Cross-Collateralization in Credit Union Agreements

[jq26]

Vehicle loan and credit card discharged in a Chapter 7. Both held by the same credit union. Client then attempted to make payment in the amount that cleared the lien on the vehicle. Credit union will not turn over title until the credit card balance is paid, claiming the amount of the lien on the vehicle was equal to total of vehicle loan + credit card balance. This came up right after case closure.

Client was unaware of cross collateralization clause in these loanliner documents, but they're likely there.

Credit union is now calling client trying to collect, which is about the dumbest thing they could have possibly done. Now I have leverage to file a motion for sanction and then settle by havng them turn over title to the vehicle. The problem is this'll cost clients $ they do not really have- looking to resolve by letter with credit union if at all possible.

Just curious if other attorneys/members successfully fought cross-col clauses. These things are brutal- NO ONE ever knows about them even though they have to be conspicuous. The cases I have found generally all come down on the side of supporting them under UCC, particularly on the east coast where I'm located.

[WhoCares1000]

I am not an attorney but I have to ask, what did the reaffirmation documents say regarding the vehicle and credit card. If I remember correctly, I was in a similar situation and had to reaffirm not only the car note but also a line of credit. In that case, there were 2 reaffirmation contracts signed. One for the car note and one for the line of credit.

If it turns out that the client reaffirmed or redeemed only the car, the Credit Union may have to give up the car title and have violated the BK laws because the credit card would have been discharged and that would have not only broken the agreement for the credit card but also the clause in the car note as the reaffirmation agreement is now the guiding contract (and I would argue that contract clauses are deemed broken all of the time in BK courts).

I would think however that a letter might do the trick. Does this CU know of any case law which backs up their position. Even if the clause is valid under UCC, does it survive BK and is it reaffirmable without statement in the reaffirmation contract? Those is the $1M questions.

[Denita]

I reaffirmed a vehicle in BK that was financed thru a CU. In the reaffirmation agreement I specified that the title would be sent to me within ten days of the final payment. All payments were specified in the reaffirmation (interest rate was reduced, payment reduced, a few months were added to the term) and the $20k credit card did not have to be reaffirmed, only the vehicle loan was reaffirmed.

Having said the above, the CU sent the standard agreement first. All the other things I added in prior to signing. They told me it was redundant (specifying the title being sent when the final payment was received by the CU) I insisted, they signed (all signed) and there were zero issues when the car was paid.

Looks like they are "silent" on the cross collateralization as a strategic move. Wouldn't your client have had to explicitly reaffirm the CC debt just like the auto loan in order for it to be valid? That is the course I would take. After all, the reaffirmation agreement is specific to balance owed, interest rate, payment rate and term (IIRC).

[Guest usctrojanalum]

really depends on how stubborn the CU is. I highly doubt you can get this done with simply a letter alone. There is really no way to predict how CU's legal department will go forward. My guess is they will have no problem litigating the matter. They are most likely aware your client does not have money to litigate and will force your clients hand.

[jq26]

No reaff was signed or even attempted on car or credit card. I think there is no question that the clients are not personally liable for the credit card or vehicle balances. They are both discharged. The CU never even presented the reaff option.

The issue is realy this- Clients believe the lien on their vehicle was equal to the amount of the vehicle loan. CU is claiming that due to cross-collateralization, the lien is equal to the vehicle loan PLUS the discharged credit card balance.

Redemption was not an option as the vehicle is worth more than the combined credit card balance + vehicle loan.

So here we are in a standoff with credit union. I want to push the issue with them to see where we stand on these clauses. Looks like it has been tested occasionally and in most circuits these hidden UCC liens are deemed valid, even though they really are nasty little inconspicuous clauses that clients have no idea about.

At this point, my likely option here is to file a motion for sanctions on the CU for the collection activity, then attempt to settle for a one time payment to the CU by the client in exchange for the titles to the vehicles plus attorney's fees.

Any case law on this point (or personal experiences) would be helpful.

