FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: MARLENE A. PENROD,
Debtor.
No. 08-60037
AMERICREDIT FINANCIAL SERVICES, BAP Nos.
INC., 07-1360,
Creditor-Appellant, 07-1368
v. OPINION
MARLENE A. PENROD,
Debtor-Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Markell, Klein, and Jury, Bankruptcy Judges
Argued and Submitted
November 5, 2009—San Francisco, California
Filed July 16, 2010
Before: Alfred T. Goodwin and William A. Fletcher,
Circuit Judges, and Richard Mills, District Judge.*
Opinion by Judge Richard Mills
*The Honorable Richard Mills, Senior United States District Judge for
the Central District of Illinois, sitting by designation.
10313
10316 IN RE PENROD
COUNSEL
William M. Burke, Costa Mesa, California, and Randall P.
Mroczynski, Cooksey Toolen Gage Duffy & Woog, Costa
Mesa, California, for the creditor-appellant.
Kenneth N. Klee, Klee, Tuchin, Bogdanoff & Stern LLP, Los
Angeles, California, and Craig V. Winslow, San Mateo, Cali-
fornia, for the debtor-appellee.
Jan T. Chilton, Severson & Werson, San Francisco, Califor-
nia, and James J. White, Ann Arbor, Michigan, 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, California, for amici curiae
Professors Ingrid M. Hillinger, Michael Hillinger, Adam J.
Levitin, and Jean Braucher.
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.
IN RE PENROD 10317
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. Accord-
ing 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 pro-
posed 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.
1
The Appellant has challenged the BAP’s calculations. In particular, the
Appellant claims that down payments and manufacturer rebates should
have been deducted from the gross negative equity amount, in accordance
with Cal. Civ. Code § 2982(a)(6)(G). We express no opinion on the merits
of the Appellant’s argument. Rather, we remand to the bankruptcy court
to examine the Appellant’s arguments and determine how credit should be
given for the rebate and the down payment.
10318 IN RE PENROD
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 bank-
ruptcy 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 bank-
ruptcy court’s ruling. . . . We also review de novo the bank-
ruptcy 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
2
We note that the Parties have not challenged the BAP’s decision
regarding the application of the dual status rule. Therefore, we will not
address whether the dual status rule or the transformation rule should
apply, although we recognize that the BAP’s use of the dual status rule has
been criticized by some. See Geoffrey M. Collins, Note, Negative Equity
and Purchase-Money Security Interests Under the Uniform Commercial
Code and the BAPCPA, 95 Cornell L. Rev. 161, 182-84 (2009).
IN RE PENROD 10319
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 col-
leagues 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.
[1] The hanging paragraph prevents the bifurcation of cer-
tain 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 collat-
eral for that debt consists of a motor vehicle (as
10320 IN RE PENROD
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)(*).
[2] 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.
[3] The term “purchase money security interest” is not
defined in the bankruptcy code. In bankruptcy, property inter-
ests are usually defined by state law. See Butner v. United
States, 440 U.S. 48, 54-57 (1979). California has adopted the
relevant portion of Revised Article 9 of the Uniform Com-
mercial 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 defini-
tion 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).
[4] 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
IN RE PENROD 10321
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.
[5] 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 defini-
tion is found in the Official Comment.
As used in subsection (a)(2), the definition of
“purchase-money obligation,” the “price” of collat-
eral or the “value given to enable” includes obliga-
tions 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.
[6] 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 (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.”).
10322 IN RE PENROD
AmeriCredit claims that the transactions are closely con-
nected, 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 Taurus to establish a purchase-money security interest.
We hold that it is not.
AmeriCredit and some courts have looked to studies indi-
cating that over a third of vehicle purchases in the United
States involve negative equity to conclude that they are suffi-
ciently connected. See, e.g., In re Howard, 597 F.3d at 857-
58. Some circuits have described combining a new vehicle
purchase with negative equity as a “package deal.” See In re
Graupner, 537 F.3d at 1302. While the trade-in and new pur-
chase may be performed at the same time, or use one unified
document, this does not automatically mean that there is a
purchase money security interest. Judge Bye, of the Eighth
Circuit, aptly made this point:
The fact that financing negative equity has become
a customary industry practice, and practical reality
necessary to many motor vehicle sales transactions,
does not alter the fact that negative equity does not
fall within Article 9’s definition of “price” or “value
given.” Money or value given to pay off the negative
equity in a trade-in vehicle is not, in the strictest
sense, given to acquire rights in the secured collat-
eral. Neither does the negative equity represent any
part of the price of the vehicle or associated costs
arising directly from the sale. The realities of such
transactions frequently require the financing of nega-
tive equity to facilitate the sale, but the focus should
be on price or value given as defined by Article 9,
and not what is necessary to entice sellers and lend-
ers into the transaction.
In re Mierkowski, 580 F.3d at 746 (Bye, J., dissenting).
IN RE PENROD 10323
Finally, negative equity cannot fall under the “other similar
obligations” category because negative equity is unlike the
examples listed in Comment 3. The items in the list are trans-
action costs related to purchase, and negative equity will “typ-
ically be larger, and more readily separable from the purchase
transaction itself, than such things as sales tax, duties and
finance charges.” In re Peaslee, 13 N.Y.3d at 83-84 (Smith,
J., dissenting); see also In re Ford, 574 F.3d at 1289 (Tym-
kovitch, J., dissenting).
