Marlene Penrod v. Americredit Financial Services , 802 F.3d 1084 ( 2015 )


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  •                      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.