§ 136.12     Failed Adequate Protection before BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 136.12, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

On unusual facts, secured claim holders have been awarded administrative expenses for adequate protection payments that were not received from the debtor. The basic rules are that the secured claim holder must have asked for adequate protection either by motion for relief from the stay or motion for adequate protection.1 Relief must have been granted in the form of an order for adequate protection or an order denying relief from the stay. When the debtor defaults, the secured claim holder must then prove that the use of its collateral was an actual and necessary expense of preserving the estate to allow an administrative expense under § 503(b). It is not easy to jump through all of these hoops, but occasionally secured claim holders have succeeded in Chapter 13 cases.

[2]

The case most often cited in support of an administrative allowance when payments to a lienholder fail in a Chapter 13 case is Grundy National Bank v. Rife.2 On convoluted facts the U.S. Court of Appeals for the Fourth Circuit held that a secured claim holder was entitled to an administrative expense for payments the Chapter 13 debtor failed to make under a confirmed plan during nine months that the debtor used a lender’s collateral. In Rife, a month after the petition Grundy National Bank filed a motion for relief from the stay with respect to two cars. No action was taken on the motion. Two months later, a plan was confirmed that called for 100 percent payment of Grundy’s claim. Soon after confirmation, an order was entered modifying the stay and providing that Grundy was to receive payments of $236 per month. Two months later, Grundy filed a second motion for relief from the stay because the debtor had failed to make any payments under the confirmed plan, in violation of the order modifying the stay. Grundy also requested an administrative expense for the payments in default. Again the bankruptcy court did not act on the motion for relief from the stay. The debtor then filed a modified plan providing for surrender of one of the cars to Grundy. The bankruptcy court denied Grundy’s objection to the modified plan and denied Grundy’s request for an administrative expense.

[3]

On appeal, the Fourth Circuit granted the bank’s demand for an administrative expense, explaining as follows:

Administrative expenses are governed by 11 U.S.C. § 503 which provides . . . that an administrative expense is allowable after notice and a hearing, “including . . . the actual and necessary costs and expenses of preserving the estate.” . . . Section 507(b) provides that to the extent adequate protection of the interest of a holder of a claim proves to be inadequate, then the creditor’s claim is given priority over allowable claims entitled to distribution under § 507(a). Section 507 applies to all chapters of the Bankruptcy Code. The prevailing rule under the pre-1978 Bankruptcy Code, rooted in equity, was that a debtor’s estate is obligated to pay for collateral it controls and uses for the benefit of the estate. . . . Under the 1978 Code, the idea of using administrative expenses to fashion adequate protection for creditors was not abandoned. “It was grafted on to [§] 507 so that ‘to the extent the protection [under Section 361] proves to be inadequate after the fact, the creditor is entitled to a first priority administrative expense.’” . . . We are persuaded that § 507(b) converts a creditor’s claim when there has been a diminution in the value of a creditor’s secured collateral by reason of a § 362 stay into an allowable administrative expense claim under § 503(b). The use of “including” in § 503(b), a word of nonlimitation under § 102(3), indicates that a “court might well conclude that they are to be allowed as administrative expenses claims not necessarily precisely covered by the provisions of section 503(b) itself but which could fall into any of the phrases described in the subsections of section 503(b). Thus, what constitute actual and necessary costs and expenses of preserving the estate might well be opened to judicial construction.” . . . As a result of the bankruptcy court’s decision in the case sub judice the debtor—who violated § 1326 (requiring the first payment under the plan to be made within thirty days), the adequate protection order of August 12, 1986, the original Plan and the modified Plan—is economically better off than if he had followed their provisions. By disregarding his commitments under both plans, the debtor was unjustly enriched at Grundy’s expense. The bankruptcy judge allowed the debtor to use the automatic stay provision to hold Grundy at bay while the debtor used the secured property (i.e., the automobiles) for nine months without making any payments whatsoever, finally informing the Bank that it could collect the abandoned 1985 vehicle when it would no longer run. The returned vehicle . . . had depreciated significantly in the period between confirmation of the Plan and the time when the automobile was actually returned. . . . We hold that on remand the Bank is entitled to the administrative expense for payments the debtor failed to make under the original and modified plans and under the adequate protection orders, or to the diminution in the value of the 1985 automobile by reason of the § 362 stay, (which would be the difference in value between [the petition date] and the date the 1985 Cavalier was surrendered to the Bank) whichever is the greater amount.3
[4]

