No. 10-1443

Supreme Cour~ U.S.FILED

dUL ?.3OFF|CE OF THE CLERK

IN THE

upreme (£ourt of t! e niteb tate

AMERICREDIT FINANCIAL SERVICES, INC.,

MARLENE A. PENROD,

Petitioner,

Respondent.

On Petition for Writ of Certiorari to

the United States Court of Appeals

for the Ninth Circuit

BRIEF IN OPPOSITION

Craig V. WinslowLAW OFHCES OFCRAIG V. WINSLOW630 N. San Mateo DriveSan Matco, CA 94401

G. Eric Brunstad, Jr.Collin O’Connor UdellMatthew J. DeludeDECHERT LLP90 State House SquareHartford, CT 06103

July 27, 2011

Kenneth N. Klee*Daniel J. BusselWhitman L. HoltKLEE, TUCHIN, BOGDANOFFSTERN LLP1999 Avenue of the StarsThirty-Ninth FloorLos Angeles, CA 90067(310) 407-4000kklee@ktbslaw.com

Counsel for Respondent*Counsel of Record

Blank Page

QUESTION PRESENTED

Whether an advance attributable to a trade-invehicle’s "negative equity" (i.e., debt owed above andbeyond the current collateral value of the trade-invehicle) is part of the "purchase money securityinterest" arising from the sale of a new vehicle andtherefore protected from bifurcation and cramdownby the "hanging paragraph" of 11 U.S.C. § 1325(a).

The resolution of this question depends entirely uponresolution of the following state law question:

..Whether an advance attributable to atrade-in vehicle’s "negative equity" is a partof the "purchase money obligation" arisingfrom the purchase of a new car, as definedunder the California Commercial Code.

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Table of Contents

QUESTION PRESENTED ........................................

PRELIMINARY STATEMENT ...............................1

RELEVANT STATE STATUTE ..............................6

REASONS FOR DENYING THE PETITION .......8

no As AmeriCredit Has Previously Argued, ThisCase Turns on the Meaning of the Term"Purchase Money Security Interest" Under theCalifornia Commercial Code and ThereforeDoes Not Involve a Circuit Split ...................... 8

The Meaning of "Purchase Money SecurityInterest" in This Case Is a Question ofCalifornia Commercial Law ........................8

AmeriCredit Failed to Raise Its "FederalLaw" Argument Before the BankruptcyCourt and Bankruptcy Appellate Paneland Instead Relied Solely on CaliforniaLaw ............................................................18

o The Court of Appeals Properly RejectedAmeriCredit’s Argument That California’sASFA Should Be Read In Pari Materiawith the California Commercial Code ...... 20

Bo

Co

iii

The Court of Appeals’ Interpretation of"Purchase Money Security Interest" UnderCalifornia Law Is Consistent with the Long-Established Meaning of That Term of Art atCommon Law, Under Modern CommercialLaw, and with the Legislative Purpose of theHanging Paragraph ........................................ 23

Under the California Commercial Code, theRepayment of a Pre-Existing Debt DoesNot Constitute a Purchase MoneyObligation .................................................. 23

The Long-Established Common LawMeaning of "Purchase Money SecurityInterest" Has Consistently ExcludedAntecedent Claims ....................................27

o Former California Commercial CodeSection 9107, the Precursor to CurrentCalifornia Commercial Code Section 9103,Adopts the Common Law ApproachExcluding Antecedent Debt ...................... 29

o The Hanging Paragraph Was Enacted toAddress the Problem of Drive-OffDepreciation, Not Negative Equity ..........32

AmeriCredit’s Claim That CaliforniaAutomobile Dealers Will Be Forced to DenyFinancing to California Consumers Is Untrueand Unsupported by the Record .................... 36

CONCLUSION .........................................................39

iv

Table of Authorities

CASES

AdarandConstructors, Inc. v. Mineta,534 U.S. 103(2001) ..............................................19

Adickes v. S.H. Kress &Co.,398 U.S. 144(1970) ..............................................19

Barnhartv. SigmonCoalCo.,Inc.,534 U.S. 438(2002) ................................................9

Butner v. United States,440 U.S. 48 (1979) ......................................4, 10, 11

Hamilton v. Lanning,130 S. Ct. 2464(2010) ..........................................34

Harris v. Youngstown Bridge Co.,90 F. 322 (6th Cir. 1898) ................................27, 28

Herb v. Pitcairn,324U.S. 117 (1945) ............................ ..................15

Hernandez v. Atl. Fin. Co.,105 Cal. App. 3d 65 (1980) ...................................21

In re Billings,838 F.2d 405 (10th Cir. 1988) ..............................12

In re Craw ford,397 B.R. 461 (Bankr. E.D. Wis. 2008) .................31

V

In re Dale,582 F.3d 568 (5th Cir. 2009) ................................12

In re Ford,574 F.3d 1279 (10th Cir. 2009) ......................13, 14

In re Howard,597 F.3d 852 (7th Cir. 2010) ................................12

In re Johnson,380 B.R. 236 (Bankr. D. Or. 2007) ......................33

In re Look,383 B.R. 210 (Bankr. D. Me. 2008) ......................13

In re Mancini,390 B.R. 796 (Bankr. M.D. Pa. 2008) ..................13

In re Mierkowski,580 F.3d 740 (8th Cir. 2009) ................................12

In re Pan Am. Corp.,125 B.R. 372 (S.D.N.Y.), aff’d, 929 F.2d 109(2d Cir. 1991) ........................................................12

In re Peaslee,547 F.3d 177 (2d Cir. 2008) .....................13, 14, 15

In re Peaslee,585 F.3d 53 (2d Cir. 2009) ...................................14

In re Peaslee,913 N.E.2d 387 (N.Y. 2009) .................................14

In re Penrod,392 B.R. 835 (B.A.P. 9th Cir. 2008) .............passim

vi

In re Penrod,611 F.3d 1158 (9th Cir. 2010) ......................passim

In re Robson,369 B.R. 377 (Bankr. N.D. Ill. 2007) ...................33

In re ~Vestfall,599 F.3d 498 (6th Cir. 2010) ................................12

Johnson v. County of Fresno,111 Cal. App. 4th 1087 (2003) .............................24

Juarez v. Arcadia Fin., Ltd.,152 Cal. App. 4th 889 (2007) ...............................21

Med. Bd. of Cal. v. Superior Court,88 Cal. App. 4th 1001 (2001) ...............................20

Michigan v. Long,463 U.S. 1032 (1983) ............................................15

Murdock v. City of Memphis,87 U.S. 590 (1874) ................................................15

Nobelman v. Am. Say. Bank,508 U.S. 324 (1993) ..............................................10

Pa. Dep’t of Corr. v. Yeskey,524 U.S. 206 (1998) ..............................................19

Pristas v. Landaus of Plymouth, Inc.,742 F.2d 797 (3d Cir. 1984) .................................12

Raleigh v. Ill. Dep’t of Revenue,530 U.S. 15 (2000) ................................................10

vii

Taylor v. Freeland & Kronz,503 U.S. 638 (1992) ........................................18, 19

Travelers Cas. & Sur. Co. of Am. v. Pac. Gas &Elec. Co.,549 U.S. 443 (2007) ..........................................4, 10

U.S. Term Limits, Inc. v. Thornton,514 U.S. 779 (1995) ..............................................15

United States v. Kimbell Foods,440 U.S. 715 (1979) ..............................................10

United States v. New Orleans R.R.,79 U.S. 362 (1870) ................................................27

Venner v. Farmers’ Loan & Trust Co.,90 F. 348 (6th Cir. 1898) ......................................27

Walker v. Superior Court,47 Cal. 3d 112 (1988) ...........................................21

STATUTES

11 U.S.C. § 506(a) ..............................................3, 8, 35

11 U.S.C. § 1325(a)(5) ...............................................34

11 U.S.C. § 1325(a)(*) ........................................passim

11 U.S.C. § 1325(b) ....................................................34

Bankruptcy Technical Corrections Act of 2010,PUB. L. NO. 111-327, 124 STAT. 3557 (2010) ..........9

