Regina Y. Drake

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
REGINA Y. DRAKE,
Debtor.
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Case No. 06-00261
(Chapter 13)
MEMORANDUM DECISION RE TRUSTEE'S
SUPPLEMENTED OBJECTION TO CLAIM OF HSBC AUTO FINANCE
The chapter 13 trustee has filed an objection (Docket Entry
No. 39) to the $23,125.81 proof of claim of HSBC Auto Finance
(“HSBC”) (which asserted a secured claim of that amount in a
motor vehicle), asking that it be treated as unsecured instead of
secured, and has supplemented her objection after the court asked
her to address certain issues.
I
The trustee objects that:
said creditor has failed to provide sufficient documentation
in support of its claim including its lien on the property
of the estate and its petition date replacement value of
said collateral, although scheduled by the debtor in the
amount of $15,478.00.
(Obj. at 1). 	This is a familiar type of objection based on 11
U.S.C. § 506(a). 	The trustee objects further that:
The decision below is signed as a decision of
the court.
Signed: December 22, 2006.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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Alternatively, said creditor has failed to meet its burden
of proving the inapplicability of U.S.C. § 506 by failing to
assert and produce a purchase money security interest
securing its debt that is the subject of the claim and by
failing to indicate the acquisition use of said collateral.
(Id.). 	By stating that a purchase money security interest has
not been produced, the court infers that the trustee means to say
that the proof of claim does not show that the claim comes within
the exception to § 506 contained in the dangling language
appended at the end of § 1325(a), which provides:
For purposes of paragraph (5) [specifying the treatment
required for each allowed secured claim provided for by the
plan], section 506 shall not apply to a claim described in
that paragraph if the creditor has a purchase money security
interest securing the debt that is the subject of the claim,
the debt was incurred within the 910-day preceding the date
of the filing of the petition, and the collateral for that
debt consists of a motor vehicle . . . acquired for the
personal use of the debtor, or if collateral for that debt
consists of any other thing of value, if the debt was
incurred during the 1-year period preceding that filing.
11 U.S.C. § 1325(a).
The trustee's objection to the claim appears to have been
related to her objection to confirmation of the debtor’s second
amended plan, in which she objected that:
the payment of any arrears claim to HSBC Auto Finance, an
undersecured creditor, amounts to an implicit classification
of creditors which unfairly discriminates against remaining
general unsecured creditors in violation of 11 U.S.C.
§ 1322(b)(1).
(Confirmation Obj. ¶ 7). 	Under the second amended plan, general
unsecured claims were to be paid 100% of their claims, without
postconfirmation interest (or postpetition-preconfirmation
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interest), whereas HSBC’s prepetition arrears claim was to be
paid 100% with 6% postconfirmation interest, regardless of
whether it was a secured claim.
However, the debtor has filed a third amended plan which
proposes to pay interest on the allowed claim of HSBC only to the
extent that it is an allowed secured claim, and to pay any
unsecured claim of HSBC in the same manner as other unsecured
claims not entitled to priority. 	The third amended plan fails to
indicate whether the allowed secured claim of HSBC is the amount
allowed under § 506(a) or instead is the full amount of the claim
(based on the dangle of § 1325(a) being applicable to render §
506(a) inapplicable). 	Nevertheless, if any portion of HSBC's
claim is treated as unsecured, that part of the claim would not
be paid with interest, and that would reduce the amount of
payments that the debtor is required to pay the trustee under the
plan.
II
The debtor's schedules treated HSBC as a secured claim to
the extent of the car's scheduled value of $15,478. 	That is
evidence that HSBC held a lien on the car. 	Moreover, the proof
of claim attached a security agreement whereby the debtor granted
HSBC a security interest. 	Although that security agreement did
not include a signature of the creditor, the District of
Columbia’s version of the Uniform Commercial Code only required
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1 	Once the District of Columbia issues a certificate of
title to a motor vehicle, a security interest can be perfected in
that vehicle only by its being noted on the certificate of title,
but beforehand, the rule of first in time, first in right
prevails. 	See McCarthy v. BMW Bank of N. Am. (In re Dorton), 327
B.R. 14 (Bankr. D.D.C. 2005), aff'd, 346 B.R. 271 (D.D.C. 2006),
appeal pending (D.C. Cir.). 	Accordingly, HSBC ought to have
appended to its proof of claim a copy of the certificate of title
(assuming one was issued, which is likely).
