Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-16097/USCOURTS-ca9-13-16097-0/pdf.json

Parties Involved:
Americredit Financial Services, Inc.
Appellee
Marlene A. Penrod

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE MARLENE A. PENROD,

Debtor.

MARLENE A. PENROD,

Appellant,

v.

AMERICREDIT FINANCIAL SERVICES,

INC.,

Appellee.

No. 13-16097

D.C. No.

4:12-cv-01548-

YGR

OPINION

Appeal from the United States District Court

for the Northern District of California

Yvonne Gonzalez Rogers, District Judge, Presiding

Argued and Submitted

July 9, 2015—San Francisco, California

Filed October 1, 2015

Before: Ronald Lee Gilman,* Susan P. Graber,

and Paul J. Watford, Circuit Judges.

Opinion by Judge Watford

* The Honorable Ronald Lee Gilman, Senior Circuit Judge for the U.S.

Court of Appeals for the Sixth Circuit, sitting by designation.

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2 IN RE PENROD

SUMMARY**

Bankruptcy

The panel reversed the district court’s affirmance of the

bankruptcy court’s denial of a debtor’s motion for attorney’s

fees following the confirmation of her Chapter 13 plan over

the objection of the assignee of the debtor’s car loan.

Ordinarily, a claim secured by property worth less than

the amount of the claim is “bifurcated” into two claims: a

secured claim equal to the value of the property and an

unsecured claim for the balance. The “hanging paragraph” of

11 U.S.C. § 1325(a)(*) creates a special rule for auto lenders

by prohibiting bifurcation of claims that are secured by a

“purchase money security interest” in a motor vehicle

recently acquired for the debtor’s personal use. The

bankruptcy court, affirmed by the Bankruptcy Appellate

Panel and by the Ninth Circuit, held that the purchase money

security interest protected by the hanging paragraph does not

include amounts attributable to the negative equity from a

trade-in vehicle. The bankruptcy court denied the debtor’s

subsequent motion seeking to recover from the lender all of

the attorney’s fees she incurred in opposing the lender’s

objection to confirmation of her Chapter 13 plan.

The parties’ contract provided for attorney’s fees for the

lender in the event of the debtor’s default. The debtor sought

attorney’s fees pursuant to California Civil Code § 1717,

which makes reciprocal an otherwise unilateral contractual

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN RE PENROD 3

obligation to pay attorneys’ fees if certain conditions are met. 

Reversing the district court, the panel held that the litigation

over the applicability of the hanging paragraph was an action

“on a contract” because the lender sought to enforce the

provisions of its contract when it objected to confirmation of

the Chapter 13 plan. By prevailing in the litigation, the

debtor obtained a ruling that precluded the lender from fully

enforcing the terms of the contract. Accordingly, the

conditions of § 1717 were satisfied. In addition, the lender

would have been entitled to recover attorney’s fees had it

prevailed. The panel remanded for either the district court or

the bankruptcy court to determine a reasonable fee award.

COUNSEL

Daniel J. Bussel (argued), Kenneth N. Klee, and Martin R.

Barash, Klee, Tuchin, Bogdanoff & Stern LLP, Los Angeles,

California, for Appellant.

Randall P. Mroczynski (argued), Cooksey, Toolen, Gage,

Duffy & Woog, Costa Mesa, California, for Appellee.

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4 IN RE PENROD

OPINION

WATFORD, Circuit Judge:

We are asked to decide whether a debtor who prevails in

a contract dispute on the basis of federal bankruptcy law may

recover reasonable attorney’s fees under California Civil

Code § 1717.