CAL. COM. CODE

CAL. COM. CODE

CAL. COM. CODE

CAL. COM. CODE

CAL. COM. CODE

CAL. COM. CODE

CAL. COM. CODE

oooVlll

§ 9101 cmt. 1 ......................21, 22, 30

§ 9101 cmt. 4.e ................................31

§ 9103 .....................................passim

§ 9103 cmt. 3 ..............................7, 25

§ 9103 cmt. 5 ..................................31

§ 9107 (repealed 1999) ...................29

§ 9107 (repealed 1999) cmt. 2 ........30

California Automobile Sales Finance Act, CAL.CIv. CODE §§ 2981 et seq ..............................passim

FLA. SWAT. ANN. § 679.1031 .......................................17

IDAHO CODE ANN. § 28-9-103 ....................................17

IND. CODE ANN. § 26-1-9.1-103 ..................................17

KAN. SWAT. ANN. § 84-9-103 .......................................17

LA. REV. SWAT. ANN. § 10:9-103 .................................17

MD. CODE ANN., COM. LAW § 9-103 ...........................17

NEB. REV. SWAT. § 9-103 .............................................17

N.D. CENT. CODE § 41-09-03 .....................................17

S.D. CODIFIED LAWS § 57A-9-103 ..............................17

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OTHER AUTHORITIES

15 ASSEMBLY INTERIM COMM. REPORTS NO. 24,FIN. & INS. REPORT (Comm. Print 1960) ..............21

Douglas C. Baird, Bankruptcy Procedure andState-Created Rights: The Lessons ofGibbons and Marathon,1982 SuP. CT. REV. 25 ..........................................10

Douglas C. Baird, Loss Distribution, ForumShopping, and Bankruptcy: A Reply toWarren,54 U. CHI. L. REV. 815 (1987) ...............................12

BLACK’S LAW DICTIONARY (9th ed. 2009) ..................25

California Economic Indicators, January-February 2011,http://www.dof.ca.gov/HTML/FS_DATA/indicatr/documents/CEI1102FINAL.pdf (lastvisited July 22, 2011) ...........................................37

California Economic Indicators, May-June2011,http://www.dof.ca.gov/HTML/FS_DATA/indicatr/documents/CEI%20201106%20FINAL.pdf (last visited July 22, 2011) ...........................37

Dienna Ching, Does Negative Equity Negatethe Hanging Paragraph ?,16 AM. BANKR. INST. L. REV. 463 (2008) ..............33

Grant Gilmore, The Purchase Money Priority,76 HARV. L. REV. 1333 (1963) ........................27, 30

x

Thomas H. Jackson, THE LOGIC AND LIMITS OF

BANKRUPTCY LAW (Harvard 1986) .......................12

National Automobile Dealers Association,NADA Data 2011: State of the IndustryReport,http://www.nada.org/Publications/NADADATA/2011/default (last visited July 22,2011) .....................................................................37

WARD’S AUTO, Key Automotive Data,http://wardsauto.com/keydata (last visitedJuly 22, 2011) .......................................................38

WARD’S MOTOR VEHICLE FACTS AND FIGURES

(James W. Bush et al. eds., 2010) ........................38

William C. Whitford, A History of theAutomobile Lender Provisions of BAPCPA,2007 U. ILL. L. REV. 143 (2007) ............................33

PRELIMINARY STATEMENT

This matter arises out of the chapter 13bankruptcy case of Respondent Marlene Penrod("Penrod"). Petitioner AmeriCredit FinancialServices, Inc. ("AmeriCredit") is a creditor of Pe~rodas assignee of a retail installment sales contractbetween Penrod and Hansel Ford car dealership.

In September 2005, Penrod purchased a 2005Ford Taurus from Hansel Ford in Santa Rosa,California.1 Pet. App. at 18a; In re Penrod, 392 B.R.835, 838 (B.A.P. 9th Cir. 2008). The cash price of theTaurus was approximately $23,500, and with taxand license, the total amount Penrod paid for theTaurus was $25,600. Pet. App. at 18a; Penrod, 392B.R. at 838. Penrod paid $1,000 down and at thesame time traded in her 1999 Ford Explorer. Pet.App. at 3a-4a; In re Penrod, 611 F.3d 1158, 1159-60(9th Cir. 2010). Although Penrod owed over $13,000secured by the Explorer, she received a credit of only$6,000 for the trade-in of the vehicle. Pet. App. at4a; Penrod, 611 F.3d at 1160. Therefore, there wasmore than $7,000 in "negative equity" (i.e., theamount by which the indebtedness secured by thevehicle exceeded its trade-in value) with respect to

AmeriCredit sets forth additional facts not contained in theopinions of the lower courts based on its reading of theRetail Installment Sales Contract. Pet. at 5-6. The copy ofthis agreement placed in the record by AmeriCredit isextremely difficult to read. Pet. App. at 158a.AmeriCredit’s interpretations of otherwise illegible portionsof the contract should be disregarded.

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the Explorer. Pet. App. at 4a; Penrod, 611 F.3d at1160. The dealership paid off the outstandingbalance owed on the Explorer, credited Penrod forthe $6,000 trade-in value of the Explorer, and addedapproximately $7,000 to the indebtedness secured bythe new Taurus. Pet. App. at 4a; Penrod, 611 F.3d at1160. Penrod therefore ultimately borrowedapproximately $31,700, of which at most $25,600 wasattributable to the cost of the Taurus. Pet. App. at4a; Penrod, 611 F.3d at 1160. According to thecontract, Penrod was to pay 20% per annum intereston the entire principal balance of the loan, includingboth the amount advanced to finance her acquisitionof the Taurus and the additional $7,000 in "negativeequity." Pet. App. at 19a n.2; Penrod, 392 B.R. at838 n.2. The contract itself separated the negativeequity from the actual purchase price of the Taurus.Pet. App. at 158a. The dealership subsequentlyassigned the loan contract and related securityinterest in Penrod’s Taurus to AmeriCredit. Pet.App. at 4a; Penrod, 611 F.3d at 1160.

A year and a half after purchasing the Taurus,Penrod filed for bankruptcy protection under chapter13. Pet. App. at 4a; Penrod, 611 F.3d at 1160. OnSeptember 21, 2007, the bankruptcy court confirmedPenrod’s plan, under which she retained the Taurussubject to that portion of AmeriCredit’s claimsecured by a purchase money security interest in thecar. The plan required Penrod to, among otherthings, make future payments to AmeriCredit of$18,537.89 plus interest out of her future earnings.But, consistent with the holdings of all three courtsbelow, Penrod’s plan treated the portion of

AmeriCredit’s claim that was based on therefinancing of past indebtedness associated with theExplorer as an unsecured claim, because the presentvalue of the Taurus was exhausted by the remainingpurchase money obligation secured by the Taurus,and the non-purchase money component of theoriginal loan was not protected from bifurcation bythe "hanging paragraph." Pet. App. at 4a-5a;Penrod, 611 F.3d at 1160.

In bankruptcy, the claims of secured creditorsare, as a matter of course, split or "bifurcated" intotwo parts: a secured portion equal to the value of thecollateral and an unsecured portion represented byany amount owed over the value of the collateral. 11U.S.C. § 506(a). The amendments to the BankruptcyCode in the Bankruptcy Abuse Prevention andConsumer Protection Act of 2005 ("BAPCPA")created a limited exception to this longstandingstatutory treatment of secured creditors. ForAmeriCredit to qualify for this special exception tothe general bankruptcy rule of bifurcation, fourrequirements must be satisfied: (i) a purchase moneysecurity interest must secure the debt that is thesubject of the claim, (ii) the debt must have beenincurred less than 910 days before bankruptcy, (iii)the collateral must be a motor vehicle, and (iv) themotor vehicle must have been acquired for thepersonal use of the debtor.

