New York Law Review

Tag: UCC Article 9

  • In re Peaslee, 91 N.Y.2d 78 (2009): Defining Purchase-Money Security Interest and Negative Equity

    In re Peaslee, 91 N.Y.2d 78 (2009)

    Under New York’s Uniform Commercial Code, the portion of an automobile retail installment sale attributable to a trade-in vehicle’s negative equity constitutes part of the “purchase-money obligation” arising from the purchase of a new car.

    Summary

    Faith Ann Peaslee purchased a car, trading in a vehicle with negative equity. This negative equity was rolled into the financing of the new car. Peaslee later filed for bankruptcy, seeking to reduce GMAC’s secured claim to the retail value of the new vehicle, treating the remaining amount as an unsecured claim. GMAC argued that, due to the “hanging paragraph” in the Bankruptcy Code, the entire amount should be treated as a secured claim because it held a purchase-money security interest (PMSI). The Second Circuit certified the question to the New York Court of Appeals, asking whether negative equity qualifies as part of a purchase-money obligation under New York’s UCC. The Court of Appeals held that it does, finding that negative equity fits within the UCC’s definition of “price” or “value given.”

    Facts

    Faith Ann Peaslee purchased a 2004 Pontiac Grand Am, financing it through a retail installment contract. She traded in her existing vehicle, which had a negative equity of $5,980 (the outstanding lien exceeded the vehicle’s value). The dealer rolled this negative equity into the financing for the new car, along with other charges, resulting in a total financed amount of $23,180. The dealer paid off the lien on the trade-in, and the security interest in the new vehicle was assigned to GMAC, LLC.

    Procedural History

    Peaslee filed for Chapter 13 bankruptcy, proposing to reduce GMAC’s secured claim to the vehicle’s retail value. GMAC objected, arguing that the “hanging paragraph” of the Bankruptcy Code entitled it to a fully secured claim because of its purchase-money security interest. The Bankruptcy Court sided with Peaslee, holding that a PMSI under New York’s UCC did not include negative equity. The District Court reversed, finding that it did. The Second Circuit then certified the question to the New York Court of Appeals.

    Issue(s)

    Whether the portion of an automobile retail installment sale attributable to a trade-in vehicle’s “negative equity” is part of the “purchase-money obligation” arising from the purchase of a new car, as defined under New York’s U.C.C.?

    Holding

    Yes, because under New York’s Uniform Commercial Code, negative equity constitutes part of the “price” or “value given” for the new vehicle, thus creating a purchase-money obligation.

    Court’s Reasoning

    The Court reasoned that a purchase-money obligation arises when an obligation is incurred as all or part of the “price” of the collateral or for “value given” to enable the debtor to acquire the collateral. The court found that negative equity fits within either definition.

    Regarding “price,” the Court noted that while the UCC doesn’t define “price,” the official comments provide expansive examples, indicating a broad interpretation is intended. Comment 3 includes expenses incurred in acquiring rights in the collateral, sales taxes, finance charges, and “other similar obligations.” The Court reasoned that negative equity falls within these “other similar obligations,” as it is often “rolled in” as part of the overall price of the newer vehicle to facilitate the transaction. As the court states, “[I]ndeed, to exclude negative equity as part of the ‘price’ would serve to hinder commercial practices rather than facilitate them.”

    Regarding “value given,” the Court rejected the argument that negative equity is merely a payoff of antecedent debt. By paying off the debt on the trade-in, the lender is giving value to the debtor, enabling them to purchase the new vehicle. The court cited In re Price, 562 F3d 618, 625 (4th Cir 2009), to support this point.

    The Court also emphasized the “close nexus” requirement between the acquisition of collateral and the secured obligation, stating that without a payoff of the trade-in debt, the buyer cannot usually complete the purchase of the new car. In this case, Peaslee’s debt to GMAC was incurred at the time of the trade-in, under the same retail installment contract, and for the same purpose of purchasing the Grand Am.

  • Badillo v. Tower Insurance Company of New York, 92 N.Y.2d 790 (1999): Insurance Company’s Duty to Secured Creditors

    92 N.Y.2d 790 (1999)

    An insurance carrier is not liable in conversion to a secured creditor of its policyholder for paying out insurance proceeds directly to the policyholder, even if the creditor has filed UCC-1 financing statements covering the destroyed collateral, absent actual notice to the carrier of the creditor’s security interest.

    Summary

    The landlords (Badillos) of a supermarket sued the supermarket’s insurer (Tower Insurance) after Tower paid fire loss proceeds directly to the tenant (the supermarket), who was the policyholder and loss payee. The Badillos claimed Tower should have paid them as security interest holders, based on UCC-1 filings. The New York Court of Appeals held that Tower was not liable to the Badillos because the UCC-1 filing did not constitute sufficient notice to the insurance company; actual notice is required to impose a duty on the insurer to protect the secured party’s interest. This decision balances the UCC’s notice filing system with the need for efficient claims processing in the insurance industry.

    Facts

    The Badillos, as landlords, granted a security interest to 75-27 B & F Supermarket, Inc. (B & F) in all personal property, goods, chattels, and insurance proceeds at the supermarket to secure B & F’s obligations as a tenant. The Badillos filed UCC-1 financing statements describing the secured collateral. A fire destroyed the supermarket less than a year later. B & F carried casualty insurance with Tower Insurance. The Badillos were not named in the policy. B & F submitted a proof of loss, and Tower paid approximately $70,000 to B & F.

    Procedural History

    The Badillos sued Tower Insurance for conversion, alleging Tower should have paid them instead of B & F. Supreme Court initially denied Tower’s motion to dismiss. The Appellate Division affirmed. Later, Supreme Court denied the Badillos’ motion for summary judgment. The Appellate Division reversed and granted summary judgment to the Badillos, holding that the UCC-1 filings gave Tower constructive notice of the Badillos’ interest. Tower appealed to the New York Court of Appeals.

