Court Opinion

ID: 5485867
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:12:19.978721+00
Date Added: 2024-06-11T08:33:40.967251
License: Public Domain

Smith, J. (dissenting).
The majority interprets the term “purchase-money security interest” (PMSI) in the Uniform Commercial Code (UCC) without considering what a PMSI is or why it exists. When the nature and purpose of a PMSI are understood, I think it becomes apparent that the majority’s interpretation is wrong.
*83I
Before turning to the nature and function of a PMSI, I will discuss the language of UCC 9-103 and of Comment 3 accompanying it—considering this language, as the majority does, essentially in a vacuum. Even from that viewpoint, I do not find the majority’s interpretation convincing.
As the majority explains, the UCC definitions of a PMSI, “purchase-money collateral” and “purchase-money obligation” interlock (see majority op at 80). The critical definition is of “purchase-money obligation”: “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” (UCC 9-103 [a] [2]). The question the Second Circuit has asked us is, in substance, whether “price” or the more cumbersome term “value given to enable the debtor to acquire” includes the obligation of an automobile purchaser to a seller, or money borrowed by such a purchaser from a lender, when that seller or lender, in connection with the purchase of a new car, refinances the purchaser’s “negative equity”—i.e., the amount the purchaser owes on her old car in excess of the old car’s value. “Price” and “value given to enable” are not defined in the statute but are explained in Comment 3 to UCC 9-103:
“As used in subsection (a) (2), the definition of ‘purchase-money obligation,’ the ‘price’ of collateral or the ‘value given to enable’ includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney’s fees, and other similar obligations.”
Simply from reading this language, I find it a stretch to say that an obligation for refinanced negative equity is among the “expenses incurred in connection with acquiring” a new car. A refinanced loan is not, in accounting terms, properly speaking, an “expense” at all; it is the substitution of a new liability for an old one. The majority finds that negative refinancing is included in the catchall phrase “other similar obligations.” But the items listed in the comment are essentially transaction costs (see In re Mitchell, 379 BR 131,137 n 8 [Bankr, MD Tenn 2007]), and refinanced negative equity is not “similar” to them; it will *84typically be larger, and more readily separable from the purchase transaction itself, than such things as sales taxes, duties and finance charges.
Still, I am willing to concede that the terms “price” and “value given” in UCC 9-103 (a) (2), as explained by Comment 3, are ambiguous if read without reference to the purpose for which that statute was enacted. When that purpose is considered, however, the ambiguity disappears.
II
The reason why a PMSI is defined in article 9 of the UCC is that certain sections of that article “provide special priority rules for purchase-money security interests” (UCC 9-103, Comment 2). Most important, under UCC 9-324 (a), a PMSI has, with certain exceptions, “priority over a conflicting security interest in the same goods.” This means that someone who sells goods on credit, or lends money to finance their purchase, can get a lien on the goods that is superior to the lien of a previous lender, even if that lender has a perfected security interest in all of the buyer’s property, whenever acquired. The general idea is that someone who provides the credit that makes possible the purchase of goods should have the first claim to them. As the Bankruptcy Appellate Panel of the Ninth Circuit has explained:
“Holders of PMSIs in goods or software can obtain priority over a prior-filed lien; this is an exception to the general ‘first in time is first in priority’ structure used by the UCC. UCC § 9-324. This exception has generally been justified on equitable notions: it protects vendors of goods from after-acquired property clauses generally used by banks and financiers. See [2 GRANT] GILMORE [Security Interests in Personal Property § 28.1], at 779 (‘What might be called the “Don’t be a Pig” school of advice to Article 9 lenders has a fashionable currency and may be expected to have some influence on lending patterns.’); James J. White, Reforming Article 9 in Light of Old Ignorance and the New Filing Rules, 79 MINN. L.REV. 529, 562 (1995) (‘[T]he most persuasive claim for purchase money priority is the fairness argument—that reasonable businesspeople expect to have priority when they sell goods from their own stock.’)” (In re Penrod, 392 BR 835, *85845-846 [BAP 9th Cir 2008]; see also Gilmore, The Purchase Money Priority, 76 Harv L Rev 1333 [1963].)