The issue in this case is whether AmeriCreditholds a purchase money security interest in theTaurus to the full extent of AmeriCredit’s claim. See,e.g., Pet. B.A.P. Br. at 5. To the extent thatAmeriCredit holds a qualifying purchase money

security interest in the Taurus, it is not subject tothe ordinary bankruptcy rule of bifurcation. But tothe extent that the portion of AmeriCredit’s claimbased on the refinancing of past indebtedness (asopposed to the acquisition price of new property)exceeds the present value of its collateral, theordinary rule of bifurcation still applies. Penrod’sposition throughout this litigation is thatAmeriCredit is, at most, entitled to special protectionunder the hanging paragraph only to the extent thatmonies were advanced to fund the purchase price ofthe Taurus, not the portion of the loan thateffectively refinanced the "negative equity" in theExplorer.

The Bankruptcy Code does not define the term"purchase money security interest." The term,however, has acquired a particular meaning incommercial law that can be traced back to earlycommon law. "Purchase money security interests"have been given preferentialtreatment incommercial law for centuries. That specialtreatment is carried forward into modern commerciallaw by the Uniform Commercial Code ("UCC"), asadopted by the State of California. The meaning of"purchase money security interest" has alwaysexcluded, and still today excludes, the refinancing ofpast indebtedness as part of a purchase moneyobligation.

In accordance with this Court’s decisions inTravelers Casualty & Surety Co. of America v. PacificGas & Electric Co., 549 U.S. 443, 450-51 (2007), andButner v. United States, 440 U.S. 48, 53-55 (1979),the courts below turned to California state law to

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ascertain the meaning of "purchase money securityinterest." Based on California Commercial Codesection 9103, the Court of Appeals, the bankruptcyappellate panel, and the bankruptcy court allproperly concluded that funds advanced to pay offthe negative equity on Penrod’s Explorer did notconstitute a purchase money obligation with respectto the Taurus, and, therefore, AmeriCredit did nothold a purchase money security interest to the fullextent of its claim. Further, all three courts correctlyrejected AmeriCredit’s argument that California’sAutomobile SalesFinance Act, CAL. CIV. CODE§§ 2981 et seq. ("ASFA"), and the CaliforniaCommercial Codeshould be construed togetherunder the common law doctrine of in pari materia toalter what would otherwise be the meaning of theapplicable California Commercial Code provision.Whether California statutes are properly construedin pari materia is also a California state law questioninvolving numerous factors including the intent ofthe California legislature. The lower courts rightlyinterpreted California law with respect to themeaning of the California Commercial Code and theapplicability of the in pari materia doctrine toexclude consideration of California’s ASFA.

The courts below held, and AmeriCreditpreviously conceded, that this case turns solely on aninterpretation of California law. Pet. App. at 7a,30a; Penrod, 611 F.3d at 1161; Penrod, 392 B.R. at843-44. The state law nature of this dispute makesit inappropriate for this Court’s review. In anyevent, the courts below correctly limited applicationof the hanging paragraph to the "purchase money

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security interest" in Penrod’s Ford Taurus as thatterm of art has been understood both at common lawand under modern commercial law in California, andelsewhere, for centuries.

RELEVANT STATE STATUTE

The facts of this matter are straightforward andsummarized in the previous section. The CaliforniaCommercial Code provision relevant to this caseprovides that:

(a) In this section:

(1) "Purchase money collateral" meansgoods or software that secures a purchasemoney obligation incurred with respect tothat collateral.

(2) "Purchase money obligation" means anobligation of an obligor incurred as all orpart of the price of the collateral or forvalue given to enable the debtor to acquirerights in or the use of the collateral if thevalue is in fact so used.

(b) A security interest in goods is apurchase money security interest asfollows:

(1) To the extent that the goods arepurchase money collateral with respect tothat security interest ....

CAL. COM. CODE § 9103. In addition, Comment 3states that:

[T]he definition of "purchase-moneyobligation," the "price" of collateral or the"value given to enable" includes obligationsfor expenses incurred in connection withacquiring rights in the collateral, sales taxes,duties, finance charges, interest, freightcharges, costs of storage in transit,demurrage, administrative charges, expensesof collection and enforcement, attorney’s fees,and other similar obligations. The concept of"purchase-money security interest" requiresa close nexus between the acquisition of thecollateral and the secured obligation.

Id. § 9103 cmt. 3.

8

REASONS FOR DENYING THE PETITION

no As AmeriCredit Has Previously Argued,This Case Turns on the Meaning of theTerm "Purchase Money Security Interest"Under the California Commercial Codeand Therefore Does Not Involve a CircuitSplit.

The Meaning of "Purchase Money SecurityInterest" in This Case Is a Question ofCalifornia Commercial Law.

In bankruptcy, the claim of a secured creditor is,as a matter of course, split or "bifurcated" into twoparts: a secured portion equal to the present value ofthe collateral and an unsecured portion representedby any amount owed over the value of the collateral.11 U.S.C. § 506(a).2 BAPCPA amended theBankruptcy Code to create a limited exception to thisbasic principle by adding the following unnumberedparagraph to section 1325(a):3

Section 506(a)(1) provides, in pertinent part, that "[a]nallowed claim of a creditor secured by a lien on property¯ . . is a secured claim to the extent of the value of suchcreditor’s interest in the estate’s interest in such property... and is an unsecured claim to the extent that the value ofsuch creditor’s interest.., is less than the amount of suchallowed claim." 11 U.S.C. § 506(a)(1).

Because the paragraph is unnumbered, most courts andcommentators refer to it as the "hanging paragraph." It isusually cited as 11 U.S.C. § 1325(a)(*).

9

For purposes of paragraph (5), section 506shall not apply to a claim described in thatparagraph if the creditor has a purchasemoney security interest securing the debtthat is the subject of the claim, the debtwas incurred within the 910-day [period4]

preceding the date of the filing of thepetition, and the collateral for that debtconsists of a motor vehicle (as defined insection 30102 of title 49) acquired for thepersonal use of the debtor, or if collateralfor that debt consists of any other thing ofvalue, if the debt was incurred during the1-year period preceding that filing.

11 U.S.C. § 1325(a)(*) (emphasis added).

The hanging paragraph excepts two kinds ofconsumer purchase money obligations fromtraditional bankruptcy bifurcation: those incurredwithin 910 days of bankruptcy secured by personaluse automobiles, and those incurred within one yearof bankruptcy secured by other collateral. This caseinvolves a debt secured by a personal use automobile.

Statutory construction begins with the plainlanguage of the statute. Barnhart v. Sigmon CoalCo., Inc., 534 U.S. 438, 450 (2002). The Bankruptcy

The word "period," apparently elided in BAPCPA itself, wasrecently added to the hanging paragraph by the BankruptcyTechnical Corrections Act of 2010, PUB. L. NO. 111-327, 124SWAT. 3557 (2010).

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Code does not define the term "purchase moneysecurity interest." When, as here, a term,particularly a term of art directly drawn fromcommon law and state commercial law, is not definedby the Bankruptcy Code, state law determines thescope of the parties’ rights and obligations. TravelersCas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549U.S. 443, 450-51 (2007); see also Raleigh v. Ill. Dep’tof Revenue, 530 U.S. 15, 20 (2000); Nobelman v. Am.Say. Bank, 508 U.S. 324, 329 (1993); United States v.Kimbell Foods, 440 U.S. 715, 740 (1979); Burner v.United States, 440 U.S. 48, 53-55 (1979). This rulemakes sense, because in general bankruptcy law isnot designed fundamentally to alter property rights.Rather, "a bankruptcy proceeding is principally aforum in which all of a debtor’s creditors can gather,assemble the debtor’s assets, and divide them amongthemselves, according to the rights that state lawgives them." Douglas C. Baird, BankruptcyProcedure and State-Created Rights: The Lessons ofGibbons and Marathon, 1982 SuP. CT. REV. 25, 35.

