Negative Equity = PMSI

4.13.10    By admin    Tags ,

In March, the Sixth Circuit Court of Appeals became the eighth circuit to hold that negative equity financing satisfies the definition of a purchase money security interest (PMSI).  See In re Westfall, 2010 WL 1050265 at *4 (6th Cir. Mar. 24, 2010).

Westfall involved a husband and wife who, eight months before filing for bankruptcy under Chapter 13, traded in their Chevy Blazer towards the purchase of a brand new Silverado.  The Blazer was subject to a $9,588 lien when the couple traded it in for a $6,000 price reduction on the Silverado.  The couple then obtained a loan which covered the newly-reduced price of the Silverado, plus the $3,588 still owed on the Blazer (the negative equity amount).  The loan was secured by the Silverado.

In the couple’s subsequent bankruptcy proceeding, the holder of the loan asserted a PMSI in the Silverado.  The bankruptcy court determined that the portion of the loan which financed the price of the Silverado constituted a PMSI, but that the portion which financed the payoff of the Blazer (the negative equity financing portion) was not a PMSI.   The district court affirmed.

On appeal, the Sixth Circuit examined the UCC’s definition of PMSI and determined that a security interest qualifies as a PMSI if the underlying obligation is incurred either “as all or part of the price” of the property or “for value given to enable” them to acquire rights in or the use of the property.  Recognizing that “price” and “value given” are not necessarily limited to a property’s price tag, and that the lending of funds to pay off negative equity is vital to some transactions, the Court held that negative equity financing satisfies the definition of PMSI.  The Court’s creditor-friendly holding in this case tracks the uniform position taken by the seven other circuits that have already addressed this issue.

Related content

  1. The Good, the Bad, and the Ugly: Bankruptcy, Divorce, and Marital Property
  2. Breadth and Priority of Security Interests in Inventory
  3. Racing to Res Judicata

Comments