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,

Creditor-Appellant, 07-1368

v. OPINION

MARLENE A. PENROD,

Debtor-Appellee. 

Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Markell, Klein, and Jury, Bankruptcy Judges

Argued and Submitted

November 5, 2009—San Francisco, California

Filed July 16, 2010

Before: Alfred T. Goodwin and William A. Fletcher,

Circuit Judges, and Richard Mills, District Judge.*

Opinion by Judge Richard Mills

*The Honorable Richard Mills, Senior United States District Judge for

the Central District of Illinois, sitting by designation. 

10313
COUNSEL

William M. Burke, Costa Mesa, California, and Randall P.

Mroczynski, Cooksey Toolen Gage Duffy & Woog, Costa

Mesa, California, for the creditor-appellant.

Kenneth N. Klee, Klee, Tuchin, Bogdanoff & Stern LLP, Los

Angeles, California, and Craig V. Winslow, San Mateo, California, for the debtor-appellee.

Jan T. Chilton, Severson & Werson, San Francisco, California, and James J. White, Ann Arbor, Michigan, for amici

curiae American Financial Services Association, National

Automobile Dealers Association, and California Bankers

Association.

Barkley Clark and Katherine M. Sutcliffe Becker, Stinson

Morrison Hecker LLP, Washington, D.C., for amici curiae

GMAC LLC, Ford Motor Credit Company LLC, Wells Fargo

Bank, N.A., Bank of America, N.A., America Honda Finance

Corp., and Toyota Motor Credit Corp.

M. Jonathan Hayes, Northridge, California, for amici curiae

Professors Ingrid M. Hillinger, Michael Hillinger, Adam J.

Levitin, and Jean Braucher.

OPINION

MILLS, District Judge:

The question presented in this case is whether a creditor has

a purchase money security interest in the “negative equity” of

a vehicle traded in at the time of a new vehicle purchase. 

10316 IN RE PENROD
Because we answer this question in the negative, we affirm

the decision of the Bankruptcy Appellate Panel (“BAP”).

I. BACKGROUND

In September 2005, Marlene Penrod purchased a 2005 Ford

Taurus from a California Ford dealership. According to the

figures recited by the BAP,1 the price of the car, including tax

and license, was approximately $25,600. Penrod traded in her

1999 Ford Explorer and paid approximately $1,000 down for

her new vehicle. She owed over $13,000 on the Explorer and

she received $6,000 in credit for the vehicle. Therefore, there

was over $7,000 in “negative equity” on the trade-in vehicle.

The dealership paid off the remaining balance on the

Explorer and added the negative equity to the amount

financed. Penrod financed approximately $31,700 in order to

purchase a vehicle that cost approximately $25,600. According to the contract, Penrod was to pay twenty percent interest

on the loan. The dealership subsequently assigned the contract

to AmeriCredit Financial Services.

523 days after purchasing the Ford Taurus, Penrod filed for

bankruptcy protection under Chapter 13. She still owed

$25,675 to AmeriCredit, which included the negative equity

from the Ford Explorer. In her Chapter 13 plan, Penrod proposed to bifurcate AmeriCredit’s claim into secured and unsecured portions. AmeriCredit objected to the plan, claiming it

had a purchase money security interest in the entire amount,

including the negative equity. 

1The Appellant has challenged the BAP’s calculations. In particular, the

Appellant claims that down payments and manufacturer rebates should

have been deducted from the gross negative equity amount, in accordance

with Cal. Civ. Code § 2982(a)(6)(G). We express no opinion on the merits

of the Appellant’s argument. Rather, we remand to the bankruptcy court

to examine the Appellant’s arguments and determine how credit should be

given for the rebate and the down payment. 

IN RE PENROD 10317
The bankruptcy court held that AmeriCredit did not have a

purchase money security interest in the portion of the loan

related to the negative equity charges. However, the bankruptcy court acknowledged that AmeriCredit had a purchase

money security interest in the remaining balance. In doing so,

the bankruptcy court adopted the dual status rule, which

allows part of a loan to have non-purchase money status,

while the remainder is covered by a purchase money security

interest.2

The bankruptcy court decision was affirmed by the BAP in

a published opinion. AmeriCredit challenges the BAP’s ruling

in this appeal.