AmeriCredit’s federal law claim is essentiallythat a special "federal rule of equity" preempts statelaw with respect to the proper scope of a "purchasemoney security interest." See Pet. at 14-20. Thisapproach was unanimously rejected in Butner v.United States, 440 U.S. 48 (1979). In Butner, thisCourt was asked to determine the rights of a secondmortgagee to rents collected during the periodbetween the mortgagor’s bankruptcy and theforeclosure sale of the property. Id. at 49. Thecircuits were split about whether the mortgagee’srights pursuant to a security interest were to be

11

determined by reference to state law or by referenceto "a federal rule of equity." Id. at 52-53. Under this"federal rule of equity," some courts affordedmortgagees a security interest in rents even if statelaw did not recognize any such interest. Id. at 53.Similarly, in this case, AmeriCredit now seeks tohave its claim recognized as a "purchase moneysecurity interest" regardless of any contrary meaningof this term of art under California state law.

In Burner, this Court rejected the concept of a"federal rule of equity," explaining that:

Property interests are created and definedby state law. Unless some federal interestrequires a different result, there is noreason why such interests shouldbeanalyzed differently simply becauseaninterested party is involved in abankruptcy proceeding. Uniform treatmentof property interests by both state andfederal courts within a State serves toreduce uncertainty, to discourage forumshopping, and to prevent a party fromreceiving a windfall merely by reason of thehappenstance of bankruptcy. Thejustification for application of state law arenot limited to ownership interests; theyapply with equal force to security interests

Id. at 55 (citation and quotation marks omitted).

Butner is a cornerstone for modern UnitedStates bankruptcy law as it has developed in our

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complex federal system. Butner’s teaching continuesto apply in many different bankruptcy contexts. See,e.g., Thomas H. Jackson, THE LOGIC AND LIMITS OFBANKRUPTCY LAW 21-27 (Harvard 1986); Douglas G.Baird, Loss Distribution, Forum Shopping, andBankruptcy: A Reply to Warren, 54 U. CHI. L. REV.815, 818 n.3 (1987).

Moreover, historic practice supports reference tostate law for the meaning of "purchase moneysecurity interest" in the hanging paragraph. Inparticular, courts have freely borrowed from statecommercial law when applying Bankruptcy Codeprovisions dealing with "purchase money securityinterests." See, e.g., In re Billings, 838 F.2d 405, 406(10th Cir. 1988) (noting while interpreting 11 U.S.C.§ 522(f) that "courts have uniformly looked to the lawof the state in which the security interest is created"to define "purchase money security interest"); Pristasv. Landaus of Plymouth, Inc., 742 F.2d 797, 800 (3dCir. 1984) (same approach to section 522(f)); In rePan Am. Corp., 125 B.R. 372, 376 (S.D.N.Y.), all’d,929 F.2d 109 (2d Cir. 1991) (same approach to formersection 1110).

Based on these principles, every federal court ofappeals and most lower courts have turned to statelaw to ascertain the meaning of the term "purchasemoney security interest" in the hanging paragraph.See, e.g., In re Westfall, 599 F.3d 498, 502 (6th Cir.2010) (defining purchase money security interest inaccordance with Ohio law); In re Howard, 597 F.3d852, 855 (7th Cir. 2010) (same under Illinois law); Inre Dale, 582 F.3d 568, 573 (5th Cir. 2009) (sameunder Texas law); In re Mierkowski, 580 F.3d 740,

13

742 (8th Cir. 2009) (same under Missouri law); In reFord, 574 F.3d 1279, 1283 (10th Cir. 2009) (sameunder Kansas law); In re Peaslee, 547 F.3d 177, 184-85 (2d Cir. 2008) (stating that "state law governs thedefinition of [purchase money security interest] inthe hanging paragraph"); In re Look, 383 B.R. 210,216 (Bankr. D. Me. 2008) (defining purchase moneysecurity interest in accordance with Maine law); Inre Mancini, 390 B.R. 796, 800 (Bankr. M.D. Pa. 2008)(same under Pennsylvania law).

AmeriCredit’s suggestion that the Court ofAppeals’ opinion conflicts with the decisions of eightother circuits and the decision of New York’s highestcourt is incorrect for this reason. The parties agreethat the decision below turns on an issue ofCalifornia state law. Pet. at 4 n.1 ("The partiesagree that the Uniform Commercial Code, asapplicable in California, applies to the transactionbetween Petitioner and Respondent."). Yet there isno circuit split regarding the definition of purchasemoney security interest under the CaliforniaCommercial Code. All the conflicting decisions citedby AmeriCredit involved the law of other states, notCalifornia.5

The fact that California Commercial Code section 9103 isdrawn from the UCC, a model statute sponsored by the

American Law Institute and the National Conference ofCommissioners on Uniform State Laws, does not somehowconvert the question determined below into a matter of

federal law. This Court does not sit to resolve conflictinginterpretations of the UCC or other so-called uniform state

footnote continued on next page...

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Although the provisions of the CaliforniaCommercial Code are similar to provisions enactedby some other states, the Court of Appeals wasobliged to interpret California law consistently withthe approach taken by the courts of California, seeFord, 574 F.3d at 1287 n.1 (Tymkovich, J.,dissenting), not the holdings of other state courts.

The decision in Reiber v. GMAC, LLC (In rePeaslee) illustrates this point. 547 F.3d 177 (2d Cir.2008), certified question answered by In re Peaslee,

913 N.E.2d 387 (N.Y. 2009), answer to certifiedquestion conformed to In re Peaslee, 585 F.3d 53 (2dCir. 2009). Faced with the same issue presented inthis matter, the Second Circuit Court of Appealscertified the question to the New York Court ofAppeals "[b]ecause we believe that the New YorkCourt of Appeals should be given the opportunity toaddress this important and recurring question ofNew York state law." 547 F.3d at 179 (emphasisadded) The court noted that section 9-103 of theNew York UCC "does not make clear whether rolled-in negative equity falls within the definition of’purchase-money obligation,’ and New York courtshave not yet considered" the question. Id. at 185.Accordingly, the Second Circuit panel stated that"[w]e believe that these questions - which areexquisitely state law issues, despite their relevance toour interpretation of the Bankruptcy Code - are best

laws. Cf. Pet. at 21-27. AmeriCredit’s complaints aboutdisuniform interpretation of the UCC should be directed tothe Permanent Editorial Board for the UCC, not this Court.

15

considered by New York’s highest court. We thereforeoffer the New York Court of Appeals the opportunityto guide us, should it opt to do so." Id. at 186(emphasis added).6

The same logic applies here. The questionwhether a trade-in vehicle’s "negative equity" is apart of the "purchase money obligation" under theCalifornia Commercial Code, on which the outcomeof this case turns, is a question for the CaliforniaSupreme Court to decide in the final instance, not.this Court. Cf. U.S. Term Limits, Inc. v. Thornton,514 U.S. 779, 838 (1995) (Kennedy, J., concurring)("Federalism was our Nation’s own discovery. TheFramers split the atom of sovereignty. It was thegenius of their idea that our citizens would have twopolitical capacities, one state and one federal, eachprotected from incursion by the other."); Herb v.Pitcairn, 324 U.S. 117, 125-26 (1945) (identifying thereason underlying the adequate and independentstate ground doctrine as "the partitioning of powerbetween the state and federal judicial systems ....We are not permitted to render an advisory opinion.... "), abrogated on other grounds by Michigan v.Long, 463 U.S. 1032 (1983); Murdock v. City ofMemphis, 87 U.S. 590, 631 (1874) ("[W]e think it

The specific question certified was "[i]s the portion of anautomobile retail installment sale attributable to a trade-invehicle’s ’negative equity’ a part of the ’purchase-moneyobligation’ arising from the purchase of a new car, asdefined under New York’s U.C.C.?" Peaslee, 547 F.3d at186.

16

equally clear that it has been the counterpart of thesame policy to vest in the Supreme Court, as a courtof appeal from the State courts, a jurisdiction limitedto the questions of a Federal character which mightbe involved in such cases." (emphasis in original)).

