In re Villarreal

566 B.R. 859

IN RE: Jose Arturo VILLARREAL Jr.; aka Villarreal, et al, Debtors

CASE NO: 16–10253

United States Bankruptcy Court, S.D. Texas, Brownsville Division.

Signed February 8, 2017

Filed February 9, 2017

Abelardo Limon, Jr, Limon Law Office PC, Brownsville, TX, for Debtors.

MEMORANDUM OPINION CONFIRMING DEBTORS' CHAPTER 13 PLAN AND DENYING THE CHAPTER 13 TRUSTEE'S MOTION TO DISMISS

[Resolving ECF No. 2]

Eduardo V. Rodriguez, United States Bankruptcy Judge

I. INTRODUCTION

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA ") created the hanging paragraph of 11 U.S.C. § 1325(a) (the "hanging paragraph "), which limits a debtor's right to bifurcate and cramdown certain claims within a chapter 13 plan. Jose Arturo Villarreal, Jr. & Miriam H. Villarreal, ("Debtors ") propose to treat as wholly unsecured certain secured cross-collateralized claims of Security Service Federal Credit Union ("SSFCU ") in motor vehicles purchased for the personal use of the Debtors within 910 days, and in some cases, within one year of filing bankruptcy where the amount of the secured claim exceeds the value of the vehicles. Additionally, Debtors seek to treat a claim of SSFCU as wholly unsecured where a personal motor vehicle was used as collateral for a loan to pay off an existing non-purchase money security interest loan with a different financial institution, Springleaf Financial ("Springleaf "). Although SSFCU has not objected, both the Debtors and the chapter 13 trustee ("Trustee ") seek guidance as to whether the Debtors' proposed chapter 13 plan is confirmable. This Court is tasked with determining whether the hanging paragraph applies to any of the claims of SSFCU. Accordingly, this Court now considers the parameters of the Bankruptcy Code,¹ specifically the hanging paragraph, relevant case law, and the Debtors' arguments to determine whether Debtors' chapter 13 plan is confirmable.

II. FINDINGS OF FACT

This Court makes the following Findings of Fact and Conclusions of Law pursuant to Fed. R. Bankr. P. 7052, which incorporates Fed. R. Civ. P. 52, and 9014. To the extent that any Finding of Fact constitutes a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law constitutes a Finding of Fact, it is adopted as such.

Debtors filed for relief under chapter 13 of title 11 on August 8, 2016. [ECF No. 1]. Debtors' Schedule A/B lists a 2008 Kia Sorento (the "Kia ") with a current value of $5,425.00. Id. at 15. Contemporaneously with their petition, Debtors filed a chapter 13 plan ("Plan ") in which the SSFCU claims are treated in Section No. 8. [ECF No. 2]. Section No. 8 sets forth that "the treatment of each class of secured claim to be paid under this plan is the lesser amount listed below as the "Collateral Value" and the allowed amount of the holder's claim." Id. at 7. The Plan lists one SSFCU claim secured by the Kia with the claim amount as $8,347.00 and the collateral value as $5,425.00. Id. ; see also [Claim No. 4–1] ("Claim No. 4 "). Pursuant to the Plan, Claim No. 4 would be paid at 5.50% interest pro-rata resulting in a total payment of $5,987.06. [ECF No. 2 at 7]. Additionally, the Debtors list four "cross-collateralized" claims for SSFCU secured by the Kia. Id. ; see also [Claims No. 5–1 at 4, 6–1 at 4, 7–1 at 4, 8–1 at 4] (the "Cross–Collateralized Loans "). The Plan lists the amount of the claims in the Cross–Collateralized Loans as $340.00, $330.00, $22,301.00, and $3,721.00, respectively. [ECF No. 2 at 7]. Further, the Plan lists the collateral value for each of the Cross–Collateralized Loans as $0.00. Id. Thus, the balance of SSFCU's claims, although secured, would be treated as wholly unsecured and would receive a 7% dividend. Id.

Debtors' Counsel, on behalf of the Debtors, filed the following five Proofs of Claim on behalf of SSFCU:

i. Claim No. 4 in the amount of $8,437.00. The loan was executed on October 29, 2014, which was within 910 days of filing bankruptcy. The original amount financed was $11,940.01. In Part 2, Section No. 8 of the proof of claim, it states that the basis for the claim was "Goods Sold." The claim states it is secured by the Kia. The Kia is listed in the "Collateral" section of the Security Agreement attached to the claim. In the "Itemization of Amount Financed" section of the attached Security Agreement, it states that $11,672.52 was "paid directly to: Financial Institution;"

ii. Claim No. 5 in the amount of $3,721.00. The loan was executed on November 14, 2014, which was within 910 days of filing bankruptcy. In Part 2, Section No. 8 of the proof of claim, it states that the basis for the claim was "Goods Sold." Part 2, Section No. 9 states that the claim is secured by the "2008 Kia Sorento (cross-collateralized)." The value of the property is listed as $0.00;