More than a decade after Rife, in an unpublished opinion, the Fourth Circuit revisited the allowance of an administrative expense to a lienholder in a Chapter 13 case. In Tidewater Finance Co. v. Henson,4 a furniture lender failed to request relief from the stay or adequate protection before confirmation. The confirmed plan required monthly payments to the furniture lender. The Chapter 13 debtor defaulted under the plan, and the furniture lender moved for an administrative expense, citing Rife. The district court gave the following account of why the furniture lender was not entitled to an administrative expense:

A prepetition creditor, by virtue of having transacted with a debtor before he or she files for bankruptcy, ordinarily fails the first prong of the administrative expense test (requiring a postpetition transaction between the creditor and the estate). . . . The Fourth Circuit has recognized that “a § 503(b) administrative expense can be created by a debtor’s postpetition use (against the secured creditor’s wishes) of collateral which the debtor has also used before going bankrupt.” . . . The “typical” example of this is presented in Grundy Nat’l Bank v. Rife, 876 F.2d 361 (4th Cir. 1989). . . . In Grundy, the court awarded administrative priority to a prepetition secured lender because the Chapter 13 debtor used the two automobiles serving as collateral “in an effort to reorganize his business (vacuum cleaner salesman); the use of the collateral was essential to the reorganization of the debtor’s business; and the use caused a decline in the collateral’s value.” . . . There is no evidence that the collateral in this case has been similarly used. Smith’s furniture (and Henson’s computer) were consumer purchases used for personal purposes. The items were not employed in an effort to operate or reestablish a business, or make an economic profit for the debtors or their estates. . . . [I]n most cases, § 503(b) is not the appropriate remedy for a prepetition secured lender whose collateral diminishes in value due to a debtor’s postpetition possession and use. . . . The appropriate redress for a creditor in such a predicament is adequate protection. . . . [T]he Code expressly indicates that a creditor must request adequate protection in order to be afforded such relief. . . . [H]aving failed to request adequate protection as the appropriate remedy, Tidewater may not now “use § 503(b) as an alternate means” to accomplish the same end.5
[5]

On further appeal the Fourth Circuit concluded somewhat more broadly than the district court that confirmation of a Chapter 13 plan is not a postpetition transaction for purposes of the two-part test for allowance of an administrative expense.6 The Fourth Circuit characterized Rife as a “narrow exception” for collateral used in the operation of a business or for economic profit. Because the furniture in Henson was not used in the operation of any business, the debtor’s default could not generate an administrative expense for Tidewater.

[6]

In jurisdictions that delay the hearing on confirmation in Chapter 13 cases,7 it is routine for debtors to be required to provide adequate protection to secured claim holders—especially to car lenders—between the filing and confirmation. If the debtor fails to make those payments, or if the payments prove insufficient to protect the value of the collateral from depreciation, the creditor can file a request for an administrative expense under § 503(b). The creditor may be able to demonstrate that its inadequately protected collateral was necessary for the preservation of the estate. For example, if the debtor drove the creditor’s collateral to and from work to earn the wages that are funding the plan and the car depreciated without compensation between the filing and confirmation, an administrative expense might be created. This argument is especially persuasive when collateral is destroyed and there is inadequate insurance.

[7]

The lienholder that did not request adequate protection or cannot prove “actual and necessary” expenditures for the preservation of the estate is not entitled to an administrative expense. One particularly egregious example proves the point for lienholders contemplating a § 503(b) request in a Chapter 13 case.

[8]

Consider the plight of the bank in In re Barrett.8 A plan was confirmed in 1989 that required the debtor to make monthly payments to the trustee of $565 and to make direct payments to the bank of continuing monthly mortgage installments. The bank appealed confirmation. During the appeal, the debtor paid more than $25,000 to the Chapter 13 trustee. However, the debtor failed to pay or to save the monthly mortgage payments that were supposed to be paid directly to the bank. For strategic reasons, the bank did not file a request for adequate protection or move for relief from the stay. Big mistake.

[9]

When the case eventually came back to the bankruptcy court from the U.S. Court of Appeals for the Sixth Circuit, there was a postpetition default in payments to the bank of more than $20,000. The debtor could not fix the plan, and the bankruptcy court concluded to dismiss the case. At dismissal, the bank argued entitlement to most of the $25,000 held by the Chapter 13 trustee based on “adequate protection theory,” based on the bank’s payment of postpetition taxes and insurance that “benefited the debtor and the estate,” and based on the superpriority in § 507(b). The bankruptcy court rejected all of these arguments, leaving the bank empty-handed:

[T]he Bank’s payments were obviously made by the Bank to protect its collateral. Any benefit to the Debtor or to the estate was incidental. Moreover, it is difficult to see how such payments could benefit the estate or other creditors. If, as here, the mortgagee is undersecured, such payments will not preserve value in the collateral for anyone other than the mortgagee. . . . Administrative expenses are normally expenses incurred at the instance of the trustee which are designed to benefit the estate generally, not simply one creditor or the debtor. . . . Nothing in [§ 503(b)(3)] suggests that the draftsmen intended to award a mortgagee administrative expense status for its costs in protecting and preserving its collateral. . . . [T]he funds held by the Trustee were never intended as adequate protection for the Bank during the preconfirmation period. The Bank did not request adequate protection until it filed this motion. . . . The Bank cannot after the fact demand moneys paid to the trustee as adequate protection. . . . The Bank argues that it is unfair for the Debtor to have had the benefit of living in the house for the last four years while the Bank paid insurance and taxes and received almost nothing on its loan. This risk was, however, apparent to the Bank, as well as the Court, from the beginning of the case. The Bank chose not to address it out of the stated concern that its appeal of the adversary proceeding might be jeopardized. The Bank might well have been justified in demanding that the Debtor escrow the mortgage payments to provide it adequate protection. It elected not to do so. Under these circumstances, section 507(b) cannot form the basis for the asserted administrative expense claim. Insofar as the Bank seeks compensation for delay in realizing on its security, which is represented by the interest component in the defaulted mortgage payment, the Bank’s request conflicts with [United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988)]. . . . The thrust of Timbers is that adequate protection is available only to protect against diminution in collateral value and may not be used to compensate for delay in foreclosure attributable to the automatic stay. The evidence in this case does not indicate that the Bank’s collateral has declined in value during the pendency of this case. . . . [T]here appears under these facts no legal basis to deviate from the clear and explicit command in section 1326 of the Code that upon dismissal prior to confirmation moneys in the hands of the Chapter 13 trustee be returned to the debtor.9
[10]

The lessons of Barrett include that administrative expense status for failed adequate protection must be predicated on a request for adequate protection and something more than just the passage of time without performance by the debtor. The creditor that acts to protect itself will not be entitled to an administrative expense unless it can prove benefit to the estate—that its performance for the debtor preserved value for the estate or for creditors generally. This will rarely be true in Chapter 13 cases because there is rarely equity in property to preserve for the benefit of the estate. The secured claim holder might prevail in its § 503(b) argument when the creditor moved for adequate protection early in the Chapter 13 case, the motion was granted, the debtor continued to use the creditor’s collateral, the collateral depreciated more than the adequate protection payments made by the debtor and the lost value injures the estate, not just the lienholder. This combination of facts is not common in Chapter 13 practice.

[11]

It has been suggested that reserve accounts for taxes or insurance in a mortgage contract are charges that could be administrative expenses under § 503.10 As demonstrated above in Barrett, the failure to pay taxes or insurance on a mortgage contract will not always generate an allowable administrative expense. If there is no equity in the property, such payments will not benefit the estate or creditors other than the lienholder for purposes of § 503(b).

[12]

Chapter 13 debtors can face “superpriority” administrative expenses when the debtor has been ordered to provide adequate protection and that protection proves inadequate. 11 U.S.C. § 507(b) provides in part:

If the trustee, under section 362, 363 or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under [§ 507(a)(1)] arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title, then such creditor’s claim under [§ 507(a)(1)] shall have priority over every other claim allowable under [§ 507(a)(1)].
[13]

To be entitled to the superpriority in § 507(b), a claim holder must first show that “the trustee” provided adequate protection to a lienholder under § 362, 363 or 364. As discussed elsewhere,11 the use of the word trustee in § 507(b) makes problems in Chapter 13 cases because, unlike the broad grant of the powers and duties of a trustee to a Chapter 11 debtor-in-possession in § 1107,12 the grant of powers to a Chapter 13 debtor in 11 U.S.C. § 1303 is limited to “the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f) and 363(l).”

[14]

To be entitled to the special priority for failed adequate protection under § 507(b), the lienholder must demonstrate that it has a debt allowable under § 507(a)(1). Section 507(a)(1) creates a first priority for administrative expenses allowable under § 503(b). Under § 503(b), an administrative expense (other than taxes) is allowed for the “actual, necessary costs and expenses of preserving the estate.”13 Thus, the creditor that would assert superpriority under § 507(b) in a Chapter 13 case must demonstrate both that adequate protection failed and that the resulting debt would be allowable as an administrative expense.

[15]

The interaction of §§ 503(b), 507(a)(1), 507(b) and 1322(a)(2) is not clear in a Chapter 13 case. We know that the holder of an administrative expense under § 503(b) enjoys the first priority described in § 507(a)(1). Most Chapter 13 plans treat administrative expenses the same as priority claims—full payment without postpetition interest—notwithstanding the absence of a reference to administrative expenses in § 1322(a)(2).14 Section 1322(a)(2) describes the claims entitled to full payment as “all claims entitled to priority under § 507 of this title.”15 Thus, in a Chapter 13 case, all claims listed in § 507 are entitled to the same “full payment, in deferred cash payments” through the plan. Section 1322(a)(2) makes no distinction among the classes of claims “entitled to priority under § 507.”