Each court of appeals to consider the issuepresented here has looked to the law of the state inwhich the case originated to determine the definitionof purchase money security interest. The sharplydivided New York Court of Appeals only construedNew York law, not California law. These courts haveconsidered state commercial codes, and in some casesother state statutes, to give the term meaning. Theoutcome of this case turns on the meaning of"purchase money obligation" under a specific state’slaw, and in particular, under the CaliforniaCommercial Code as interpreted by California courts.

As a further indication of the fundamentallystate law nature of this dispute, CaliforniaCommercial Code section 9103(h) deliberately givesCalifornia’s courts the discretion to determine therules applicable to purchase money transactionsinvolving consumer-goods, such as Penrod’s car.7

Although not all states have enacted UCC section 9-

Section 9103(h) provides that "[t]he limitation of the rulesin subdivisions (e), (f), and (g) to transactions other thanconsumer-goods transactions is intended to leave to thecourt the determination of the proper rules in consumer-goods transactions." CAL. COM. CODE § 9103(h).

17

103(h),s the California legislature’s decision toinclude subsection (h) expressly "leave[s] to the courtthe determination of the proper rules in consumer-goods transactions." CAL. COM. CODE § 9103(h).Moreover, the special treatment of consumer-goodstransactions under the UCC demonstrates that thedrafters invited variation in the interpretation of theterm "purchase money security interest" among thestates particularly with respect to consumertransactions. Accordingly, the definition of the term"purchase money security interest" in consumer-goods transactions is an open-textured question ofstate law, one not suitable for this Court’s resolution.

In sum, no court of appeals has treatedinterpretation of the term "purchase money securityinterest" as a question of federal law. As a result,this Court cannot authoritatively resolve thequestion presented. Rather, the Court’s decisioninterpreting California Commercial Code section9103 would remain subject to any subsequent,contrary conclusion by the California state courts.Therefore, certiorari should be denied.

See FLA. SWAT. ANN. § 679.1031 (eliminating "other than aconsumer-goods transaction" from relevant text); IDAHO

CODE ANN. § 28-9-103 (same); IND. CODE ANN. § 26-1-9.1-

103 (same); KAN. SWAT. ANN. § 84-9-103 (same); LA. REV.SWAT. ANN. § 10:9-103 (same); MD. CODE ANN., COM. LAW §9-103 (same); NEB. REV. SWAT. § 9-103 (same); N.D. CENT.CODE § 41-09-03 (same); S.D. CODIFIED LAWS § 57A-9-103

(same).

18

2. AmeriCredit Failed to Raise Its "FederalLaw"Argument Before the Bankruptcy Courtand Bankruptcy Appellate Panel and InsteadRelied Solely on California Law.

Despite the readily apparent state law nature ofthe issue, AmeriCredit has now purported to discoverthat the question presented in this case is one of"federal law" controlled by the plain text of theBankruptcy Code "Without the Need to ConsultState Law." Pet. 9th Cir. Reply Br. at 24. Untilfiling its brief in the Ninth Circuit, however,AmeriCredit insisted that the resolution of the caseturned solely on state law. More specifically,AmeriCredit argued that "Whether a Creditor has a’Purchase Money Security Interest’ is Determined byReference to State Law Not The Bankruptcy Code."Pet. B.A.P. Br. at 8. Similarly, before thebankruptcy court, AmeriCredit devoted all but theintroductory section of its brief to California statelaw arguments. Pet. Bankr. Ct. Br. at 5-23.AmeriCredit belatedly raised its "federal law"argument for the first time on appeal to the NinthCircuit. Pet. 9th Cir. Br. at 9-27. Penrod respondedthat any "federal law" argument had been waivedbecause AmeriCredit had not raised it below andbecause AmeriCredit adopted the opposite positionbefore the bankruptcy court and bankruptcyappellate panel. Resp. 9th Cir. Br. at 15-16. TheNinth Circuit panel properly declined to addressAmeriCredit’s new argument.

"[O]rdinarily, this Court does not decidequestions not raised or resolved in the lowercourt[s]." Taylor v. Freeland & Kronz, 503 U.S. 638,

19

646 (1992) (quoting Youakim v. Miller, 425 U.S. 231,234 (1976) (per curiam)); see also Adickes v. S.H.Kress & Co., 398 U.S. 144, 147 n.2 (1970) ("Whereissues are neither raised before nor considered by theCourt of Appeals, this Court will not ordinarily

--consider them."). Accordingly, when, as here, theonly purported federal issue raised by the petitionwas waived by the petitioner below, and not passedon by the lower courts, certiorari review is routinelydenied. Pa. Dep’t of Corr. v. Yeskey, 524 U.S. 206,212-13 (1998) (declining to address whetherapplication of the ADA to state prisons is aconstitutional exercise of Congress’s power becausethe issue, although raised in petitioner’s brief, wasnot addressed by the lower courts); Taylor, 503 U.S.at 646 (declining to consider petitioner’s argumentthat Bankruptcy Code section 105(a) permits courtsto disallow exemptions based on good faith); see alsoAdarand Constructors, Inc. v. Mineta, 534 U.S. 103,109 (2001) (dismissing writ and declining to applyconstitutional standard to complex statutes withoutbenefit of lower court review).

AmeriCredit’s own categorical statements to thelower courts that this case turns on state law, asopposed to federal law, were correct. That fact,particularly when combined with AmeriCredit’sfailure to timely raise its "federal law" theories,weighs strongly against granting certiorari.

20

The Court of Appeals Properly RejectedAmeriCredit’s Argument That California’sASFA Should Be Read In Pari Materia withthe California Commercial Code.

As part of its state law argument, AmeriCrediturged the lower courts to use the California ASFA todefine the scope of purchase money obligations andpurchase money security interests in cars sold atretail. Pet. App. at 11a, 44a; Pet. 9th Cir. Br. at 44-52; Pet. B.A.P. Br. at 16-18; Pet. Bankr. Ct. Br. at 11-12; Penrod, 611 F.3d at 1163; Penrod, 392 B.R. at849. The courts below rejected AmeriCredit’sargument that the California ASFA and theCalifornia Commercial Code should be construedtogether under the in pari materia doctrine. Pet.App. at 11a-12a, 44a-45a; Penrod, 611 F.3d at 1163;Penrod, 392 B.R. at 849-50. Under this doctrine, twoclosely-related statutes enacted for the same purposeare construed in light of one another. Whether twoparticular state statutes should be construed in parimateria is an inherently state law questionimplicating various considerations, including a statelegislature’s intent. Pet. App. at 46a-47a; Penrod,392 B.R. at 850. Again, the final word on therelevance of California’s ASFA to the meaning ofCalifornia Commercial Code section 9103 belongs tothe California Supreme Court.

Under California law, a statute that is modeledon another statute and shares the same legislativepurpose is considered in pari materia with the otherand should be interpreted consistently. See Med. Bd.of Cal. v. Superior Court, 88 Cal. App. 4th 1001(2001). Furthermore, the "[c]haracterization of the

21

object or purpose is more important thancharacterization of subject matter in determiningwhether different statutes are closely enough relatedto justify interpreting one in light of the other. It hasbeen held that where the same subject is treated inseveral acts having different~objects the statutes arenot in pari materia. The adventitious occurrence of... similar subject matter, in laws enacted for whollydifferent ends will normally not justify applying therule." Walker v. Superior Court, 47 Cal. 3d 112, 124n.4 (1988) (quotation marks omitted).

California’s ASFA was enacted in 1961 toprovide comprehensive protection to California retailmotor vehicle buyers. Hernandez v. Atl. Fin. Co., 105Cal. App. 3d 65, 69 (1980); see also 15 ASSEMBLYINTERIM COMMITTEE REPORTS NO. 24, FINANCE ANDINSURANCE REPORT 7 (Comm. Print 1960) (noting theimportance of protecting the unsophisticated motorvehicle consumer). When originally enacted, ASFArequired better disclosure of financing terms, as wellas maximum allowable finance charges, prohibitionson certain sale contract provisions, and limitationson the repossession and resale of consumer vehicles.Nearly 50 years later, the ASFA remains first andforemost a "buyer protection act." See, e.g., Juarez v.Arcadia Fin., Ltd., 152 Cal. App. 4th 889, 901 (2007).

