Funds Paid by GAP Insurance Provider After Debtor Totaled Car Were Not Property of the Estate and Belonged to Creditor

Funds Paid by GAP Insurance Provider After Debtor Totaled Car Were Not Property of the Estate and Belonged to Creditor

This matter requires deciding which party should receive funds paid by a Guaranteed Auto Protection (GAP) provider after Debtor  totaled his car. Debtor and the Chapter 13 Trustee contend that the GAP proceeds should flow to the bankruptcy estate. Creditor Credit Acceptance Corporation, which received the GAP funds directly from the GAP provider, argues that it is entitled to keep those funds.

On September 9, 2014, Debtor signed a Retail Installment Contract to purchase a used 2014 Nissan Versa from Chevrolet Dealer. He provided a $1,000 down payment and financed the remainder of the purchase price. Included within the total amount financed was a $599.00 charge payable to Western Diversified Services, Inc. for “Optional Gap Protection.”  Debtor signed the Retail Installment Contract on the line reflecting that he was acquiring GAP protection under a paragraph that stated:

GAP PROTECTION: Optional Guaranteed Auto Protection (GAP) is not required to obtain credit. GAP protection will not be financed under this Contract unless You sign for it below and agree to pay the additional cost shown below and on Line 5G of the ITEMIZATION OF AMOUNT FINANCED. You may obtain optional GAP protection from a person of Your choice that is authorized to sell such coverage and is acceptable to Us. The GAP contract issued by the provider of the protection will describe the terms and conditions of coverage in further detail. If You want GAP protection, sign below.

[Id.] The Retail Installment Agreement also contained a term stating that Dealer “has assigned this contract to Credit Acceptance Corporation,” Creditor herein. [Id.]

The Retail Installment Contract also has “Additional Terms and Conditions” pages. The additional terms included, inter alia, a paragraph labeled “Security Interest and Assignment of Proceeds.” [Proof of Claim 1-1 at 6-8.] That paragraph states:

You give Us a security interest in the Vehicle. This secures payment of all You owe on this Contract and in any transfer, renewal, extension or assignment of this Contract. It also secures Your other agreements in this Contract. You agree to have the certificate of title show our security interest (lien) in the Vehicle[.] Until Your obligations under this Contract are satisfied, You assign to Us all Your right, title and interest in and to: 1) all parts or goods put on the Vehicle; 2) all money or goods received (proceeds) for the Vehicle (including all parts or goods put on the Vehicle); 3) all insurance, service, or other contracts We finance for You; and 4) all proceeds from insurance, service, or other contracts We finance for You. This includes any refunds of premiums.

[Id. at 6.]

On the same day he executed the Retail Installment Contract, Debtor also signed a “GAP Addendum.” The GAP Addendum identified Debtor as the “Customer/Borrower;” identifies Creditor as the “Financial Institution/Lender,” and specifies both the amount paid as the premium for GAP protection ($599.00) and the total amount financed ($15,860.58, which includes the amount paid as the premium for GAP protection). The GAP Addendum itself, however, does not specify which person or entity would receive a payment from the GAP protection provider in the event any payment became due.

On December 19, 2014, Debtor filed a chapter 13 bankruptcy petition. Debtor listed his 2014 Nissan Versa on Schedule B, indicating that Creditor’s lien on the vehicle was not timely perfected. Debtor’s chapter 13 plan filed with his petition estimated Creditor’s claim at $15,371 with a secured value of $0. Creditor filed Proof of Claim 1-1 on December 23, 2014, listing a fully-secured claim of $15,190.68. Creditor then objected to Debtor’s chapter 13 plan, claiming that the plan failed to satisfy 11 U.S.C. § 1325 as it proposed to pay less than the full amount of Creditor’s secured claim. Subsequently, pursuant to an Agreed Order between the Chapter 13 Trustee, Creditor, and Debtor, all parties agreed that Creditor’s lien on the vehicle was avoided in accordance with §§ 544 and 547, that the collateral was preserved for the benefit of the estate pursuant to § 551, and that Creditor’s claim would be treated as a general unsecured claim.  Debtor’s plan then was confirmed.

About two years later, Debtor totaled his vehicle. On April 27, 2017, the Court entered an Agreed Order as between Debtor and the Chapter 13 Trustee directing the distribution of insurance proceeds from State Farm Insurance Company: “Insurance proceeds in the amount of $5,487.00, after application of the deductible, are available to the debtor for the purchase of a replacement vehicle. The trustee has no opposition to the debtor using the insurance proceeds to acquire a replacement vehicle.” However, the State Farm insurance proceeds did not cover the full amount of Debtor’s remaining indebtedness to Creditor on its unsecured claim based on the Retail Installment Contract. As a result, Debtor’s GAP protection was triggered. Because Debtor purchased GAP protection, “Debtor’s GAP insurance … made a payment to the Creditor in the amount of $5,830.04.”

Debtor challenged Creditor’s receipt of the payment, and Creditor refused to turn over the funds. Accordingly, Debtor filed a Motion to Compel Release of Funds (the “Motion”), arguing that “Creditor is being paid as an unsecured creditor, making the GAP payment and distributions from the Trustee [as an unsecured creditor under debtor’s chapter 13 plan] duplicative,” and asking that Creditor be compelled to turn over the $5,830.04 to the Chapter 13 Trustee.  Creditor filed an Objection.  The Court held a hearing and has reviewed these filings along with the Proof of Claim and additional submissions by Creditor, Debtor, and the Chapter 13 Trustee.  The Court notes that none of the parties filed in the record the GAP contract issued by the provider of GAP protection referenced in the Retail Installment Agreement.

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