Ford Motor Credit Co. v. Stevens

United States Court of Appeals,
Eleventh Circuit.
No. 96-9390.
In re: Albert G. STEVENS, Edelgard Stevens, Debtors.
FORD MOTOR CREDIT COMPANY, Plaintiff-Appellant,
v.
Albert G. STEVENS, Edelgard Stevens, Defendants-Appellees,
Barnee C. Baxter, Trustee-Appellee.
Dec. 12, 1997.
Appeal from the United States District Court for the Southern District of Georgia. (No. CV 195-
167), Dudley H. Bowen, Jr. Judge.
Before COX and BARKETT, Circuit Judges, and HUNT*, District Judge.
BARKETT, Circuit Judge:
Ford Motor Credit Company ("Ford") appeals from the district court's order permitting the
Chapter 13 Trustee ("the Trustee") to recover from Ford alleged overpayments that Ford received
from a confirmed Chapter 13 bankruptcy plan.
Albert and Edelgard Stevens ("the Debtors") filed a Chapter 13 petition in the U.S.
Bankruptcy Court for the Southern District of Georgia. Among their assets was a 1992 pick-up
truck, in which Ford held a properly perfected security interest. Ford was also the named loss payee
on an insurance policy covering the truck. As part of the Debtors' confirmed Chapter 13 plan, the
bankruptcy court allowed Ford's secured claim, in which it requested the amount of $18,586.72, plus
interest at a rate of 12% as provided by local bankruptcy court rule. Approximately one year later,
*
Honorable Willis B. Hunt, Jr., U.S. District Judge for the Northern District of Georgia,
sitting by designation.
after the Trustee had made numerous payments to Ford under the plan, the truck was completely
destroyed in an accident. In response to Ford's request, the insurance company paid directly to Ford
the sum of $14,967.42, which reflected the remainder of the debt owed to Ford, and interest
calculated at a rate of 13.5% pursuant to the original contract with the Debtors,1 rather than at the
12% rate provided in the bankruptcy plan. Combined with the principal payments that Ford had
already received from the Trustee, Ford recovered $1,852.83 more than what it should have received
under the Chapter 13 plan. The Trustee requested that Ford refund the overpayment and when Ford
failed to do so, the Trustee withheld the amount of the overpayment from Ford's monthly lump sum
disbursement check. This check included payments due to Ford from all of the debtor accounts
administered by the Trustee.
DISCUSSION
As a threshold matter, we first consider the Trustee's motion to dismiss Ford's appeal in this
case on grounds that the issues raised in the appeal became moot upon the Debtors' discharge from
the bankruptcy court. The Debtors' discharge was entered on April 5, 1995. On July 10, 1996,
however, the bankruptcy court reopened the case and revoked the discharge for the purpose of
correcting an administrative error. It appears that the case remains open. The Trustee argues that,
notwithstanding the reopening of the case, Ford's appeal is moot because no relief would be
available should Ford prevail. We find no merit in this argument, and deny the Trustee's motion to
dismiss.
Turning to the merits, we first consider Ford's argument that the insurance proceeds it
1
The interest portion of the insurance proceeds reflected the difference between the 13.5%
contractual interest rate and the 12% interest rate from the date of the confirmation of the
bankruptcy plan until the destruction of the truck, plus interest that accrued at the original 13.5%
rate in the five months before the plan was confirmed.
received as the named loss payee on the insurance policy covering the truck are not property of the
bankruptcy estate, and that, thus, Ford was entitled to retain the amount reflecting the original
contractual interest rate from the insurer. The property of a Chapter 13 bankruptcy estate is
comprised of "all legal or equitable interests of the debtor in property as of the commencement of
the case," which includes "proceeds, product, offspring, rents, or profits of or from property of the
estate." 11 U.S.C. § 541(a)(1) & (6). Confirmation of a plan under Chapter 13 of the Bankruptcy
Code binds the debtors and creditors to the terms of that plan. 11 U.S.C. § 1327(a). If insurance
proceeds are considered property of the bankruptcy estate, then the distribution of those proceeds
is governed by the terms of the confirmed Chapter 13 plan.
