## Facts

- Marlene Penrod bought a 2005 Ford Taurus in California in September 2005 for about $25,600 (including tax and license), trading in a 1999 Ford Explorer and paying about $1,000 down.
- Penrod owed over $13,000 on the Explorer but received $6,000 trade-in credit, leaving over $7,000 in negative equity.
- The dealer paid off the Explorer loan and added the negative equity to the new financing; Penrod financed about $31,700 at 20% interest.
- The retail installment contract was assigned to AmeriCredit Financial Services, Inc., which held a security interest in the Taurus securing the full contract balance, including the rolled-in negative equity.
- About 523 days later, Penrod filed Chapter 13; she owed about $25,675, including the negative-equity component.
- Penrod’s plan proposed to bifurcate AmeriCredit’s claim into secured and unsecured portions based on the Taurus’s value; AmeriCredit objected, asserting a 910-day purchase-money security interest (PMSI) protected from bifurcation by the “hanging paragraph” following 11 U.S.C. § 1325(a)(9).
- The bankruptcy court (affirmed by the BAP) applied the dual-status rule: PMSI for the Taurus purchase portion, non-PMSI for the negative equity; AmeriCredit appealed.

## Issues

1. Whether the portion of a 910-day vehicle loan used to pay negative equity on a traded-in vehicle is part of a PMSI under California’s UCC definition, making the entire claim immune from bifurcation under the § 1325(a) hanging paragraph.
2. Whether, under California law, down payments and manufacturer rebates should be credited when calculating the amount of negative equity treated as non-PMSI.

## Decision

- The Ninth Circuit held AmeriCredit did not have a PMSI in the negative-equity portion of the obligation.
- The court affirmed the judgment that the negative-equity component is not protected by the § 1325(a) hanging paragraph and may be bifurcated under § 506.
- The court remanded for the bankruptcy court to determine how to account for down payments and manufacturer rebates in calculating negative equity under Cal. Civ. Code § 2982(a)(6)(G), expressing no view on the merits of AmeriCredit’s calculation argument.

## Legal Principles

- The hanging paragraph’s anti-bifurcation protection applies only to a “purchase money security interest”; whether a security interest is a PMSI is determined by applicable state UCC law.
- Under California’s Article 9, a PMSI exists only “to the extent” the obligation is 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.
- Financing that retires an antecedent debt on different collateral (rolled-in negative equity from a trade-in) is not part of the “price” of the new vehicle and does not constitute “value given to enable” acquisition in the Article 9 sense.
- Under the dual-status rule, a single loan may be PMSI in part and non-PMSI in part; only the PMSI portion receives hanging-paragraph protection from cramdown.

## Conclusion

The Ninth Circuit ruled that rolled-in negative equity from a trade-in is not purchase-money under California’s UCC, so the creditor’s 910-day protection from bifurcation extends only to the portion of the vehicle loan attributable to the new car’s purchase and related acquisition charges, with a remand to correct the negative-equity calculation if needed.


In re Penrod, 611 F.3d 1158 (9th Cir. 2010)