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the debtor’s signature on the security agreement for there to be
an enforceable security interest. 	See D.C. Code
§ 9-203(b)(3)(A); Falconbridge U.S., Inc. v. Bank One Illinois
(In re Vic Supply Co., Inc.), 227 F.3d 928 (7th Cir. 2000) (lack
of creditor’s signature on security agreement was not fatal even
though security agreement specifically provided that it was
effective only when “accepted” by the creditor “as provided
below,” meaning signed in the blank space for signature). 	So
there can be no doubt that HSBC had a security interest in the
vehicle.
The trustee’s objection regarding failure to attach evidence
of the lien may be that no evidence of perfection of the security
interest has been appended to the proof of claim as required by
Rule 3001(d) and by the Official Form. 1 	However, that alone is
not a basis for disallowing the claim, and the trustee did not
affirmatively contend in her objection that the claim is
unperfected. 	A creditor’s failure to fully comply with the
documentary requirements of Rule 3001(d) does not provide a basis
for disallowing a claim. 	Dove-Nation v. eCast Settlement Corp.
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(In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); In
re Shank, 315 B.R. 799, 812 (Bankr. N.D. Ga. 2004) (concluding
that “an objection to a proof of claim based solely on the lack
of attached documents provides no basis for disallowance of a
claim, even if the claimant declines to respond to the
objection.”).
The court raised this issue in its order directing the
trustee to supplement her objection to HSBC's claim. 	In
response, the trustee has stated that if the creditor does not
produce a copy of the certificate of title that bears a notation
of its lien, the trustee recommends that the claim be allowed as
unsecured only in the amount filed less all post-petition
payments received by the creditor. 	This still fell short of
affirmatively alleging that the security interest was
unperfected, but even if the objection had made that affirmative
allegation, the issue of perfection could not be adjudicated
pursuant to the objection to claim.
HSBC did not consent to the issue being adjudicated via an
objection to claim. 	A lien remains in place unless avoided, and
the avoidance of a lien must be pursued via an adversary
proceeding unless the creditor consents to its being adjudicated
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2 	Avoidance of the lien as unperfected pursuant to 11
U.S.C. § 544(a) ordinarily would require an adversary proceeding
unless the creditor appeared in response to an objection to claim
and waived the requirement of an adversary proceeding. 	Fed. R.
Bankr. P. 7001; see also In re Anderson, 330 B.R. 180, 188
(Bankr. S.D. Tex. 2005); but see In re Kleibrink, 346 B.R. 734,
749-53 (Bankr. N.D. Tex. 2006) (in certain circumstances a lien
may be invalidated via an objection to claim). 	One of the
protections an adversary proceeding confers on a lienholder whose
lien the trustee seeks to avoid is the requirement of service
under Fed. R. Bankr. P. 7004. 	In contrast, an objection to claim
may be served under Fed. R. Bankr. P. 3007 by mailing the
objection to the claimant at the address at which it indicated on
the proof of claim that notices should be sent. 	In re Hawthorne,
326 B.R. 1 (Bankr. D.D.C. 2005).
6
via some other procedural vehicle. 2 	Accordingly, the court will
dismiss the objection to claim without prejudice with respect to
its contesting whether the lien was perfected.
III
The court turns next to the issue of the amount that ought
to be allowed as a secured claim if 11 U.S.C. § 506(a) applies.
A.