I

The appellant in this case, Marlene Penrod, bought a new

Ford Taurus from a car dealership in California. Although

the Taurus cost $25,000, Penrod borrowed a total of $32,000

to purchase it. (For simplicity’s sake, we will use round

numbers throughout.) The extra $7,000 represented the

“negative equity” in Penrod’s old vehicle—a Ford Explorer

worth $6,000 on which she still owed $13,000. Because

Penrod wanted to trade in the Explorer at the same time she

purchased the Taurus, the dealer gave her a $6,000 credit for

the Explorer, paid off the $13,000 loan balance, and agreed to

roll the $7,000 in negative equity into Penrod’s new loan for

the Taurus. The loan was subsequently assigned to the

appellee, AmeriCredit Financial Services, Inc.

Less than two years later, Penrod filed a Chapter 13

bankruptcy petition, listing as one of her liabilities the

roughly $26,000 she still owed on the loan for the Taurus. 

AmeriCredit filed a proof of claim asserting a secured claim

for the entire $26,000 loan balance. AmeriCredit’s status as

a fully secured creditor hinged on the installment sale

contract that Penrod signed when she purchased the Taurus. 

In that contract, Penrod granted the lender a security interest

in the Taurus and agreed that “[t]his secures payment of all

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IN RE PENROD 5

you owe on this contract.” Thus, the security interest granted

by Penrod secured repayment of not only the amount she paid

for the Taurus itself, but also the $7,000 she borrowed to

refinance the negative equity in her Explorer.

Penrod proposed a Chapter 13 plan that bifurcated

AmeriCredit’s claim into a secured claim for $16,000 (the

estimated value of the Taurus at the time) and an unsecured

claim for the remaining $10,000. If confirmed, Penrod’s plan

would have significantly reduced the amount AmeriCredit

would likely collect on the loan. This is because a Chapter 13

plan, in order to be confirmed by the court, must ensure that

secured claims will be paid in full over the life of the plan. 

11 U.S.C. § 1325(a)(5)(B)(i). Unsecured claims, by contrast,

need be paid only to the extent that the debtor has “disposable

income” available to pay them. § 1325(b)(1). If the debtor

successfully completes the plan, unsecured claims are

discharged whether they have been paid in full or not. 

§ 1328(a).

Faced with the prospect that it would likely be repaid only

the $16,000 assigned to its secured claim, AmeriCredit

objected to confirmation of Penrod’s proposed plan. 

AmeriCredit insisted, as it had in its proof of claim, that it

held a secured claim for the full $26,000 loan balance. 

Penrod’s plan, AmeriCredit contended, could not be

confirmed unless it obligated her to repay that amount, not

just the $16,000 corresponding to the value of the Taurus. In

arguing that its claim should be treated as fully secured,

AmeriCredit relied on a provision of the Bankruptcy Code

known as the “hanging paragraph,” so called because

Congress placed it after 11 U.S.C. § 1325(a)(9) without

designating it as a separate subsection. See Bankruptcy

Abuse Prevention and ConsumerProtection Act of 2005, Pub.

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6 IN RE PENROD

L. No. 109–8, § 306(b), 119 Stat. 23, 80. The hanging

paragraph carves out an exception to the usual rule governing

how secured claims are treated in bankruptcy. Ordinarily, a

claim secured by property worth less than the amount of the

claim is “bifurcated” into two claims: a secured claim equal

to the value of the property and an unsecured claim for the

balance. 11 U.S.C. § 506(a)(1). The hanging paragraph

creates a special rule for auto lenders by prohibiting

bifurcation of claims that are secured by a “purchase money

security interest” in a motor vehicle recently acquired for the

debtor’s personal use. § 1325(a)(*).1 The hanging paragraph

thus allows a creditor to assert a secured claim for the full

loan balance even if the vehicle is worth less than that

amount, as is often the case early in the loan’s term.

A lengthy and hard-fought battle over the applicability of

this provision ensued. The details of that battle, not relevant

here, are fleshed out in two earlier opinions, one by the

Bankruptcy Appellate Panel (BAP), the other by this court. 