[16]

Section 507(b) states that a claim for failed adequate protection “shall have priority over every other claim allowable under [§ 507(a)(1)].”16 Section 507(b) contemplates a “superpriority” for claims resulting from the failure of adequate protection—a priority ahead of all priority claims described in § 507(a). Section 507(b) does not clearly tell us whether a claim for failed adequate protection has priority over other administrative expenses allowable under §§ 507(a)(1) and 503(b); but the superpriority probably makes more sense if so interpreted.

[17]

Does the superpriority in § 507(b) have any meaning in a Chapter 13 case? It can be argued that the superpriority in § 507(b) is neutralized by § 1322(a)(2) in Chapter 13 cases: § 507(b) is a “priority under section 507 of this title” and thus the holder of a superpriority claim under § 507(b) is entitled to the same full payment in deferred cash payments in a Chapter 13 case as other priority claim holders under § 1322(a)(2).

[18]

Notice that one predicate for the § 507(b) superpriority is an administrative expense allowable under § 503(b). Chapter 13 debtors use property subject to liens prior to confirmation and typically provide adequate protection by making payments to the Chapter 13 trustee consistent with § 1326.17 Such payments might be inadequate for purposes of § 507(b) if, for example, the collateral depreciated more quickly than the debtor made payments to the trustee and the lienholder became more exposed at confirmation than at the filing of the Chapter 13 case. In that situation, the lienholder might argue for the § 507(b) superpriority if the creditor can also prove that it has an allowable administrative expense under § 503(b). To satisfy § 503(b)(1), the lienholder will have to prove that the insecurity that developed after the petition because of the debtor’s use of its collateral constitutes “actual, necessary costs and expenses of preserving the estate.”18

[19]

This returns the creditor full cycle to the same problem that secured claim holders always have proving entitlement to an administrative expense for failed adequate protection. As demonstrated above, it is not enough for § 503(b) purposes that the secured claim holder has experienced depreciation in its collateral without receiving compensatory payments from the debtor. The lender must also prove that it moved for relief from the stay or demanded adequate protection, that adequate protection was ordered, that adequate protection was not provided, that the collateral depreciated and that the lost value was an expense necessary to preservation of the Chapter 13 estate. Put another way, everything a creditor must prove to be entitled to an administrative expense for failed adequate protection, the creditor must also prove as one step in the superpriority trail under § 507(b). It has been held that § 507(b) does not allow full payment priority status when adequate protection fails but the creditor fails to show that the claim represents an actual, necessary expense of preserving the estate.19

[20]

Although reversed on appeal, the Bankruptcy Court for the Southern District of Georgia held that lienholders are entitled to superpriority under §§ 503(b)(1)(A) and 507(b) when preconfirmation payments by a Chapter 13 debtor to the trustee are less than the depreciation in value of collateral between the filing of the case and confirmation.20 This approach ignores at least one fundamental step in the superpriority calculus: the lienholder must prove both that the loss in value between the petition and confirmation was caused by the debtor’s use and that the loss in value was an actual, necessary expense of preserving the estate. The bankruptcy court did not explain how a creditor gets a superpriority in a Chapter 13 case given the generic reference to § 507 in § 1322(a)(2). On appeal, the district court did not clearly reject the bankruptcy court’s superpriority analysis; the district court reversed because the bankruptcy court’s use of § 507(b) “unnecessarily complicates” the administration of Chapter 13 cases.21

[21]

In a different Chapter 13 case by the same name, the same Georgia bankruptcy court allowed a “superpriority administrative expense claim” when “adequate protection” failed after confirmation. In In re Johnson,22 the debtors modified a confirmed plan to surrender collateral and to reconsider the unsecured deficiency claim under § 502(j).23 The bankruptcy court allowed the modification but also held that the creditor was entitled to an administrative expense to the extent that adequate protection failed between confirmation and surrender:

Each secured claim is, in theory, adequately protected because the payment of the debt through the plan keeps pace with the depreciation of the collateral. However, the existence of a deficiency amount demonstrates that the creditor’s claim was not adequately protected. . . . Therefore, the creditor may seek allowance of a claim for an administrative expense caused by this failure of adequate protection. 11 U.S.C. § 503(b) . . . . Payment of such an administrative expense has priority over unsecured claims and is paid in full. . . . Foreclosure value, not replacement value, should be the basis of the super priority administrative expense claim. The debtor’s payments on the secured claim and the cash received from the postconfirmation sale of the collateral should both be subtracted from that foreclosure value. The resulting dollar amount is the creditor’s allowable super priority administrative expense for failure of adequate protection. . . . When the super priority administrative expense . . . is less than the deficiency amount, . . . the difference between the foreclosure value and the replacement value will remain an unsecured claim. . . . The administrative expense claim merely compensates the creditor for the unpaid devaluation of the collateral during the time that the debtor had the use of it.24
[22]

This Johnson is also misguided in several respects. The adequate protection construct used by the court is not applicable after confirmation in a Chapter 13 case. At confirmation, the preconfirmation right to adequate protection described in § 361 is replaced with lien retention and present value described in § 1325(a)(5).25 As in its earlier decision, the Johnson court seems to be reaching for the superpriority allowed for failed adequate protection by § 507(b), but the court does not engage in the multi-step analysis required by § 507(b). More fully developed decisions from other courts recognize that a secured claim holder is not entitled to an administrative expense when collateral is surrendered after confirmation and a deficiency results.26

[23]

Winning either the § 503(b) argument or the more difficult § 507(b) argument seems to get the lienholder the same thing in a Chapter 13 case—an administrative expense that most plans will pay in full without interest under § 1322(a)(2). In the event of conversion to Chapter 7, § 503(b) administrative expense status entitles the creditor to second priority, just behind the expenses of administration in the Chapter 7 case.27 If the Chapter 13 case fails of confirmation, a lienholder with an administrative expense under § 503(b) is entitled to recover from the funds paid to the Chapter 13 trustee under § 1326 without regard to whether the lienholder is also entitled to superpriority under § 507(b).28

[24]

The superpriority in § 507(b) is available only when court-ordered adequate protection fails for “a claim secured by a lien on property of the debtor.”29 This requirement excludes the claims of lessors of personal property, though lessors may be entitled to adequate protection under § 363(e) in cases filed after October 22, 1994.30


 

1  See § 47.1  Adequate Protection of Lienholders before Confirmation, § 57.2  Adequate Protection Rights and § 64.1  Lack of Adequate Protection. See also § 102.6  Lessor Can Demand Adequate ProtectionBAPCPA created two new statutory adequate protection rights that may give rise to litigation about the status of "failed" adequate protection in Chapter 13 cases. See § 136.13  Failed Adequate Protection after BAPCPAsee also § 47.2  Preconfirmation Adequate Protection after BAPCPA and § 57.3  Preconfirmation Adequate Protection Rights after BAPCPA.

 

2  876 F.2d 361 (4th Cir. 1989).

 

3  876 F.2d at 363–64. Accord In re Miller, No. 99-81339, 2002 WL 31115656, at *5–*6 (Bankr. M.D.N.C. Apr. 19, 2002) (unpublished) (Although § 1329 does not authorize surrender of a Freightliner tractor 18 months after confirmation, § 502(j) permits reconsideration of the claim secured by the Freightliner after surrender; when depreciation exceeds the amount paid under the plan, the difference is allowable as an administrative expense. “Despite the Debtors’ efforts to maintain the vehicle, the 1999 Freightliner has suffered a huge loss in its value. It has depreciated in the amount of $46,550.00 during a time period when Associates has been paid only $38,785.13. . . . Associates made every effort to ensure that it was adequately protected by objecting to confirmation of the plan on the basis that the proposed plan did not adequately protect its interest . . . . The Debtors made the conscious decision to retain the vehicle as provided under § 1325(a)(5) and, in return, Associates received a secured claim in the amount of the value of the vehicle at that time. . . . The plan did not adequately protect Associates, therefore, it is entitled to an administrative expense claim caused by this failure of adequate protection in the amount of $7,764.87 ($46,550.00 - $38,785.13) pursuant to § 507(b).”); In re Allen, 240 B.R. 231, 236 (Bankr. W.D. Va. 1999) (In a Chapter 13 case that reached confirmation 16 months after filing, in which the car lender moved for relief from the stay, to the extent surrender of car pursuant to plan produces less than liquidation value of the car at filing, car lender is entitled to an administrative expense. “See Grundy Nat. Bank v. Rife, 876 F.2d 361, 363–64 (4th Cir. 1989).”); In re Holly, 109 B.R. 524 (Bankr. S.D. Ga. 1989) (Secured claim holders who were provided adequate protection prior to confirmation by payments to the Chapter 13 trustee could recover as administrative expenses a pro rata share of monies held by the Chapter 13 trustee at conversion to Chapter 7.).

