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
Appellant, 07-1368
v. ORDER
MARLENE A. PENROD,
Appellee.
Filed February 28, 2011
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 rehear-
ing 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).
*The Honorable Richard Mills, Senior District Judge for the U.S. Dis-
trict Court for Central Illinois, Springfield, sitting by designation.
2975
2976 IN RE PENROD
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 circuits2 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 trans-
actions 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 Appel-
late 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
1
The panel remanded the case to the BAP only for a recalculation of fig-
ures that are disputed, but unrelated to the reasons for my dissent.
2
See, e.g., In re Westfall, 599 F.3d 498 (6th Cir. 2010); In re Howard,
597 F.3d 852 (7th Cir. 2010); In re Peaslee, 585 F.3d 53 (2d Cir. 2009)
(per curiam); In re Dale, 582 F.3d 568 (5th Cir. 2009); In re Mierkowski,
580 F.3d 740 (8th Cir. 2009); In re Ford, 574 F.3d 1279 (10th Cir. 2009);
In re Price, 562 F.3d 618 (4th Cir. 2009); In re Graupner, 537 F.3d 1295
(11th Cir. 2008).
IN RE PENROD 2977
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 “un-
secured” 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 criti-
cal 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 busi-
ness.
3
A PMSI is a secured debt not subject to discharge in bankruptcy along
with debts held by general creditors, secured by title to the car so that the
holder of the secured interest—here, AmeriCredit—has the right to repos-
sess the new car if the new owner fails to make a payment.
2978 IN RE PENROD
The specifics of this case make this point abundantly clear.4
The liability Penrod agreed to assume was as follows:
The cost of new Taurus $25,600
Plus the cost of having the Explorer loan
paid off + $13,000
Less the value of the Explorer -$ 6,000
Less Penrod’s downpayment -$ 1,000
Total Penrod borrows secured by the new Taurus = $31,600
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 pay-
ments. 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 unse-
cured debt in the class with general unsecured debtors—
4
I use the figures from the panel’s opinion. They have been rounded for
ease of reference.
IN RE PENROD 2979
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 compa-
nies 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 rul-
ing 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 bal-
ance. 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 thou-
sands 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 analy-
sis Congress set forth for us to follow.
III.
Before the amendment of the Bankruptcy Code by the
Bankruptcy Abuse Prevention and Consumer Protection Act
5
See Bureau of Transp. Statistics, U.S. Dep’t of Transp., National
Transportation Statistics 1-12 (2010), available at http://www.bts.gov/
publications/national_transportation_statistics/html/table_01_12.html
2980 IN RE PENROD
of 2005 (“BAPCPA”), one of the benefits of filing a Chapter
13 bankruptcy was that under § 506(a) the debtor could bifur-
cate 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], sec-
tion 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 collat-
eral 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 Tau-
rus 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 lim-
ited 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
IN RE PENROD 2981
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 lan-
guage 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
(1979). California, where the parties reside and this transac-
tion 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 § 9103
as, inter alia:
‘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) (emphasis added). That is
exactly what we have here. Penrod gave the dealer an obliga-
tion (the loan of $31,600, not just $25,600) incurred as part
of the price of the collateral (the $25,600 for the Taurus) and
for the value given ($6,000 in negative equity) to enable Pen-
rod to obtain the Taurus.
The panel concentrates solely, and mistakenly, on the first
part of California Commercial Code § 9103(a)(2) in attempt-
2982 IN RE PENROD
ing to determine the “price” of the collateral. In re Penrod,
611 F.3d at 1162. What the panel overlooks is the second
clause of California Commercial Code § 9103(a)(2); that
clause defines a “purchase money obligation” as the “value
given to enable the debtor to acquire rights in or the use of the
collateral if the value is in fact so used.” Paying off the old
loan on the Explorer was the value given to enable Penrod to
acquire the new Taurus. The panel renders this section, relied
upon by every other circuit to look at the issue, superfluous.
