Case No. 02-15596-JKC-13United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.
July 3, 2003
ORDER GRANTING BANK ONE, N.A.’S REQUEST FOR ADEQUATE PROTECTION
JAMES COACHYS, Bankruptcy Judge
This matter comes before the Court on Bank One, N.A.’s (“Bank One”) Motion for Relief from Automatic Stay and Abandonment (the “Motion”). For the reasons stated below, the Court grants Bank One’s request for adequate protection, but orders that another hearing be held to establish the proper amount of such adequate protection.
Facts and Procedural History
Jeffrey and Ronda Marcum (the “Debtors”) filed a petition for relief under Chapter 13 of the United States Bankruptcy Code on September 9, 2002. On January 8, 2003, the case was dismissed on an unopposed Motion to Dismiss filed by the Chapter 13 Trustee. On the Debtors’ motion, the case was eventually reinstated on February 11, 2003. Prior to that — on February 7, 2003 — Bank One filed its Motion, asking that the stay be lifted so that it could proceed against the Debtors’ 1993 Mitsubishi Eclipse (the “Vehicle”), in which Bank One holds a perfected security interest.[1] In support of that request, Bank One alleged, pursuant to 11 U.S.C. § 362(d)(1), that its interest in the Vehicle was not “adequately protected.”
The Court conducted an initial hearing on the Motion on March 4, 2003. At that time, the Debtor had proposed a Chapter 13 plan, providing for payments of $500.00 for seven months and $2,600.00 per month for an additional 53 months. The plan also provided for a secured claim of $2,500.00 for Bank One, to be paid at 14.9% interest. An amended plan has since been filed, although it has not yet been confirmed. While the Debtors have been making monthly payments to the Chapter 13 Trustee, consistent with Code § 1326, these payments have not yet been distributed to any of the Debtors’ creditors and will not be distributed until a plan is confirmed.
Because the Debtors have failed to obtain prompt confirmation of a plan, Bank One asserted at the initial hearing that it was entitled to relief from the stay or, in the alternative, to monthly “adequate protection” payments.[2] The Court continued the hearing until April 29, 2003, at which time Bank One again argued that it was either entitled to relief from the stay or to monthly adequate protection payments until confirmation of the Debtors’ plan. At this hearing, Debtors’ counsel acknowledged that the Debtors’ current proposed plan is unconfirmable and that a new plan would have to be filed to avoid dismissal. Nevertheless, the Debtors maintained that Bank One’s interest in the vehicle is adequately protected based on their payment of pre-confirmation plan payment to the trustee. The Chapter 13 Trustee also appeared at the hearing and reported to the Court that for administrative reasons, the Trustee was opposed to making periodic adequate protection payments to secured creditors. The Trustee instead proposed that such payments be held until the plan was confirmed or the case was either dismissed or converted.
At the conclusion of the hearing, the Court took the matter under advisement and asked the parties to submit briefs on their respective positions. The Court ultimately received multiple briefs from both the Debtors and Bank One. The Trustee, however, indicated in a letter dated May 5, 2003, that he would not be submitting a brief.
Discussion and Decision
Section 362(d)(1) of the Code states that “the court shall grant relief from the stay . . . for cause, including the lack of adequate protection of an interest in property of such party in interest.” Section 362(d)(2) further provides that stay relief will be granted “with respect to a stay of an act against property . . . if (A) the debtor does not have an equity in such property; and (B) such property is not necessary for an effective reorganization. . . .” Section 361 of the Code further provides:
When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by —
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity’s interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.
Finally, § 363(d) of the Code provides that the trustee or debtor-in-possession’s use, sale or lease of estate property may be conditioned upon the provision of adequate protection.
The concept of adequate protection in bankruptcy is derived, in part, from the Fifth Amendment’s protection of property interests. Wright v. Union Central Life Ins. Co., 311 U.S. 273, 61 S.Ct. 196, 85 L.Ed. 184
(194); H.R. No. 989, 95th Cong., 1st Sess. 338-40 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 49 (1978). “The Bankruptcy Code provides secured creditors various rights, including the right to adequate protection, and these rights replace the protection afforded by possession.” United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 2315, 76 L.Ed.2d 515 (1983). “The principle of adequate protection reconciles the competing interests of the debtor, who needs time to reorganize free from harassing creditors, and the secured creditor, on the other hand, who is entitled to constitutional protection for its bargained — for property interest.” In re Planned Systems, Inc., 78 B.R. 852, 861 (Bankr.S.D.Ohio1987).
