MEMORANDUM OPINION

DOUGLAS D. DODD, Bankruptcy Judge.

Debtors Deloris and Nateshus Jackson sought to buy a replacement vehicle using collision insurance proceeds for prepetition damage to a vehicle subject to the purchase money security interest of Neighbors Federal Credit Union. Neighbors objected to the motion, arguing that the debtors have no interest in the insurance proceeds.

For the following reasons, the debtors' motion is denied.

FACTS AND PROCEDURAL HISTORY

A prepetition automobile accident destroyed the debtors' 2017 Nissan Altima, which was subject to a purchase money security interest in favor of Neighbors. The debtors' proposed chapter 13 plan—not yet confirmed— provides for payments to Neighbors of $329.90 in months 8 through 60 in exchange for using $14,700 of the collision insurance proceeds to buy a replacement vehicle.1

Mr. Jackson drove the car as a full-time driver for food delivery service Waitr although lack of a vehicle since the accident has left him unable to continue the work full time. On the hearing date he was sharing a car with his wife, a security guard. He occasionally still works part-time for Waitr and also drives for Uber when the couple's car-sharing schedule permits. Mr. Jackson has been searching for a replacement car priced at around $14,000, the approximate amount GoAuto paid under the debtors' collision coverage for the totaled Nissan Altima.2

Neighbors opposes the debtors' use of the collision insurance proceeds and substitution of collateral. It insists on retaining all the collision coverage proceeds.

Neither party disputes several key facts:

ANALYSIS

The debtors argue that as beneficiaries of the insurance policy they alone—and not the bank—are entitled to the insurance payment and that as a result, the money belongs to their bankruptcy estate. The debtors reason that Neighbors merely has a lien on the funds that attached to the insurance proceeds when the vehicle was declared a total loss.

Neighbors contends that as the lienholder named on the declarations page of the debtors' GoAuto insurance policy, it alone has the right to the GoAuto collision insurance proceeds because the payment was less than the balance owed Neighbors on the insured collateral.6

Resolution of the motion turns on two issues: (1) whether the insurance proceeds are property of the estate, and if so, (2) whether the debtors' proposal adequately protects Neighbors' interest in the proceeds.

The Automobile Insurance Collision Proceeds Are Not Property of the Estate.

Debtors argue that the estate's ownership of the 2017 Nissan Altima when the bankruptcy case commenced renders the insurance proceeds property of the estate, regardless of the vehicle's condition at the time of filing.7 They rely on Bankruptcy Code section 541,8 which provides that the estate includes any "proceeds, product, offspring, rents, or profits of or from property of the estate."9 The debtors reason that the estate includes proceeds of collision insurance when a claim for damage to an insured vehicle leads to payment. Because they are beneficiaries of the GoAuto policy, the Jacksons contend that the collision insurance proceeds belong to the bankruptcy estate.10

Courts focus on the insurance policy itself in analyzing ownership of insurance proceeds. "Insurance policies are property of the estate because, regardless of who the insured is, the debtor retains certain contract rights under the policy itself. Any rights the debtor has against the insurer, whether contractual or otherwise, become property of the estate."11

But ownership of the policy does not necessarily mean that a debtor has a right to the policy proceeds. The leading bankruptcy treatise explains the right to proceeds of casualty insurance:

The debtors' insurance declarations page13 lists Neighbors as a lienholder/additional insured on the wrecked vehicle. The debtors argue that because the GoAuto policy did not include an explicit loss payee rider, Neighbors is not entitled to the insurance payment. However, the policy on page 18 references the rights of an entity with a security interest in an insured vehicle: "If the auto is subject to a lien or a person or entity other than you had an ownership interest in the auto at the time of the accident or loss, such person or entity may be included by us as a payee on any payment."

Further, the debtors agreed to insure Neighbors' interest in the vehicle when they borrowed the money to buy it in 2017.14 In American General Fire & Cas. Co. v. Reese,15 the Fifth Circuit relied on Louisiana jurisprudence to equitably reform an insurance contract to name a mortgagee as loss payee where the homeowners' fire insurance policy did not name the mortgagee as loss payee:

Thus, even if the court were to accept the debtors' argument that the general loss payee language in the GoAuto policy were insufficient to grant Neighbors an interest in the insurance proceeds, Louisiana law recognizes the right of a lienholder, such as Neighbors, to the proceeds where the parties intended that it be paid from the proceeds. A fortiori, the debtors' naming Neighbors as loss payee on the declarations page supports the lender's claim to the proceeds.