By contrast, Division 9 of the CaliforniaCommercial Code "provides a comprehensive schemefor the regulation of security interests in personalproperty and fixtures." CAL. COM. CODE § 9101 cmt.1. Although the California Commercial Code appliesto automobile financing as a species of personalproperty financing, the Court of Appeals was correct

22

in holding that the fundamental disparity in theirpurposes, scope, and function precludes the twostatutes from being considered in pari materia underCalifornia law.9 The primary purpose of theCalifornia Commercial Code is to facilitate andregulate the creation and enforcement of securityinterests in personal property (whether held bybusinesses or consumers), not consumer protection.CAL. COM. CODE § 9101 cmt. 1.

The Court of Appeals’ decision, as well as thoseof the bankruptcy appellate panel and thebankruptcy court, are in accord with this Court’sclear directives that state law controls the substanceof claims in bankruptcy, and the resolution of thiscase turns solely on the definition of "purchasemoney security interest" under California law. Asthe issue presented is fundamentally one of state,rather than federal, law, this case is a poor choice forcertiorari review. The "circuit split" touted byAmeriCredit is based on different interpretations ofstate law, and the highest courts of those individualstates are the final arbiters of disputes over defined

Penrod agrees with all the lower court decisions in this caseand all the decisions of other courts of appeals that Penrod’scase involves a question of state, not federal, law. If,however, this Court concludes that the case properlypresents an issue of federal law and grants certiorari onthat issue, then this Court should preclude AmeriCreditfrom arguing that California’s ASFA is controlling orpersuasive or otherwise attempting to relitigate thesubsidiary California law question of the proper scope andapplication of the in pari materia doctrine.

23

terms in their states’ statutes. This Court does notsit as the final arbiter of state law issues, even whensuch issues may affect bankruptcy law. Properrespect for state law sovereignty over state lawissues precludes certiorari review of this case.

The Court of Appeals’ Interpretation of"Purchase Money Security Interest" UnderCalifornia Law Is Consistent with theLong-Established Meaning of That Term ofArt at Common Law, Under ModernCommercial Law, and with the LegislativePurpose of the Hanging Paragraph.

If this Court were to grant certiorari and decidea matter of California state law, the Court wouldfind that the decision below fully comports with aproper and comprehensive review of the relevantCalifornia statute and was correctly decided.

Under the California Commercial Code, theRepayment of a Pre-Existing Debt Does NotConstitute a Purchase Money Obligation.

The Court of Appeals began its analysis of theterm "purchase money security interest" by turningto the applicable state law, California CommercialCode section 9103. Pet. App. at 7a-8a; Penrod, 611F.3d at 1161. Under section 9103, the starting pointfor defining a "purchase money security interest" is a"purchase money obligation," which means "anobligation of an obligor incurred as all or part of theprice of the collateral or for value given to enable thedebtor to acquire rights in or the use of the collateralif the value is in fact so used." CAL. COM. CODE

24

§ 9103(a)(2). This language encompasses two kindsof purchase money obligations. Pet. App. at 7a-8a,33a-34a; Penrod, 611 F.3d at 1161; Penrod, 392 B.R.at 844-45.

One kind of purchase money obligationdescribed in section 9103(a)(2) is known as an"enabling loan" whereby a third-party lenderprovides funds to a borrower to purchase goods froma seller. The lender’s purchase money obligationarises from value that the lender gave to theborrower to enable the borrower to acquire rights inthe collateral, and which value the borrower, in fact,used to acquire the collateral. For example, a creditunion may obtain a purchase money security interestby loaning money to a borrower for the purpose ofbuying a car if the borrower in fact uses the loan topurchase a vehicle from a car dealer.

The second kind of purchase money obligationdescribed in section 9103(a)(2), which is applicable inthis case, is a credit sale transaction in which theseller extends credit to the buyer. When a car dealerextends credit to a borrower to purchase a vehicle,the transaction is a credit sale. Under Californialaw, the transaction will maintain its character as acredit sale transaction even if the original sellerassigns its rights as a creditor to another entity, ashappened in this case. See, e.g., Johnson v. County ofFresno, 111 Cal. App. 4th 1087, 1096 (2003) (recitingstate law principle that an assignee stands in theshoes of the assignor).

In credit sales transactions, the seller’spurchase money security interest extends to all or

25

part of the "price" of the collateral. CAL. COM. CODE

§ 9103(a)(2). The comment to California CommercialCode section 9103 states that the "price" for purposesof defining a "purchase money obligation" mayinclude obligations for expenses incurred inconnection with acquiring rights in the collateral,sales taxes, duties, finance charges, freight charges,costs of storage in transit, demurrage, administrativecharges, expenses of collection and enforcement, andattorney’s fees. CAL. COM. CODE § 9103 cmt. 3."Price" may also include other obligations that aresimilar to those items on the enumerated list. Id.Those items are standard transaction costs incidentto the sale and delivery of the newly acquiredcollateral, in this case Penrod’s Ford Taurus.BLACK’S LAW DICTIONARY 398 (9th ed. 2009) (defining"transaction cost" as "[a] cost connected with aprocess transaction, such as a broker’s commission,the time and effort expended to arrange a deal, orthe cost involved in litigating a dispute").

The Court of Appeals, as well as the bankruptcyappellate panel and the bankruptcy court, correctlyconcluded that under California law, the satisfactionof a pre-existing claim, or antecedent debt, is notincluded in this list or similar to those items on thelist. Negative equity is not a transaction cost. It isnot a cost of the sale and delivery of the new car, butinstead arises out of a past debt of the buyer toanother creditor incurred in connection with adifferent transaction. Negative equity is thereforeconceptually and analytically distinct from the actualprice of the vehicle and its ancillary charges. Indeed,the very contract Penrod signed reflects awareness of

26

this distinction between price and negative equity byseparating the contractual description of the twocomponents of the transaction. See Pet. App. at158a.

As the bankruptcy appellate panel aptlyobserved, "negative equity is essentially anothercreditor’s unsecured claim," Pet. App. at 28a, Penrod,392 B.R. at 842, and the substitution of a newliability for an old liability could not properly beconsidered an "expense" incurred in connection withacquiring the collateral. Pet. App. at 9a; Penrod, 611F.3d at 1162. The Court of Appeals properly heldthat the payment of another creditor’s unsecuredclaim does not represent any part of the price of thevehicle or associated costs arising directly from thesale. Pet. App. at 9a; Penrod, 611 F.3d at 1162.Lastly, the court correctly rejected AmeriCredit’sentreaties to use California’s ASFA to redefine theproper scope of a purchase money obligation underthe California Commercial Code to mean somethingdifferent (and broader) in the case of a securityinterest in a consumer’s car than in any other kind ofproperty subject to the same language in theCalifornia Commercial Code. Pet. App. at 11a;Penrod, 611 F.3d at 1163.

27

The Long-Established Common LawMeaning of "Purchase Money SecurityInterest" Has Consistently ExcludedAntecedent Claims.

The holding of the Court of Appeals comportswith the long history of the "purchase money securityinterest" at common law. Indeed, "the idea that apurchase-money interest prevails over antecedentclaims against the vendee or his property hasvenerable roots." Grant Gilmore, The PurchaseMoney Priority, 76 HARV. L. REV. 1333, 1340 (1963);see also United States v. New Orleans R.R., 79 U.S.(12 Wall.) 362, 365 (1870) (establishing thatpurchase money obligations are distinct from andwould receive priority over antecedent claims).

