§ 57.3     Preconfirmation Adequate Protection Rights after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 57.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Some lessors and lienholders were given special rights by BAPCPA between the petition and confirmation in Chapter 13 cases. Detailed elsewhere,1 § 1326(a)(1) mandates, unless the court orders otherwise, that a Chapter 13 debtor commence making payments not later than 30 days after the petition: (1) to a lessor of personal property in the amount scheduled for that portion of the lease that becomes due after the petition; and (2) to a creditor holding an allowed purchase money claim secured by personal property in an amount that provides adequate protection for that portion of the obligation that becomes due after the petition.2

[2]

The payments required by new § 1326(a)(1) are not conditioned that the lessor or creditor will first make a request or file a motion. Unless the court orders otherwise—and there are many good reasons why courts should order otherwise3—the payments under § 1326(a)(1) must commence directly to the lessor or creditor within 30 days of the petition.

[3]

The preconfirmation entitlements in new § 1326(a)(1)(B) and (C) are oddly worded. The portion of a scheduled lease of personal property that becomes due after the petition should be relatively easy to determine from the agreement. “Scheduled in a lease of personal property” could mean “scheduled by the debtor” in Official Form 64 or could mean the amount indicated in the contract. It would be unusual for a Chapter 13 debtor to record in the schedules the portion of a lease of personal property that becomes due after the petition. “Scheduled” most likely refers to the amount in the contract itself. Prepetition defaults under a lease of personal property are not included because the amount a Chapter 13 debtor must pay during the preconfirmation period is limited to the portion of the lease that becomes due after the petition.

[4]

The preconfirmation adequate protection payable to a creditor holding an allowed purchase money claim secured by personal property is more problematic. Adequate protection is a term of art defined in § 361 by reference to depreciation or loss of value in collateral caused by an automatic stay or by a debtor’s use.5 New § 1326(a)(1)(C) requires a Chapter 13 debtor to make payments before confirmation that provide adequate protection for the “portion of the obligation that becomes due” after the petition. This element of the preconfirmation adequate protection entitlement in § 1326(a)(1)(C) may be difficult to prove if the creditor has accelerated the debt prepetition or reduced the debt to a prepetition judgment.6 The portion of a debt that becomes due by contract with respect to a purchase money security interest in personal property is not likely to bear a predictable relationship to the amount of adequate protection that would be required to protect the lienholder from depreciation under § 361.

[5]

The absence of any reference to § 361 in new § 1326(a)(1)7 suggests that the adequate protection required to be paid to creditors holding allowed purchase money security interests in personal property in Chapter 13 cases prior to confirmation is different from lost value or depreciation. It is arguable that the portion of the obligation that becomes due after the petition is the periodic contract payment. Adequate protection for a periodic payment might be the lost use value of that money between the petition and confirmation. That lost use value would be included in the postpetition interest allowed to most secured claim holders at confirmation under § 1325(a)(5).8

[6]

To be entitled to adequate protection prior to confirmation under new § 1326(a)(1)(C), the creditor must have an “allowed” claim secured by personal property. To have an allowed claim, the claim holder must have filed a proof of claim in the Chapter 13 case.9 Also, adequate protection is limited to the extent the claim is “attributable” to the purchase of personal property. Calculating the portion of the portion of the debt that becomes due after the petition that is secured by a purchase money security interest could be complicated when preexisting debt was paid off, items other than personal property were financed or more than one item of personal property was financed but only some items remain to secure the claim.10 The meaning of “attributable” in this context becomes more complicated if § 506 does not apply to the claim at confirmation because of the new hanging sentence at the end of § 1325(a).11

[7]

Under new § 1326(a)(3), the bankruptcy court may, “subject to § 363,” modify, increase or reduce payments required under § 1326(a)(1)(B) or (C).12 Section 363 manages the use, sale or lease of property during a bankruptcy case. Section 363(e) instructs the bankruptcy court to prohibit or condition the use, sale or lease of property “as is necessary to provide adequate protection.”13 Adequate protection required by § 363(e) is the statutory sort described in § 361. A creditor’s entitlement to adequate protection under § 363(e) is not automatic—it is typically triggered by a motion from the creditor to prohibit the use of property subject to a lien or by stay litigation under § 362.