II. STANDARD OF REVIEW

“We review decisions of the BAP de novo and apply the

same standard of review that the BAP applied to the bankruptcy court’s ruling. . . . We also review de novo the bankruptcy court’s and the BAP’s interpretations of the bankruptcy

statute.” Boyajian v. New Falls Corp. (In re Boyajian), 564

F.3d 1088, 1090 (9th Cir. 2009) (citations omitted).

III. DISCUSSION

A.

AmeriCredit has placed great emphasis on the decisions of

the other circuit courts of appeal. In total, over some strong

dissents, eight circuits have held that a creditor has a purchase

money security interest in the negative equity of a debtor’s

2We note that the Parties have not challenged the BAP’s decision

regarding the application of the dual status rule. Therefore, we will not

address whether the dual status rule or the transformation rule should

apply, although we recognize that the BAP’s use of the dual status rule has

been criticized by some. See Geoffrey M. Collins, Note, Negative Equity

and Purchase-Money Security Interests Under the Uniform Commercial

Code and the BAPCPA, 95 Cornell L. Rev. 161, 182-84 (2009). 

10318 IN RE PENROD
trade-in vehicle. Nuvell Credit Corp. v. Westfall (In re Westfall), 599 F.3d 498 (6th Cir. 2010); In re Howard, 597 F.3d

852 (7th Cir. 2010); Reiber v. GMAC, LLC (In re Peaslee),

585 F.3d 53 (2d Cir. 2009) (per curiam) (adopting the

response to a certified question of a divided New York Court

of Appeals, In re Peaslee, 13 N.Y.3d 75 (2009)); Ford Motor

Credit Co. v. Dale (In re Dale), 582 F.3d 568 (5th Cir. 2009);

Ford Motor Credit Co. v. Mierkowski (In re Mierkowski), 580

F.3d 740 (8th Cir. 2009); Ford v. Ford Motor Credit Co. (In

re Ford), 574 F.3d 1279 (10th Cir. 2009); In re Price, 562

F.3d 618 (4th Cir. 2009); and Graupner v. Nuvell Credit

Corp. (In re Graupner), 537 F.3d 1295 (11th Cir. 2008).

We decline to adopt the reasoning of our sister circuits. We

acknowledge that our decision creates a circuit split, and we

do not do this lightly. However, we are persuaded by the wellreasoned decision of Bankruptcy Judge Markell and his colleagues on the BAP. 

This appeal involves the application of 11 U.S.C.

§ 1325(a)(*) — a paragraph added to the Bankruptcy Code by

the Bankruptcy Abuse Prevention and Consumer Protection

Act of 2005 (“BAPCPA”). The paragraph is commonly called

the “hanging paragraph” because it was added to the end of

§ 1325(a) without a number.

[1] The hanging paragraph prevents the bifurcation of certain claims. Bifurcation occurs when a creditor’s claim is split

into secured and unsecured claims. The hanging paragraph

states:

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 [sic] preceding

the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as

IN RE PENROD 10319
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.

11 U.S.C. § 1325(a)(*).

[2] The only requirement from the hanging paragraph that

is at issue in this case is whether there was a purchase money

security interest in the negative equity in the trade-in vehicle.

[3] The term “purchase money security interest” is not

defined in the bankruptcy code. In bankruptcy, property interests are usually defined by state law. See Butner v. United

States, 440 U.S. 48, 54-57 (1979). California has adopted the

relevant portion of Revised Article 9 of the Uniform Commercial Code (“U.C.C.”) and the U.C.C. Official Comment.

Purchase money security interest is defined in U.C.C. § 9-

103, and in California Commercial Code § 9103.

The code does not provide a precise, encapsulated definition of purchase money security interest, but rather a string of

connected definitions. The relevant language provides that

“[a] security interest in goods is a purchase money security

interest . . . [t]o the extent that the goods are purchase money

collateral with respect to that security interest.” Cal. Comm.

Code § 9103(b). “ ‘Purchase money collateral’ means goods

or software that secures a purchase money obligation.” Cal.

Comm. Code § 9103(a)(1). “ ‘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).

[4] In plain English, a purchase money security interest

arises when a person buys a good and the seller (if a dealer

financed transaction) or lender (if the sale is financed by a

10320 IN RE PENROD
loan) retains a security interest in that good for all or part of

the price. Purchase money security interests have long been

favored at law, and enjoy “super-priority” rights over other

types of security interests and liens. See Grant Gilmore, The

Purchase Money Priority, 76 Harv. L. Rev. 1333 (1963).

B.

