Bankruptcy court finds cross – collateralization provision in separate loan transactions valid and effective (In re Porter)

The following is an update analyzing a recent case of interest:

Bankruptcy court finds cross- collateralization provision in separate loan transactions valid and effective

A New Mexico bankruptcy court has held that the cross-collateralization provision in each of debtor’s second and third loan agreements with a credit union was sufficient to render a vehicle–which was purchased by debtor and her spouse with their first loan from the credit union, and which secured this first loan– collateral for second and third loans. To view the link click here. In re Porter, 2020 WL 1860105 (Bankr. D. N.M., 2020).  To read the opinion, click here.

FACTS

In March of 2016, Ms. Porter took out a loan from a credit union to buy a vehicle. They signed the credit union’s standard loan documentation, which included the grant of a security interest in the vehicle. Shortly thereafter, Ms. Porter took out two additional loans from the credit union. The loan documents had different loan amounts, interest rates, repayment terms, and collateral descriptions, but were otherwise identical. They all contained the following terms:

Truth in Lending Disclosure; Security: Collateral securing other loans with the credit union may also secure this loan. You are giving a security interest in your shares and dividends and, if any, your deposits and interest in the credit union; and the property described below[.]

Loan Agreement; 4. Security for Loan–This Agreement is secured by all property described in the “Security” section of the Truth in Lending Disclosure. Property securing other loans you have with us also secures this loan, unless the property is a dwelling.

Security Agreement; 2. What the Security Interest Covers/Cross Collateral Provisions–The security interest secures the Loan and any extensions, renewals or refinancing of the Loan. If the Property is not a dwelling, the security interest also secures any other loans, including any credit card loan, you have now or receive in the future from us and any other amounts you owe us for any reason now or in the future, except any loan secured by your principal residence.

In the first loan documentation, the vehicle was described in detail as the collateral. The other two loan documents had no similar description.

On March 14, 2019, Ms. Porter and her spouse filed a Chapter 7 case. Their schedules listed the vehicle as collateral for the first loan only, not the other two. The credit union filed a declaratory relief action seeking findings that (1) all three loans to Ms. Porter were secured by the vehicle; (2) the loans were not subject to discharge as unsecured claims; and (3) the loans were not subject to “strip-down.” When the debtors answered, they admitted that all three loans were secured by the vehicle. But once the credit union moved for summary judgment, the debtors attempted to “take back” their admission on cross-collateralization, in the words of the court.

The court granted the credit union’s motion, finding that all of the loans were secured by the vehicle, not just the first loan.

REASONING

The court’s ruling was based initially on Ms. Porter’s admissions in her answer to the complaint. The court might have allowed her to “take back” the admissions–citing Underberg v. U.S., 362 F. Supp. 2d 1278, 1283 (D.N.M. 2005)– but she failed to request court permission to withdraw or amend her answer.  Even without that admission, however, it appears that the court would still have ruled for the credit union.  The court found the cross-collateralization language in all three sets of the loan documents to be clear and unequivocal.  As to the failure of the second two sets of loan documents to specifically identify the vehicle, the court wrote:

There is no requirement that the cross collateral be separately described. Defendants’ primary argument, i.e., that loans two and three are unsecured because the 4Runner was not specifically described in the documents for those loans, fails.

After deciding the key issue regarding cross-collateralization, the other two issues in the case flowed naturally, with the court holding: (1) the debtors did not pay off the total debt secured by the vehicle simply by tendering the remaining balance owed on the first loan, when in fact it was also collateral for the second and third loans; and (2) it was not appropriate for the court, after the bankruptcy case was closed and the motor vehicle was abandoned back to Ms. Porter, to grant the credit union’s request for a valuation of the vehicle.

AUTHOR’S COMMENT

The court had an easy time with this case, between the debtor’s unsuccessfully-withdrawn admission that the loans were cross-collateralized, and the clear language in the loan documents. The only issue that gave the court any pause was the lack of description of the vehicle in the second two loan documents. I was disappointed that the court offered no citations of any type in its discussion of the cross-collateralization issue. I was hoping for a bit more discussion of authority on the topic. Credit unions regularly engage in this practice, and most consumer debtors do not realize their credit cards are being cross collateralized on their cars.

The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. These materials were written by Christopher V. Hawkins, an attorney with Sullivan Hill Rez & Engel, APLC, a member of the ad hoc group and the CLA’s Commercial Transactions Committee, with editorial contributions by the Hon. Meredith A. Jury, United States Bankruptcy Judge, C.D. Cal. (Ret.), a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee of Business Law Section of the California Lawyers Association to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.