with the debt owner’s claim that the negative equity is an “expense,” rather, the Court noted that it is the payment of an antecedent debt, not “an expense incurred in buying the new vehicle.” Further, the Court found that the transactions of (1) combining a new vehicle purchase with (2) negative equity from an old vehicle as a “package deal” are not closely connected so as to satisfy the requirements of the UCC Official Comment and negative equity cannot call under the other similar obligations category of “price” as noted in the Official Comment.
The Court also disagreed with the debt owner’s claim that its position was in harmony with federal bankruptcy law, finding that the debt owner’s position is not consistent with the Bankruptcy Code, as under the Code, “security interests are given preferential treatment to the extent that the obligation relates to the receipt of truly new value, not just old obligations that have been repackaged.”
Ralph T. Wutscher
Kahrl Wutscher LLP
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