Court Opinion

ID: 3006506
Source: CourtListenerOpinion
Date Created: 2015-10-01 17:01:32.380812+00
Date Added: 2024-06-11T11:39:20.822406
License: Public Domain

FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT

 IN RE MARLENE A. PENROD,                         No. 13-16097
                                   Debtor.
                                                    D.C. No.
                                                 4:12-cv-01548-
 MARLENE A. PENROD,                                   YGR
                                Appellant,

                     v.                             OPINION

 AMERICREDIT FINANCIAL SERVICES,
 INC.,
                        Appellee.

      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.
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.
                        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.
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
                        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 Consumer Protection Act of 2005, Pub.
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.”
                        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
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
                        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
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 &
                        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 bankruptcy proceedings 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
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 bankruptcy law—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).
                         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.
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.