## Facts

- Nada Zaochney entered into a loan agreement with Alaska USA Federal Credit Union (Alaska USA) for a credit line.
- The credit-line agreement included a “cross-collateralization” term stating that collateral pledged for other loans the debtor had (or would have) with Alaska USA would also secure the credit-line obligation (with exceptions such as a principal dwelling and household goods).
- About ten days later, Zaochney bought a 2008 Chevrolet Impala from Alaska Sales and Service and financed the purchase through Alaska USA.
- The retail installment sales contract for the Impala stated that the vehicle served as collateral and, as permitted by law, secured other obligations the debtor then owed or later owed to the creditor; it also included a cross-collateralization provision with similar carve-outs.
- Zaochney later filed a Chapter 7 bankruptcy case.
- Zaochney filed a motion to value Alaska USA’s security interest in the Impala.
- The parties agreed the Impala’s value was $12,950.
- Alaska USA contended that, due to the cross-collateralization/dragnet language, the Impala secured not only the vehicle loan but also amounts owed on the credit line.
- Zaochney argued the dragnet/cross-collateralization clauses were unenforceable and that the Impala should secure only the vehicle loan.

## Issues

1. Whether the cross-collateralization (dragnet) provisions in the credit-line agreement and/or the retail installment sales contract were enforceable such that the Impala secured both the vehicle loan and the debtor’s credit-line balance owed to Alaska USA.

## Decision

- The court held the dragnet/cross-collateralization clauses were valid and enforceable.
- The court concluded the Impala served as collateral for both the purchase-money auto obligation and the credit-line obligation, to the extent of the vehicle’s value.
- The court granted the debtor’s motion to value in part by valuing Alaska USA’s secured interest in the Impala at $12,950, while rejecting the debtor’s attempt to limit the lien’s reach to the auto loan alone.

## Legal Principles

- A security agreement may provide that identified collateral secures not only the debt incurred to acquire the collateral but also other existing or future obligations to the same creditor (a dragnet or cross-collateralization clause), if the agreement’s terms are clear and enforceable under applicable state law.
- Courts generally apply objective contract interpretation: a signer is bound by unambiguous, conspicuous terms in a written agreement absent a recognized basis to avoid the contract (such as fraud, duress, or other invalidating grounds).
- In bankruptcy, valuation of collateral fixes the amount of the secured claim in that collateral; the secured portion is limited to the collateral’s value, with any excess claim treated as unsecured.

## Conclusion

In this Chapter 7 dispute, the court determined that Alaska USA’s agreements contained enforceable cross-collateralization language, so the debtor’s 2008 Chevrolet Impala secured both the car loan and the debtor’s credit-line debt to Alaska USA, with Alaska USA’s secured claim in the vehicle capped at the agreed value of $12,950.


In re Zaochney, 2011 WL 6148727 (2011)