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07- 3962- bk ( L) I n Re: Fai t h Ann P eas l ee 1 U N IT E D S T A T E S C O U R T O F A P P E A LS 2 3 F O R T H E S E C O N D C IR C U IT 4 5

____________________________________ 6 7 August Term, 2008 8 9 (Argued: September 25, 2008 Dec ided: October 9, 2009) 10 11 Docke t Nos. 07-3962-bk(L ); 07-3952-bk( CON); 07-3964-bk( CON); 07-3986-bk( CON); 07- 12 3990-bk(CON) 13

____________________________________ 14 1 5 IN R E : F A IT H A NN P E A S LE E , J O N A T H A N T

. V A N M A N E N , M IC H A E L C O LO M B A I, 16 SHANNON A . COL OMBA I , PAMEL A D. JACKS ON 17 18

________________ 19 20 GE OR GE M. REI B ER, 21 22 Defendant- Appellant , 23 24 – v. – 25 26 GM AC , L L C, F ORD M OT OR CRE DI T CO MPA

NY , G EN ERA LMO TO RS A CCE PTA NC E 27 CORPOR ATI ON, SOVEREI GN B ANK, HSB C AUTO F I NANCE, 28 29 Plain tif fs- Ap pe lle es. 30 31

____________________________________ 32 33 Be fore : CAL AB RESI , STRAUB, a nd RAGGI , Circuit Judges

. 34 35

____________________________________ 36 37 Appea l from a judg ment of the United States District Court for the Western District of 38 New Y ork re versinga dec ision of the Ba nkruptcy Court and holding that neg ative equity on a 39 trade -in vehicle is included in the purcha se money secur ity interest ac company

ing a new c ar’ s 40 purcha se and is ther efor e prote cted f rom cra mdown by

the Hang ing Par ag raph of Section 1325 of 41 the B ankruptc y

Code. Be cause we f

ound that this case r aised a n important and re curr ing-2- 1 question of New

York state la

w—whethe r neg ative equity is included in a purc hase mone y 2 secur ity

interest under

New Y ork’s interpr etation of the Uniform Commercial Code 3 (“ U. C.C .” )—

we c e rt if ie d th a t qu e sti on

to t he Ne w Y or

k Co ur t of Ap pe a ls. Th e Court

of Ap pe a ls 4 answe red the question in the aff irmative. Ac cording ly , we now A FF I RM. 5 6 .

_ ________________________ 7 8 GEORGE M. REI BER, Roche ster, N.Y., Pro s e . 9 10 BA RKL EY CL ARK (Katherine M. Sutcliffe Be cker , on the brief ), 11 Stins on Morrison Hec ker, L L P, W ashing ton, D.C., for Plain tiffs12 Ap pe lle es G M A C , L L C an d F o r d M o t o r C r e d i tC o mp an y. 13 14 Matthew J. McGowan, Salter Mc Gowan Sylvia & L eonar d, Inc., 15 Providence , R.I ., for Plainti ff-Appellee Sovereig n Ba nk. 16 17 Mart in A . M oo ne y , M ark D. Gl a ste tte r, B onnie S. B ake r, De ily 18 Mooney & G lastetter, L L P, Albany , N.Y., for Plainti ff-Appellee 19 HSBC Auto Fina nce. 20 21 Richard L ieb, St. J ohn’s Univer sity School of L aw, Jamaica, N .Y. 22 (Ing rid M. Hillinger , of counsel), for Amici Curiae Ing ri d M

. 23 Hillinger , Michae l Hillinger , Adam J. L evitin, Michael M. White, 24 and Jean B ra uc he r i n Su

pp or t of De fe nd ant- Ap pe lla

nt. 25 26 L ewis W. Si eg el (Ta ra Tw omey , of counsel), Ne w York, N .Y., for 27 Amicus Curiae National Association of Consumer Ba nkruptcy 28 Attor ne y s in Sup po rt of De fe nd ant- Ap pe lla

nt. 29 30 J ames J. W hite, Ann Arbor , MI , for Amici Curiae Americ an 31 Financ ial Service s Association and National Automobile Dealer s 32 As so c iatio n in Sup po rt of Pla int if fs -A pp e lle e s. 33

_____________________________________ 34 1 Per Curiam : 2 Th is c on so lid a te d a pp e a l r a ise s th e qu e sti on

of wh e the r t he po rt ion

of an a uto mob ile 3 reta il inst alment sale oblig ation attributable to a tra de-in ve hicle’s “ neg ative equity” ( i.e ., debt 4 owed a

bove and be y ond the cur

rent c ollatera l value of the trade d-in vehicle ) should be-3- 1 considere d part of the purcha se-money secur ity interest ar ising fr om the sale of a vehicle, a

nd 2 there fore protec ted from c ramdown by the “ha ng ing pa ragraph” of Section 1325 of the 3 Ba nkruptcy Code. We assume fa

miliarity with the fac ts and the proc edura l history of this case as 4 outlined in our prior opinion, see I n re Peasle e , 547 F.3d 177 ( 2d Cir. 2008), 5 which in turn dre w from the B ankruptc y Court and District Court opinions in t his case, s ee G en. 6 Motors Acce

ptance Corp. v. Pe aslee , 3 73 B .R. 25 2 ( W.D .N .Y . 2 00 7) ; In re Pe aslee , 3 58 B .R. 7 545 (B ankr. W.D.N.Y. 2006)