Neighbors relies on the Fifth Circuit case of Matter of Edgeworth to argue that "[t]he overriding question when determining whether insurance proceeds are property of the estate is whether the debtor would have a right to receive and keep those proceeds when the insurer paid on a claim. When a payment by the insurer cannot inure to the debtor's pecuniary benefit, then that payment should neither enhance nor decrease the bankruptcy estate."17 It concluded that Edgeworth, the debtor, had no claim to his malpractice insurance proceeds because malpractice insurance is payable to third parties injured by an insured doctor's conduct.18 Though Edgeworth dealt with medical malpractice insurance, the court did not limit its holding to malpractice coverage. "Examples of insurance policies whose proceeds are property of the estate include casualty, collision, life, and fire insurance policies in which the debtor is a beneficiary. Proceeds of those insurance policies, if made payable to the debtor rather than a third party such as a creditor, are property of the estate and may inure to all bankruptcy creditors."19

Edgeworth supports the conclusion that where motor vehicle collateral is destroyed prepetition and collision insurance proceeds are insufficient to satisfy the debt to a lienholder named a loss payee on the policy, the proceeds are not property of the bankruptcy estate. Therefore, the $14,876 insurance payment from the debtors' collision coverage was less than the $29,000 owed to Neighbors so Neighbors is entitled to retain the proceeds.

Even if the Insurance Proceeds were Property of the Estate, the Debtors did not Prove that they Would Adequately Protect Neighbors' Interest.

Nor would the debtors prevail even if the collision coverage proceeds were estate property. Bankruptcy Code section 363(c)(2) allows a debtor to use cash collateral if either (1) the secured creditor consents, or (2) the court approves the use and the debtor provides adequate protection to the secured creditor.20 Because Neighbors did not consent to the debtors' use of the collision insurance coverage proceeds, the debtors bore the burden of proving that their proposed use of the proceeds would adequately protect Neighbors' interest in the replacement collateral, which requires a fact intensive analysis.21

The debtors offered no persuasive evidence that their proposal, which shifted over time, would adequately protect Neighbors. Their original motion22 proposed giving Neighbors only a replacement lien with the same rank and to the same extent as that Neighbors had in the destroyed Nissan Altima: it omitted any suggestion of another form of adequate protection.23 The debtors' later memorandum casually mentioned more adequate protection: "The debtor is entitled to seek use of cash collateral such as the subject insurance proceeds, and the debtor proposed adequate protection including a request for only half the of the funds, and monthly payments with interest to pay the portion of the funds to be utilized, and subject to the secured claim of the creditor."24 A later filing included an even further refined proposal:

None of the debtors' proposals were sufficient.

The Jacksons offered no evidence that they had plans to acquire a specific replacement auto, much less a contract to purchase a vehicle. Mr. Jackson was still actively searching for a replacement at the time of the hearing, testifying that he had considered several cars as replacements26 but not identifying which of the possible autos he planned to buy and offer as substitute collateral.

In addition, even had the debtors identified a specific replacement, the evidence did not establish that they could adequately protect Neighbors given the debtors' intended use of the replacement. Vehicle values decline with time and use: excessive mileage can accelerate depreciation and reduce the value of motor vehicle collateral. Mr. Jackson conceded at the hearing that his extensive use of the demolished vehicle making food deliveries for Waitr likely caused it to depreciate more rapidly than otherwise. Thus, even if the debtors had selected a replacement vehicle, the evidence supports an inference that Mr. Jackson's plan to use the replacement to resume driving full-time for Waitr would subject the replacement collateral to accelerated depreciation, much like the Nissan Altima.

In sum, the debtors have not demonstrated their ability to provide adequate protection of Neighbors' interest in the insurance proceeds.

CONCLUSION

The collision insurance proceeds were insufficient to satisfy the claim of Neighbors, the loss payee according to the insurance policy's declarations page, and were not property of the debtors' estate. Even had the proceeds been found to be property of the estate, the debtors failed to carry their burden of proving that they could adequately protect Neighbors if allowed to use the proceeds to buy a replacement vehicle.