Penrod v. Americredit Fin. Servs., Inc. (In re Penrod)
| Decision Date | 10 May 2013 |
| Docket Number | Case No.: 12-CV-01548 YGR |
| Court | U.S. District Court — Northern District of California |
| Parties | IN RE MARLENE A. PENROD, Debtor. MARLENE A. PENROD, Appellant, v. AMERICREDIT FINANCIAL SERVICES, INC., Appellee. |
This is an appeal from a bankruptcy court order denying Appellant, and Debtor, Marlene Penrod's motion to require a creditor to pay her attorneys' fees. Ms. Penrod sought an award of attorneys' fees from one of its creditors, Appellee AmeriCredit Financial Services ("AmeriCredit"), after AmeriCredit unsuccessfully objected to her Chapter 13 reorganization plan that treated a portion of its claim as unsecured. The bankruptcy judge denied her fees request, finding that Ms. Penrod could not recover attorneys' fees because she was not a party "prevailing on the contract" within the meaning of California Civil Code Section 1717. This appeal followed.
Having carefully considered the papers submitted, for the reasons set forth below, the Court finds that the bankruptcy judge did not abuse his discretion or err in failing to award attorneys' fees and costs.1 Because the litigation regarding the treatment of AmeriCredit's claim was not an action "on a contract" within the meaning of California Civil Code section 1717, the prevailing party is not entitled to contractual attorneys' fees. Therefore, the Court AFFIRMS the decision of the bankruptcy judge.
In September 2005, Marlene Penrod purchased a 2005 Ford Taurus from a California Ford dealership. As part of her purchase, she traded in her 1999 Ford Explorer and paid approximately $1,000 down for her new vehicle. She owed more on the Ford Explorer, over $13,000, than the agreed trade-in value of $6,000, which left over $7,000 in "negative equity"2 on the trade-in vehicle. All told, Penrod financed approximately $31,700 to purchase a vehicle that cost approximately $25,600. The dealership subsequently assigned the contract to AmeriCredit.
The Retail Installment Sales Contract contained the following attorneys' fees provision:
You may have to pay collection costs. You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts.
In March 2007, Ms. Penrod filed for Chapter 13 bankruptcy protection. Ms. Penrod still owed AmeriCredit over $25,000 on the Ford Taurus, which included the negative equity from the Ford Explorer. In her reorganization plan, Ms. Penrod sought to treat as unsecured the portion of the debt she owed to AmeriCredit arising from the negative equity from trading in the Ford Explorer.
AmeriCredit objected to modification of its secured claim arguing that the claim was protected from bifurcation into secured and unsecured claims under the portion of 11 U.S.C. § 1325(a) commonly known as the "hanging paragraph."3 Pursuant to the "hanging paragraph," bifurcation of a claim into secured and unsecured claims is not permitted under a Chapter 13 reorganization plan with respect to certain motor vehicle debt that is subject to a "purchase money security interest" and that meets certain other requirements. AmeriCredit argued that it held a purchase money security interest in the entire debt and bifurcation of its claim into secured andunsecured portions was improper under the "hanging paragraph." As an initial matter, the bankruptcy judge needed to determine whether AmeriCredit's interest in the negative equity associated with the trade-in vehicle was a "purchase money security interest," a term not defined by the Bankruptcy Code, which required applying the Uniform Commercial Code and California state law.
Ultimately the bankruptcy judge relied on a decision by Bankruptcy Judge Morgan, who had held that the portion of the debt representing the payoff of the negative equity in the trade-in vehicle was not secured by a "purchase money security interest." Therefore, the "hanging paragraph" of subsection 1325(a) did not protect the negative equity associated with the trade-in vehicle. Accordingly, the bankruptcy judge allowed Ms. Penrod to treat the negative equity portion of the loan as unsecured debt, overruled AmeriCredit's objection to confirmation, and confirmed Ms. Penrod's reorganization plan.