. 8 I. Bac kgr ound 9 As we e x plained pre viously , car buy ers pur chasingnew c ars of ten eng ag e in what a

re 10 called pur chase -money transac tions in which a seller r etains an inter est in the g ood sold ( i.e. , the 11 car) to secur e pay ment of all or pa

rt of its price. T his interest is known as a “ purcha se-money 12 secur ity

interest,” or

PMS I

. See I

n re Peasle e , 547 F.3d at 180. Not infreque ntly , when c ar 13 buy ers tra de in old car s, the value of the debt the buyer ow es on the old ca r excee ds the ca

r’s 14 str e e t va lue . “ Ad jus tin g the sa le s c on tr a c t f or a ne w v e hic le to a c c ount f or thi s d e fi c ie nc y

is 15 known as ‘r olling in’ the ne g ative equity .” Id. Whe the r t his ne g a tiv e e qu ity

is p art of the PMSI 16 become s a matter of signific ance beca

use of 11 U.S.C. § 1325(a) (*), the so- called “ hang ing 17 para g raph.” Whil e a Cha pter 13 de btor may

g ener ally establish a plan that a llows her to re tain a 18 vehicle a

nd bifurcate a c reditor’ s claims into secure d and unsec ured por tions based on the value 19 of that vehic le in what is ca lled a cr amdown, see 11 U.S.C. § 1325(a)(5) (B ), the ha ng ing 20 para g raph e stablishes an exception. This provision prohibits t he cr amdown of PMSI s secur ed by 21 an automobile purc hased w ithin 910 day s of the debtor ’s bankr uptcy filing. See 11 U.S.C. §Th e ha ng ingpa ra g ra phwa s a dd e d to the B ank ru ptc y Cod e by the B ank ru ptc y Ab us e 1 Prevention and Consumer Prote ction Act of 2005 ( “B APCP A”) , Pub. L . No. 109-8, 119 Stat. 23. I t pr ov ide s in

fu ll: F or purp os e s o f p ara g ra

ph(5 ), se c tio n 5 06 sh a ll n ot a pp ly to a c la im d e sc ri be d in that pa ra g ra phif the cre ditor has a purchase money security intere

st securing the de bt t ha t is thesu bje c t of

thec lai m , the debt wa s incurre d within the 910-day [si c] prec edingthe date of

the filing of the pe tition, and the collatera l for that debt consists of a motor vehic le (a s defined in se ction 30102 of title 49) ac quired for the per sonal use of the debtor, or if collater al for that debt consists of any other thing of value, if the debt was inc urre d duringthe 1-year period pre cedingthat fi l i n g. Id. (empha sis added). As the Ne w Y or

k Co ur t of Ap pe a ls e xpla ine d, the re le va nt p ro vis ion s o f t

he U. C.C

. 2 interre late. Unde r N.Y. U .C.C. § 9-103(b), a se curity interest in a g ood “is a purc hase- money secur ity interest . . . to the extent that the g oods are purcha se-money collater al with respe ct to that secur ity interest.” See I

n re Peasle e , 13 N.Y.3d 75, 80 (2009) (quoting U.C.C.). “[P] urcha semoney collater al” is in turn def

ined as “ g oods or softwar e that sec ures a purcha se-money obligation incurred w ith respec t to that collatera l.” N.Y. U.C.C. § 9-103(a )(1) . This makes

“ p ur c h a s e - m o n e y

o b l i g a t i o n , ” d e f

i n e d i n§ 9

- 1 0 3 ( a ) ( 2 ) , th e k e y

t e r mf o r i n t e r p r e t i n g P M S I. -4- 1 1325(a) (*). 1 2 A PMSI is not defined in the hang ing pa ragraph or

elsewhe re in the f

eder al B ankruptc y 3 Code, and we have pr eviously held that state lawg overns its definition. See I n re Peasle e , 547 4 F.3d at 184. Specifica lly , we f ound that the def

inition of P MSIwas c ontrolled by the prope r 5 construction of “ purcha se-money obligation,” which Section 9-103( a)( 2) of the U .C.C. describes 6 a s an o bli g a tio n “ inc ur re d a s a ll o r p art

of the pr ic e of

the c oll a te ra l or

fo r v a lue g ive n to e na

ble 7 the debtor to a cquire rig hts in or the use of the c ollatera l if the value is in fa ct so used.” N .Y. 8 U.C.C. § 9-103(a) (2). Recog nizi ng both that this i ssue had not bee n addre ssed by any court of 2 9 the State of Ne w York a nd that it was ce rtain to rec ur, see I n re Peasle e , 547 F.3d at 183–84, we 10 c e rt if

ie d th e fo llo wi ngqu e sti on to t he Ne w Y or

k Co ur t of Ap pe a ls: 11 I s th e po rt ion of an a uto mob ile re ta il i ns ta lme nt s a le attr ibuta ble to a tr a de -i n 12 vehicle’ s “neg ative equity” a pa rt of the “ purcha se-money obligation” arisingfrom-5- 1 the purc hase of a new car , as def

ined under

New Y ork’s U.C.C.? 2 The Ne w York Court of A ppeals a cce pted ce rtification and, in a divided opinion issued 3 on J une 24, 2009, answ ere d the question in the aff irmative. On July

