In re Penrod, 08–60037.

• Decision Date: 28 February 2011
• Docket Number: No. 08–60037.,08–60037.
• Parties: In re Marlene A. PENROD, Debtor,AmeriCredit Financial Services, Inc., Appellant,v.Marlene A. Penrod, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

636 F.3d 1175

11 Cal. Daily Op. Serv. 2617

2011 Daily Journal D.A.R. 3175

In re Marlene A. PENROD, Debtor,AmeriCredit Financial Services, Inc., Appellant,

v.Marlene A. Penrod, Appellee.

No. 08–60037.

United States Court of Appeals, Ninth Circuit.

Feb. 28, 2011.

OPINION TEXT STARTS HEREKenneth N. Klee, Klee, Tuchin, Bogdanoff & Stern LLP, Los Angeles, CA, for Debtor.Randal Paul Mroczynski, Cooksey Toolen Gage Duffy & Woog, William M. Burke, Costa Mesa, CA, for Appellant.Craig Vincent Winslow, Esquire, Law Offices of Craig V. Winslow, San Mateo, CA, for Appellee.Before: ALFRED T. GOODWIN and WILLIAM A. FLETCHER, Circuit Judges, and RICHARD MILLS, Senior District Judge.^*Order; Dissent by Judge BEA.

ORDER

Judge W. Fletcher has voted to deny the petition for rehearing en banc, and Judges Goodwin and Mills so recommend.

A judge of the court called for a vote on the petition for rehearing en banc. A vote was taken, and a majority of the active judges of the court failed to vote for en banc rehearing. Fed. R.App. P. 35(f).

Appellant's petition for rehearing en banc, filed August 30, 2010, is DENIED.

BEA, Circuit Judge, joined by O'SCANNLAIN, TALLMAN, and CALLAHAN, Circuit Judges, dissenting from the denial of rehearing en banc:

The panel reads Congress's revisions to the Bankruptcy Code to mean the exact opposite of what the plain language says. In re Penrod, 611 F.3d 1158, 1159 (9th Cir.2010).¹ In doing so, the panel renders the relevant statute, 11 U.S.C. § 1325(a)(*), completely meaningless. In contrast, each of the other eight circuits ² to address this statute have been unwilling to re-write its plain language, and have instead enforced it. Further, by ignoring how automobiles are actually financed, the panel's revision leaves an already struggling auto industry in perilous waters and affects thousands of commercial transactions each year. Thus finding ourselves on the wrong end of an eight to one circuit split, we respectfully dissent from the denial of rehearing en banc.

I.

This is an appeal from a decision by the Bankruptcy Appellate Panel (“BAP”), affirming a decision by the bankruptcy court confirming Marlene Penrod's Chapter 13 Plan. Penrod's reorganization plan listed a debt for a loan made to her for the purchase of a new Ford Taurus automobile. Although the entire loan was secured by the Taurus, she sought to use 11 U.S.C. § 506 of the Bankruptcy Code to convert this loan into a “secured” portion (for the value of the Taurus) and an “unsecured” portion reflecting the amount that the dealer had paid a bank to discharge the unpaid balance of her loan on her trade-in car, a Ford Explorer. Penrod owed more on the Explorer than its agreed trade-in value, and this difference is known in the auto trade as “negative equity.” The bankruptcy court ruled that the negative equity portion of the loan could be treated as unsecured debt. The BAP affirmed this ruling, and the three-judge panel affirmed the BAP.

II.

Like millions of car purchasers every year, Marlene Penrod went into a dealership with an old car, a 1999 Ford Explorer, wanting to purchase a new car, a 2005 Ford Taurus. She held only registered, not legal, title to the Explorer. Her lender for the Explorer held legal title until she paid off the remainder of the loan. To get legal title to her Explorer, which she needed to trade it in for the Taurus, Penrod needed the entire debt on the Explorer paid off.

Now place yourself in the shoes of the Taurus dealer. From the dealer's perspective, the total purchase price of the new Taurus must include both the price for the Taurus, and the total amount of negative equity paid off by him to discharge Penrod's debt on her old Explorer. Now ask yourself the critical question, a question which the panel apparently failed to consider: Would anyone extend this line of credit and pay off the buyer's negative equity in her old car if he could not get a purchase money security interest (“PMSI”) ³ in the total amount of debt he assumed? Not if he wanted to stay in business.

The specifics of this case make this point abundantly clear.⁴ The liability Penrod agreed to assume was as follows:

As one can see, the amount of money the dealer paid the bank is every bit as much a part of the dealer's cost to sell the Taurus as is the factory invoice. It is part of the “purchase money loan” because the loan to pay off the balance owed on the Explorer is part of the purchase of the Taurus.

