In In re Johnson, 2014 WL 6953306 (9th Cir.BAP 2014), the 9th Cir. BAP applied In re: Penrod to bifurcate secured and unsecured claims on an automobile subject to a retail installment sales contract, but found that the unsecured claim should not be reduced to zero.
On August 3, 2012, Johnson purchased a 2013 Hyundai Accent from Win Hyundai Carson. Win Hyundai financed the full price of the vehicle, paid off Johnson’s debt on a 2010 Hyundai Accent he traded in, and added the negative equity to the amount financed. See Americredit Fin. Servs., Inc. v. Penrod (In re Penrod), 392 B.R. 835, 838 (9th Cir. BAP2008) (in the motor vehicle sales finance business, negative equity is the difference between the value of the trade-in vehicle and the amount owed). Win Hyundai also financed optional service plans totaling $2545 and GAP insurance of $800 for Johnson. Then, Win Hyundai promptly assigned Johnson’s contract to appellee Hyundai Motor Finance. Johnson objected to Appellee’s proof of claim on multiple grounds . . . Also on March 28, 2014, the bankruptcy court filed and entered the Order on Objections to Claims, allowing Appellee’s claim in the amount of $22,237.66, with $17,600.39 secured and $4,637.27 unsecured. The order also required Appellee to cancel the GAP and service contracts and to file an amended proof of claim.
The 9th Circuit BAP affirmed.
Johnson appropriately argued the applicability to Appellee’s claim of the Ninth Circuit’s decision in In re Penrod. In In re Penrod, the court was presented with the question of “whether a creditor has a purchase money security interest in the ‘negative equity’ of a vehicle traded in at the time of a new vehicle purchase .” 611 F.3d at 1159. As is the case here, the question in Penrod arose in the context of the application of § 1325(a)(*). FN10 Id. at 1161. The Ninth Circuit held that the creditor does not. Id. at 1164. Nowhere in the opinion did the court discuss or determine that a creditor’s claim should be reduced to zero if, in its filed proof of claim, the creditor failed to separately classify the secured and unsecured components of its total claim. Johnson did not provide authority to support such a result, nor did we locate supporting authority. Here, the bankruptcy court implicitly interpreted Johnson’s argument as one based on alleged creditor bad faith and explicitly found that Appellee did not act in bad faith by failing to classify part of its claim as unsecured. The bankruptcy court instructed Appellee to file an amended proof of claim, and the Appellee complied. Because the bankruptcy court considered the possibility of bad faith as grounds for reduction or disallowance of Appellee’s claim, but found no evidence in the record to support a bad faith finding, we conclude that the bankruptcy court did not err when it refused to reduce Appellee’s claim to zero.