 

4  272 B.R. 135 (D. Md. 2001), aff’d, No. 02-1126, 2003 WL 122503 (4th Cir. Jan. 15, 2003) (unpublished).

 

5  272 B.R. at 139–40.

 

6  Accord In re Adams, 275 B.R. 274, 282 (Bankr. N.D. Ill. 2002) (Applying In re Jartran, Inc., 732 F.2d 584 (7th Cir. 1984): “it is undisputed that Ford has a pre-petition claim. It does not claim to have extended credit to Debtors after the bankruptcy filing. . . . [B]ecause Ford extended credit to Debtors prior to their filing bankruptcy, the extension of such credit could not possibly have been of benefit to Debtors’ bankruptcy estate. Therefore, Ford’s assertion that it is entitled to an administrative claim is without merit.”).

 

7  See § 115.1  Timing of Hearing on Confirmation before BAPCPA and § 115.2  Timing of Hearing on Confirmation after BAPCPA.

 

8  149 B.R. 494 (Bankr. N.D. Ohio 1993).

 

9  149 B.R. at 499–500. Accord Williams v. IMC Mortgage Co. (In re Williams), 246 B.R. 591, 594–96 (B.A.P. 8th Cir. 1999) (Prepetition mortgage holder is not entitled to an administrative expense for unpaid postpetition mortgage installments when Chapter 13 case is dismissed before confirmation. Proposed plan would pay prepetition mortgage through the trustee. Between filing and dismissal, trustee accumulated $6,397. Case was dismissed before confirmation. Mortgage holder did not request adequate protection but did file an application for payment of an administrative expense. Bankruptcy court allowed $5,264 as an administrative expense for unpaid installments between the filing and dismissal. BAP reversed, finding that mortgage holder could not establish either that the expense arose from a transaction with the estate or that it benefited the estate. “IMC failed to meet either [of] these tests. First, the expense—the postpetition mortgage payment—although not due until after the filing of the petition, was an obligation incurred prior to the creation of the estate. It is not sufficient that the payment became due after the petition date if the transaction was entered into prepetition. . . . The liabilities between the parties were fixed prepetition. Second, there was no evidence, or reasonable articulation of a position, presented to the bankruptcy court that any benefit was accorded the estate or that the accrual of the postpetition mortgage payments was an ‘actual, necessary’ cost of preserving the estate. The incongruous nature of IMC’s argument is demonstrated by the fact that it did not expend any funds to preserve the estate. . . . Courts commonly recognize that § 503(b) is not intended to provide an administrative expense award to a prepetition secured lender based on the debtor’s postpetition possession and use of collateral. . . . [T]he prepetition secured creditor is not contributing a benefit to the estate because the debtor is merely continuing to use property that the debtor already owns. . . . To afford a secured or unsecured claim administrative expense status solely on the basis that it did not receive any of the funds intended to be paid to creditors during the confirmation process would afford the right to administrative expense status to virtually every secured creditor. This result was neither intended by the Code nor is it reasonable on policy grounds. . . . IMC had other remedies that were available to it if it thought its collateral inadequate. . . . IMC could have moved for relief from the automatic stay under § 362(d) to foreclose its mortgage, or it could have requested adequate protection under § 363(e). . . . A prepetition secured creditor’s remedy for use and depreciation of its collateral during the bankruptcy is through a request for adequate protection, not an administrative expense. . . . If a creditor fails to seek adequate protection payments, nothing in § 503 suggests that an administrative expense priority is intended as an alternative remedy to adequate protection.”); In re Robinson, 225 B.R. 228, 232–33 (Bankr. N.D. Okla. 1998) (Car lender that never asked for adequate protection is not entitled to an administrative expense claim for repossession costs or attorney fees nor for depreciation in the value of a car during Chapter 13 case. Car lender repossessed the debtors’ car after Chapter 13 case was dismissed and before order was entered vacating the order of dismissal. Then car lender was granted relief from the stay to claim the car. Car lender filed a motion for an administrative expense priority for repossession fees and attorney fees and for depreciation in the value of the car. Car lender is not entitled to an administrative claim because applying § 503(b) “AFG acted to protect its interest in the Vehicle. The expenses incurred in doing so, while they may well have benefited AFG, are of no benefit to the bankruptcy estate. Expenses which benefit only the creditor are not eligible for administrative priority status. . . . Even if the amount sought by AFG related to a decline in value of the Vehicle during the pendency of the bankruptcy case, this Court would not allow them an administrative claim. AFG did not seek an order of adequate protection in this case; instead, AFG sought and obtained relief from the automatic stay. . . . Having failed to request adequate protection, AFG may not use § 503(b) as an alternate means to the same end.”); In re Walter, 199 B.R. 390, 392–93 (Bankr. C.D. Ill. 1996) (At dismissal before confirmation, bank is not entitled to recover under § 503(b) from the funds held by the Chapter 13 trustee where bank did not make a request for adequate protection and bank has not proved any other entitlement to an administrative expense. “[Section] 1326(a)(2) directs the Chapter 13 trustee to return post-petition payments to the debtor if the plan is not confirmed. The statute provides one exception to this general rule, which permits the trustee to deduct and pay any administrative expense claims arising under § 503(b). . . . [T]he Bank argues that it is entitled to the funds as adequate protection to offset any impairment to the value of its collateral. However, a request for adequate protection must be made prospectively. . . . A bank cannot after the fact demand funds paid to the trustee as adequate protection. . . . As for the Bank’s assertion that it is somehow entitled to an administrative expense claim based upon some implied (but unproven) diminution in the value of its collateral, nothing in § 503(b) suggests that a mortgagee is entitled to an administrative expense claim for its costs in protecting and preserving its collateral. . . . Administrative expenses are normally expenses incurred at the instance of the trustee which are designed to benefit the estate generally, not simply one creditor or the debtor.”).

