Negative Equity in Vehicles

In re: Penrod, was a case with a ninth circuit Bankruptcy Appellate Panel said looking to the Uniform Commercial Code, the panel found the negative equity from a trade and does not constitute a “purchase money security interest” as required by the hanging paragraph.  Negative equity is the term given when a consumer trades in a car that has more debt against it than it is worth, and the new seller rolls the deficiency on the old car into the debt on the new. 

The Court turned to the UCC definition of PMSI, inhaled the negative equity is not a part of the price of the vehicle, rather it is the auto seller’s assumption of one of the debtors antecedent debts.

The panel also declined to us California’s doctrine of In pari materia to incorporate a definition from the California automobile and sales law into a term in the UCC, stating it would require using the state law based interpretive rule to construe how a federal statute would incorporate a state statute which was too convoluted to withstand any rigorous analysis.  The panel adopted the dual status rule, which allows the creditor to receive purchase money status for that portion of the collateral not allocable to negative equity.