[8]

It appears there are now two kinds of “adequate protection” in § 1326—the new variety described in § 1326(a)(1)(C) and the traditional form incorporated by the cross-references in § 1326(a)(3). Adequate protection under § 361 is not applicable under § 1326(a)(3) unless someone moves the court to modify, increase or reduce payments required by § 1326(a)(1). Because of odd wording in new § 1326(a)(1)(C), there may be some incentive for creditors with depreciating collateral to file motions in Chapter 13 cases to have the court fix preconfirmation adequate protection payments under § 1326(a)(3).14 It has been held that a creditor ineligible for preconfirmation adequate protection under § 1326(a)(1)(C) is not prohibited from seeking the more traditional form in § 361 by, for example, filing a motion for relief from the stay.15

[9]

Payments proposed by the plan under § 1326(a)(1)(A) and made to the trustee before confirmation are retained by the trustee until the plan is confirmed or the case fails.16 If no plan is confirmed, the trustee is instructed by § 1326(a)(2) to return “any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).”17 “Paragraph (3)” is probably § 1326(a)(3)18—the section that authorizes the bankruptcy court to modify, increase or reduce payments required prior to confirmation by § 1326(a)(1)(B) and (C). In other words, if no Chapter 13 plan is confirmed and the Chapter 13 trustee is holding money received from the debtor, the trustee must return that money to the debtor unless there are payments “due and owing” to lessors or creditors pursuant to a court determination under § 1326(a)(3) to modify, increase or reduce payments otherwise required by § 1326(a)(1)(B) or (C).

[10]

Especially in districts where the bankruptcy court has “ordered otherwise” and all preconfirmation payments described in § 1326(a)(1) are made through the Chapter 13 trustee, the likelihood is great that there will be cases in which no plan is confirmed and in which the Chapter 13 trustee is holding payments from the debtor. A lessor or creditor who wants to share in that money before it is returned to the debtor must have passed through § 1326(a)(3) to qualify for the entitlement in § 1326(a)(2).

[11]

Section 1326(a) as amended by BAPCPA, creates substantial new expectations of preconfirmation payments in Chapter 13 cases for lessors of personal property and purchase money lenders secured by personal property. These expectations are somewhat dulled by the accelerated timing for the hearing on confirmation mandated by new § 1324(b).19 After BAPCPA, the typical Chapter 13 case will reach confirmation somewhere between 40 days and 95 days after the petition.20 New § 1326(a)(1) would require, unless the court orders otherwise, that most Chapter 13 debtors commence payments to lessors and allowed purchase money claim holders no later than 30 days into this period. A motion by a lessor or purchase money lender under § 1326(a)(3) to modify the payments required by § 1326(a)(1) would be noticed and heard later—probably at or about the time of confirmation.

[12]

There is an alternative reading of § 1326(a)(2) that would position lienholders differently with respect to recovery of unpaid preconfirmation adequate protection payments when a Chapter 13 case fails. The cross-reference to “paragraph (3)” in § 1326(a)(2) could be rewritten as a reference to § 1326(a)(1)(C).21 This reconstruction arms an allowed secured claim holder to argue that a “due and owing” prepetition adequate protection payment under § 1326(a)(1)(C) is recoverable from money held by the Chapter 13 trustee when a case fails without regard to whether the bankruptcy court has modified, increased or reduced adequate protection under § 1326(a)(3). This reading hardly explains all the strange words in § 1326(a)(2)22 and raises new issues, including that it is not obvious how “due and owing” is determined by reference only to § 1326(a)(1)(C).

[13]

Casualty insurance is often part of a lienholder’s right to adequate protection.23 BAPCPA mandates that, not later than 60 days after the petition, a Chapter 13 debtor retaining possession of personal property subject to a lease or securing (in whole or in part) the purchase price of the property shall provide the lessor or secured creditor “reasonable evidence of the maintenance of any required insurance coverage.”24 This requirement to prove insurance continues as long as the debtor retains possession of the property.

[14]

During the preconfirmation period, there are rules or practices in most jurisdictions that require Chapter 13 debtors to prove insurance on high-risk collateral such as a car. In most districts, these requirements are more strict than the 60 days allowed by § 1326(a)(4) after BAPCPA. Chapter 13 debtors have a substantial argument from new § 1326(a)(4) that reasonable evidence of the maintenance of insurance cannot be required by local rule or practice any earlier than 60 days after the petition.

[15]

The proof of insurance requirement in § 1326(a)(4) applies to leases of personal property and to purchase-money-secured claims whether “allowed” or not in the Chapter 13 case. Also, the payments required by § 1326(a)(1)(B) and (C) and the proof of insurance required by § 1326(a)(4) apply without regard to the debtor’s intentions with respect to the property. If the debtor intends to reject a lease of personal property or intends to surrender personal property collateral, the debtor should do so immediately after the petition to avoid accruing any obligations to the lessor or lienholder under § 1326(a)(1)(B) or (C).25

[16]

Creditors that are uncertain what the debtor intends to do with their leased property or collateral may consider filing a motion under § 1326(a)(3) to have the court fix the amount of preconfirmation payments required by § 1326(a)(1). That motion should prompt the debtor to reject the lease or surrender the collateral in advance of confirmation to avoid any jeopardy under § 1326(a).