By the end of the 19th century, in order toprevent manipulation of the purchase money priorityto defraud senior security holders, courts hadsharply distinguished purchase money securityobligations from antecedent claims: only those claims"directly related to the acquisition of the property"were entitled to the privileged status of purchasemoney security interests. Gilmore, supra, at 1345(quotation marks omitted); see also Venner v.Farmers" Loan & Trust Co., 90 F. 348, 355 (6th Cir.1898) (holding that claimant was required to showthat his claim was "in fact the purchase price of theconveyed property, for the implied lien of a vendorwill not arise out of any general indebtedness orother liability at large"); Harris v. YoungstownBridge Co., 90 F. 322, 333 (6th Cir. 1898) (granting

28

purchase money priority exclusively "to the extent ofsums expended" in the purchase of property).

More specifically, only funds that were appliedin fact to the actual purchase of the collateral inquestion could receive purchase money priority. AsCircuit Judge (later Chief Justice) Taft explained:

When that which is given theappearance of a... purchase-money lienis really only a device to secure moneyborrowed for other purposes.., than thebuying of the [collateral] in question, thenthe attempt to supplant the first lien ofthe mortgage . . is a fraud upon themortgage, and the pseudo purchase-money lien must be postponed ....

Harris, 90 F. at 329 (Taft, J.).

As the Harris court made expressly clear,money borrowed for purposes other than the actualpurchase of goods, i.e., the payment of antecedentdebt, could not receive purchase money priority. Assuch, the decisions of the Court of Appeals, thebankruptcy appellate panel, and the bankruptcycourt are all consistent with the time-honoredunderstanding that money used to refinanceantecedent debt is not entitled to enjoy the priorityafforded to purchase money security interests.

29

3. Former California Commercial Code Section9107, the Precursor to Current CaliforniaCommercial Code Section 9103, Adopts theCommon Law Approach ExcludingAntecedent Debt.

The exclusion of antecedent debt from purchasemoney classification also finds textual support in theoriginal version of California Commercial CodeDivision 9, which draws directly from common lawpurchase money principles.

Division 9’s original definition of "purchasemoney security interest" was codified at formerCalifornia Commercial Code section 9107, whichprovided:

A security interest is a "purchase moneysecurity interest" to the extent that it is

(a) Taken or retained by the seller of thecollateral to secure all or part of itsprice; or

(b) Taken by a person who by makingadvances or incurring an obligationgives value to enable the debtor toacquire rights in or the use of collateralif such value is in fact so used.

CAL. COM. CODE § 9107 (repealed 1999).

Subsection (a), upon which the relevant portionof current California Commercial Code section 9103

30

dealing with credit sales transactions is based,simply adopts the pre-UCC notion that a securityinterest can receive purchase money priority only ifthe funding supplied is in fact applied to the actualpurchase. Subsection (a) applies this principle in astraightforward manner by requiring that thesecurity interest actually constitute a portion or allof the purchase price. Accordingly, "It]here isnothing novel" in subsection (a) distinguishing itfrom preexisting common law jurisprudence.Gilmore, supra, at 1372-73.

The Official Comments, both new and old,provide further guidance. In particular, Comment 2to former section 9107 states:

This Section therefore provides that thepurchase money party must be one whogives value ’%y making advances orincurring an obligation": the quotedlanguage excludes from the purchasemoney category any security interesttaken as security for or in satisfaction of apre-existing claim or antecedent debt.

CAL. COM. CODE § 9107 (repealed 1999) cmt. 2.

Although this comment is not expresslyreprinted in the comments to the revised version ofthe definition in California Commercial Code section9103, Comment 1 to current section 9101 explainsthat "the Comments to former Article 9 will remainof substantial historical value and interest" and "alsowill remain useful in understanding the background

31

and general conceptual approach of this Article." Seealso In re Crawford, 397 B.R. 461, 465-66 (Bankr.E.D. Wis. 2008)("[I]t appears that the definition of[purchase money security interest] under formerUCC § 9-107 has essentially not changed, and thatComment 2 to former § 9-107 is currently applicable,although that Comment was not retained in theOfficial Comments to the Revised Article 9.").

Moreover, Comment 5 to current CaliforniaCommercial Code section 9103 notes that subsections(b) and (c) (describing when a security interest ingoods and software is a purchase money securityinterest) are limited to goods and software, but alsoexplains that "[o]therwise, no change in meaningfrom former [section 9107] is intended." See alsoCAL. COM. CODE § 9101 cmt. 4.e. (making clear that"[t]he substantive changes" between prior section9107 and new section 9103 "apply only to non-consumer-goods transactions").

The express exclusion of antecedent debt fromthe definition of "purchase money security interest"under former section 9107 is founded in long-standing traditions at common law. Moreover,nothing suggests a departure from these historicalpractices, especially considering that the two kinds of"purchase money obligations" under current section9103 are identical to those set forth under formersection 9107.

Therefore, despite AmeriCredit’s claim to thecontrary, the Court of Appeals, the bankruptcyappellate panel, and the bankruptcy court were

32

correct in holding that funds advanced to refinanceantecedent debt are not purchase money obligationsunder California law. As a result, a lien securing anobligation related to antecedent debt does not qualifyas a "purchase money security interest." By limitingthe definition of purchase money security interests,the California Commercial Code properlycircumscribes the exceptional treatment afforded tosuch security interests to only those obligations thatdirectly relate to the buyer’s acquisition of thepurchase money collateral.

The Hanging Paragraph Was Enacted toAddress the Problem of Drive-OffDepreciation, Not Negative Equity.

AmeriCredit wrongly suggests that the Court ofAppeals’ decision will frustrate significant federalpolicies as evidenced by the title of the legislativesection that contained the hanging paragraph. Thattitle, "Restoring the Foundation for Secured Credit,"however, does not imply that consumer auto lendersshould now receive special protection frombifurcation for refinancing old debts. See Pet. App.at 28a; Penrod, 392 B.R. at 842 (citing Dean v. Davis,242 U.S. 438 (1917)). Treating refinancedantecedent debt as secured by a purchase moneysecurity interest in new collateral has never beenpart of the "Foundation for Secured Credit."

Rather, the hanging paragraph, with its clearlydefined timeframe and specification of claimscovered, resulted from Congress’ concern with therapid depreciation of motor vehicles and other

33

consumer goods obtained on credit at retail. It is awell-known fact that new automobiles immediatelylose significant value when they are driven off thedealer’s lot and become used automobiles. See, e.g.,In re Robson, 369 B.R. 377, 382 (Bankr. N.D. Ill.2007) ("Generally, vehicles depreciate the most ~vhenthey are newest .... "); In re Johnson, 380 B.R. 236,250 (Bankr. D. Or. 2007) ("[F]rom the language ofthe [h]anging [p]aragraph itself and its limitedlegislative history, it is clear that the [h]anging[p]aragraph was designed to combat... [the] takingadvantage of the substantial depreciation that occursimmediately when a new car is driven off the lot.... "); see generally William C. Whitford, A Historyof the Automobile Lender Provisions of BAPCPA,2007 U. ILL. L. REV. 143, 178 (2007) (describing thisconsideration as an animating part of the BAPCPAlegislation); Dienna Ching, Does Negative EquityNegate the Hanging Paragraph?, 16 AM. BANKR.INST. L. REV. 463, 501 (2008) (noting that thelegislative history surrounding the hangingparagraph centers around depreciation concerns). Inview of this fact, Congress apparently believed that,in order to facilitate large loan-to-value ratios andlonger terms in consumer auto finance, a purchasemoney obligation less than two and one half yearsold should be excepted from the normal bifurcation ofsecured claims based on the value of the collateral inchapter 13 cases. Rapid drive-off depreciation, notnegative equity financing, is the problem that thehanging paragraph addresses. For this reason thespecial protection of the hanging paragraph islimited to the purchase price of vehicles acquired

34

within two and a half years of the consumer’sbankruptcy filing.

Here, AmeriCredit, in addition to advancing theprice of Penrod’s new Taurus, chose to pay a debt(negative equity) that Penrod owed to anothercreditor (the lender on her trade-in Explorer). UnderPenrod’s confirmed chapter 13 plan, AmeriCreditwill receive the full amount of the remainingprincipal due for the purchase of the Taurus,$18,537.89, plus interest. The plan, however,properly treats the funds advanced to pay off thenegative equity as an unsecured debt.

