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In re Penrod

July 16, 2010

IN RE: MARLENE A. PENROD, DEBTOR.
AMERICREDIT FINANCIAL SERVICES, INC., CREDITOR-APPELLANT,
v.
MARLENE A. PENROD, DEBTOR-APPELLEE.



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

The opinion of the court was delivered by: Mills, District Judge

FOR PUBLICATION

Argued and Submitted November 5, 2009 -- San Francisco, California

Before: Alfred T. Goodwin and William A. Fletcher, Circuit Judges, and Richard Mills, District Judge.*fn1

OPINION

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,*fn2 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 unse-cured 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.*fn3

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 West-fall), 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 (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. ยง 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" ...


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