Monday, April 13, 2009, 9:45 PM

4th Circuit Issues Pro-Creditor Ruling On Bankruptcy Code's Elusive "Hanging Paragraph"

Today in In re Price the Fourth Circuit issued a significant ruling on the "hanging paragraph" in Chapter 13 of the Bankruptcy Code (11 U.S.C. § 1325(a)). The Fourth Circuit decided how to apply the hanging paragraph to a secured claim when a portion of the claim relates to the financing of negative equity -- which, in a car transaction, refers to the difference between the value of the trade-in vehicle and the amount of the buyer’s preexisting debt on that trade-in.

The Fourth Circuit ruled for the creditor, Wells Fargo, holding that the hanging paragraph gives a creditor a purchase money security interest in the portion of a car loan that relates to negative equity on the trade-in vehicle. This was a significant issue on which other courts have split.

The Fourth Circuit relied on state law to interpret "purchase money security interest" in the hanging paragraph (i.e., UCC Article 9). And the Court was moved by, among other things, the fact that negative equity financing is integral to the debtor’s acquisition of a new car, as well as Congress’s intent to protect secured car lenders from having their claims bifurcated in Chapter 13.

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