See In re Penrod, 392 B.R. 835 (9th Cir. BAP 2008), aff’d,

611 F.3d 1158 (9th Cir. 2010). All that matters for our

purposes is this: The bankruptcy court ruled that the purchase

money security interest protected by the hanging paragraph

does not include amounts attributable to the negative equity

from a trade-in vehicle. After subtracting the $7,000 in

1 The hanging paragraph provides: “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 period

preceding the date of the filing of the petition, and the collateral for that

debt consists of a motor vehicle (as 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.”

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IN RE PENROD 7

negative equity from Penrod’s loan balance, the court ruled

that AmeriCredit was left with a secured claim for $19,000

and an unsecured claim for $7,000. Penrod amended her plan

to reflect that ruling, and the bankruptcy court confirmed the

amended plan.

AmeriCredit appealed, and the BAP affirmed. 392 B.R.

at 852. After our court affirmed the BAP’s ruling, 611 F.3d

at 1161–63, AmeriCredit unsuccessfully petitioned for

rehearing en banc, over the dissent of four judges, 636 F.3d

1175 (9th Cir. 2011) (Bea, J., dissenting from denial of

rehearing en banc). The Supreme Court subsequently denied

AmeriCredit’s petition for certiorari. 132 S. Ct. 108 (2011).

Penrod then filed a motion in the bankruptcy court

seeking to recover from AmeriCredit all of the attorney’s fees

she incurred in opposing AmeriCredit’s objection to

confirmation of her Chapter 13 plan—some $245,000, all

told. As the basis for this request, Penrod relied on a

provision in her contract with AmeriCredit stating that, in the

event of a default (which the contract defined to include filing

for bankruptcy), “You will pay our reasonable costs to collect

what you owe, including attorney fees, court costs, collection

agency fees, and fees paid for other reasonable collection

efforts.” (Emphasis added.) Penrod argued that if

AmeriCredit had prevailed in the litigation, it would have

been entitled to recover attorney’s fees from her as part of its

effort to “collect what [she] owe[d].” That fact, Penrod

asserted, entitled her to collect attorney’s fees from

AmeriCredit under California Civil Code § 1717, which

provides in relevant part:

In any action on a contract, where the contract

specifically provides that attorney’s fees and

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8 IN RE PENROD

costs, which are incurred to enforce that

contract, shall be awarded either to one of the

parties or to the prevailing party, then the

party who is determined to be the party

prevailing on the contract, whether he or she

is the party specified in the contract or not,

shall be entitled to reasonable attorney’s fees

in addition to other costs.

Cal. Civ. Code § 1717(a).

The bankruptcy court denied Penrod’s motion for

attorney’s fees on the ground that Penrod did not prevail “on

the contract” because her success in the litigation with

AmeriCredit turned on a question of federal bankruptcy law. 

The court held that a debtor prevails “on the contract” only

when she prevails on an issue of state law or non-bankruptcy

federal law. The district court affirmed.

II

California Civil Code § 1717 makes reciprocal an

otherwise unilateral contractual obligation to pay attorney’s

fees. Santisas v. Goodin, 951 P.2d 399, 406 (Cal. 1998). 

Three conditions must be met before the statute applies. 

First, the action in which the fees are incurred must be an

action “on a contract,” a phrase that is liberally construed. In

re Tobacco Cases I, 124 Cal. Rptr. 3d 352, 359 (Ct. App.

2011). Second, the contract must contain a provision stating

that attorney’s fees incurred to enforce the contract shall be

awarded either to one of the parties or to the prevailing party. 

And third, the party seeking fees must be the party who

“prevail[ed] on the contract,” meaning (with exceptions not

relevant here) “the party who recovered a greater relief in the

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IN RE PENROD 9

action on the contract.” Cal. Civ. Code § 1717(b)(1). If

§ 1717’s conditions are met here, Penrod may recover her

attorney’s fees from AmeriCredit, provided that AmeriCredit

would have been entitled to recover its fees had it prevailed. 

See Santisas, 951 P.2d at 407.