[7] However one structures or describes the transaction,
the negative equity is antecedent debt. A seller or lender can
obtain a purchase money security interest only for new value,
and closely related costs. Old value simply does not fit within
that rubric.
C.
[8] AmeriCredit argues that the California Automobile
Sales Finance Act (“ASFA”) should be used in determining
the “price of the collateral.” The ASFA inlcudes negative
equity charges in the “cash price” of the vehicle. Cal. Civ.
Code § 2981(e). AmeriCredit has invoked the in pari materia
doctrine to read the ASFA and Article 9 together, to construe
the term “price of the collateral.”
[9] We disagree. The purpose of the “cash price” definition
in the ASFA is to disclose to consumers that they are respon-
sible for negative equity charges. The definition says nothing
about whether those charges result in a purchase money
security interest. See In re Ford, 574 F.3d 1292-93 (Tym-
kovitch, J., dissenting). The disclosure provisions of the
ASFA were enacted for a different purpose than the “price of
the collateral” provision in the U.C.C. Even courts that have
ruled in favor of creditors have recognized that laws such as
the ASFA are not helpful in determining the “price of the col-
lateral.” Writing for the Seventh Circuit, Judge Posner said
the following regarding an analogous Illinois law: “[i]t’s a
10324 IN RE PENROD
consumer-protection statute, intended to require disclosure of
the charges that make up the total price that a consumer pays
for the car, rather than to prescribe what is and is not included
in the purchase money security interest.” In re Howard, 597
F.3d at 857. Therefore, we ignore the ASFA’s “cash price”
definition.
D.
AmeriCredit has argued that its position is in harmony with
federal bankruptcy law. In its brief, AmeriCredit states that
“Section 547(c)(3) of the Bankruptcy Code gives special pro-
tection from preference avoidance to ‘enabling loans,’ which
are defined like a purchase-money security interest.” How-
ever, upon closer examination it appears that AmeriCredit’s
position runs counter to basic federal bankruptcy principles.
Specifically, the statutory language cited by AmeriCredit pro-
vides that:
(c) The trustee may not avoid under this section a
transfer—
...
(3) that creates a security interest in prop-
erty acquired by the debtor—
(A) to the extent that such security inter-
est secures new value that was—
(i) given at or after the security agree-
ment that contains a description of
such property as collateral;
(ii) given by or on behalf of the
secured party under such agreement;
(iii) given to enable the debtor to
acquire such property; and
IN RE PENROD 10325
(iv) in fact used by the debtor to
acquire such property; and
(B) that is perfected on or before 30 days
after the debtor receives possession of
such property[.]
11 U.S.C. § 547(c)(3).
[10] However, new value is defined in the same section as
follows:
“[N]ew value” means money or money’s worth in
goods, services, or new credit, or release by a trans-
feree of property previously transferred to such
transferee in a transaction that is neither void nor
voidable by the debtor or the trustee under any appli-
cable law, including proceeds of such property, but
does not include an obligation substituted for an
existing obligation[.]
11 U.S.C. § 547(a)(2) (emphasis added).
[11] Therefore, AmeriCredit’s position is not consistent
with the Bankruptcy Code. Under the Bankruptcy Code,
security interests are given preferential treatment to the extent
that the obligation relates to the receipt of truly new value, not
just old obligations that have been repackaged. The negative
equity charges related to Penrod’s 1999 Ford Explorer would
not qualify as new value under 11 U.S.C. § 547(a)(2). There-
fore, AmeriCredit’s position is not in harmony with federal
bankruptcy principles.
E.
Any conclusion in favor of AmeriCredit based upon the
phrase “value given to enable the debtor to acquire rights in
or the use of collateral” would be erroneous. Many of the
10326 IN RE PENROD
courts that have faced this issue have honed in on the “value
given to enable” language in describing negative equity.
Those courts see “value given to enable” as a good descriptor
of how the original car and its loan might be an obstacle to
purchasing the new car.
However, there is a difference between “price” and “value
given to enable.”3 Both sellers and third party lenders can
obtain purchase money security interests. A seller obtains a
purchase money security interest through a dealer financed
sale, where the merchandise goes out the door upon the credit
of the buyer. Payment is to be made to the dealer. A purchase
money security interest is only valid for the “price” of the
merchandise.
A lender such as a finance company, bank, or credit union
obtains a purchase money security interest when it makes
funds available to the purchaser to buy the merchandise. The
money is provided to the borrower to make the purchase. See
Collins, 95 Cornell L. Rev. at 186. That language is somewhat
broader than “price” because the money has to be traced from
the lender to the borrower to the seller. See In re Howard, 597
F.3d at 855-56 (“The ‘value given’ part of the definition is
intended to make clear that the obligation can be to a finance
company . . . rather than to the seller.”). Broad language is
employed to encompass third party financing, not to expand
the scope of purchase money security interests.
[12] In sum, we find that a creditor does not have a pur-
chase money security interest in the “negative equity” of a
vehicle traded in during a new vehicle purchase.
3
We note that AmeriCredit claims that there is a purchase money secur-
ity interest in the negative equity under “price.” This is correct, because
the sale was initially financed by the dealer, and the indebtedness was sub-
sequently transferred to AmeriCredit. As a dealer-financed transaction,
“price” should be used instead of “value given to enable.”
IN RE PENROD 10327
IV. CONCLUSION
For the foregoing reasons, the decision of the Bankruptcy
Appellate Panel is AFFIRMED and REMANDED to the
bankruptcy court for further proceedings regarding how credit
should be given for the rebate and down payment.