[5] With all of the foregoing as background, we arrive at

the key issue of this appeal — the meaning of “price” for the

purposes of the purchase money security interest. The definition is found in the Official Comment.

As used in subsection (a)(2), the definition of

“purchase-money obligation,” the “price” of collateral or the “value given to enable” includes obligations for expenses incurred in connection with

acquiring rights in the collateral, sales taxes, duties,

finance charges, interest, freight charges, costs of

storage in transit, demurrage, administrative charges,

expenses of collection and enforcement, attorney’s

fees, and other similar obligations.

U.C.C. § 9-103 cmt. 3.

AmeriCredit argues that the negative equity related to the

Ford Taurus Penrod traded in is an “expense[ ] incurred in

connection with acquiring rights in the collateral.” In doing

so, AmeriCredit places more weight on this phrase than it can

bear. 

[6] The payment of Penrod’s remaining debt on her 1999

Ford Explorer cannot easily be characterized as an “expense.”

It is the payment of an antecedent debt, not an expense

incurred in buying the new vehicle. See In re Peaslee, 13

N.Y.3d at 83 (Smith, J., dissenting) (“A refinanced loan is

not, in accounting terms, properly speaking an ‘expense’ at

all; it is the substitution of a new liability for an old one.”).

IN RE PENROD 10321
AmeriCredit claims that the transactions are closely connected, and that the requirements of Comment 3 are satisfied

as a result. While all things are connected at some level, the

question here is whether the negative equity on Penrod’s Ford

Explorer was sufficiently connected to the purchase of the

Ford Taurus to establish a purchase-money security interest.

We hold that it is not.

AmeriCredit and some courts have looked to studies indicating that over a third of vehicle purchases in the United

States involve negative equity to conclude that they are sufficiently connected. See, e.g., In re Howard, 597 F.3d at 857-

58. Some circuits have described combining a new vehicle

purchase with negative equity as a “package deal.” See In re

Graupner, 537 F.3d at 1302. While the trade-in and new purchase may be performed at the same time, or use one unified

document, this does not automatically mean that there is a

purchase money security interest. Judge Bye, of the Eighth

Circuit, aptly made this point:

The fact that financing negative equity has become

a customary industry practice, and practical reality

necessary to many motor vehicle sales transactions,

does not alter the fact that negative equity does not

fall within Article 9’s definition of “price” or “value

given.” Money or value given to pay off the negative

equity in a trade-in vehicle is not, in the strictest

sense, given to acquire rights in the secured collateral. Neither does the negative equity represent any

part of the price of the vehicle or associated costs

arising directly from the sale. The realities of such

transactions frequently require the financing of negative equity to facilitate the sale, but the focus should

be on price or value given as defined by Article 9,

and not what is necessary to entice sellers and lenders into the transaction.

In re Mierkowski, 580 F.3d at 746 (Bye, J., dissenting).

10322 IN RE PENROD
Finally, negative equity cannot fall under the “other similar

obligations” category because negative equity is unlike the

examples listed in Comment 3. The items in the list are transaction costs related to purchase, and negative equity will “typically be larger, and more readily separable from the purchase

transaction itself, than such things as sales tax, duties and

finance charges.” In re Peaslee, 13 N.Y.3d at 83-84 (Smith,

J., dissenting); see also In re Ford, 574 F.3d at 1289 (Tymkovitch, J., dissenting). 

[7] However one structures or describes the transaction,

the negative equity is antecedent debt. A seller or lender can

obtain a purchase money security interest only for new value,

and closely related costs. Old value simply does not fit within

that rubric.

C.

[8] AmeriCredit argues that the California Automobile

Sales Finance Act (“ASFA”) should be used in determining

the “price of the collateral.” The ASFA inlcudes negative

equity charges in the “cash price” of the vehicle. Cal. Civ.

Code § 2981(e). AmeriCredit has invoked the in pari materia

doctrine to read the ASFA and Article 9 together, to construe

the term “price of the collateral.” 

