§ 136.13 — Failed Adequate Protection after BAPCPA

Revised: March 29, 2006

[1]

BAPCPA did not change the general rule that creditors with prepetition liens are rarely entitled to any special claim status when the debtor fails to make payments during a Chapter 13 case.1 But BAPCPA did create two new statutory “adequate protection” rights that are likely to produce new litigation about the status of “failed” adequate protection in Chapter 13 cases.

[2]

BAPCPA amended § 1326(a)(1) to require Chapter 13 debtors—not later than 30 days after the petition—to commence payments in the amount “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.”2 This adequate protection payment requirement applies without regard to whether the debtor is using the collateral and without regard to whether there is any benefit to the estate or to other creditors. There is no clue in new § 1326(a)(1) what consequence attaches when a Chapter 13 debtor fails to make these preconfirmation adequate protection payments.

[3]

BAPCPA also amended § 1325(a)(5) to insert a new adequate protection entitlement at confirmation of a Chapter 13 plan. Somewhat simplified, if the plan proposes periodic payments to a lienholder, those payments must be “sufficient to provide . . . adequate protection during the period of the plan.”3 This new notion of postconfirmation adequate protection may be different from the preconfirmation adequate protection in new § 1326(a)(1), and either or both may be foreign to pre-BAPCPA adequate protection defined in § 361. In any case, there are going to be many post-BAPCPA Chapter 13 plans confirmed that contain periodic payments to lienholders which explicitly or implicitly provide “adequate protection.”

[4]

Ordinarily, when a debtor in a bankruptcy case is ordered to make adequate protection payments and fails to do so, the lienholder is quickly entitled to some other relief with respect to its collateral, such as relief from the stay. Perhaps the same will be true when the Chapter 13 debtor fails to comply with the new statutory forms of adequate protection in §§ 1326(a)(1)(C) and 1325(a)(5)(B)(iii)(II).

[5]

Creditors that get stiffed on adequate protection payments understandably get mad and then want to get even. Relief from the stay does not resurrect the value lost from uncompensated use of collateral. The reported decisions4 indicate that it occurs to some to assert that use of the collateral was an “actual, necessary cost and expense of preserving the estate”—an administrative expense under § 503(b)(1)(A).

[6]

Administrative expense status for failed adequate protection is a hard row to hoe for a prepetition lienholder. The special conditions for allowance of administrative expenses apply. Prepetition lienholders have difficulty proving a postpetition transaction with the debtor or that the estate or other creditors have benefited from the debtor’s use of the collateral.

[7]

New §§ 1325(a)(5)(B)(iii)(II) and 1326(a)(1)(C) do not change the usual rules for allowance of an administrative expense to a prepetition lienholder that has failed to receive adequate protection. The lienholder must prove the usual predicates for an administrative expense allowance, including benefit to the estate. The typical case will be a car lender whose collateral is driven by the debtor to and from work. It is not inconceivable that a car lender could demonstrate that this use of its collateral benefited the estate by enabling the debtor to generate income to fund a Chapter 13 plan. In circuits that require an identifiable postpetition transaction with the debtor for administrative expense purposes, the car lender will stretch to characterize the new statutory entitlements to adequate protection as postpetition transactions.

[8]

In a Chapter 13 case, allowance of an administrative expense under § 503(b) gets the prepetition car lender a priority claim that must be paid in full to accomplish confirmation under § 1322(a)(2). An administrative expense priority for unpaid postpetition adequate protection payments might be worth something to a prepetition lienholder if the debtor surrenders the collateral, but if the debtor retains the collateral and pays the secured claim through the plan consistent with § 1325(a)(5), the missed adequate protection payments will typically be resolved somewhere in the payments of principal and interest under the plan. This is especially likely after BAPCPA with respect to 910-day PMSI car claims and claims secured by other things of value when the debt was incurred within a year of the petition.5

[9]

In the preconfirmation context, BAPCPA invites lienholders to assert that failed adequate protection generates an allowable administrative expense. New § 1326(a)(2) provides awkwardly that at the demise of a Chapter 13 case before confirmation, funds held by the trustee are returned to the debtor if “not yet due and owing to creditors pursuant to [§ 1326(a)(3)],” and after deducting claims “allowed under section 503(b).”6 Claims allowed under § 503(b) would be administrative expenses, and payments due and owing under § 1326(a)(3) could be court-ordered payments of preconfirmation adequate protection.7 By either route, a lienholder with unpaid preconfirmation adequate protection payments might intercept return to the debtor of payments held by the trustee when the case fails before confirmation.

[10]

The further possibility that a lienholder that fails to receive adequate protection payments in a Chapter 13 case will seek a “super priority” under § 507(b) is not enhanced by BAPCPA. The special status in § 507(b) is reserved for failed adequate protection provided by a trustee under § 362, 363 or 364. There is no mention in § 507(b) of adequate protection provided by a Chapter 13 debtor under § 1325 or 1326.

[11]

Moreover, the “super priority” in § 507(b) is only available when failed adequate protection leaves the lienholder with a claim allowable under § 507(a)(2)—an administrative expense under § 503(b). For all the reasons just discussed, the holder of a prepetition lien that fails to receive adequate protection payments postpetition has difficulty proving the predicates for administrative expense status under § 503(b).

[12]

Even if the prepetition lienholder can prove entitlement to an administrative expense under § 503(b), the “super priority” in § 507(b) is of questionable value in a Chapter 13 case because all priority claims have the same full-payment entitlement in a Chapter 13 case under § 1322(a)(2). Surmounting the additional conditions for super-priority status under § 507(b) gets the prepetition lienholder the same full-payment entitlement with respect to the unpaid adequate protection that would attend administrative expense status in the first instance.


 

1  See § 297.1 [ Failed Adequate Protection ] § 136.12  Failed Adequate Protection before BAPCPA.

 

2  11 U.S.C. § 1326(a)(1)(C), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

3  11 U.S.C. § 1325(a)(5)(B)(iii)(II), discussed in § 449.1 [ “Adequate Protection” after Confirmation ] § 74.15  “Adequate Protection” after Confirmation after BAPCPA.

 

4  See § 297.1 [ Failed Adequate Protection ] § 136.12  Failed Adequate Protection before BAPCPA.

 

5  See §§ 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506, 462.1 [ 910-Day PMSI Car Claims: A Reprise ] § 87.7  910-Day PMSI Car Claims after BAPCPA: A Reprise and 509.1 [ 910-Day PMSI Car Claims: Epilogue ] § 132.8  910-Day PMSI Car Claims: Epilogue.

 

6  11 U.S.C. § 1326(a)(2), discussed in §§ 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA and 534.1 [ Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) ] § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA.

 

7  Id.