The panel says the second clause of the statute does not apply
but fails to explain why. See In re Penrod, 611 F.3d at 1164.
The statute—as read by all other eight circuits—requires
only that the value given “enable” the actual purchase. Thus
the issue is not whether Penrod could have purchased the Tau-
rus without trading in the Explorer, but rather what she in fact
did.6 It is undisputed that she used her ownership interest in
the Explorer “to enable [her] to acquire rights in or the use of
the [Taurus]” and that the value given was in fact so used.
Cal. Comm. Code § 9-103 (a)(2). If the transfer of title of the
6
Perhaps Penrod did not need to trade in her Explorer to afford the Tau-
rus, but she chose to do so. She also chose to sign the new loan agreement
that clearly stated the entire loan was secured by the Taurus:
Security Interest
You give us a security interest in:
The vehicle and all parts or goods installed in it;
All money or goods received (proceeds) for the vehicle;
All insurance, maintenance, service or other contracts we
finance for you. This includes any refunds of premiums or
charges from the contracts;
This secures payment of all you owe on this contract. It also
secures your other agreements in this contract as the law
allows. You will make sure the title shows our security inter-
est (lien) in the vehicle.
IN RE PENROD 2983
Explorer to the Taurus dealer did not “enable” the sale of the
Taurus to Penrod, then words have lost their meaning.7
IV.
Every other circuit court to address this precise issue has
upheld Congress’s clear intent and granted creditors a PMSI
in the entire debt incurred in financing a vehicle purchase,
including the purchaser’s negative equity. In doing so, each of
these circuits was interpreting a state’s law which had adopted
the language of U.C.C. Article 9-103 unchanged, as did Cali-
fornia Commercial Code § 9103. See In re Howard, 597 F.3d
at 855.
One of the early courts to evaluate a claim similar to Pen-
rod’s in depth was a South Carolina bankruptcy court. The
court had before it a Chapter 13 plan in which the debtors pro-
posed to bifurcate a loan on their vehicle into a secured por-
tion of the debt (representing the value of their new car), and
an unsecured portion for the balance (representing the nega-
tive equity of their trade-in). In re Vinson, 391 B.R. 754
(Bankr. D.S.C. 2008). The loan on the vehicle included nega-
tive equity, as well as title and document fees. The bankruptcy
court looked to South Carolina law for the statutory definition
of a purchase money loan as “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.” S.C. Code Ann. § 36-
9-103(a)(2).8 The court examined the official commentary to
7
“Enable” is defined as: “1. to make able; give power, means, compe-
tence, or ability to; authorize: This document will enable him to pass
through the enemy lines unmolested. 2. to make possible or easy: Aero-
nautics enables us to overcome great distances. 3. to make ready; equip
(often used in combination): Web-enabled cell phones.” See
http://dictionary.reference.com/browse/enable (last visited January 20,
2011).
8
Note that each state’s version of U.C.C. § 9-103, including S.C. Code
Ann. § 36-9-103(a)(2), is identical to California Commercial Code § 9103.
2984 IN RE PENROD
this statutory provision and noted that “purchase money”
included negative equity and the other charges included in the
financing. 391 B.R. at 757-58. Therefore, the court had no
difficulty holding that the negative equity was part of the
PMSI; thus it denied confirmation of the debtors’ bifurcation
plan.
The Fifth Circuit agreed, holding that under Texas’ version
of the U.C.C., negative equity, gap insurance, and extended
warranties were all purchase-money obligations. In re Dale,
582 F.3d 568 (5th Cir. 2009). The court held that the creditor
from which the Chapter 13 debtor had bought a pick-up truck
(a frequent occurrence in Texas) has a PMSI in the debt
derived from those items, and therefore the debtor could not
bifurcate the claim into secured and unsecured portions.
