In re Penrod

Marlene Penrod (debtor) purchased a Ford Taurus from a California car dealership. The Taurus’s price was $25,600. During the transaction, Penrod traded in an older vehicle with a negative equity—the amount that Penrod still owed on the vehicle that exceeded the vehicle’s value—of $7,000. Penrod obtained financing from the dealership of approximately $31,600 to purchase the Taurus. That financed amount included the negative equity. The dealership assigned the loan to AmeriCredit Financial Services (AmeriCredit) (creditor), which retained a security interest in the Taurus. Penrod filed for Chapter 13 bankruptcy 523 days after purchasing the Taurus. At the time, Penrod still owed AmeriCredit over $25,000, including the negative equity. Penrod proposed to bifurcate AmeriCredit’s claim into secured and unsecured portions. AmeriCredit opposed the bifurcation, arguing that it had a purchase-money security interest (PMSI) in the entire amount of the loan, including the negative equity. Under 11 U.S.C. § 1325(a)(*), also known as the hanging paragraph following 11 U.S.C. § 1325(a)(9), a debtor was prohibited from bifurcating a secured creditor’s claim if the creditor had a PMSI in a vehicle purchased within 910 days of the debtor’s bankruptcy filing. The bankruptcy court held that AmeriCredit had a PMSI in the portion of the loan that reflected the remaining balance on the car’s purchase price, but not in the portion that reflected the negative equity of the trade-in vehicle. The bankruptcy appellate panel (BAP) affirmed. AmeriCredit appealed, and the Ninth Circuit affirmed the BAP, holding that a creditor’s PMSI in a newly purchased vehicle does not include negative equity in a vehicle traded in at the time of the purchase. AmeriCredit sought rehearing en banc.