## Facts

- Consumer debtors bought new vehicles using retail installment contracts that included financing to pay off liens on their traded-in vehicles.
- In each transaction, the traded-in vehicle’s loan balance exceeded its value, creating “negative equity.”
- The negative equity was rolled into the amount financed for the new vehicle, and the new vehicle secured the resulting obligation.
- In Chapter 13 cases, the trustee disputed whether the negative-equity portion of the obligation qualified as a purchase-money obligation under New York U.C.C. § 9-103.
- The federal appellate court certified to New York’s highest court the question whether negative equity is part of a purchase-money obligation, and thus part of a purchase-money security interest (PMSI), in the new vehicle.

## Issues

1. Whether, under New York U.C.C. § 9-103, the portion of a new-vehicle retail installment obligation attributable to a trade-in’s negative equity is part of the “purchase-money obligation.”
2. If so, whether the creditor’s security interest in the new vehicle is a PMSI for the entire amount financed, including the negative-equity payoff.

## Decision

- The court answered the certified question yes: rolled-in negative equity is part of the purchase-money obligation under New York U.C.C. § 9-103.
- The court concluded the negative-equity payoff can be treated as part of the “price of the collateral” or as “value given to enable” the debtor to acquire rights in the new vehicle.
- As a result, the creditor’s security interest in the new vehicle qualifies as a PMSI for the full obligation, including the negative-equity component.

## Legal Principles

- Under New York U.C.C. § 9-103, a “purchase-money obligation” includes obligations incurred as all or part of the price of the collateral and obligations incurred for value given to enable the debtor to acquire rights in or use of the collateral.
- Financing that pays off a trade-in lien and is rolled into the new-car financing may constitute “value given to enable” acquisition of the new vehicle because it facilitates completing the purchase and obtaining rights in the collateral.
- The PMSI analysis treats the transaction functionally as an integrated purchase-money transaction rather than separating the negative-equity payoff as unrelated debt.

## Conclusion

The court held that negative equity rolled into a new automobile financing agreement is part of the purchase-money obligation under New York’s U.C.C., so the lender’s security interest in the new vehicle is a PMSI securing the entire financed amount, including the negative-equity payoff.


In re Peaslee, 13 N.Y.3d 75 (N.Y. 2009)