## Facts

- Marlene A. Penrod purchased a new Ford Taurus in California and financed the purchase through a retail installment contract later assigned to AmeriCredit Financial Services, Inc.
- As part of the transaction, Penrod traded in an older vehicle on which she owed about $7,000 more than its value (negative equity).
- The dealer paid off the trade-in loan and rolled the negative equity into the new Taurus financing, increasing the amount financed to roughly $31,600.
- The contract granted a security interest in the Taurus to secure “all” amounts owed under the contract, including the negative equity payoff.
- 523 days after the purchase, Penrod filed for Chapter 13 bankruptcy and proposed a plan that bifurcated AmeriCredit’s claim into (i) a secured claim equal to the Taurus’s value and (ii) an unsecured claim for the remainder, including the negative equity component.
- AmeriCredit objected, asserting the “hanging paragraph” to 11 U.S.C. § 1325(a) barred bifurcation because its claim was secured by a purchase-money security interest (PMSI) in a motor vehicle acquired within 910 days of bankruptcy.

## Issues

1. Whether, for purposes of the § 1325(a) hanging paragraph, a creditor’s PMSI in a 910-day vehicle includes the portion of the financed debt attributable to rolled-in negative equity from a trade-in.
2. If negative equity is not part of the PMSI, whether the creditor’s claim may be treated as dual-status (partly purchase-money secured and partly non-purchase-money unsecured) and bifurcated accordingly.

## Decision

- The Ninth Circuit affirmed the Bankruptcy Appellate Panel and bankruptcy court.
- The court held that the PMSI does not include the portion of the loan used to refinance the trade-in’s negative equity.
- The hanging paragraph therefore did not protect the negative equity portion from bifurcation; only the purchase-money portion tied to acquiring the new vehicle was shielded from cramdown.

## Legal Principles

- Because the Bankruptcy Code does not define “purchase-money security interest,” courts look to applicable state commercial law (UCC concepts) to determine PMSI scope.
- A PMSI secures a “purchase-money obligation,” limited to amounts incurred as part of the price of the collateral or value given to enable the debtor to acquire rights in the collateral.
- Paying off antecedent debt on a different vehicle (negative equity) is refinancing of prior debt, not value given to enable acquisition of the new collateral, and thus is non-purchase-money.
- A single retail installment contract can create a dual-status security interest, securing both purchase-money and non-purchase-money obligations; bundling does not convert non-purchase-money debt into PMSI.
- Under the § 1325(a) hanging paragraph, anti-bifurcation protection applies only to the extent the creditor holds a PMSI in the 910-day vehicle; non-PMSI portions remain subject to bifurcation.

## Conclusion

The Ninth Circuit held that rolled-in trade-in negative equity is not part of a vehicle lender’s PMSI for purposes of the § 1325(a) hanging paragraph, allowing a Chapter 13 debtor to bifurcate and treat that negative equity portion as unsecured while treating the true purchase-money portion as secured.


Penrod v. AmeriCredit Fin. Servs., Inc. (In re Penrod), 636 F.3d 1175 (9th Cir. 2011)