    Issue(s)

    Whether an insurance carrier, by paying fire loss proceeds to its policyholder, is liable in conversion to the policyholder’s landlords who had filed UCC-1 financing statements covering the destroyed collateral, when the insurance carrier had no actual notice of the landlord’s security interest.

    Holding

    No, because the UCC-1 filing, without more, did not alter Tower’s obligation to pay the proceeds to its insured, B & F. The Court distinguished between constructive notice (through UCC filings) and actual notice, requiring the latter to impose a duty on the insurer.

    Court’s Reasoning

    The Court of Appeals distinguished this case from Rosario-Paolo, Inc. v C & M Pizza Rest., where the carrier was liable to a third party because it had actual notice of their interest before paying the insured. Here, the Badillos only filed UCC-1 statements. The insurance contract was solely between B & F and Tower, obligating Tower to pay B & F. The Court stated that the UCC’s notice-filing concept is to warn potential purchasers, transferees, or other creditors, not to create an obligation for insurance carriers to conduct UCC searches before paying claims. The Court acknowledged UCC 9-306(1), which expands the definition of “proceeds” to include insurance payments, but clarified that this amendment affects only the rights between the debtor and creditor, not between the creditor and the insurance carrier, absent actual notice. Imposing a duty to search UCC filings would complicate and delay claim payments. The court analogized the insurance carrier to an account debtor protected under UCC 9-318(3) when making payment without actual notice of an assignment. The court suggested that the secured party could have protected its interests by being named as a loss payee or additional insured in the policy. The Court quoted UCC 9-303 Comment 1 stating that “A perfected security interest may still be or become subordinate to other interests * * * but in general after perfection the secured party is protected against creditors and transferees of the debtor and in particular against any representative of creditors in insolvency proceedings instituted by or against the debtor”.

  • Berkowitz v. Chavo International, Inc., 74 N.Y.2d 144 (1989): Perfecting Security Interests in Promissory Notes

    74 N.Y.2d 144 (1989)

    To perfect a security interest in a promissory note, a secured party must take possession of the note unless the note constitutes part of chattel paper, in which case perfection can occur either by possession or filing.

    Summary

    This case addresses whether a creditor’s judgment lien on a promissory note has priority over a prior security interest claimed by a financing company. Chavo International, Inc. (Chavo) assigned its receivables to Congress Talcott Corp. (Talcott) under a factoring agreement. Later, Chavo received a promissory note from Forest Lake Ltd. (Forest Lake) as payment for assets. Susan Berkowitz obtained a judgment against Chavo and sought to enforce it against the Forest Lake note. The court held that the promissory note was an ‘instrument’ under UCC Article 9, requiring Talcott to take possession to perfect its security interest. Because Talcott did not possess the note, Berkowitz’s judgment lien had priority.

    Facts

    Susan Berkowitz won an arbitration against Chavo for unpaid sales commissions and obtained a judgment in California, which was then filed in New York. Prior to Berkowitz’s claim, Chavo had a factoring agreement with Talcott, assigning all present and future receivables to Talcott as security. Subsequently, Chavo sold assets to Forest Lake, receiving a promissory note in return. The note directed payments to Talcott to reduce Chavo’s debt under the factoring agreement. Berkowitz then served a restraining notice on Forest Lake to enforce her judgment against the note’s proceeds.

    Procedural History

    Berkowitz sought to enforce her judgment against the promissory note. Talcott moved to vacate Berkowitz’s restraining notice, claiming a superior security interest. The Supreme Court granted Talcott’s motion, holding that Talcott had a perfected security interest prior to Berkowitz’s lien. The Appellate Division reversed, holding that the promissory note was an ‘instrument’ requiring possession for perfection, which Talcott lacked. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the promissory note from Forest Lake to Chavo constitutes an ‘instrument’ under UCC Article 9?

    2. Whether the promissory note constitutes ‘chattel paper’ which could be perfected by filing instead of possession?

    3. Whether Talcott’s factoring agreement gave them a security interest in the note.

    Holding

    1. Yes, because the promissory note is a writing that evidences a right to payment of money and is of a type that is transferred in the ordinary course of business.

    2. No, because the promissory note and purchase agreement, taken together, do not evidence a monetary obligation and a security interest in specific goods.

    3. Yes, because the factoring agreement between Talcott and Chavo assigned to Talcott all of Chavo’s receivables, including “all obligations of every kind at any time owing to [Chavo]”.

    Court’s Reasoning

    The court reasoned that the promissory note met the definition of an ‘instrument’ under UCC 9-105(1)(i) because it was a writing evidencing a monetary obligation. The court addressed and rejected Talcott’s argument that the note constituted chattel paper. “Chattel paper” is defined as writings that evidence both a monetary obligation and a security interest in specific goods or a lease of specific goods. The court found that the purchase agreement, taken together with the promissory note, did not create a security interest in the assets sold. Chavo retained no residual interest in the assets. The court stated, “[C]hattel paper and non-negotiable instruments lie somewhere on the spectrum between the negotiable instrument on the one hand and the account on the other; for the former possession is everything, for the latter it is nothing.” Since Talcott didn’t possess the instrument, they did not have a perfected security interest, so Berkowitz’s lien had priority. The court emphasized the importance of possession for perfecting a security interest in instruments, stating that if possession were not required, Talcott’s security interest would have prevailed. The court found that the factoring agreement was broad enough to encompass the promissory note because it included “all obligations of every kind at any time owing to [Chavo].”