The United States Court of Appeals for the Fifth Circuit recently upheld a trial court’s denial of a consumer’s Chapter 13 bankruptcy plan, which proposed a “partial buy-back” of a loan cross-guaranteed.
In that decision, the Fifth Circuit held that the text of 11 USC § 1325 (a) (5) allows debtors to select a different option “with respect to each authorized secured debt”, but it does not allow a debtor to select different options for different guarantees securing the same claim.
A copy of the notice 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 auto loans with the defendant. The loans were cross-guaranteed, meaning that both car A and car B were pledged as collateral for each loan. The defendant had filed two separate proofs of claim, one for auto loan A and the other for auto loan B.
The consumer decided that he could only afford to keep one car, so his bankruptcy plan, citing 11 USC § 1325 (a) (5), suggested he keep car A, to “cram” claim of car A and return car B to the defendant as security for the claim of car B.
The defendant filed an opposition to the plan, in particular the “partial return” of the collateral under the car B claim, arguing that the cross-collateral provisions of the loans prevented the consumer from handing over car B and keeping the claim. car A.
The bankruptcy court issued an order confirming the plan. The defendant filed a motion for a new trial, which the bankruptcy court dismissed. The defendant appealed the orders upholding the plan and dismissing the motion for a new trial in the lower court. The trial court overturned the bankruptcy court order upholding the plan and sent the case back for further proceedings in accordance with its order. The consumer appealed.
Section 1325 (a) of the Bankruptcy Code contains a number of requirements regarding the confirmation by a bankruptcy court of a Chapter 13 plan. Subsection (a) (5) governs treatment by a plan. an authorized secured debt:
- (a) Subject to paragraph (b), the court confirms a plan if:
- (5) with respect to each authorized guaranteed debt provided for by the plan:
- (A) the holder of such claim has accepted the scheme;
- (B) (i) the plan provides that:
- (I) the holder of such claim retains the lien securing that claim until the earlier of the following dates:
- a bis) payment of the underlying debt determined under non-bankruptcy law; or
- bb) discharge under article 1328; and
- (II) if the case under this chapter is rejected or converted without the completion of the plan, this lien shall also be retained by such holder to the extent recognized by applicable law in non-bankruptcy matters;
- (ii) the value, on the effective date of the plan, of the property to be distributed under the plan as a result of such a claim is not less than the authorized amount of such claim; and
- (iii) if –
- (I) the goods to be distributed under this paragraph are in the form of periodic payments, such payments must be in equal monthly amounts; and
- (II) the holder of the claim is guaranteed by personal property, the amount of these payments must not be less than an amount sufficient to ensure the holder of this claim adequate protection during the duration of the regime; or
- (C) the debtor assigns the assets securing this claim to that holder. . .
Section 1325 (a) (5) (B) provides for the so-called “cram down” option, which allows the debtor to retain the collateral despite the obligee’s objection and to provide the obligee with payments which, during the term of the plan, will total the current value of the collateral. Assocs. Com. Corp. vs. Rash, 520 US 953, 957 (1997).
The consumer argued that the plain language of section 1325 (a) (5) obliges the debtor to choose an option “in respect of each authorized secured debt” and allows debtors to choose different options for each individual claim against. their succession.
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 cannot select different options for different guarantees securing the same claim.
The bankruptcy court agreed with the consumer, but the trial court agreed with the defendant and concluded that the consumer should either pile up or drop all guarantees securing the claim of car B, c ‘i.e. both car A and car B.
The Fifth Circuit agreed with the respondent and the trial court, stating that the use by Article 1325 (a) (5) of the conjunction “or” between the options provided in paragraphs (A), ( B) and (C) makes it clear that debtors can only choose one of these three options for each claim. The Court ruled that while section 1325 (a) (5) allows 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 guarantees guaranteeing the same claim.
The decision of the Fifth Circuit in Williams v. Tower Loan of Mississippi (In re williams), 168 F.3d 845 (5th Cir. 1999), here supported the Court’s decision. In Williams, a debtor’s plan was to settle a secured debt by relinquishing part of the collateral securing the debt and repaying the overwhelming value of the remaining collateral. Username. at 846. The Fifth Circuit ruled that the debtor’s plan could not be approved because “[t]it simple language of [section 1325(a)(5)] does not give the debtor the right to adopt a combination of the options proposed in (B) and (C). ” Username. to 847.
To 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 ruled that a debtor should choose the option provided in paragraph (B) or (C) and could not mix and match. Username. (citing Kerwin, 996 F.2d at 556-57).
The Fifth Circuit also cited the decision of the United States Supreme Court Assocs. Com. Corp. vs. Rash, 520 US 953 (1997) in the Williams decision. Username. In Eruption, the Supreme Court held that (1) “[a] the treatment proposed by the secured receivables plan can be confirmed if one of the three conditions is met “and (2)”[i]If the secured creditor does not agree to a debtor’s Chapter 13 plan, the debtor has two options for dealing with authorized secured claims: surrender the collateral to the creditor. . . or, in the context of the reduction option, to keep the guarantee despite the objection of the obligee. ” Eruption, 520 US at 957. In the opinion of the Fifth Circuit, this decision “strongly indicates that a debtor cannot combine paragraphs (B) and (C) to create a fourth option.” Williams, 168 F. 3d at 847.
The consumer argued that because Williams concerned only one claim, it did not address the requirement in Section 1352 (a) (5) that a debtor make a single decision with respect to “each” secured claim. The bankruptcy court agreed with the consumer and concluded that Williams is factually distinct from this case. However, the court of first instance held that, as only one claim was at issue in this case, car B was claiming, the decision in Williams is clearly applicable.
The Fifth Circuit agreed with the court of first instance, holding that debtors should choose the same option of Article 1325 (a) (5) for all guarantees securing a single claim, as was decided in Williams. Applying this rule to the B car claim, Circuit Five concluded that in order for the plan to be approved under Section 1325 (a) (5), the plan must select the same option § 1325 (a) (5) ) for both warranty elements. car B claim warranty – car A and car B.
Therefore, the Fifth Circuit ruled that the plan violated the plain language of Article 1325 (a) (5) and upheld the trial court’s decision.