In Re Marlene A. Penrod

• Decision Date: 16 July 2010
• Docket Number: No. 08-60037.,08-60037.
• Citation: 611 F.3d 1158
• Parties: In re Marlene A. PENROD, Debtor.Americredit Financial Services, Inc., Creditor-Appellant,v.Marlene A. Penrod, Debtor-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

611 F.3d 1158

In re Marlene A. PENROD, Debtor.Americredit Financial Services, Inc., Creditor-Appellant,v.Marlene A. Penrod, Debtor-Appellee.

No. 08-60037.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 5, 2009.

Filed July 16, 2010.

William M. Burke, Costa Mesa, CA, and Randall P. Mroczynski, Cooksey Toolen Gage Duffy & Woog, Costa Mesa, CA, for the creditor-appellant.

Kenneth N. Klee, Klee, Tuchin, Bogdanoff & Stern LLP, Los Angeles, CA, and Craig V. Winslow, San Mateo, CA, for the debtor-appellee.

Jan T. Chilton, Severson & Werson, San Francisco, CA, and James J. White, Ann Arbor, MI, for amici curiae American Financial Services Association, National Automobile Dealers Association, and California Bankers Association.

Barkley Clark and Katherine M. Sutcliffe Becker, Stinson Morrison Hecker LLP, Washington, D.C., for amici curiae GMAC LLC, Ford Motor Credit Company LLC, Wells Fargo Bank, N.A., Bank of America, N.A., America Honda Finance Corp., and Toyota Motor Credit Corp.

M. Jonathan Hayes, Northridge, CA, for amici curiae Professors Ingrid M. Hillinger, Michael Hillinger, Adam J. Levitin, and Jean Braucher.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel Markell, Klein, and Jury, Bankruptcy Judges. BAP Nos. 07-1360, 07-1368.

Before ALFRED T. GOODWIN and WILLIAM A. FLETCHER, Circuit Judges, and RICHARD MILLS, District Judge.^*

OPINION

MILLS, District Judge:

The question presented in this case is whether a creditor has a purchase money security interest in the “negative equity” of a vehicle traded in at the time of a new vehicle purchase. Because we answer this question in the negative, we affirm the decision of the Bankruptcy Appellate Panel (“BAP”).

I. BACKGROUND

In September 2005, Marlene Penrod purchased a 2005 Ford Taurus from a California Ford dealership. According to the figures recited by the BAP, ¹ the price of the car, including tax and license, was approximately $25,600. Penrod traded in her 1999 Ford Explorer and paid approximately $1,000 down for her new vehicle. She owed over $13,000 on the Explorer and she received $6,000 in credit for the vehicle. Therefore, there was over $7,000 in “negative equity” on the trade-in vehicle.

The dealership paid off the remaining balance on the Explorer and added the negative equity to the amount financed. Penrod financed approximately $31,700 in order to purchase a vehicle that cost approximately $25,600. According to the contract, Penrod was to pay twenty percent interest on the loan. The dealership subsequently assigned the contract to AmeriCredit Financial Services.

523 days after purchasing the Ford Taurus, Penrod filed for bankruptcy protection under Chapter 13. She still owed $25,675 to AmeriCredit, which included the negative equity from the Ford Explorer. In her Chapter 13 plan, Penrod proposed to bifurcate AmeriCredit's claim into secured and unsecured portions. AmeriCredit objected to the plan, claiming it had a purchase money security interest in the entire amount, including the negative equity.

The bankruptcy court held that AmeriCredit did not have a purchase money security interest in the portion of the loan related to the negative equity charges. However, the bankruptcy court acknowledged that AmeriCredit had a purchase money security interest in the remaining balance. In doing so, the bankruptcy court adopted the dual status rule, which allows part of a loan to have non-purchase money status, while the remainder is covered by a purchase money security interest.²

The bankruptcy court decision was affirmed by the BAP in a published opinion. AmeriCredit challenges the BAP's ruling in this appeal.

II. STANDARD OF REVIEW

“We review decisions of the BAP de novo and apply the same standard of review that the BAP applied to the bankruptcy court's ruling.... We also review de novo the bankruptcy court's and the BAP's interpretations of the bankruptcy statute.” Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1090 (9th Cir.2009) (citations omitted).

III. DISCUSSION

A.

