Judge Somers

11-21383 Keele (Doc. # 49) - Document Text

SIGNED this 14th day of March, 2012.


Opinion Designated for Electronic Use, But Not for Print Publication

In re:


This matter came before the Court on February 17, 2012, on Creditor First Federal
Savings and Loan’s response to the Chapter 13 Trustee’s objection to its claim. The
Creditor appeared by counsel Wesley F. Smith. Trustee W.H. Griffin appeared on his
own behalf. The Debtors appeared by counsel Russell B. Cloon. The Court has reviewed
the relevant materials and heard the parties’ arguments, and is now ready to rule.

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In May 2010, the Debtors refinanced a debt of approximately $52,000 they owed
to the Creditor that was secured by a 1999 double-wide manufactured home (“Home”).
The “Note, Disclosure, and Security Agreement” they signed said they were giving a
security interest in the property “being purchased,” identified as the Home, but also said
all but $50 of the amount they promised to pay the Creditor was going to pay off an
existing loan from the Creditor. The Creditor’s lien had been perfected by a notation on a
certificate of title for the Home that was issued in August 2006. The note’s reference to
the loan payoff and the date of the notation on the title show the Debtors bought the
Home before the 2010 loan was made, so this new financing arrangement did not enable
them to buy it. Nothing presented to the Court shows whether the loan that was paid off
was a purchase-money loan. The Debtors made the required payments on the refinanced
loan for approximately one year.

On May 10, 2011, the Debtors filed a Chapter 13 bankruptcy petition. At that
time, the Debtor-husband was receiving unemployment benefits and the Debtor-wife was
working. They filed a plan in which they proposed to pay $1,000 per month for 24
months and then $1,500 per month 33 months. They used the form Chapter 13 plan that
is suggested for use in this District. In that form, debtors are to specify in ¶ 10(c) any pre-
confirmation payments they propose to make on allowed claims secured by personal
property that the Trustee should pay as if their plan had been confirmed. These Debtors
did not list any proposed payments in ¶ 10(c). Paragraph 10(c) provides that to receive
any pre- or post-confirmation payment, the creditor must have a filed and allowed claim,


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which this Creditor does not yet have. The Debtors did list the Creditor in ¶ 10(d) as the
holder of a general secured claim to whom they proposed to pay the value of their Home,
alleged to be $23,000, with a pro rata share of their monthly payments (along with two
creditors holding claims secured by motor vehicles).

On May 26, 2011, the Creditor filed a proof of claim. The claim said the amount
owed on the date of filing was $51,562.65. The space for specifying the amount of any
arrearage was left blank. The Creditor claimed the Home was worth almost $39,000, and
attached an NADA appraisal guide value report as support for that value.

On June 7, 2011, the Creditor filed an objection to the Debtors’ plan, saying the
Home was worth almost $39,000, and asking the Court to determine the Home’s value.
The Creditor also said the Debtors would not be able to make all the plan payments or to
comply with the plan.

A hearing on confirmation of the Debtors’ plan was set for July 14 but, by
agreement of the parties, was continued to September 16. The parties later agreed to
continue that hearing to October 20.

On October 20, 2011, the Creditor filed a motion for stay relief, saying the Debtors
had missed five payments since filing for bankruptcy and had agreed to surrender the
Home. An agreed order granting the motion was entered the next day. Neither the
motion nor the order said anything about adequate protection for the Creditor’s lien. This
order made ¶ 8 of the form plan the controlling paragraph with regard to the now-
surrendered Home. As relevant here, that paragraph provides that for surrendered


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property, “[t]he trustee shall not make distributions on account of any secured claim in
this class.” Because the stay relief order had resolved the Creditor’s objection to the
Debtors’ plan, an order confirming the plan was entered on October 31, 2011.

On October 24, 2011, the Trustee filed an objection to the Creditor’s claim, noting
the stay relief order and asking to have the Creditor’s secured claim allowed as $0. The
Creditor filed a response, pointing out that the Debtors had proposed to pay it a pro rata
share of their monthly plan payments, and it had been paid nothing because its objection
had prevented their plan from being confirmed. The Creditor asked the Court to order the
Trustee to pay it as adequate protection a pro rata share of the funds he had on hand, and
then to disallow the remainder of its claim. The Creditor further sought to reserve the
right to make an unsecured claim for any deficiency balance that might remain after the
Home was liquidated.