A chapter 13 debtor, such as Penrod, isobligated to commit his or her projected disposableincome to the plan. 11 U.S.C. § 1325(b); seeHamilton v. Lanning, 130 S. Ct. 2464 (2010). Netdisposable income is effectively determined afterdeducting secured loan repayment fromtheconsumer debtor’s current monthly income.11U.S.C. §§ 1325(a)(5) & 1325(b)(2). Distribution ofprojected disposable income in chapter 13 is almostalways a zero-sum game because the claims againstthe debtor typically far exceed the debtor’s projecteddisposable income under the plan. Thus, an undulybroad reading of the California Commercial Code’sdefinition of purchase money obligation will have twoeffects. First, it may make many chapter 13 plansinfeasible because the amount required to pay thenegative equity (i.e., a prior creditor’s unsecureddebt) must be paid in full, and may therefore exceedcurrent monthly income. Second, even if the highercar payment will not exhaust the consumer’s currentmonthly income, it will allocate more of the debtor’s

35

income to the car lender, such as AmeriCredit, at theexpense of debtor’s other unsecured creditors. SeePet. App. at 28a; Penrod, 392 B.R. at 842-43.Neither the text of the hanging paragraph nor theunderlying legislative history even hints thatCongress intended such a result. No policy, expressor implied, supports a construction of purchasemoney obligations that favors repayment ofrefinanced past debt rolled into car loans over otherunsecured debts.

Additionally, AmeriCredit’s view would createan incentive for potential chapter 13 debtors such asPenrod to file for bankruptcy earlier than they mightotherwise. After all, assuming that Penrod hadowned her 1999 Ford Explorer for more than 910days prior to the date she acquired the Taurus, noneof the indebtedness relating to her Explorer wouldhave been protected by the hanging paragraph. HadPenrod filed her bankruptcy before trading in theExplorer, Bankruptcy Code section 506(a) wouldhave operated to bifurcate the indebtedness andallowed Penrod to "strip" any secured indebtednessin excess of the Explorer’s value. Had Penrod doneso and then traded the Explorer in for the Taurus,the secured claim remaining against the Tauruswould be similar to those produced by the Court ofAppeals’ construction of the hanging paragraph. Putdifferently, AmeriCredit’s proposed regime wouldencourage debtors to file bankruptcy before acquiringa new car. There is nothing to suggest Congressintended to enact a rule that could be circumventedin this fashion, particularly given the heavy costsassociated with chapter 13 debtors filing for

36

bankruptcy earlier than would otherwise benecessary.

Because the treatment of AmeriCredit’s claimsis entirely consistent with longstanding bankruptcypolicy and the actual purpose behind the hangingparagraph, this case does not present the occasionfor certiorari review.

Co AmeriCredit’s Claim That CaliforniaAutomobile Dealers Will Be Forced toDeny Financing to California ConsumersIs Untrue and Unsupported by the Record.

AmeriCredit and its amici urge this Court togrant certiorari because of their contention that ifthe Court of Appeals’ decision stands, automobilefinancers and dealers will have no choice but to denyfinancing to all purchasers of motor vehicles withnegative equity throughout the Ninth Circuit. See,e.g., Pet. at 31-32 ("Dealers and their financingsources will have no choice but to deny this financingto all purchasers of motor vehicles in states in theNinth Circuit."); Br. of Am. Bankers Ass’n as AmicusCuriae in Supp. of the Pet’r at 3-5 (ominouslysuggesting that the decisions below create a "pricetag" that "the public can ill-afford" and may includethe lack of further lender "participation in thisparticular sector of consumer financing").

This doomsday rhetoric is both untrue andunsupported by the record. AmeriCredit has neverproduced or submitted any evidence to the Court ofAppeals, the bankruptcy appellate panel, or thebankruptcy court or cited any authority to support

37

its claim that the markets for the sale of automobilesand automobile financing will collapse in Californiaand the rest of the western United States absent thisCourt’s imminent intervention to protect "negativeequity" financing from bifurcation in chapter 13consumer debt plans. These cataclysmic assertionsfall under their own weight. Moreover, these notionsare utterly inconsistent with how retail auto saleshave increased in California since the decision belowwas entered. New car sales in California topped 1.1million in 2010.1° Since the Court of Appeals decidedthis issue in July 2010, new car sales in Californiahave steadily risen from nearly 84,000 in August2010 to more than 104,000 in February 2011.11Industry data show that California automobile salesare accelerating at a faster pace than much of therest of the country.

Indeed until 2005, during long periods of timewhen retail auto sales regularly reached recordlevels that still today have not been matched, all

10

11

National Automobile Dealers Association, NADA Data2011: State of the Industry Report, at 17, available athttp://www.nada.org/Publications/NADADATA/2011/default(last visited July 22, 2011).

See California Economic Indicators, January-February2011, at 5 (August 2010 data), available at http://www.dof.ca.gov/HTML/FS_DATA/indicatr/documents/CEIl102FINAL.pdf (last visited July 22, 2011); California EconomicIndicators, May-June 2011, at 6 (February 2011 data),available at http://www.dof.ca.gov/HTML/FS DATA/indicatr/documents/CEI%201106%20FINAL.pdf (lastvisited July 22, 2011).

38

purchase money financing of consumer automobileswas routinely subject to bifurcation in chapter 13plans.

[ .S.R.etad \,ehlcle ~ ales of Cars and Trucks

20,000,000

18,000,000

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

Units Sold

WARD’S MOTOR VEHICLE FACTS AND FIGURES 17(James W. Bush et al. eds., 2010); WARD’S AUTO, KeyAutomotive Data, available at http://wardsauto.com!keydata (last visited July 22, 2011).

Auto lenders lend consumers funds in excess ofthe value of the cars securing such loans becausethey anticipate voluntary repayment, notinvoluntary collection upon default and bankruptcy.Bifurcation or no bifurcation, auto lenders do betterin chapter 13 than by repossessing vehicles of avalue less than the debts they secure. The price ofdefault, bankruptcy, and repossession is a cost ofdoing business. Business will continue, Californians

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will continue to buy cars, and they will do so oncredit under the decision below just as they did longbefore there was a hanging paragraph and when thegeneral rule of bankruptcy bifurcation appliedthroughout the Nation. It is illogical to suggest thatlimiting the special protection from bifurcation fornegative equity financing of personal cars will causethe market to be less favorable than periods in whichno protection at all from bifurcation existed, whetherthe deficiency claim arose from negative equity,drive-off depreciation, or otherwise. Indeed, the legalenvironment for consumer auto lenders even afterthe decision below remains more favorable than inthe pre-2005 era because the non-negative equitycomponent of the purchase financing continues toenjoy special treatment under the hangingparagraph.

In short, there is no reason to believe thatAmeriCredit’s maximalist, non-plain-meaninginterpretation of the scope of the protection frombifurcation afforded to car loans by the hangingparagraph has magically become the essentialpredicate for vibrant retail markets in automobilesand the related financing in the last few years.Although review by this Court is unnecessary andunwarranted in any event, such review certainlyshould not be prompted by hyperbolic and falseclaims about the practical ramifications of thedecision below.

CONCLUSION

For the foregoing reasons, the Court should denyAmeriCredit’s petition for a writ of certiorari.

Craig V. WinslowLAW OFFICES OFCRAIG V. WINSLOW630 N. San Mateo DriveLSan Mateo, CA 94401

G. Eric Brunstad, Jr.Collin O’Connor UdellMatthew J. DeludeDECHERT LLP90 State House SquareHartford, CT 06103

July 27, 2011

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Respectfully submitted,

Kenneth N. Klee*Daniel J. BusselWhitman L. HoltKLEE, TUCHIN, BOGDANOFFSTERN LLP1999 Avenue of the StarsThirty-Ninth FloorLos Angeles, CA 90067(310) 407-4000kklee@ktbslaw.com

Counsel for Respondent

*Counsel of Record