iii. Claim No. 6 in the amount of $22,301.00. The loan was executed on October 19, 2015, which was both within 910 days and one year of filing bankruptcy. The value of the claim is listed as $0.00. In Part 2, Section No. 8 of the proof of claim, it states that the basis for the claim was "Goods Sold." Part 2, Section No. 9 states that the claim is secured by the "2008 Kia Sorento (cross-collateralized);"

iv. Claim No. 7 in the amount of $330.00. The loan was executed on October 28, 2014, which was within 910 days of filing bankruptcy. The value of the claim is listed as $0.00. In Part 2, Section No. 8 of the proof of claim, it states that the basis for the claim was "Goods Sold." Part 2, Section No. 9 states that the claim is secured by the "2008 Kia Sorento (cross-collateralized);"

v. Claim No. 8 in the amount of $340.00. The loan was executed on October 28, 2014, which was within 910 days of filing bankruptcy. The listed value of the claim is $0.00. In Part 2, Section No. 8 of the proof of claim, it states that the basis for the claim was "Goods Sold." Part 2, Section No. 9 states that the claim is secured by the "2008 Kia Sorento (cross-collateralized)."

[Claim Nos. 4–1, 5–1, 6–1, 7–1, 8–1]. Each of SSFCU's loans contain a cross-collateralization clause that provides:

SECURITY AGREEMENT—You hereby grant to the Credit Union a security interest and the right of setoff in any account at the Credit Union in which you have an interest or in which you may have an interest in the future. Any property shown in the "Collateral" section on the first page of this Agreement will be security for this loan, as well as any and all increases, accessories, equipment, attachments, accessions and replacements to the property and all proceeds, insurance proceeds or premium rebates or refunds relating to the property of this Agreement. The property securing this loan also secures your repayment of all other obligations you now owe or may owe to the Credit Union at any time in the future.

[Claim No. 4–1 at 5]; [Claim No. 5–1 at 5]; [Claim No. 6–1 at 5]; [Claim No. 7–1 at 5]; [Claim No. 8–1 at 5].

On September 28, 2016, the Trustee filed a Motion to Dismiss or Convert because of alleged mathematical errors in the Plan and Debtors' alleged failure to timely file necessary amendments to the Plan. [ECF No. 23 at 1]. On October 5, 2016, this Court held a hearing on confirmation of Debtors' Plan. The Trustee stated that they were not opposed to confirmation, but raised concerns regarding whether SSFCU's claims were treated appropriately pursuant to the hanging paragraph. The Court granted Debtors' Counsel leave to brief the issues regarding SSFCU's claims. On October 16, 2016, Debtors filed their Response to Trustee's Motion to Dismiss alleging that "all necessary amendments or documents [would] be filed before the hearing date." [ECF No. 26 at 1]. On October 26, 2016, Debtors filed a Brief in Support of Confirmation alleging that the hanging paragraph does not apply because SSFCU's claims are not purchase-money security interests. [ECF No. 27] ("Brief "). Specifically, Debtors contend that Claim No. 4 is not a purchase-money security interest because the Kia was used as collateral to pay off a non-purchase money security interest loan with Springleaf. Id. at 4. Additionally, Debtors allege that the Cross–Collateralized Loans are not purchase-money security interests because the loans were not given as part of the price of the Kia or to enable Debtors to acquire rights in the Kia as the Debtor. Id. at 5. On November 2, 2016, the Court held a hearing regarding confirmation and Debtors presented oral arguments in support of the Brief. Specifically, Debtors reiterated that none of the SSFCU claims represent a purchase-money security interest because the loans were not given as "all or part of the price" of the Kia and did not enable Debtors to "acquire rights in or use" of the Kia because the Debtors' already had use of and rights in the Kia as their personal vehicle. See alsoid. at 4. SSFCU has not filed any objections to Debtors' Plan. Briefing on the matter has closed and it is now ripe for consideration.

III. LEGAL STANDARD

Bankruptcy courts have an independent duty to determine whether a chapter 13 plan complies with the Code, regardless of whether the parties object to the plan. In re Sierra , 560 B.R. 296, 302 (Bankr. S.D. Tex. 2016) (citing In re Divine Ripe, LLC , 554 B.R. 395, 410 (Bankr. S.D. Tex. 2016) ). The requirements of plan confirmation are governed, in part, by the parameters of § 1325. A chapter 13 plan that includes treatment of an allowed secured claim shall be confirmed if either the creditor accepts the plan or the debtor surrenders the property to the creditor. § 1325(a)(5)(A), (C). Additionally, a debtor may confirm a plan without a secured creditor's consent or surrendering the property if the plan complies with the requirements of § 1325(a)(5)(B). In relevant part, the court shall confirm a plan if the plan provides that:

(I) the holder of such [a secured] claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt determined under nonbankruptcy law;

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