Michael Douglas Beaver and Catherine E. Beaver

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
MICHAEL DOUGLAS BEAVER and
CATHERINE E. BEAVER,
DEBTORS
CASE NO.
05-06123-5-ATS
ORDER REGARDING MOTION FOR PRE-CONFIRMATION
ADEQUATE PROTECTION PAYMENTS
The matter before the court in this chapter 13 case is the Motion
for Pre-Confirmation Adequate Protection Payments filed by Coastal
Federal Credit Union. Coastal seeks pre-confirmation adequate
protection of its security interests in two vehicles owned by one of
the joint chapter 13 debtors, Catherine E. Beaver. According to
Coastal, adequate protection payments are required by 11 U.S.C.
§ 1326(a)(1)(C) to be paid directly to Coastal by the debtors. The
debtors concede that Coastal is entitled to adequate protection, but
contend that adequate protection may be provided by means other than
the direct payments requested by Coastal. A hearing was held in
Raleigh, North Carolina on January 17, 2005.
Michael Douglas Beaver and Catherine E. Beaver filed a joint
petition for relief under chapter 13 of the Bankruptcy Code on
December 1, 2005. Coastal is a secured creditor with claims secured by
a 2000 Buick Regal LS and a 1996 GMC Sierra Wideside; the claims, which
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were assigned to Coastal, are attributable to the purchases of the
automobiles.
The balance owing on the claim secured by the Buick Regal is
$5,726.18, and the NADA wholesale value of the Buick Regal is $4,875.
The installment contract applicable to the claim secured by the Buick
provides for interest at the rate of 7.25% per annum and monthly
payments of $305.29. The balance owing on the claim secured by the GMC
Sierra is $6,061.86, and the NADA wholesale value of the GMC Sierra is
$5,225. The installment contract applicable to the purchase of the GMC
Sierra provides for interest at the rate of 6.0% per annum and monthly
payments of $175.69.
Coastal argues that § 1326(a)(1)(C) requires the debtors to make
pre-confirmation adequate protection payments directly to Coastal in
the amounts provided in the installment contracts, i.e., $305.29 for
the Buick Regal and $175.69 for the GMC Sierra. The debtors maintain
that they are not required by § 1326(a)(1)(C) to make pre-confirmation
adequate protection payments to Coastal and may provide adequate
protection by means other than direct payments. The court agrees with
the debtors.
Section 1326(a)(1) provides:
(a)(1) Unless the court orders otherwise, the debtor shall
commence making payments not 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;
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1Section 1326(a)(1) provides that the payments must commence "not
later than 30 days after the date of the filing of the plan or the
order for relief, whichever is earlier." Since a plan may not be filed
until an order for relief is entered, 30 days from the order for relief
will always be the earlier date.
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(B) scheduled in a lease of personal property directly
to the lessor . . . ; and
(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.
11 U.S.C. § 1326(a)(1).
According to Coastal, a plain reading of § 1326(a)(1)(C) requires
a debtor to make adequate protection payments directly to the creditor.
However, the court interprets the statute differently. The court’s
understanding of § 1326(a)(1)(C), which was added to the Bankruptcy
Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, Pub. L. No. 109-8, § 309, is that a chapter 13 debtor is
required to begin making adequate protection payments 30 days after the
order for relief1 if direct payment is the form of adequate protection
that the chapter 13 debtor has chosen to provide to a creditor with a
claim secured by personal property attributable to the purchase of the
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2Even if Coastal’s interpretation of the § 1326(a)(1)(C) is
correct, § 1326(a)(1), which begins "[u]nless the court orders
otherwise," gives the court the discretion to alter a requirement that
the debtor make direct pre-confirmation adequate protection payments to
a secured creditor.