16, 2009, we invited the 4 parties to submit letter brief s on the eff

ect of the Court of Appe als’ dec ision. W e now r esolve 5 the c a se be fo re us by AF F I RMI

NGthe jud g me nt o f t

he Di str ic t Co ur

t. 6 II. Discussion 7 In it s inte rp re tatio n o f N .Y . U .C. C. § 9- 10 3( a )( 2) , th e Ne w Y or k Co ur t of Ap pe a ls 8 explained that there a re two w ay s that a purc hase- money obligation may

arise: “ (1) whe re the 9 obligor -the de btor-incur s an oblig ation as all or pa rt of the ‘ price ’ of the c ollatera l, or (2) where 10 ‘value ’ is g iven to enable the debtor to a cquire the collater al.” In re Pe aslee , 13 N.Y.3d at 80. 11 The c ourt conc luded that neg ative equity fits within either definition, id. , and found f urther, a s 12 Comment 3 to § 9-103 of the U.C.C. require s, that there w as a “ close ne x us betwee n the 13 a c qu isi tio n o f c oll a te ra l and the se c ur e d o bli g a tio n” be c a us e the fi na

nc ingof ne g a tiv e e qu ity

is 14 integ ral to the c ompletion of the sale of a new car , id. a t 82 . A s a

re su lt, the Court

of Ap pe a ls 15 c on c lud e d th a t th e po rt ion of an a uto mob ile re ta il i ns ta lme nt s a le a ttr ibuta ble to a tr a de -i n 16 vehicle’ s neg ative equity does constitute a pur chase -money obligation under Ne w York’ s U.C.C. 17 Id. 18 The Ne w York Court of A ppeals’ a nswer to our

cer tified question is determinative of the 19 case befor e us. We now know that, unde r Ne w York la w, neg ative equity

is considere d a 20 purcha se-money

obligation and there fore included in a PMSI . Acc ording ly , beca use the other 21 conditions for avoidingcra mdown under the hang ing pa ragraph w ere not contested by theIn decidingthe appe als from the ba nkruptcy court, the D istrict Court indicated that 3 “ther e is no dispute that three of the four conditions in § 1325 for avoidingcra mdown have be en met: eac h of the de btors incurre d debt by purcha sing a

motor vehicle f

or the de btor’s per sonal use within 910 day s prior to filing the bankruptc y petition.” Peaslee , 3 73 B .R. a t 25 7. In it s initial briefing befor e this Court, appellants vig orously contested the fourth condition: whether debt from pr eviously

purcha sed ca

rs, including those purcha sed more tha n 910 day s befor e the bankruptc y

filing, should be tr eate d as PMSIwhen it is “rolled in” to the de bt for a ne w purc hase. They made no a

rgument that the fa cts of this case might ca st doubt on the ex istence of any other require ment of the ha

ng ing pa ragraph. A ccor dingly , we tre at such que stions as waived. After our dec ision to certify , sever al other c ircuit courts a ddresse d the question at issue 4 here and, apply

ing the laws of va

rious states, held, like the Ne w York Court of A ppeals, that the amount financ ed under

a motor vehic le re tail instalment sale contra ct for ne g ative equity is part of a PMSI

. Se e In reDa le , — F.3d —, 2009 WL2857998, at *6 (5th Cir. Sept. 8, 2009); In re Mierkowski , —

F .3 d — , 2 00 9 WL

28 53 58 6, a t *2 (8 th C ir . Se pt. 8, 20 09 ); In reFo rd , 574 F.3d 12 79 , 1 28 5 ( 10 th C ir . 2 00 9) ; In re Price , 5 62 F .3 d 6 18 , 6 25 –2 8 ( 4th Cir . 2 00 9) . T he El e ve nth Circuit also rea ched this conc lusion in a case de cided be fore our ce rtification opinion. Se e In re Graupner , 537 F.3d 1295, 1302 ( 11th Cir. 2008). -6- 1 parties, debtor-a

ppellants’ entire claims, including those portions attributable to the payoff of 3 2 ne g a tiv e e qu ity

on the ir tr a de -i n v e hic le s, mus t be tr e a te d a s se c ur e d c la ims . A s a re su lt, 3 c re dit or -a

pp e lle e s are immun e fr om c ra mdo wn and bif ur c a tio n o f t

he ir fu ll s e c ur ity

int e re st i n 4 de bto r- a

pp e lla nts ’ c ars , in c lud ingthat po rt ion de ri vin g fr om t

he ne g a tiv e tr a de -i n v a lue of the ir 5 pr ior

c ars . 4 6 The judg ment of the District Court, which r ever sed the De cisions and Orde rs of the Ba nkruptcy Court for the Western D istrict of NewYork, is AF FI RMED.