Ford does not dispute that the truck and the insurance policy covering damage to the truck
were property of the Debtors and, therefore, property of the Chapter 13 estate. The fact that the
insurance policy is property of the bankruptcy estate, however, does not necessarily mean that the
proceeds from that policy are also property of the estate. In some circumstances, a creditor or
beneficiary other than the debtor may be entitled to proceeds distributed pursuant to an insurance
policy that is property of a bankruptcy estate. See, e.g., First Fidelity Bank v. McAteer, 985 F.2d
114, 117 (3d Cir.1993) (holding that proceeds from credit life insurance policy belonged to creditor
and not to the bankruptcy estate); In re Louisiana World Exposition, 832 F.2d 1391, 1399 (5th
Cir.1987) (holding that proceeds from Directors and Officers liability insurance policy held by
bankrupt corporation were not property of bankruptcy estate). But cf. Vitek v. Floyd (In re Vitek),
51 F.3d 530, 534-35 (5th Cir.1995) (noting that Louisiana World Exposition might be limited to the
narrow situation in which the debtor has no interest in the liability insurance proceeds).
Where the debtor has an interest in the insurance proceeds, however, the proceeds are
considered property of the bankruptcy estate and distribution of the proceeds is governed according
to the terms of the bankruptcy plan. See, e.g., In re Feher, 202 B.R. 966, 970 (Bankr.S.D.Ill.1996)
(holding that, "in view of the fact that Mr. Feher has a shared interest in any proceeds paid under the
policy, the proceeds constitute property of Mr. Feher's bankruptcy estate"); In re Hill, 174 B.R. 949,
952 (Bankr.S.D.Ohio 1994). In order to determine the parties' respective rights with regard to the
insurance proceeds from the destruction of the truck, one must consider the nature and type of the
insurance policy involved, and its relationship to the property of the bankruptcy estate.
The policy at issue in this case is intended to protect both the owner and the secured creditor
in the event of the destruction of the security (the truck). In the context of the insurance policy on
the truck, therefore, the proceeds act as a substitute for the insured collateral. See Bradt v.
Woodlawn Auto Workers (In re Bradt), 757 F.2d 512, 515 (2d Cir.1985) (citing H.R.Rep. No. 595,
95th Cong., 1st Sess. 368 (1977)) (holding that broad definition of "proceeds" under 11 U.S.C. §
541(a)(6) encompasses insurance proceeds that simply represent a "conversion in form of property
of the estate"); In re Suter, 181 B.R. 116 (Bankr.N.D.Ala.1994) (observing that, "[f]rom a secured
creditor's perspective, property insurance is a substitute for the collateral insured"); see also In re
Jones, 179 B.R. 450, 454 (Bankr.E.D.Penn.1995) (concluding that home insurance proceeds
constitute liquidated property of the bankruptcy estate). Ford's interest in the insurance proceeds
flowing from the destruction of the secured collateral is only as great as its interest in the collateral
itself. See In re Feher, 202 B.R. at 970-71; In re Arkell, 165 B.R. 432, 434
(Bankr.M.D.Tenn.1994). That interest was defined at the time of the confirmation of the Chapter
13 plan as the remaining principal owed on the truck, with interest at a rate of 12%. Section 1327(a)
of the Bankruptcy Code states that "the provisions of a confirmed plan bind ... each creditor ...
whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. §
1327(a). In this case, Ford requested the total amount due on the truck, with interest at a 12% rate,
and its claim was allowed in full. Ford is bound by the terms of its allowed claim and is therefore
limited to recovering from the insurance proceeds the amount of its debt as determined under the
Chapter 13 plan.
Ford, however, argues that it is entitled to retain the excess insurance proceeds reflecting the
contractual interest rate, relying primarily upon the Third Circuit's decision in McAteer. In that case,
McAteer purchased a truck using a bank loan. As security for the loan, McAteer purchased a credit
life insurance policy under which, in the event of McAteer's death, the insurer would pay the bank
the amount of debt remaining according to the schedule of indebtedness, plus up to two months
arrearage. McAteer subsequently filed for bankruptcy, and under the terms of the confirmed
Chapter 13 plan, the bank's secured interest in the truck was "crammed down" from $13,722.22 to
just over $8,000, representing the bank's secured interest in the truck, plus 10% of its unsecured
interest. When McAteer died, the bank recovered the full amount of its debt outstanding at the time
of McAteer's death under the original indebtedness schedule. The bankruptcy court ordered all
proceeds in excess of the bank's secured claim turned over to the debtor's estate. The Court of
Appeals reversed, holding that because the insurance proceeds were not property of the bankruptcy
estate, the creditor bank could recover the full amount of its original loan from the insurer, rather
than the limited "crammed down" amount. McAteer, 985 F.2d at 117-19.