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collateral. If the debtor has chosen another method of providing
adequate protection, no pre-confirmation direct payments are needed.2
A bedrock rule of statutory construction is that when Congress
intends to change an existing law, it does so clearly. Cohen v. de la
Cruz, 523 U.S. 213, 221, 118 S. Ct. 1212, 1218 (1998) (We . . . "will
not read the Bankruptcy Code to erode past bankruptcy practice absent
a clear indication that Congress intended such a departure.") (quoting
Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 563,
110 S. Ct. 2126, 2133 (1990)).
It is well established bankruptcy law and practice that when
adequate protection is required to protect an interest of an entity in
property, it may be provided by a variety of methods. Providing cash
payments directly to the entity holding the interest in property is one
of those methods, but it is not the exclusive method. Section 361
provides that adequate protection may be provided by cash payments,
replacement liens or "such other relief" as would "result in the
realization by such entity of the indubitable equivalent of such
entity’s interest in such property." 11 U.S.C. § 361(3). Adequate
protection can take many forms and may even be the status quo where the
value of the creditor’s collateral is sufficient to provide an "equity
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cushion." See Matter of Mendoza, 111 F.3d 1264 (5th Cir. 1997);
Baybank-Middlesex v. Ralar Distributors, Inc., 69 F.3d 1200 (1st Cir.
1995); but see In re Snowshoe Co., Inc., 789 F.2d 1085 (4th Cir. 1986).
Had Congress intended to change this well established practice of
affording debtors a wide range of adequate protection options, it would
have done so more clearly. The legislative history merely paraphrases
the statute and does not suggest that Congress intended to limit a
debtor’s adequate protection options. See E-2 Collier on Bankruptcy
App. Pt. 10(b) at App. 10-338 (15th ed. Rev. 2005)(quoting Report of
the Committee on the Judiciary, House of Representatives, to Accompany
S. 256 (April 8, 2005)).
The debtors suggest that proposing a plan that provides for the
payment of the secured claim over the life of plan is in itself
adequate protection. The problem with that proposal is that typically
the value of the collateral does not exceed the amount of the secured
claim. Unless the secured creditor receives pre-confirmation payments
in an amount that is equal to the amount that the collateral is
depreciating, the creditor’s interest in the property will not be
adequately protected in the event that the plan is not confirmed and
the payments are returned to the debtor when the case is dismissed. A
plan that provides for the payment of the secured claim over the life
of the plan and also provides that a portion of each pre-confirmation
payment will be distributed to the secured creditor in the event that
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the plan is not confirmed and the case is dismissed may provide
adequate protection without the necessity of pre-confirmation payments
to the secured creditor.
Of course, every case is different, and adequate protection will
be determined based on the unique facts of each case. As a practical
matter, however, debtors, secured creditors, standing chapter 13
trustees and the court do not want to have to litigate the adequacy of
adequate protection in every chapter 13 case. What is needed is a
general agreement among secured creditors, debtors and standing
trustees as to what presumptively provides adequate protection in most
cases. This can best be accomplished through the local rule making
process which requires public notice of a proposed rule and the
opportunity for all concerned parties to comment. Fed. R. Bankr. P.
9029 and Fed. R. Civ. P. 83.
As contemplated by § 1326(a)(1)(C), pre-confirmation payments
made by the chapter 13 debtor directly to the secured creditor are one
way to provide adequate protection, but that may not be the best way
given the accounting problems it might create for secured creditors and
trustees. Pre-confirmation payments made by the chapter 13 trustee to
a secured creditor with an allowed claim are an acceptable method of
providing adequate protection, but there may be disagreement as to the
amount and timing of the payments to be made. In the present case the
parties have agreed that the requirements of § 1326(a)(1)(C) may be met
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3Section 502(a) provides that a "claim or interest, proof of which
is filed under section 501 of this title, is deemed allowed, unless a
party in interest . . . objects." 11 U.S.C. § 502(a); see also
Jacksonville Airport, Inc. v. Michkeldel, Inc. (In re Michkeldel,
Inc.), __ F.3d __, Case No. 05-1242 (4th Cir. Jan. 19, 2006).
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by the chapter 13 trustee making pre-confirmation payments to Coastal
each month in the amount of 1% of the value of Coastal’s collateral.
That method of providing adequate protection is acceptable to the
court, and the trustee may make a direct payment to Coastal as adequate
protection if Coastal holds an allowed secured claim.3
SO ORDERED.
DATED: January 24, 2006
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