AmeriCredit does not contest that the contract contains a

unilateral attorney’s fees provision for purposes of the second

condition. Nor does it contest that if the litigation over the

applicability of the hanging paragraph was an action “on a

contract,” then Penrod recovered the greater relief for

purposes of the third condition. The only issue in dispute is

whether the first condition has been established—that is,

whether the hanging-paragraph litigation constitutes an action

“on a contract” under § 1717. We conclude that it does.

Under California law, an action is “on a contract” when

a party seeks to enforce, or avoid enforcement of, the

provisions of the contract. City of Emeryville v. Robinson,

621 F.3d 1251, 1267 (9th Cir. 2010); Douglas E. Barnhart,

Inc. v. CMC Fabricators, Inc., 149 Cal. Rptr. 3d 440, 449 (Ct.

App. 2012); Turner v. Schultz, 96 Cal. Rptr. 3d 659, 663 (Ct.

App. 2009). AmeriCredit sought to enforce the provisions of

its contract with Penrod when it objected to confirmation of

her proposed Chapter 13 plan. The plan treated

AmeriCredit’s claim as only partially secured, but

AmeriCredit insisted that it was entitled to have its claim

treated as fully secured. The only possible source of that

asserted right was the contract—in particular, the provision

in which Penrod granted a security interest in her Taurus to

secure “payment of all you owe on this contract.” (Had the

contract not granted AmeriCredit a security interest in the car,

AmeriCredit could not have asserted a secured claim for any

amount. See 11 U.S.C. § 506(a).) The security interest

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10 IN RE PENROD

conveyed by the contract covered not just the funds Penrod

borrowed to pay for the Taurus, but also the funds she

borrowed to refinance the negative equity in the Explorer. 

The sole issue in the hanging-paragraph litigation was

whether this provision of the contract should be enforced

according to its terms, or whether its enforceability was

limited by bankruptcy law to exclude the negative-equity

portion of the loan. See In re Penrod, 611 F.3d at 1159–61 &

n.2. By prevailing in that litigation, Penrod obtained a ruling

that precluded AmeriCredit from fully enforcing the terms of

the contract. For that reason, § 1717’s first condition was

satisfied as well. 

III

The bankruptcy court and the district court saw things

differently. As we explain next, both courts erred by relying

on an overly narrow reading of § 1717.

A

The bankruptcy court denied Penrod’s fee request based

on a mistaken view of the law, which constitutes an abuse of

discretion. See Northbay Wellness Group, Inc. v. Beyries,

789 F.3d 956, 959 (9th Cir. 2015). The court correctly

recognized that a party prevails in an action “on a contract”

if the party defeats enforcement of one of the contract’s

terms. But the court erroneously held that § 1717 applies

only if the party defeats enforcement under non-bankruptcy

law. Because Penrod prevailed under bankruptcy law, the

court concluded, she could not invoke the statute’s protection.

The bankruptcy court’s reasoning might have been valid

before the Supreme Court decided Travelers Casualty &

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IN RE PENROD 11

Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443

(2007). Before Travelers, our court had held that attorney’s

fees incurred in bankruptcyproceedings could not be awarded

under contractual provisions or state fee-shifting statutes

“where the litigated issues involve not basic contract

enforcement questions, but issues peculiar to federal

bankruptcy law.” In re Fobian, 951 F.2d 1149, 1153 (9th Cir.

1991). We thought back then that such a limitation was

implicitly imposed by the Bankruptcy Code itself. The

Supreme Court squarely rejected that view in Travelers. The

Court noted that the validity of creditors’ claims in

bankruptcy is ordinarily a question of state law, and “we

generally presume that claims enforceable under applicable

state law will be allowed in bankruptcy unless they are

expressly disallowed.” 549 U.S. at 452. The Court held that

nothing in the Bankruptcy Code expressly disallows claims

for attorney’s fees simply because the fees are incurred

litigating questions of federal bankruptcy law. Id. at 452–53.

