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PMSI car loan includes roll-over debt: Peaselee appeal

Peaslee (2nd Circuit Oct. 9, 2009): Peaslee is a Western District of New York Chapter 13 case appealed all the way to the Second Circuit Court of Appeals in New York City, which, in turn, certified the central issue of the case to the New York State Court of Appeals. In chapter 13, a car loan must be treated as fully secured, and paid in full as a secured claim, no matter how much the car is worth, if the loan is less than 2 1/2 years old and if it is a "purchase money security interest" (pmsi). PMSI is what is sounds like, a security interest that is granted to the lender in return for financing the purchase of something (a non-pmsi is a security interest given to a lender against property the borrower already owned.) When a borrower buys a car and finances the purchase with a car loan, the lender gets a lien against the car; that is a pmsi. In Peaslee, the question was whether the portion of a car loan that was rolled over from a prior car loan was pmsi. Often when a car buyer trades in an old car for a new one, the old car has a loan against it and the trade-in value of the old car is less than the amount of that loan. Often in that case the balance on the old loan that is not paid off by the trade-in is rolled over into the loan for the new car, so the borrower now owes all the money for the new car plus something left over from the old car.

In Peaslee, the debtor argued that the rollover portion of the old car loan should not be treated as a pmsi, but rather should be treated as an unsecured loan because it exceeded the value of the new car. The Bankruptcy Court (In re Peaslee 358 BR 545 (Judge Ninfo 2006), agreed with the debtor but, on appeal, the District Court reversed (373 BR 272, Judge Larimer 2007.) The case was appealed to the Second Circuit, which concluded that the definition of what is a pmsi is a state law issue, and they "certified" that question to New Yorkss highest court, the Court of Appeals (that is, the federal Court of Appeals asked the state court for a definitive interpretation of state law.) The Court of Appeals concluded that under New York's Uniform Commercial Code, the rolled-over balance on the old loan was part of the consideration in purchasing the new car, and so the whole loan should be considered pmsi (In re Peaselee, 13 NY 3rd 75.) Once the Second Circuit received that certified decision, it issued a short decision October 9, 2009 that for Chapter 13 purposes, the whole car loan, including the roll-over, was pmsi and had to be treated as fully secured.

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