Thus, the Second Circuit’s question—whether a “purchase-money obligation” (i.e., an obligation secured by a PMSI) includes “the portion of an automobile retail instalment sale attributable to a trade-in vehicle’s ‘negative equity’ ”—may be rephrased in this way: “Is a lien resulting from the refinancing of a trade-in vehicle’s ‘negative equity’ entitled to the special priority given PMSIs over other liens by UCC article 9?” When the question is asked that way, I do not see how the answer can be yes. The whole idea of a PMSI is that a seller or lender who finances the purchase of goods has a unique interest, superior to the interest of other lenders, in the goods thus purchased. I can imagine no reason to enlarge the priority lien of that seller or lender because, as part of the same transaction, it refinances the debt remaining from another purchase that took place years ago. As an Appellate Division case interpreting UCC article 9 recognizes, “a loan procured to satisfy a pre-existing debt” is inconsistent with the basic idea of a PMSI, which secures “an advance ‘enabling] the debtor to acquire rights in . . . the . . . collateral’ (UCC 9-107 [b])” (General Elec. Capital Commercial Automotive Fin. v Spartan Motors, 246 AD2d 41, 50 [2d Dept 1998] [brackets and ellipses in original]).
Seen in this light, the question the Second Circuit has asked us must be answered no.
Ill
It may well be that the answer the majority gives to the Second Circuit’s question, though wrong as a matter of state law, will produce a just result in this case—or, at least, a result more consistent with Congress’s purpose in enacting the “hanging paragraph” as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The purpose of the hanging paragraph, as I understand it, is to protect sellers and other financiers of automobile purchases against buyers who go bankrupt shortly after buying cars, and then use the “cram down” provision of the Bankruptcy Code to keep the cars without paying all of the debt they incurred to purchase them. This abuse may well extend to transactions that include “negative equity,” and I can understand the rationale for adopting an interpretation of the hanging paragraph that reaches such transactions.
*86But we have not been asked to interpret, and in this federal case have no power to interpret, the hanging paragraph or any other provision of federal law. The Second Circuit has already decided, as have many other federal courts, that the words “purchase money security interest” in the hanging paragraph must be interpreted according to state law—in other words, according to article 9 of the UCC, which was written long before BAPCPA or the hanging paragraph existed. I believe the majority may have overlooked this point, and adopted an interpretation better suited to the purposes of BAPCPA than to the purposes of the UCC.
If my surmise is correct, we are not the first court to suffer this confusion. In In re Graupner (537 F3d 1295, 1302 [11th Cir 2008]), a Federal Court of Appeals, interpreting the UCC as the majority here has, defended its interpretation as comporting “with what Congress intended in enacting BAPCPA.” Even more recently, in In re Price (562 F3d 618, 628 [4th Cir 2009]), another Federal Court of Appeals defended the same result as coinciding “with Congress’s intent in enacting the hanging paragraph.” Neither court explained how Congress’s intent in enacting BAPCPA could be relevant to the correct interpretation of the UCC.
But the apparent confusion of the Graupner and Price courts in interpreting the UCC is of less consequence than the majority’s error today. Our interpretations of state law are binding precedents. If the scope given to a PMSI by the UCC becomes important in some future case involving the sort of issue the UCC was written to resolve—a priority dispute between creditors under state law—today’s decision may present a significant problem. Perhaps a future court will solve the problem by limiting the majority’s holding to the peculiar context that produced it. Until and unless that happens, today’s decision will becloud the clarity and predictability that the authors of article 9 were seeking in enacting the statutes governing PMSIs.
Judges Graffeo, Read and Jones concur with Judge Pigott; Judge Smith dissents and votes to answer the certified question in the negative in a separate opinion in which Chief Judge Lippman and Judge Ciparick concur.
Following certification of a question by the United States Court of Appeals for the Second Circuit and acceptance of the question by this Court pursuant to section 500.27 of the Rules *87of Practice of the New York State Court of Appeals (22 NYCRR 500.27), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question answered in the affirmative.