Co-Signed Loans May Receive Special Treatment in Chapter 13

Posted by NCBRC - April 12, 2013

A chapter 13 plan may provide for full repayment of a co-signed loan even though other unsecured creditors receive less. In re Rivera, No. 12-66 (B.A.P. 1st Cir. Apr. 5, 2013). In Rivera, the debtors proposed a chapter 13 plan under which one creditor, Villa-Coop, was to receive repayment in full of the unsecured portion of its loan which was co-signed by the debtor’s mother-in-law. The other unsecured creditors would receive repayment of only 4.51 percent on their loans. The trustee objected to the plan on the grounds that its treatment of Villa-Coop constituted unfair discrimination in violation of section 1322(a)(3) and (b)(1) and that section 1325(b)(1) requires equal distribution of projected disposable income. The bankruptcy court confirmed the plan. In re Rivera, 480 B.R. 112 (Bankr. D. P.R. 2012).

On appeal to the BAP, the trustee renewed his arguments under both section 1322 and section 1325. With respect to section 1325(b) the trustee argued that equal distribution to unsecured creditors is implicit in the statutory language and that any additional payments to an unsecured creditor would have to be paid out of the debtor’s discretionary income.

The BAP disagreed. It found that section 1325 merely requires that all the debtor’s projected disposable income be applied to the repayment of unsecured creditors and says nothing about proportionate distribution. Statutory construction requires that specific language governs more general provisions and where section 1322 deals specifically with distribution, a finding that the more general provision in section 1325 has its own allocation requirement “would essentially subvert § 1322(b)(1).”

The issue surrounding section 1322 involves the prohibition against unfair discrimination between members of a class as modified by the phrase “however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.” The BAP turned to the comprehensive reasoning set forth in In re Renteria, 470 B.R. 838 (B.A.P. 9th Cir. 2012) which began with a walk through the various approaches to the construction of section 1322(b) taken by other courts.

The majority view relies on the statutory rule that language in one clause that differs from that employed in another clause of the same statute must be accorded different meaning. Because Congress chose to prohibit “unfair discrimination,” in one clause but allow “different treatment” in the “however” clause suggests that different treatment is different from what is meant by unfair discrimination. Following this reasoning, courts have found that the “however” clause permits some different treatment of co-signed loans but does not entirely exempt them from the prohibition against the unfair discrimination prohibited within the same statute. See, e.g., In re Battista, 180 B.R. 355 (Bankr. D. N.H. 1995), and Nelson v. Easley (In re Easley), 72 B.R. 948 (Bankr. M.D. Tenn. 1987).

The minority view follows the “last antecedent” rule under which placement of the “however” clause immediately after the “unfair discrimination” clause creates an exception to the discrimination clause in all circumstances. See, e.g., In re Hill, 255 B.R. 579, 580 (Bankr. N.D. Cal. 2000), rev’d on other grounds, In re Hill, 268 B.R. 548, 550 (B.A.P. 9th Cir. 2001); In re Dornon, 103 B.R. 61, 64 (Bankr. N.D. N.Y. 1989).

Recognizing validity in these conflicting statutory interpretations, the Renteria court turned to legislative history for guidance. There, it found that Congress introduced the “however” clause to address and correct the findings of such courts as In re Utter, 3 B.R. 369 (Bankr. W.D. N.Y. 1980); In re Montano, 4 B.R. 535 (Bankr. D. D.C. 1980), where the courts did not permit different treatment of co-signed loans. Congress noted that debtors will frequently go to great lengths to repay loans that have been co-signed by family or friends and that the practical effect of this is that many plans that appear feasible and fair on paper, fail. Section 1322(b)(1) was intended to authorize courts to take this reality into account and permit debtors treat such loans differently. S. Rep. No. 98-65 (1983). Based on this, the Renteria court concluded that “Congress sought to permit a chapter 13 debtor to separately classify and to prefer a codebtor consumer claim when the facts are similar to those presented in Utter and Montano.”

The Rivera court noted that the Renteria court left open the possibility that there may be occasions when differential treatment of a co-signed loan could run afoul of the unfair treatment clause. Adopting the same position, the Rivera panel turned to whether there were circumstances under which a co-signed debt should not be treated differently from other unsecured debts. The court applied the test set forth in In re Thompson, 191 B.R. 967, 971-72 (Bankr. S.D. Ga. 1996), in which a court may consider: 1) whether the claim is truly a co-debtor claim, 2) whether the co-debtor took on the debt for the debtor’s benefit for vice versa, 3) whether the plan is proposed in good faith under section 1325(a)(3).

In Rivera, neither the first nor second considerations were disputed at the bankruptcy court level. As to the third requirement, the panel found that the lower court’s finding of good faith was adequately supported. Therefore, the panel affirmed the decision of the lower court.

Rivera opinion

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