[9] We disagree. The purpose of the “cash price” definition

in the ASFA is to disclose to consumers that they are responsible for negative equity charges. The definition says nothing

about whether those charges result in a purchase money

security interest. See In re Ford, 574 F.3d 1292-93 (Tymkovitch, J., dissenting). The disclosure provisions of the

ASFA were enacted for a different purpose than the “price of

the collateral” provision in the U.C.C. Even courts that have

ruled in favor of creditors have recognized that laws such as

the ASFA are not helpful in determining the “price of the collateral.” Writing for the Seventh Circuit, Judge Posner said

the following regarding an analogous Illinois law: “[i]t’s a

IN RE PENROD 10323
consumer-protection statute, intended to require disclosure of

the charges that make up the total price that a consumer pays

for the car, rather than to prescribe what is and is not included

in the purchase money security interest.” In re Howard, 597

F.3d at 857. Therefore, we ignore the ASFA’s “cash price”

definition.

D.

AmeriCredit has argued that its position is in harmony with

federal bankruptcy law. In its brief, AmeriCredit states that

“Section 547(c)(3) of the Bankruptcy Code gives special protection from preference avoidance to ‘enabling loans,’ which

are defined like a purchase-money security interest.” However, upon closer examination it appears that AmeriCredit’s

position runs counter to basic federal bankruptcy principles.

Specifically, the statutory language cited by AmeriCredit provides that:

(c) The trustee may not avoid under this section a

transfer—

. . . 

(3) that creates a security interest in property acquired by the debtor—

(A) to the extent that such security interest secures new value that was—

(i) given at or after the security agreement that contains a description of

such property as collateral;

(ii) given by or on behalf of the

secured party under such agreement;

(iii) given to enable the debtor to

acquire such property; and

10324 IN RE PENROD
(iv) in fact used by the debtor to

acquire such property; and

(B) that is perfected on or before 30 days

after the debtor receives possession of

such property[.]

11 U.S.C. § 547(c)(3).

[10] However, new value is defined in the same section as

follows:

“[N]ew value” means money or money’s worth in

goods, services, or new credit, or release by a transferee of property previously transferred to such

transferee in a transaction that is neither void nor

voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but

does not include an obligation substituted for an

existing obligation[.]

11 U.S.C. § 547(a)(2) (emphasis added).

[11] Therefore, AmeriCredit’s position is not consistent

with the Bankruptcy Code. Under the Bankruptcy Code,

security interests are given preferential treatment to the extent

that the obligation relates to the receipt of truly new value, not

just old obligations that have been repackaged. The negative

equity charges related to Penrod’s 1999 Ford Explorer would

not qualify as new value under 11 U.S.C. § 547(a)(2). Therefore, AmeriCredit’s position is not in harmony with federal

bankruptcy principles.

E.

Any conclusion in favor of AmeriCredit based upon the

phrase “value given to enable the debtor to acquire rights in

or the use of collateral” would be erroneous. Many of the

IN RE PENROD 10325
courts that have faced this issue have honed in on the “value

given to enable” language in describing negative equity.

Those courts see “value given to enable” as a good descriptor

of how the original car and its loan might be an obstacle to

purchasing the new car.

However, there is a difference between “price” and “value

given to enable.”

3

 Both sellers and third party lenders can

obtain purchase money security interests. A seller obtains a

purchase money security interest through a dealer financed

sale, where the merchandise goes out the door upon the credit

of the buyer. Payment is to be made to the dealer. A purchase

money security interest is only valid for the “price” of the

merchandise.

A lender such as a finance company, bank, or credit union

obtains a purchase money security interest when it makes

funds available to the purchaser to buy the merchandise. The

money is provided to the borrower to make the purchase. See

Collins, 95 Cornell L. Rev. at 186. That language is somewhat

broader than “price” because the money has to be traced from

the lender to the borrower to the seller. See In re Howard, 597

F.3d at 855-56 (“The ‘value given’ part of the definition is

intended to make clear that the obligation can be to a finance

company . . . rather than to the seller.”). Broad language is

employed to encompass third party financing, not to expand

the scope of purchase money security interests.

[12] In sum, we find that a creditor does not have a purchase money security interest in the “negative equity” of a

vehicle traded in during a new vehicle purchase.

3We note that AmeriCredit claims that there is a purchase money security interest in the negative equity under “price.” This is correct, because

the sale was initially financed by the dealer, and the indebtedness was subsequently transferred to AmeriCredit. As a dealer-financed transaction,

“price” should be used instead of “value given to enable.” 

10326 IN RE PENROD
IV. CONCLUSION

For the foregoing reasons, the decision of the Bankruptcy

Appellate Panel is AFFIRMED and REMANDED to the

bankruptcy court for further proceedings regarding how credit

should be given for the rebate and down payment.

IN RE PENROD 10327