On October 28, 2011, the Debtors filed a motion to modify their plan to abate their
plan payments through February 28, 2012, because the Debtor-husband’s unemployment
benefits had run out and a claim he was making for workers compensation benefits was
being contested. No objections were filed, and the motion was granted. Later, in
February 2012, the Debtors filed a motion to modify their plan to reflect their surrender of
the Home and to eliminate the Creditor as a secured creditor to be paid under the plan.
The Trustee filed an objection, and that matter is still pending.

Due to a mixup, the Trustee’s objection to the Creditor’s claim was orally granted
at a hearing on the objection. The Creditor filed a motion to reconsider and, with the


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Trustee’s consent, the matter was set for hearing on February 17, 2012. At that time, the
Court heard arguments and took the matter under advisement. The Trustee represented to
the Court that the Debtors’ plan will not provide anything to their unsecured creditors, but
will at most pay the two debts secured by their vehicles, their attorney fees, and the
Trustee’s percentage fee.

The Court has carefully reviewed the Creditor’s pleadings, including its proof of
claim, its objection to the Debtors’ plan, its motion for stay relief, its response to the
Trustee’s objection to its claim, and its motion to reconsider the oral order granting that
objection, and has found no assertion that any part of the Creditor’s security interest in the
Debtors’ Home is a purchase money security interest. At the hearing on February 17, the
Creditor’s counsel did not allege that the Creditor’s claim was a purchase money security

a. Adequate Protection under §§ 361, 362, and 363.
When the Debtors filed their Chapter 13 petition, § 362(a) of the Bankruptcy Code
imposed a stay that prevented the Creditor from enforcing its lien on their Home. Section
362(d) provides, in relevant part, “On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided under subsection (a) of this
section, such as by terminating, annulling, modifying, or conditioning such stay — (1) for
cause, including the lack of adequate protection of an interest in property of such party in
interest.” Since the Debtors were originally proposing to use the Home by continuing to


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live in it, § 363(e) is relevant here and it provides, “[A]t any time, on request of an entity
that has an interest in property used . . . by the trustee, the court, with or without a
hearing, shall prohibit or condition such use . . . as is necessary to provide adequate
protection of such interest.”1 But the Creditor did not ask for adequate protection until
after the Debtors had surrendered the Home. At least one court, in Best Products, has
held that a creditor was not entitled to adequate protection payments under § 363(e)
where it did not move to prohibit or condition the debtor’s use of its collateral before it
reacquired possession of the collateral.2

Courts are divided on the question whether the value that is to be adequately
protected is the value of the creditor’s interest as of the date of the bankruptcy petition, or
the date the creditor asks for adequate protection,3 although most of the decisions
awarding adequate protection payments for the period before the request are now twenty
or more years old. The Court has found no Tenth Circuit, Tenth Circuit BAP, or District
of Kansas opinions addressing the question.

Courts reaching the conclusion that adequate protection is not required until the
creditor asks for it have pointed out that § 362(d)(1) and § 363(e) require the creditor to
ask for adequate protection in order to get it, except when the trustee or debtor wants to

111 U.S.C. § 1303 gives Chapter 13 debtors the right and power to use property under § 363(e).
2In re Best Prods. Co., 138 B.R. 155 (Bankr. S.D.N.Y.), aff’d 149 B.R. 346 (S.D.N.Y. 1992).
33 Collier on Bankruptcy, ¶ 361.02[3] (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th

ed. 2011).