In In re Graupner, 537 F.3d 1295 (11th Cir. 2008), the
Eleventh Circuit agreed, applying Georgia’s version of Article
9 of the U.C.C. See Ga. Code Ann. § 11-9-103. As with other
states, Georgia defines a PMSI as a security interest to the
extent that an obligation was incurred as all or part of the
price of the collateral “or for value given to enable the debtor
to acquire rights in the collateral.” Id. at 1299. To determine
whether negative equity was part of the “price” of the collat-
eral or the “value given to enable” the transaction, the Elev-
enth Circuit applied the doctrine of in pari materia.9 It relied
on a Georgia consumer protection and disclosure statute cov-
ering the same subject matter, which defined “cash sale price”
9
Unlike Georgia, we do not need to look to other state statutes to inter-
pret the term “price” because California Commercial Code § 9103 specifi-
cally says that a “ ‘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.” Nevertheless, were we to employ the tool
of in pari materia, we would still be compelled to find that negative equity
is included in the term price, as did the other circuits. The California Auto-
mobile Sales Finance Act (“ASFA”) includes “negative equity” charges in
the “cash price” of the vehicle. Cal. Civ. Code § 2981(e).
IN RE PENROD 2985
as “any amount paid to the buyer to satisfy a lien on or a
security interest in a motor vehicle used as a trade-in on the
motor vehicle.” Id. at 1299 (internal quotations and citations
omitted). The court concluded that “[n]egative equity was an
integral part of and inextricably intertwined with the sales
transaction.” Id. at 1302.
Finally, the Eleventh Circuit also concluded that this inter-
pretation was consistent with the legislative intent of
§ 1325(a)(*). This paragraph was added in 2005 at a time
when bankruptcy courts commonly bifurcated interests in
motor vehicles and limited the creditors’ secured interest to
the value of the motor vehicle at the time of the bankruptcy
filing. Id. at 1297. The amendment was intended to end this
practice. Id. at 1302. “The purpose underlying the hanging
paragraph [§ 1325(a)(*)] is to ensure that debtors repay the
amount they actually agreed to pay for a motor vehicle pur-
chased within 910 days of bankruptcy, instead of the true
value of the collateral.” Id. (citations omitted). To interpret
§ 1325(a)(*) as excluding negative equity would render the
amendment meaningless. Id. Therefore, the Eleventh Circuit
held the creditor had a security interest in the entire amount
of the loan, including that part of the loan accounting for neg-
ative equity.
The Second, Fourth, Sixth, Seventh, Eighth, and Tenth Cir-
cuits all agreed with the Fifth and Eleventh Circuits, and held
that a creditor’s PMSI applied to the entire debt incurred in
financing a vehicle purchase, including those portions of the
debt associated with the financing of the debtors’ negative
equity in a trade-in vehicle. See, e.g., In re Westfall, 599 F.3d
498 (6th Cir. 2010) (interpreting Ohio’s version of U.C.C.
Article 9-103); In re Howard, 597 F.3d 852 (7th Cir. 2010)
(Illinois); In re Peaslee, 585 F.3d 53 (2d Cir. 2009) (per
curiam) (New York); In re Mierkowski, 580 F.3d 740 (8th
Cir. 2009) (Missouri); In re Ford, 574 F.3d 1279 (10th Cir.
2009) (Kansas); In re Price, 562 F.3d 618 (4th Cir. 2009)
(North Carolina). Each of these cases looked to state law that
2986 IN RE PENROD
tracked language identical to California Commercial Code
§ 9103.
V.
Not only does the panel’s construction of § 1325(a)(*)
make no commercial sense, but it makes that section superflu-
ous. Before BAPCPA, Debtors had the ability to bifurcate
debts under § 506 into that covered by the collateral (the new
car) which was secured, and any excess amount, which would
not be considered a secured debt. Section 1325(a)(*) specifi-
cally states that in the case of the purchase of a new car, the
ability to bifurcate debt secured by a new car “shall not
apply.” Yet that is exactly what the panel’s opinion does.
We thus dissent from the denial of rehearing en banc,
which could have prevented us from being on the wrong end
of an eight to one circuit split.