This is a fascinating opinion by Judge Watford. And if you're keenly interested in the "hanging paragraph" of 11 U.S.C. § 1325(a)(*), which 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, you're going to be doubly thrilled. And who isn't?
But the most interesting part of the case to me is its factual underpinning. Marlene Penrod traded in a Ford Explorer worth $6000 -- on which she owed $13,000 -- so she could buy a Ford Taurus worth $25,000. So this is someone who's got negative equity in a car, but there's someone still willing to loan her money, presumably at confiscatory rates, so she can trade up to a Taurus.
But, predictably, she falls behind, and ultimately declares bankruptcy. At which point AmeriCredit, which loaned her the money for the Taurus (and paid off her Explorer), isn't happy with her proposed bankruptcy plan, since it would result in a secured claim for only $16,000 (the value of the Taurus at the time) and an unsecured claim (which basically would be wiped out) for $10,000. So it objects to her plan.
There's then a legal fight. Not surprising. But remember, it's over a mere $10,000, when $16,000 is already getting paid, an a bankrupt debtor.
Ms. Penrod ultimately wins that dispute. What legal fees did she say she incurred in litigating the "hanging paragraph" issue in Section 1325(a)(*); e.g., in fighting AmeriCredit's objection to her plan to make $10,000 of its debt unsecured?
I'm not necessarily saying she didn't expend $245,000 of legal fees in fighting a $10,000 dispute. I'm not necessarily saying she did, either.
But what I am saying is that it makes no rational economic sense to spend $245,000 in legal fees to fight a $10,000 dispute. Especially when that doesn't even count the legal fees spent on the other side.
I understand that there's an attorney fee provision here in which AmeriCredit will recover it's fees (albeit from a bankrupt debtor) if it wins and Ms. Penrod's lawyer will recover fees (at least under the Ninth Circuit's ruling, which reversed the district court on this issue) if her side wins.
But. socially, we should not be spending $245,000-plus -- or anything like it -- on a $10,000 dispute like this.
Even if we allegedly do.
That's not to say that Ms. Penrod shouldn't (or should) be allowed to recover her fees.
But it is to say that $245,000 disputes over $10,000 are socially inefficient.
Though apparently transpire.