 

10  In re Rathe, 114 B.R. 253 (Bankr. D. Idaho 1990) (Although mortgage holder would have been entitled to collect reserves for taxes or insurance in a mortgage contract as administrative expenses accruing during payments under a Chapter 13 plan, the mortgage holder’s failure to attempt collection until after completion of payments under the plan and after approval of the Chapter 13 trustee’s final report precludes recovery.).

 

11  See § 45.1  Debtor Has Exclusive Possession and Control of Estate Property and discussion of avoidance and recovery powers beginning at § 50.1  Turnover of Property and § 51.1  Can Debtor Sue and Be Sued?.

 

12  11 U.S.C. § 1107(a) provides:

Subject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.

 

13  11 U.S.C. § 503(b)(1)(A).

 

14  See § 73.2  What Claims Are Priority Claims?§ 73.3  Priority Claims Added or Changed by BAPCPA, § 136.1  Treatment of Priority Claims and § 136.2  Taxes before BAPCPA.

 

15  11 U.S.C. § 1322(a)(2).

 

16  11 U.S.C. § 507(b) (emphasis added). The use of claim in this phrase referencing administrative expenses under § 507(a)(1) is at least a poor choice of words, if not down right misleading.

 

17  See § 47.1  Adequate Protection of Lienholders before Confirmation and § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

18  11 U.S.C. § 503(b)(1)(A).

 

19  In re Severson, 53 B.R. 8 (Bankr. D. Or. 1985). See also In re Robertson, 105 B.R. 504 (Bankr. D. Minn. 1989) (Creditor is not entitled to administrative expense award from funds left in the hands of the Chapter 13 trustee after the creditor successfully pursued an objection to confirmation and forced the debtor to dismiss the Chapter 13 case. Creditor failed to demonstrate substantial benefit to the estate.).

 

20  GMAC v. Johnson (In re Johnson), 145 B.R. 108, 114 (Bankr. S.D. Ga. 1992) (Secured claim holder is entitled to a “superpriority” expense ahead of all other administrative expenses if adequate protection fails between the filing and confirmation. “A debtor provides ‘adequate protection’ to each creditor holding a secured claim by making preconfirmation payments to the Chapter 13 trustee. . . . Upon confirmation . . . these accumulated funds are distributed. . . . If at confirmation the court determines a secured creditor’s collateral is worth less at confirmation than its value on the date the bankruptcy petition was filed, that is, if after the fact the protection provided the secured party through plan payments proves to be inadequate, the creditor is entitled to a priority expense claim, a ‘superpriority’ payable ahead of all other administrative expense claims, to the extent of the failure of adequate protection. 11 U.S.C. § 507(b).” Because the appropriate standard for valuing collateral for confirmation purposes is retail value and for purposes of relief from the stay is wholesale value, secured claim holder will be entitled to a § 507(b) superpriority claim to the extent that there is a decline between the wholesale value of the collateral at the petition and the retail value at confirmation.), rev’d, 165 B.R. 524 (S.D. Ga. 1994).

