Under section 1325(a)(5), a chapter 13 plan cannot provide for different treatment of two vehicles which were purchased at different times with loans from the same creditor where both lending agreements included cross-collateralization clauses securing each loan by both vehicles. Barragan-Flores v. Evolve Federal Credit Union, No. 18-50420 (5th Cir. Jan 14, 2021).
In 2011, the debtor purchased a GMC Sierra using a loan from Evolve Federal Credit Union. In 2016, he took out another loan with Evolve for the purchase of a Toyota Camry. Both loan agreements contained the language: ““Collateral securing other loans with the Credit Union may also secure this loan.” In 2017, he filed for chapter 13 bankruptcy, and Evolve filed two proofs of claim representing the two loans. In his plan, the debtor sought to surrender the Camry as collateral for the 2016 loan. He proposed to keep the Sierra and cram down the 2011 loan. Evolve objected to the “partial surrender,” arguing that the cross-collateralization clause in the loan agreements prohibited the proposed treatment of the collateral. The bankruptcy court confirmed the debtor’s plan as proposed. The district court reversed and remanded. The debtor appealed to the Fifth Circuit.
Section 1325(a)(5) governs treatment of secured loans in chapter 13. In Assocs. Com. Corp. v. Rash, 520 U.S. 953, 956-57 (1997), the Supreme Court found that, under that section, a chapter 13 plan may be confirmed under any of three mutually exclusive conditions: “The secured creditor accepts the plan; the debtor surrenders the property securing the claim to the creditor; or the debtor invokes the so-called ‘cram down’ power.” Cram down allows a debtor to keep the collateral and pay off the debt through the plan to the extent of the collateral’s actual value.
The court found section 1325(a)(5) permits a debtor to select a different option for treatment of each individual claim but the inclusion of the word “or” between the options indicates that the provision does not permit the debtor to select different options for treatment of collateral for one claim.
The debtor argued that Evolve had two separate claims and his proposed plan treated the collateral for each claim differently, as permitted by section 1325(a)(5). The court disagreed. It found that, because of the cross-collateralization clause, Evolve’s two claims were secured by both the Camry and the Sierra and, therefore, with respect to each claim, both vehicles had to receive identical treatment. The court explained that in Williams v. Tower Loan of Mississippi (In re Williams), 168 F.3d 845 (5th Cir. 1999), it held that a debtor could not combine options in section 1325(a)(5) by surrendering a portion of the collateral while cramming down the value of the remaining portion to satisfy one claim.
The court disagreed with the bankruptcy court’s finding that Williams was inapplicable because, where Williams involved only one claim, this case involved two claims representing separate loans. The court found the difference was immaterial, stating: “Were the holding in . . . Williams inapplicable to debtors with multiple claims secured by the same collateral, then such debtors would be afforded greater flexibility in providing for secured creditors’ claims even though those debtors and their collateral are more encumbered. That result is counterintuitive. It is also contrary to the plain language of § 1325(a)(5).”
The court affirmed the decision of the district court.
Barragan-Flores 5th Cir Jan 2021
Tags: Plan confirmation, cross-collateralization