[Guest usctrojanalum]

At this point, my likely option here is to file a motion for sanctions on the CU for the collection activity, then attempt to settle for a one time payment to the CU by the client in exchange for the titles to the vehicles plus attorney's fees.

Have you sent the CU a letter requesting that they stop contacting your client and they are still contacting him anyway? If yes, this strategy is good. If not, the BK Court is not going to do anything drastic.

[saytar]

Just a newbie here. I know it would cost something such as filing fees,etc., but can't the bk be reopened or admended to deal with this credit card? Using the argument that debtor was unaware of this clause and would have specifically addressed this in the orginal bk.???

[jq26]

Have you sent the CU a letter requesting that they stop contacting your client and they are still contacting him anyway? If yes, this strategy is good. If not, the BK Court is not going to do anything drastic.

It isn't about the motion really, it is about the time and effort put into answering and appearing. Just forcing them to settle the matter.

[1stStep]

It can't hurt to try... but busting up a cross-collateral agreement will be tough... I know in AZ they are ironclad...

[WhoCares1000]

The wild card here though is Bankruptcy. If the bank wanted the car, they would be repo'd it as soon as the BK was done because there was no reaffirmation agreement done for either debt. They want the money instead.

Where jq26 might have an opening is that the CU contacted the debtor on a debt that was discharged in BK. There were no reaffirmation agreements. Hence, he might still be able to get sanctions for the contact and that might be enough to get the CU to disgorge the title rather than face a BK judge.

So maybe the answer here is to not attack the cross-collateral agreement but go around it. The bank can talk about it all they want but the judge will probably tell them to get the car and stop calling the debtor.

[jq26]

Credit union repo'ed the car. I wrote a ten page motion requesting sanctions for violation of permanent injunction on three separate counts. I particularly point out that the cross-collateralization clause in the agreement are ambiguous and bogus. I then write a second motion requesting an expedited hearing in bk court. Judge approves the expedited hearing.

Credit union hires firm to defend them. Firm calls me today to basically see why I'm all twisted up about this, acting like I'm overreacting. I tell firm they need to hand vehicle titles over plus a few thousand for my attorney's fees or I will see them in court to stand in front of Federal Judge XXXXXXX and roll the dice. They'll be back in touch in the morning.

[despritfreya]

jq,

I think you will be hard pressed to win your Motion. While the CU did violate the Discharge Injunction by attempting to collect $$ from your client, it did not, IMO violate anything by picking up the car. You may be able to hold it in contempt for the attempt to collect $$ but that probably won’t amount to much of a “sanction”.

Your research (same as mine) is quite clear. Dragnet clauses are 99% of the time enforceable both under State and Federal law. The following case has a very good breakdown of the issues - In re Casenove, 306 B.R. 367 (Bankr.M.D.Fla., 2004). There are so many others, most of which date back quite a few years.

The fear I have is that you have open yourself and your client up to an award of attny fees if you have no colorable argument. On the other hand, if you play your cards right and are a good negotiator, maybe you can settle the matter in a way that both sides come out fine.

In my jurisdiction the Judges have gotten around the need to reaffirm pretty much anything. However, when it comes to CUs, if my client has any other "unsecured" loans with the CU, I may want my client to sign a reaff which specifically recognizes that all other unsecured obligations will have no impact on the release of the lien. If the CU is not willing to so provide and redemption is not in the cards, I recommend that my client walk away.

Good luck with this and keep us posted.

Des.

Edited October 5, 2012 by despritfreya

[jq26]

Thanks for the case law Des.

The car was returned to the client as part of a settlement. Lots of work for a relatively small fee from the client, but good to flush out some of these issues (and keep creditors on their toes).

[1time2many]

Thanks for the case law Des.

The car was returned to the client as part of a settlement. Lots of work for a relatively small fee from the client, but good to flush out some of these issues (and keep creditors on their toes).

Great Job JQ.....I doubt they seen this coming.