 

21  Johnson v. GMAC (In re Johnson), 165 B.R. 524, 528–29 (S.D. Ga. 1994) (“That value should be determined as of the commencement of the bankruptcy case is obvious where the collateral is depreciable personal property. Applying § 1325(a)(5)(B) to subjugate an objecting secured creditor to a plan that assigns a value to its collateral lower than the collateral’s value when the bankruptcy case was filed raises Fifth Amendment takings concerns. The Bankruptcy Court circumvented this dilemma by utilizing § 507(b) in the application of § 1325(a)(5)(B)(ii). Section 507(b) would, under the Bankruptcy Court’s analysis, authorize a ‘superpriority’ expense claim— . . . to the extent of any depreciation between the date of filing and the date of confirmation. This approach, even if technically correct, unnecessarily complicates the administration of the secured party’s claim in the Chapter 13 case. The Bankruptcy Court would have to accept evidence at the confirmation hearing of the value of the collateral as of the date of the filing and as of the date of confirmation, make a value determination as of the two dates, compare the values, and award the secured creditor a tripartite claim comprising its secured claim, its § 507(b) claim, and an unsecured claim for the balance of the debt. Perhaps appealing in the abstract as a means of avoiding a takings problem, this approach is impractical for the average Chapter 13 case. Moreover, it yields essentially the same net result for the secured creditor as would valuing the collateral as of the date of filing. Thus in my view, injecting § 507(b) into the otherwise straightforward comparison called for by § 1325(a)(5)(B)(ii) is improper.”).

 

22  247 B.R. 904 (Bankr. S.D. Ga. 1999).

 

23  See § 264.1 [ To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim ] § 127.7  To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim.

 

24  247 B.R. 909–11.

 

25  See discussion of providing for secured claims beginning at § 74.1  General Rules before BAPCPA§ 75.1  In General: Modification Without § 506§ 76.1  Valuation, Claim Splitting and Dewsnup§ 77.1  “Value, As of the Effective Date of the Plan” Means Interest and § 78.1  Full Payment of Allowed Secured Claim.

 

26  See, e.g., In re Adams, 275 B.R. 274, 282–83 (Bankr. N.D. Ill. 2002) (Car lender is not entitled to an administrative expense or superpriority for the deficiency when it is granted relief from the stay to repossess and sell its collateral after confirmation. Applying In re Jartran, Inc., 732 F.2d 584 (7th Cir. 1984): “it is undisputed that Ford has a pre-petition claim. It does not claim to have extended credit to Debtors after the bankruptcy filing. . . . [B]ecause Ford extended credit to Debtors prior to their filing bankruptcy, the extension of such credit could not possibly have been of benefit to Debtors’ bankruptcy estate. Therefore, Ford’s assertion that it is entitled to an administrative claim is without merit. Absent an administrative claim, Ford cannot qualify for a superpriority claim under 11 U.S.C. § 507(b).” Declining to follow In re Johnson, 247 B.R. 904 (Bankr. S.D. Ga. 1999): “Section 361(3) precludes bankruptcy courts from allowing administrative claims as a means of providing adequate protection . . . . There is nothing in these statutes that permits a pre-bankruptcy secured creditor to treat unsecured creditors as guarantors of its collateral, which is essentially what the ruling in Johnson did by giving the secured creditor a superpriority claim on the deficiency portion of its allowed secured claim. . . . Finally, the grant in Johnson of an administrative claim on account of a pre-petition debt runs counter to the two-part test in [In re Jartran, 732 F.2d 584 (7th Cir. 1984)].”); In re Zieder, 263 B.R. 114, 119 (Bankr. D. Ariz. 2001) (Car lender is not entitled to an administrative expense for the deficiency that results when debtor surrenders pickup truck a year after confirmation. Confirmed plan treated Ford as a secured creditor with a claim of $18,062. A year after confirmation, the debtor surrendered the collateral and moved to modify the plan to treat the deficiency as an unsecured claim. “[I]f Ford is relying on § 507(b) as authority to promote its [deficiency claim] to superpriority status, it has not demonstrated that § 363(e) applies postconfirmation, when the protections of §§ 361 and 363 are supplanted by § 1325(a)(5). . . . Administrative expense status is generally not accorded prepetition secured lenders simply because they did not receive all the payments promised by a plan.”).

 

27  11 U.S.C. § 726(b).

 

28  11 U.S.C. § 1326(a)(2). See also § 142.5  On Postpetition Claims, § 143.1  In Cases Filed before October 22, 1994, § 143.2  In Cases Filed after October 22, 1994§ 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA and § 153.1  In General.

 

29  11 U.S.C. § 507(b), quoted above in the text.

 

30  See § 47.1  Adequate Protection of Lienholders before Confirmation, § 47.2  Preconfirmation Adequate Protection after BAPCPA, § 57.2  Adequate Protection Rights, § 57.3  Preconfirmation Adequate Protection Rights after BAPCPA§ 102.6  Lessor Can Demand Adequate Protection§ 136.10  Leases and Executory Contracts before BAPCPA and § 136.11  Leases and Executory Contracts after BAPCPA.