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5th Cir. Rejects Chapter 13 Debtor’s Attempt to ‘Partially Surrender’ Different Collateral for Same Claim

car loanThe U.S. Court of Appeals for the Fifth Circuit recently affirmed a trial court’s denial of a consumer’s Chapter 13 bankruptcy plan that proposed a “partial surrender” of a cross-collateralized loan.

In so ruling, the Fifth Circuit held that the text of 11 U.S.C. § 1325(a)(5) allows debtors to select a different option “with respect to each allowed secured claim,” but it does not allow a debtor to select different options for different collateral securing the same claim.

A copy of the opinion in Evolve Federal Credit Union v. Barragan-Flores is available at:  Link to Opinion.

In June 2017, the consumer filed for Chapter 13 bankruptcy at a time when he had outstanding balances on two car loans with the defendant. The loans were cross-collateralized, meaning that car A and car B were both pledged as collateral for each loan. The defendant had filed two separate proofs of claim, one for the car A loan and one for the car B loan.

The consumer decided that he could only afford to keep one car, so his bankruptcy plan, citing 11 U.S.C. § 1325(a)(5), proposed that he retain car A, “cram down” the car A claim, and surrender car B to the defendant as collateral for the car B claim.

The defendant filed an objection to the plan, specifically the “partial surrender” of collateral under the car B claim, arguing that the cross-collateralization provisions in the loans prevented the consumer from surrendering car B and retaining car A.

The bankruptcy court entered an order confirming the plan. The defendant filed a motion for a new trial, which the bankruptcy court denied. The defendant appealed the orders confirming the plan and denying the motion for a new trial to the trial court. The trial court reversed the bankruptcy court’s order confirming the plan and remanded the case for further proceedings in accordance with its order. The consumer appealed.

Section 1325(a) of the Bankruptcy Code contains a number of requirements regarding a bankruptcy court’s confirmation of a Chapter 13 plan. Subsection (a)(5) governs a plan’s treatment of an allowed secured claim:

    (a) Except as provided in subsection (b), the court shall confirm a plan if—
    ….
    (5) with respect to each allowed secured claim provided for by the plan—
    (A) the holder of such claim has accepted the plan;
    (B)(i) the plan provides that—
    (I) the holder of such claim retain the lien securing such claim until the earlier of—
    (aa) the payment of the underlying debt determined under nonbankruptcy law; or
    (bb) discharge under section 1328; and
    (II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;
    (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and
    (iii) if—
    (I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and
    (II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or
    (C) the debtor surrenders the property securing such claim to such holder . . .

Section 1325(a)(5)(B) provides the so-called “cram down” option, which allows the debtor to keep the collateral over the objection of the creditor and provide the creditor with payments that, over the life of the plan, will total the present value of the collateral. Assocs. Com. Corp. v. Rash, 520 U.S. 953, 957 (1997).

The consumer argued that the plain language of section 1325(a)(5) requires a debtor to select an option “with respect to each allowed secured claim,” and allows debtors to select different options for each individual claim against their estate.

The defendant, on the other hand, argued that because section 1325(a)(5) presents its options using the conjunction “or,” the consumer must select one of the three options for each secured claim — he may not select different options for different collateral securing the same claim.

The bankruptcy court agreed with the consumer, but the trial court agreed with the defendant and held that the consumer must either cram down or surrender all the collateral securing the car B claim, meaning both car A and car B.

The Fifth Circuit agreed with the defendant and the trial court, stating that section 1325(a)(5)’s use of the conjunction “or” between the options provided in subsections (A), (B), and (C) makes it clear that debtors may choose only one of those three options for each claim. The Court held that, even though section 1325(a)(5) does allow a bankruptcy plan to select a different option for each claim, the plan violates section 1325(a)(5) when it selects different options for different collateral securing the same claim. 

The Fifth Circuit’s ruling in Williams v. Tower Loan of Mississippi (In re Williams), 168 F.3d 845 (5th Cir. 1999), supported the Court’s decision here. In Williams, a debtor’s plan sought to address one secured claim by surrendering some of the collateral securing the claim and paying the cram down value of the remaining collateral. Id. at 846. The Fifth Circuit held that the debtor’s plan could not be approved because “[t]he plain language of [section 1325(a)(5)] does not give the debtor the right to adopt a combination of the options offered in (B) and (C).” Id. at 847.

In Williams, the Fifth Circuit adopted the reasoning behind First Brandon Nat’l Bank v. Kerwin (In re Kerwin), 996 F.2d 552 (2d. Cir. 1993), where the Second Circuit held that a debtor had to choose the option provided in either subsection (B) or (C) and could not mix-and-match. Id. (citing Kerwin, 996 F.2d at 556-57).

The Fifth Circuit also cited the Supreme Court of the United States’s ruling in Assocs. Com. Corp. v. Rash, 520 U.S. 953 (1997) in the Williams decision. Id. In Rash, the Supreme Court held that (1) “[a] plan’s proposed treatment of secured claims can be confirmed if one of three conditions is satisfied” and (2) “[i]f a secured creditor does not accept a debtor’s Chapter 13 plan, the debtor has two options for handling allowed secured claims: surrender the collateral to the creditor . . . or, under the cram down option, keep the collateral over the creditor’s objection.” Rash, 520 U.S. at 957. In the view of the Fifth Circuit, this ruling “strongly indicates that a debtor cannot combine subsections (B) and (C) to create a fourth option.” Williams, 168 F. 3d at 847.

The consumer argued that because Williams only involved one claim, it did not address section 1352(a)(5)’s requirement that a debtor make a unique decision with respect to “each” secured claim. The bankruptcy court agreed with the consumer and held that Williams is factually distinct from this case. However, the trial court held that because only one claim is at issue in this matter, the car B claim, the ruling in Williams is clearly applicable.

The Fifth Circuit agreed with the trial court, holding that the debtors must select the same section 1325(a)(5) option for all the collateral securing a single claim, as was decided in Williams. Applying that rule to the car B claim, the Fifth Circuit concluded that for the plan to be approvable under section 1325(a)(5), the plan must select the same § 1325(a)(5) option for both items of collateral securing the car B claim — car A and car B.

Accordingly, the Fifth Circuit held that the plan violated the plain language of section 1325(a)(5) and affirmed the ruling of the trial court.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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