[17]

Section 1326(a) does not state a consequence if the debtor fails to make the payments required by § 1326(a)(1)(B) and (C) or fails to provide reasonable evidence of insurance under § 1326(a)(4). BAPCPA did not amend the grounds for conversion or dismissal in § 1307 to suggest that remedy. A lessor or lienholder not receiving preconfirmation payments required by § 1326(a)(1)(B) or (C) might file a motion for relief from the stay under § 362, a motion for adequate protection under § 363 and/or a motion to increase payments under § 1326(a)(3). Combining the motions, the lessor or creditor has the added leverage of a court order under § 1326(a)(3) that would provide the protection in § 1326(a)(2) in the event no plan is confirmed and the Chapter 13 trustee is holding payments from the debtor at the end of the case.

[18]

There is almost always personal property that is leased or that is collateral for a purchase money claim in Chapter 13 cases. It can be anticipated that local practices and procedures will quickly grow up to deal with the preconfirmation payments required by new § 1326(a)(1). The typical Chapter 13 case can’t bear the expense of preconfirmation adequate protection litigation in addition to all of the new documents and duties required by BAPCPA. The new preconfirmation payment rights of lessors and purchase money lenders in § 1326(a)(1) will force many Chapter 13 debtors to make payments before confirmation rather than litigate the new entitlements. Agile creditors will jump through the hoops necessary to establish rights in the payments made by the debtor to the trustee as a hedge against the failure to confirm a plan.


 

1  See §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

2  11 U.S.C. § 1326(a)(1)(B) and (C), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

3  See §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 419.1 [ Payments to Creditors before Confirmation ] § 53.11  Payments to Creditors before Confirmation.

 

4  See § 35.8 [ Schedule G—Executory Contracts and Leases ] § 36.14  Schedule G—Executory Contracts and Leases.

 

5  See 11 U.S.C. § 361, discussed in §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1  Adequate Protection of Lienholders before Confirmation and 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

6  See § 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA. See, e.g., In re Smith, 355 B.R. 519 (Bankr. D. Md. 2006) (Car lender not entitled to automatic adequate protection payments before confirmation under § 1326(a)(1)(C) when lender accelerated contract and obtained prepetition judgment for balance because no amount becomes due under the contract after the petition.).

 

7  But see 11 U.S.C. § 1326(a)(3), discussed below and in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

8  See discussion of 11 U.S.C. § 1325(a)(5) beginning at § 74.1  General Rules before BAPCPA.

 

9  See § 288.1 [ Failure to File Proof of Claim ] § 135.5  Failure to File Proof of Claim.

 

10  The purchase money character of debt for various purposes is discussed in §§ 51.1 [ Limitations on Lien Avoidance ] § 49.3  Limitations on Lien Avoidance, 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA and 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

11  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

12  11 U.S.C. § 1326(a)(3), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

13  11 U.S.C. § 363(e). See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1  Adequate Protection of Lienholders before Confirmation and 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

14  See 11 U.S.C. § 1326(a)(1)(C), discussed below and in § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

15  In re Smith, 355 B.R. 519, 524 (Bankr. D. Md. 2006) (Car lender not entitled to preconfirmation adequate protection under § 1326(a)(1)(C) because debt was reduced to a prepetition judgment still has adequate protection remedy by motion under § 362(d)(1). “[T]his does not mean that a creditor in the position of the Movant, has no right to adequate protection. Section 362(d)(1) provides that when requested by a party-in-interest and after notice and a hearing, the court shall grant relief from stay for cause including lack of adequate protection of an interest in property. . . . [T]his provision requires the creditor to file a motion for relief from stay. Upon such motion the court may order a continuation of the automatic stay conditioned upon the provision of adequate protection to the creditor.”).

 

16  11 U.S.C. § 1326(a)(2).

 

17  11 U.S.C. § 1326(a)(2), discussed in § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

18  The confusing cross-reference to “paragraph (3)” could also be rewritten as “§ 1326(a)(1)(C).” See § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

19  11 U.S.C. § 1324 is discussed in § 502.1 [ Timing of Hearing on Confirmation ] § 115.2  Timing of Hearing on Confirmation after BAPCPA.

 

20  See 11 U.S.C. § 1324 and Fed. R. Bankr. P. 2002, discussed in § 502.1 [ Timing of Hearing on Confirmation ] § 115.2  Timing of Hearing on Confirmation after BAPCPA.

 

21  See § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

22  See § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

23  See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1  Adequate Protection of Lienholders before Confirmation and 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

24  11 U.S.C. § 1326(a)(4), discussed in § 404.1 [ Adequate Protection before Confirmation ] § 47.2  Preconfirmation Adequate Protection after BAPCPA.

 

25  See § 414.1 [ Preconfirmation Assumption and Rejection of Leases and Executory Contracts ] § 51.4  Preconfirmation Assumption and Rejection of Leases and Executory Contracts after BAPCPA.