Marlene Penrod v. Americredit Financial Services
2015 U.S. App. LEXIS 17250
9th Cir.2015Background
- Penrod purchased a Ford Taurus and rolled $7,000 of negative equity from a trade-in into a $32,000 loan; the loan was assigned to AmeriCredit.
- Penrod filed Chapter 13 and proposed bifurcating AmeriCredit’s claim into a secured claim equal to the car’s value (~$16,000) and an unsecured claim for the remainder.
- AmeriCredit asserted a fully secured claim for the entire balance under the retail installment contract and relied on the Bankruptcy Code’s “hanging paragraph” preventing bifurcation of certain auto purchase-money security interests.
- Bankruptcy court held the hanging paragraph did not protect amounts attributable to negative equity from a trade-in; it treated $7,000 as unsecured, and the plan was confirmed; appellate process culminated in this court’s prior affirmance.
- Penrod sought recovery of $245,000 in attorney’s fees under the contract and California Civil Code § 1717; bankruptcy and district courts denied fees, reasoning § 1717 does not apply when the prevailing party won under federal bankruptcy law.
- Ninth Circuit reversed, holding the litigation was an "action on a contract," that Penrod prevailed on the contract, and § 1717 entitles her to reasonable attorney’s fees; remanded to determine amount.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether litigation over applicability of the hanging paragraph is an "action on a contract" under Cal. Civ. Code § 1717 | Penrod: Yes — AmeriCredit sought to enforce the contract's security-interest language; defeating enforcement is an action on the contract | AmeriCredit: No — dispute turned on federal bankruptcy law, not contract law | Held: Yes — enforcing or preventing enforcement of a contract term is an action on a contract, even if decided under bankruptcy law |
| Whether § 1717 bars fee awards when prevailing party wins under federal bankruptcy law | Penrod: § 1717 applies regardless of whether relief is based on bankruptcy law | AmeriCredit: § 1717 should not apply because issues were peculiar to federal bankruptcy law | Held: Travelers forecloses a categorical bar; California law does not preclude § 1717 fees for litigation under bankruptcy law |
| Whether Penrod was the "party prevailing on the contract" for § 1717 purposes | Penrod: She obtained greater relief by precluding full enforcement of the contract term securing negative equity | AmeriCredit: (implicitly) Penrod did not prevail on the contract because outcome flowed from bankruptcy law | Held: Penrod prevailed on the contract because she defeated enforcement of a contract term; she is entitled to fees if AmeriCredit could have recovered them had it prevailed |
| Whether AmeriCredit could have recovered attorney’s fees had it prevailed | Penrod: The contract’s broad collection-fee clause covers AmeriCredit’s litigation to collect the loan balance | AmeriCredit: Denied it would have sought fees (factual denial) | Held: The contract plainly authorized AmeriCredit to seek collection costs and fees; thus reciprocal recovery under § 1717 is available to Penrod |
Key Cases Cited
- Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007) (Bankruptcy Code does not categorically disallow fee claims for litigation involving bankruptcy-law issues)
- Santisas v. Goodin, 17 Cal.4th 599 (Cal. 1998) (interpretation of Cal. Civ. Code § 1717 and reciprocal fee-shifting principles)
- In re Penrod, 611 F.3d 1158 (9th Cir. 2010) (prior appeal addressing hanging-paragraph applicability)
- In re Fobian, 951 F.2d 1149 (9th Cir. 1991) (pre-Travelers precedent limiting recovery of fees in bankruptcy litigations)
- Circle Star Ctr. Assocs. v. Liberate Techs., 55 Cal. Rptr. 3d 232 (Ct. App. 2006) (contractual fees recoverable for litigation of bankruptcy-law issues)