Before Penrod filed for bankruptcy, AmeriCredit had a secured loan for the entire balance left on the $31,600 loan for the Taurus. Had Penrod failed to pay any part of this loan, AmeriCredit was entitled to repossess the Taurus, a quick and effective method to persuade Penrod to keep up on her payments. However, after the bankruptcy court's ruling, AmeriCredit had only a partially secured loan, and a partially unsecured loan. All Penrod had to pay off was the balance on the $25,600 and she could fend off repossession of the car. She could fail to pay the balance of the $6,000 in negative equity and AmeriCredit would have no right to repossess the Taurus. It would have to line up with the unsecured creditors in bankruptcy. So this $6,000, that was once secured by the Explorer, and then by the Taurus, was converted into an unsecured debt in the class with general unsecured debtors—something neither the bank nor the dealer would ever have agreed to.

The distinction made by the panel opinion between the loan paid off and the new loan is artificial at best. In re Penrod, 611 F.3d at 1162. Is there any doubt that the loan company which held title to the old Explorer had a purchase money secured interest? No. Then why should the fact that the old loan is rolled into a new one in the purchase of the Taurus make a difference? It shouldn't.

Neither loan would ever have been made by the car companies absent a secured interest. The debtor should not be able to turn a secured loan into an unsecured loan just by deciding to buy a newer car. This change is a complete reversal of the rules by which thousands of loans have been made in one of this country's largest industries. In this economy, such a ruling hardly helps the already struggling car industry. As the panel recognized, approximately one-third of the car sales in America involve a trade-in vehicle with a negative equity balance. In re Penrod, 611 F.3d at 1162 (citing In re Howard, 597 F.3d 852, 857–58 (7th Cir.2010)). According to the U.S. Department of Transportation, automobile sales in the U.S. from 1998 to 2008 have ranged from 6.8 to 8.1 million cars each year.⁵ So the panel's opinion could easily affect thousands of transactions each year. This prospect is not simply an ancillary consideration, it is a practical reality that was well-understood by Congress and was the cornerstone of the analysis Congress set forth for us to follow.

III.

Before the amendment of the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), one of the benefits of filing a Chapter 13 bankruptcy was that under § 506(a) the debtor could bifurcate a secured, unavoidable debt, with one part representing the amount of the value of the collateral, and the deficiency being treated as an unsecured claim. But then came § 1325(a)(*). After is was enacted, all this changed.

In 2005, as part of the Bankruptcy Code reform, Congress changed the rules about bifurcating loans into secured and unsecured claims:

For purposes of paragraph (5) [secured claims], section 506 [which limits the amount of a secured claim to the value of the collateral securing the claim, in this case the value of the Taurus] 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 [period] preceding the date of the filing of the petition [Penrod bought the Taurus 523 days before she filed for bankruptcy], 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 [everyone agrees the Taurus was for Penrod's personal use]....

11 U.S.C. § 1325(a)(*) (emphasis added). In other words, this statute provides that AmeriCredit's secured claim is not limited to the value of the Taurus, but rather extends to the whole value of the loan made to effect the purchase of the Taurus, if AmeriCredit has a PMSI.

Keeping the entire loan, including negative equity, as a secured debt appears to be exactly what Congress intended. 11 U.S.C. § 1325(a)(*) was added as part of BAPCPA. See Pub.L. 109–8, § 306(b), 119 Stat. 80 (2005). The title of this section is Giving Secured Creditors Fair Treatment in Chapter 13, and this section specifies its purpose as “Restoring the Foundation for Secured Credit.” The plain language of the statute clearly says that “Section 506 shall not apply” in to these loans. 11 U.S.C. § 1325(a)(*). Section 506 is the only provision that allowed Penrod to bifurcate her loan in the first place. The panel's holding not only disregards the plain language of the statute, it also undermines this purpose.

The panel says that § 1325(a)(*) does not apply because AmeriCredit did not have a PMSI in the negative equity it paid off so Penrod could use the Explorer as a trade-in for the Taurus. Under Bankruptcy law, what constitutes a PMSI—as with other types of property interests—is usually determined 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, where the parties reside and this transaction took place, has adopted the relevant portion of Revised Article 9 of the Uniform Commercial Code (“U.C.C.”) and the U.C.C. Official Comments. This is particularly useful because the other circuits to address this issue have also involved transactions in states that had adopted Article 9 of the U.C.C.

A PMSI is defined in California Commercial Code §...