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use cash collateral, in which case § 363(c)(2) forbids the use unless the secured creditor
consents or the court approves the use.4 A leading bankruptcy treatise says, “The text of
the Bankruptcy Code seems to support the view that protection is provided only from the
date of the request.”5 Furthermore, a debtor’s use of property that secures a claim does
not necessarily cause the value of that property to go down. As the Best Products court
said, by asking for adequate protection, the creditor shows it is concerned the value of its
collateral is declining, and forces the debtor to decide whether to avoid paying adequate
protection by surrendering the collateral to the creditor, or to provide adequate protection
so it can continue to use the property.6 This Court agrees that a rule requiring a creditor
to ask for adequate protection before it can get it is more appropriate than a rule that such
protection must be paid retroactive to the date the bankruptcy petition was filed, no matter
when the creditor asked for it.7

4E.g., In re Sharon, 234 B.R. 676, 683-85 (6th Cir. BAP 1999); In re Kain, 86 B.R. 506, 512
(Bankr. W.D. Mich. 1988); cf. In re Robinson, 225 B.R. 228, 233-34 (Bankr. N.D. Okla. 1998) (after-thefact
request for allowance of administrative expense under § 503(b) based on depreciation of collateral is
not a substitute for timely adequate protection request).

53 Collier on Bankruptcy, ¶ 361.02[3].

6138 B.R. at 158.

7The Court recognizes, but rejects the reasoning of courts that allow adequate protection to be
awarded retroactively to a date before it was requested. See, e.g., In re Big3D, 438 B.R. 214, 227-29 (9th
Cir. BAP, en banc) (noting growing trend to award adequate protection only from creditor’s request
forward, but retaining rule of prior case that bankruptcy court should determine when creditor would have
obtained state law remedies but for bankruptcy, and then exercise discretion based on circumstances of
case to fix adequate protection); In re Craddock-Terry Shoe Corp., 98 B.R. 250 (Bankr. W.D. Va. 1988)
(concluding granting adequate protection only from date of request forward would force creditors to rush
to court to seek it and interrupt breathing space debtors normally enjoy, and would not protect against all
postpetition decreases in value caused by automatic stay);


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The Creditor suggested it should receive a pro rata share of the Debtors’ pre-
confirmation plan payments because that is what it would have received if its own
objection had not delayed the confirmation of the Debtors’ plan until after they
surrendered the Home. But if the Debtors’ plan had not been confirmed and the case had
been dismissed, the pre-confirmation payments the Debtors made would have been used
only to pay administrative expenses, with any remaining balance being returned to them,
not paid to their creditors.8 With respect to the Creditor’s secured claim, the Debtor’s
surrender of the Home was equivalent to a dismissal of the case before plan confirmation.
There is no reason why the Creditor’s secured claim should receive better treatment than
it would have if confirmation had been denied and the case had been dismissed.

b. Adequate Protection under § 1326(a)(1)(C).
At the February 17 hearing, the Creditor’s counsel pointed out that a pre-planconfirmation
adequate protection requirement had been added to Chapter 13 in 2005. The
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended
§ 1326(a)(1) to provide, as relevant here:

Unless the court orders otherwise, the debtor shall commence
making payments no later than 30 days after the date of the filing of the
plan or the order for relief, whichever is earlier, in the amount —

(A) proposed by the plan to the trustee;
. . . ;
8See § 1326(a)(2).

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(C) that provides adequate protection directly to a creditor
holding an allowed claim secured by personal property to the extent
the claim is attributable to the purchase of such property by the
debtor for that portion of the obligation that becomes due after the
order for relief, reducing the payments under subparagraph (A) by
the amount so paid and providing the trustee with evidence of such
payment, including the amount and date of payment
In the leading treatise on Chapter 13, the authors identify a variety of difficulties that arise
when trying to understand and apply new subsection (C).9 However, the Court need not
grapple with those difficulties in this case. A careful reading of § 1326(a)(1)(C) makes
clear that it requires pre-confirmation adequate protection payments only for the
purchase-money portion of a secured claim. The Creditor has neither alleged nor
established that any portion of its claim is a purchase-money claim. Consequently, the
Creditor has failed to show that its secured claim is covered by this new requirement. In
this case, no adequate protection payments are required by § 1326(a)(1)(C).


For these reasons, the Court concludes the Creditor has not established any basis
for it to be awarded adequate protection from the plan payments the Debtors made to the
Trustee before they surrendered the Home to the Creditor. The Creditor’s request for
adequate protection is therefore denied.

# # #

9Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 401.1 at ¶¶ 2-26 & § 404.1 at
¶¶ 3-24 (4th ed., section revised July 27, 2007), available at www.Ch13online.com.


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