Following confirmation of Ms. Penrod's reorganization plan, AmeriCredit appealed the bankruptcy court decision that allowed Ms. Penrod to bifurcate its claim. The Bankruptcy Appellate Panel affirmed. AmeriCredit Fin. Servs., Inc. v. Penrod (In re Penrod), 392 B.R. 835 (9th Cir. B.A.P. 2008). The Ninth Circuit Court of Appeals affirmed. AmeriCredit Fin. Servs., Inc. v. Penrod (In re Penrod), 611 F.3d 1158 (9th Cir. 2010). The Ninth Circuit denied AmeriCredit's request for rehearing en banc, AmeriCredit Fin. Servs., Inc. v. Penrod (In re Penrod), 636 F.3d 1175 (9th Cir. 2011), and the United States Supreme Court denied AmeriCredit's petition for writ of certiorari, AmeriCredit Fin. Servs., Inc. v. Penrod, 132 S. Ct. 108 (2011).
After the Supreme Court denied AmeriCredit's petition for writ of certiorari, Ms. Penrod sought to recover attorneys' fees under the contractual attorneys' fees clause and California Civil Code § 1717, which makes the unilateral contractual fee clause a reciprocal obligation in a contract enforcement action. The bankruptcy judge denied the attorneys' fees request finding that the issue on which Ms. Penrod prevailed involved questions of federal bankruptcy law and therefore, she did not prevail "on the contract" within the meaning of California Civil Code § 1717. Ms. Penrod timely appealed, arguing that she is entitled to fees pursuant to California Civil Code § 1717 as the party prevailing "on the contract."
A bankruptcy court's decision whether to award attorneys' fees should not be disturbed absent an abuse of discretion or an erroneous application of the law. See In re Bennett, 298 F.3d 1059, 1063 (9th Cir. 2002); In re Jastrem, 253 F.3d 438, 442 (9th Cir. 2001). The bankruptcy court's findings of fact are reviewed for clear error and its conclusions of law, including its interpretation of the Bankruptcy Code, are reviewed de novo. See Blausey v. United States Trustee, 552 F.3d 1124, 1132 (9th Cir. 2009); In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005). This Court must accept the bankruptcy court's factual findings unless upon review it is left with the definite and firm conviction that a mistake has been committed. See In re Straightline Invs., Inc., 525 F.3d 870, 876 (9th Cir. 2008); Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 2004); In re Banks, 263 F.3d 862, 869 (9th Cir. 2001). Whether the bankruptcy judge applies the correct law regarding a party's entitlement to attorneys' fees is an issue of law reviewed de novo. See U.S. for Use & Benefit of Reed v. Callahan, 884 F.2d 1180, 1185 (9th Cir. 1989).
The issue presented on appeal is: "Did the Bankruptcy Court err in failing to award attorneys' fees and costs to Debtor pursuant to Cal. Civ. Code § 1717 in light of, inter alia, the decision of the United States Supreme Court in Travelers Casualty & Surety Co. v. Pacific Gas and Electric Co., 549 U.S. 443, 127 S. Ct. 1199, 178 L. Ed. 178 (2007), and the Bankruptcy Court's apparent reliance upon the discredited rule articulated in Fobian v. Western Farm Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1991)." This is a two part issue: (A) did the bankruptcy judge apply the incorrect law; and, if the correct law was applied, (B) was the decision of the bankruptcy judge based on an erroneous application of the law. Because the answer to both questions is "no," the Court AFFIRMS.
Under the "American Rule," a prevailing litigant is not entitled to recover its attorneys' fees except when authorized by contract or statute. Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 448 (2007). "In a case governed by the Bankruptcy Act ... '[t]he character of [a contractual] obligation to pay attorney's fees presents no obstacle to enforcing it in bankruptcy." Id. Thus, "a 'prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees inaccordance with applicable state law ...." Id. at 451 ().
In this case, Ms. Penrod argues the "applicable" state law is California Civil Code § 1717, which provides a reciprocal right to recover contractual attorneys' fees by the party "prevailing on the contract" in "any action on a contract." Specifically, California Civil Code § 1717 states:
In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.
Cal. Civ. Code § 1717(a). Thus, under California Civil Code § 1717, the prevailing party may recover its attorneys' fees notwithstanding whether that party is the party identified in the contract. Id. Ms. Penrod contends that, pursuant to the attorneys' fee provision in the parties' contract4 and the reciprocity provision of California Civil Code § 1717, she is entitled to recover attorneys' fees from AmeriCredit.
First, Ms. Penrod argues that the bankruptcy judge erred by applying the wrong law. Even though the bankruptcy judge did not reference In re Fobian, Ms. Penrod contends that the bankruptcy judge implicitly relied upon the so-called "Fobian" rule. Following In re Fobian, courts in the Ninth Circuit prohibited...
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