After Travelers, then, the question is whether § 1717

categorically precludes an award of attorney’s fees when a

party successfully limits enforcement of a contract solely on

the basis of federal bankruptcy law. We see nothing in

California law suggesting that to be the case. Certainly

nothing in the text of § 1717 imposes such a limitation, and

we have found no California authority holding that § 1717

precludes a fee award under these circumstances. The

California cases we have found suggest that no such

categorical limitation exists. In Circle Star Center Associates

v. Liberate Technologies, 55 Cal. Rptr. 3d 232 (Ct. App.

2002), a lessor sought to recover the attorney’s fees it

incurred in obtaining the dismissal of the lessee’s bad-faith

bankruptcy filing, pursuant to a contractual provision

entitling the prevailing party to recover attorney’s fees in any

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12 IN RE PENROD

action arising out of the lease. Id. at 235–38. The court held

that the recovery of those fees—all of which were incurred

litigating issues of federal bankruptcylaw—were recoverable

under the contract. Id. at 238. And in Chinese Yellow Pages

Co. v. Chinese Overseas Marketing Services Corp., 88 Cal.

Rptr. 3d 250 (Ct. App. 2009), the court held that a judgment

creditor could recover the fees it incurred in bankruptcy court

litigating issues under federal bankruptcy law related to the

enforceability of the judgment it had obtained. Id. at 261–66. 

That case involved a different fee-shifting statute—California

Code of Civil Procedure § 685.040—but it suggests that

California law does not categorically exempt from recovery

under state fee-shifting statutes attorney’s fees incurred in

litigating issues under bankruptcy law.

B

In affirming the bankruptcy court’s ruling, the district

court held that the litigation between Penrod and AmeriCredit

did not constitute an action “on a contract” because the

dispute involved purely legal questions and was resolved on

purely legal grounds. That holding, too, reflects a mistaken

view of the law. Nothing in the text of § 1717 limits its

application to actions in which the court is required to resolve

disputed factual issues relating to the contract. A party who

obtains (or defeats) enforcement of a contract on purely legal

grounds, as by prevailing on a motion to dismiss with

prejudice or by showing that a defendant’s contract-based

defenses are barred by federal statute or federal common law,

still prevails in an action “on a contract.” Cano v. Glover,

48 Cal. Rptr. 3d 871, 873–75 (Ct. App. 2006); RTC Mortgage

Trust 1994-S2 v. Shlens, 72 Cal. Rptr. 2d 581, 596–97 (Ct.

App. 1998).

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IN RE PENROD 13

IV

As we have explained, the hanging-paragraph litigation

was an “action on a contract” in which Penrod prevailed. The

only remaining question is whether AmeriCredit would have

been entitled to recover attorney’s fees had it prevailed, a

necessary prerequisite for Penrod to recover her own fees. 

See Santisas, 951 P.2d at 407. We think the answer to that

question is clear. The contract included—no doubt for

AmeriCredit’s benefit—an attorney’s fees provision quite

broad in scope. The provision was not limited, for example,

to actions to determine whether the terms of the contract had

been breached. It instead stated that, in the event of default,

Penrod would be obligated to pay the reasonable attorney’s

fees AmeriCredit incurred in attempting “to collect what you

owe.” That provision encompasses AmeriCredit’s efforts in

the hanging-paragraph litigation to establish that it held a

fully secured rather than a partially secured claim. 

AmeriCredit wanted to prevail on that issue to ensure that it

would collect 100% of what it was owed on the loan. 

AmeriCredit had no reason to litigate that issue other than as

part of an attempt to collect from Penrod what she owed. 

Whether AmeriCredit actually would have sought attorney’s

fees had it prevailed (something it denies) is immaterial. 

What matters is whether it could have sought fees under the

contract, and here it could indeed have done so.

* * *

As the “party prevailing on the contract,” Penrod is

entitled to recover reasonable attorney’s fees under § 1717. 

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14 IN RE PENROD

Accordingly, we reverse the district court’s judgment and

remand for either the district court or the bankruptcy court to

determine a reasonable fee award.

REVERSED and REMANDED.

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