Cross-Collateralized Loans May Be Crammed Down

Posted by NCBRC - February 6, 2017

Cross-collateralized loans were not immune from cramdown where they did not have a “close nexus” to the purchase of the collateral vehicles for purposes of the 910-claim exception to cramdown, and motor vehicles are not “any other thing of value” for purposes of the second exception. In re McPhilamy, No. 16-10238 (Bankr. S.D. Tex. Jan. 31, 2017).

In their chapter 13 plan, the debtors, Sean and Bertha McPhilamy, sought to treat as unsecured five of the seven claims held by Rio Grande Federal Credit Union (RGFCU). The claims were based on loans cross-collateralized by two motor vehicles, a Honda Civic and a Chevy Camaro. The loans were executed at least within 910 days, and in some cases within one year, of the McPhilamy’s bankruptcy. The plan proposed to treat the other two of the seven claims (claims 10 and 12) as secured because they were for loans used to purchase the two vehicles at issue. Those two debts exceeded the value of the vehicles.

Though RGFCU did not object to confirmation, the trustee moved to dismiss or convert on the basis that the debtors had failed to propose a confirmable plan.

The case required the court to determine whether the loans were purchase money security interests, or were “any other thing of value,” under either of the two exceptions to cramdown found in the hanging paragraph of section 1325(a).

Beginning with whether the cross-collateralized loans were purchase money security interests, the court turned to state law. Texas defines a purchase money security interest loan as a loan that is included in the price of the vehicle and is incurred to make it possible to purchase the vehicle. With respect to the “price” of the vehicle, the definition is broad enough to include associated costs that do not necessarily go directly to the cost of the vehicle itself. There must, however, be a “close nexus” between the loan and the purchase of the vehicle.

The court then looked to each of the five cross-collateralized loans to determine if they fit this definition, beginning with the single loan cross-collateralized by the Honda Civic (claim 7). Finding that it was not a purchase money security interest, the court noted that claim 10, which included documents related to vehicle ownership such as the certificate of title, covered the entire cost of the vehicle. Claim 7, on the other hand, although taken out the same day as claim 10, was not used to pay any associated costs of the vehicle.

The same was true of the claims cross-collateralized by the Camaro. The one loan (claim 12) included the vehicle ownership documents and covered the cost of the car. The other loans which were not made either at the time of purchase or at the time of refinancing, did not advance the McPhilamy’s ownership interest in the vehicle or make the purchase possible in any way. The court concluded that none of the loans were 910-claims and, therefore, they were not subject to that exception to cramdown.

The court then addressed whether the loans fell under the second exception to cramdown: “any other thing of value.” For that exception to apply, the debt must have been incurred to facilitate the acquisition of the collateral within one year of bankruptcy. Of the four claims that met the one-year bar, the court found that although the second exception does not explicitly refer to purchase money security interests, the entire hanging paragraph applies only to those interests. Therefore, for the same reasons the first exception was inapplicable, the court found that the second exception did not apply.

Furthermore, though it was unnecessary to its conclusion, the court agreed with the McPhilamy’s argument that “any other thing of value” does not include motor vehicles. Applying the rule of statutory construction that “the specific governs the general,” the court found because the first exception explicitly deals with motor vehicles, the second, more general, exception deals with items other than motor vehicles. The use of the word “other” further supports this view, as including motor vehicles in that exception would render the word meaningless.

The court concluded that the debtors’ plan properly bifurcated and crammed down the five cross-collateralized claims and confirmed the plan.

McPhilamy Bankr SD Tex opinion Jan 2017

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