AmeriCredit has placed great emphasis on the decisions of the other circuit courts of appeal. In total, over some strong dissents, eight circuits have held that a creditor has a purchase money security interest in the negative equity of a debtor's trade-in vehicle. Nuvell Credit Corp. v. Westfall (In re Westfall), 599 F.3d 498 (6th Cir.2010); In re Howard, 597 F.3d 852 (7th Cir.2010); Reiber v. GMAC, LLC (In re Peaslee), 585 F.3d 53 (2d Cir.2009) (per curiam) (adopting the response to a certified question of a divided New York Court of Appeals In re Peaslee, 13 N.Y.3d 75, 885 N.Y.S.2d 1, 913 N.E.2d 387 (2009)); Ford Motor Credit Co. v. Dale (In re Dale), 582 F.3d 568 (5th Cir.2009); Ford Motor Credit Co. v. Mierkowski (In re Mierkowski), 580 F.3d 740 (8th Cir.2009); Ford v. Ford Motor Credit Co. (In re Ford), 574 F.3d 1279 (10th Cir.2009); In re Price, 562 F.3d 618 (4th Cir.2009); and Graupner v. Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11th Cir.2008).

We decline to adopt the reasoning of our sister circuits. We acknowledge that our decision creates a circuit split, and we do not do this lightly. However, we are persuaded by the well-reasoned decision of Bankruptcy Judge Markell and his colleagues on the BAP.

This appeal involves the application of 11 U.S.C. § 1325(a)(*)-a paragraph added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). The paragraph is commonly called the “hanging paragraph” because it was added to the end of § 1325(a) without a number.

The hanging paragraph prevents the bifurcation of certain claims. Bifurcation occurs when a creditor's claim is split into secured and unsecured claims. The hanging paragraph states:

For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [ sic ] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

11 U.S.C. § 1325(a)(*).

The only requirement from the hanging paragraph that is at issue in this case is whether there was a purchase money security interest in the negative equity in the trade-in vehicle.

The term “purchase money security interest” is not defined in the bankruptcy code. In bankruptcy, property interests are usually defined by state law. See Butner v. United States, 440 U.S. 48, 54-57, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). California has adopted the relevant portion of Revised Article 9 of the Uniform Commercial Code (“U.C.C.”) and the U.C.C. Official Comment. Purchase money security interest is defined in U.C.C. § 9-103, and in California Commercial Code § 9103.

The code does not provide a precise, encapsulated definition of purchase money security interest, but rather a string of connected definitions. The relevant language provides that “[a] security interest in goods is a purchase money security interest ... [t]o the extent that the goods are purchase money collateral with respect to that security interest.” Cal. Comm.Code § 9103(b). “ ‘Purchase money collateral’ means goods or software that secures a purchase money obligation.” Cal. Comm.Code § 9103(a)(1). “ ‘Purchase money obligation’ means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.” Cal. Comm.Code § 9103(a)(2).

In plain English, a purchase money security interest arises when a person buys a good and the seller (if a dealer financed transaction) or lender (if the sale is financed by a loan) retains a security interest in that good for all or part of the price. Purchase money security interests have long been favored at law, and enjoy “super-priority” rights over other types of security interests and liens. See Grant Gilmore The Purchase Money Priority, 76 Harv. L.Rev. 1333 (1963).

B.

With all of the foregoing as background, we arrive at the key issue of this appeal-the meaning of “price” for the purposes of the purchase money security interest. The definition is found in the Official Comment.

As used in subsection (a)(2), the definition of “purchase-money obligation,” the “price” of collateral or the “value given to enable” includes obligations for expenses incurred in connection with acquiring rights in the collateral, sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney's fees, and other similar obligations.

U.C.C. § 9-103 cmt. 3.

AmeriCredit argues that the negative equity related to the Ford Taurus Penrod traded in is an “expense[ ] incurred in connection with acquiring rights in the collateral.” In doing so, AmeriCredit places more weight on this phrase than it can bear.

The payment of Penrod's remaining debt on her 1999 Ford Explorer cannot easily be characterized as an “expense.” It is the payment of an antecedent debt, not an expense incurred in buying the new vehicle. See In re Peaslee, 13 N.Y.3d at 83, 885 N.Y.S.2d 1, 913 N.E.2d 387 (Smith, J., dissenting) (“A refinanced loan is not, in accounting terms, properly speaking an ‘expense’ at all; it is the substitution of a new liability for an old one.”). AmeriCredit claims that the transactions are closely connected, and that the requirements of Comment 3 are satisfied as a result. While all things are connected at some level, the question here is whether the negative equity on Penrod's Ford Explorer was sufficiently connected to the purchase of the Ford...