Pursuant to Code § 362(g), “the party requesting [stay] relief has the burden of proof on the issue of the debtors’s equity in the property,” while “the party opposing such relief has the burden of proof on all other issues.” Here, the Debtors first argue that Bank One is adequately protected through the pre-confirmation payments they have been making to the Chapter 13 Trustee. Admittedly, there is case law (relied upon by the Debtors) which holds that pre-confirmation plan payments, required to be made within thirty days of the plan being filed, automatically constitute adequate protection to a creditor, such as Bank One, which holds a lien on a depreciating asset. See In re Johnson, 145 B.R. 108, 114 (Bankr.S.D.Ga. 1992) (“A debtor provides `adequate protection’ to each creditor holding a secured claim by making preconfirmation payments to the Chapter 13 trustee), rev’d on other grounds, 165 B.R. 524 (S.D.Ga. 1994)”.
The bankruptcy court’s conclusion in Johnson rests on the assumption that the accumulated funds will be distributed in due course to the secured creditor following confirmation of the plan. Id. (“Upon confirmation of the debtor’s plan, these accumulated funds are distributed pursuant to the plan”). However, not every Chapter 13 plan is confirmed. Many cases are eventually dismissed or converted for a variety of reasons prior to plan confirmation. In those instances, § 1326(a)(2) provides:
A payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as practicable. If a plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.
(emphasis added). Section 503(b) of the Code, in turn, grants administrative expense priority to the “actual, necessary costs and expenses of preserving the estate. . . .”
Accordingly, a secured creditor will only realize the value of pre-confirmation payments if a plan is actually confirmed and the payments collected by the Chapter 13 trustee prior to confirmation are disbursed. It follows under the Johnson court’s logic that, in all other instances, a secured creditor will not be compensated for any loss in value that occurs during the pendency of the Chapter 13 case. Thus, the Court must conclude that the payment of pre-confirmation plan payments, without more, does not constitute adequate protection.
The Debtors also insist that Bank One has waived any right to adequate protection by failing to include such relief in an agreed order entered into by the parties which resolved Bank One’s objection to the valuation of the Vehicle included in the Debtor’s original plan. The Court fails to see how resolution of a confirmation issue affects Bank One’s right to receive adequate protection for the pre-confirmation period. The issues are simply unrelated.
Based on the figures provided in the Debtors’ schedules, the Court notes that the Debtors’ indebtedness to Bank One far exceeds the value of the Vehicle and, thus, there is no “equity cushion” protecting Bank One’s interest. Given that the Debtors have otherwise failed to establish that Bank One’s interest in the Vehicle is adequately protected, the Court must conclude that “cause” exists under 11 U.S.C. § 362(d)(1) to either lift the stay or condition is future application on the payment of adequate protection.
Under § 361 of the Code, adequate protection may take the form of periodic payments to be made by the Debtors either directly or indirectly to Bank One, dating back from Bank One’s first request for adequate protection on March 4, 2003.[3] At least in this instance, where there are no unencumbered assets in which Bank One could take an additional lien, this appears to be the most appropriate form of adequate protection. In this Court’s opinion, adequate protection should generally be based on the average monthly depreciation of the subject collateral as this amount most closely reflects the loss suffered by a secured creditor unable to proceed against its collateral due to the automatic stay. This is not to say, however, that a debtor and secured creditor may not agree to adequate protection in a different amount, e.g., the amount due under the parties’ contract, or if the value of the collateral has been “crammed down,” the payment due under the plan. That approach certainly creates less of an administrative burden for the parties and/or the Court.
Notwithstanding the “information” provided by Bank One in its surreply brief, the Court is currently without “evidence” to determine the appropriate amount of adequate protection to award.[4] Barring an agreement between the parties as to this amount, the Court will conduct another hearing in this matter, at which time Bank One will be expected to submit non-hearsay evidence as to monthly depreciation.
The hearing will be held on ___ at ___ in Room 325, United Stated Courthouse, 46 East Ohio Street, Indianapolis, Indiana. The parties should contact the Court prior to the scheduled hearing to indicate whether an agreement has been reached.