General Electric Capital Commercial Automotive Finance, Inc. v. General Motors Acceptance Corporation

NY: Appellate Div., 2nd …
246 AD 2d 41, 675 NYS 2d 626 (1998)

ELI5:

Rule of Law:

A lender who advances funds to a debtor by reimbursing the debtor for a recent purchase of collateral can acquire a purchase-money security interest (PMSI) under UCC § 9-107(b), provided the loan and purchase transactions are 'closely allied' in substance and intent, regardless of the sequence of the fund transfers.

Facts:

In 1983, General Electric Capital Commercial Automotive Finance, Inc. (GECC) acquired a blanket security interest in all current and future inventory of Spartan Motors, Ltd. (Spartan), a car dealership.
On July 19, 1991, Spartan entered into a separate wholesale financing agreement with General Motors Acceptance Corporation (GMAC).
GMAC filed its security agreement and properly notified GECC that it expected to acquire purchase-money security interests in Spartan's inventory.
On May 7, 1992, Spartan purchased a Mercedes-Benz for $121,500 using its own funds.
On May 13, 1992, six days after the purchase, GMAC reimbursed Spartan for the full purchase price of the Mercedes.
On July 7, 1992, Spartan purchased a second Mercedes-Benz for $120,000 using its own funds.
On July 9, 1992, two days after the purchase, GMAC reimbursed Spartan for the full purchase price of the second Mercedes.
The two vehicles remained as unsold inventory in Spartan's showroom.

Procedural Posture:

GECC sued Spartan and GMAC in the Supreme Court, Dutchess County (the trial court of first instance) to determine the priority of liens on Spartan's inventory.
After Spartan filed for bankruptcy, GMAC took possession of and sold the two Mercedes-Benz vehicles.
GECC filed a motion for summary judgment against GMAC, arguing its security interest had priority.
The trial court granted summary judgment in favor of GECC, holding that GMAC's reimbursement did not create a purchase-money security interest.
Upon GMAC's motion for reargument, the trial court adhered to its original decision.
GMAC, as the appellant, appealed the trial court's judgment to this court (an intermediate appellate court).

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Does a lender who reimburses a debtor for a purchase after the debtor has already paid for and taken possession of the collateral acquire a purchase-money security interest under UCC § 9-107(b) that has priority over a previously perfected security interest in the same collateral?

Opinions:

Majority - Friedmann, J.

Yes, a lender who reimburses a debtor for a purchase after the debtor has taken possession of the collateral can acquire a valid purchase-money security interest. The court held that the UCC's definition of a PMSI should not be constrained by rigid formalities or the sequence of fund transfers. Instead, the critical inquiry is whether the loan transaction and the purchase transaction are 'closely allied.' In this case, GMAC's financing was closely allied with Spartan's purchases because the reimbursements occurred only days after the purchases, the arrangement was common in the industry and in the parties' course of dealing, and GMAC's financial commitment enabled Spartan to acquire the vehicles. The court reasoned that the intent of UCC § 9-107(b) is to liberalize the PMSI concept, and the parties' course of performance could modify the express terms of their written agreement.

Analysis:

This decision significantly clarifies the scope of a purchase-money security interest under UCC § 9-107(b) in New York by adopting the 'closely allied' test. It moves away from a strict, formalistic interpretation that would require the lender's funds to be advanced before or simultaneously with the debtor's acquisition of collateral. The ruling prioritizes the substance of the transaction and the parties' intent over the mere timing of payments, providing greater flexibility for financiers. This precedent strengthens the position of purchase-money lenders against creditors holding after-acquired property clauses, so long as a clear and timely connection between the loan and the specific purchase can be established.

Gunnerbot

AI-powered case assistant

Loaded: General Electric Capital Commercial Automotive Finance, Inc. v. General Motors Acceptance Corporation (1998)

Try: "What was the holding?" or "Explain the dissent"

Premium Feature