6th Circuit Determines that Negative Equity Financing can be Protected From Cramdown

In the case of Nuvell Credit Corp. v. Westfall, the Sixth Circuit issued an opinion today that addressed treatment of negative equity financing under the "hanging paragraph" found at the end of 11 U.S.C. Section 1325(a). Negative equity financing occurs when the seller of a new vehicle accepts an old "trade in" vehicle that is subject to a lien in an amount that exceeds the value of the old trade in vehicle. Typically, the total purchase price for the new vehicle plus the "negative equity" for the old vehicle is paid by the consumer in installments, and the dealer retains a lien on the new vehicle as collateral to secure the consumer's future installment payments. The rationale of financing a vehicle at greater than 100% is questionable from both the consumer and lender perspective. Regardless, the Sixth Circuit construed Ohio's version of the UCC in determining that the negative equity financing portion of a vehicle purchase transaction is eligible for protection from cramdown as a purchase money security interest pursuant to the "hanging paragraph" of the Bankruptcy Code.