McAteer, however, is not at all analogous. In this case the insurance proceeds flow from the
destruction of the truck, and stand as the substitute for the collateral securing Ford's loan. In
McAteer, the insurance proceeds flow from the death of the debtor, and have no relationship to the
value or status of the truck. Nor would the proceeds in McAteer take the place of the truck, as the
truck was still intact and retained the same value in the bankruptcy estate before and after the
debtor's death. In other words, if the truck in McAteer—which was property of the bankruptcy
estate—had been destroyed, it would not have triggered the disbursement of the insurance proceeds;
conversely, McAteer's death did not affect the value of the truck, which remained in the bankruptcy
estate. Thus, the debtor in McAteer could not claim an interest in the proceeds by virtue of the
truck's status as property of the bankruptcy estate. In contrast, in this case the disbursement of
insurance proceeds caused by the destruction of the truck fell within the property of the bankruptcy
estate. Having a confirmed secured claim with regard to the truck, Ford was certainly entitled to
collect on its claim from the insurance proceeds as substitute collateral. It was not entitled, however,
to recover more than the amount of its secured claim as confirmed by the Chapter 13 plan. We
conclude, therefore, that Ford was required to turn over the excess sum to the Trustee.
We reject, however, the Trustee's argument that he acted properly to recover the
overpayment by withholding funds owed to Ford by debtors in nearly 30 unrelated bankruptcy cases
also administered by the Trustee. Nothing in the Bankruptcy Code authorizes the action of the
Trustee, whose powers and duties are defined and delimited by statute. The powers and duties of
a Chapter 13 trustee are set forth in 11 U.S.C. § 1302, which provides that among the duties of a
trustee are the obligations to dispose of estate monies, to advise "and assist the debtor in
performance under the plan ... and ensure that the debtor commences making timely payments under
section 1326 of this title." 11 U.S.C. § 1302(b). As a fiduciary of the Chapter 13 estate, a trustee
is authorized to bring an adversary action to recover overpayments from a creditor. See, e.g., In re
Vaughn, 110 B.R. 94, 95 (Bankr.M.D.Ga.1990). The authority to recover overpayments from a
particular creditor, however, does not endow the Trustee with the authority to act on his own
initiative to divert funds from the plans of other debtors in order to satisfy the overpayment. We are
not persuaded by the Trustee's argument that his action was authorized by code provisions that
empower a bankruptcy trustee to recover excess payments made to a creditor as well as by powers
inherent in the overall scheme of the Bankruptcy Code.
The Trustee's action was not only not authorized by the Code but also affirmatively violated
the Trustee's statutory obligations under the Code. A Chapter 13 trustee is obliged by statute to make
payments to all creditors under the terms of the confirmed plan. 11 U.S.C. § 1326(c). By
withholding the amount of the overpayment from the unrelated plans, the Trustee violated his
statutory obligation to make payments to creditors as required under the terms of a confirmed plan
by, in effect, refusing to make the full payment required under the terms of the other plans
administered by the Trustee. The Trustee also violated his obligation to assist the debtors in those
unrelated cases in the performance of their plans. The Trustee's action violated his duty to make
payments on the behalf of the other debtors, placing them at risk for default. For these reasons, we
hold that the Trustee overstepped the bounds of his authority in withholding the amount of the
overpayment made by the Stevens' Chapter 13 estate from payments owed to Ford in the unrelated
plans.
For these reasons, we AFFIRM the district court's holding that Ford is required to turn over
the excess sum to the Trustee, we REVERSE the district court's holding that the Trustee acted
properly in withholding the amount of the overpayment from payments owed to Ford in other
unrelated plans, and we REMAND to the district court for further proceedings consistent with this
opinion.