A preliminary issue is whether the amount of an allowed
secured claim can be fixed via an objection to claim. 	A claim is
allowed unless objected to. 	11 U.S.C. § 502(a). 	Accordingly,
when a claim overstates the portion of the claim that is an
allowed secured claim by reason of overstating the value of the
collateral, an objection to claim must be filed to disallow the
erroneous portion of the claim. 	A proof of claim asserting a
secured claim places value in play as an issue with respect to
allowance of the claim. 	Nothing in the Federal Rules of
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Bankruptcy Procedure bars determination of the value of the
collateral incident to an objection that the proof of claim has
overstated the amount of the claim that is secured versus
unsecured.
Under Fed. R. Bankr. P. 3012, “[t]he court may determine the
value of a claim secured by a lien on property in which the
estate has an interest on motion of any party in interest and
after a hearing on notice to the holder of the secured claim and
any other entity as the court may direct.” 	However, Rule 3012 is
an additional vehicle for valuing collateral and does not bar a
court's ascertaining the value of collateral pursuant to a Rule
3007 objection to allowance of a claim that overstates the
portion of the claim that is secured. 	Rule 3012 applies even
when no proof of claim has been filed, and is necessary for
different reasons than Rule 3007, as the valuation of collateral
is important for purposes other than only the claims allowance
process. 	For example, if a debtor wishes to fix the value of
collateral in order to determine what adequate protection must be
accorded the creditor, it could proceed by a Rule 3012 motion.
When, however, a party disputes a proof of claim's assertion of
the value of collateral securing a claim, that party is
authorized to proceed by way of a Rule 3007 objection to claim.
It makes no sense to require a cumbersome two-step process of
filing a Rule 3012 motion to fix value and then a Rule 3007
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3 	Fed. R. Bankr. P. 9014(b) directs that service of a Rule
3012 motion is governed by Rule 7004, whereas an objection to
claim is governed by Rule 3007. 	By filing a proof of claim, the
creditor subjects itself to service under Rule 3007 of an
objection to its claim. 	Hawthorne, 326 B.R. at 4-5. 	When a
creditor has not filed a proof of claim, and a motion must be
utilized to address the value of the creditor's collateral, it
makes sense that service should be made under Rule 7004, but it
would not make sense to require such service when the creditor
has filed a proof of claim listing an address for receiving
notices relating to that claim. 	Hawthorne, Id. at 5.
4 	The Advisory Committee Note (1983) to Rule 3012 suggests
that a Rule 3012 valuation motion could be used for certain
adjudications (“impairment under § 1124, or treatment of the
claim in a plan pursuant to § 1129(b) of the Code”) that one
would think could ordinarily be accomplished via an objection to
claim. 	However, a Rule 3012 valuation motion could theoretically
be filed prior to the creditor's filing a proof of claim. 	In any
event, the Advisory Committee Note did not purport to address
whether Rule 3012 was to be the exclusive vehicle for valuing
collateral securing a claim. 	Instead, the Advisory Committee
Note appears to have been attempting to list examples of
valuation issues that do not require an adversary proceeding
(“commenced when the validity, priority, or extent of a lien is
at issue as prescribed by Rule 7001"), and Rule 3012 may have
been intended to clarify that Rule 7001 does not apply to
proceedings to value collateral. 	The bottom line is that when a
proof of claim over-states the value of a creditor's collateral,
a party may challenge that valuation either by way of a Rule 3012
motion or a Rule 3007 objection to claim.
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objection to claim to disallow the asserted secured claim based
on the value fixed pursuant to the Rule 3012 motion. 	Moreover,
the difference in requirements regarding service is an additional
factor that could make a two-step process more onerous. 3
Nothing in the Federal Rules of Bankruptcy Procedure
demonstrates that the rule makers intended to make Rule 3012 the
sole vehicle for valuing collateral to the exclusion of other
vehicles such as Rule 3007. 4 	See Connecticut Nat'l Bank v.
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5 	Rule 3001(f) provides that “[a] proof of claim executed
and filed in accordance with these rules shall constitute prima
facie evidence of the validity and amount of the claim.”
9
Germain, 503 U.S. 249 (1992) (“Redundancies across statutes are
not unusual events in drafting, and so long as there is no
'positive repugnancy' between two laws, Wood v. United States, 16
Pet. 342, 363, 10 L.Ed. 987 (1842), a court must give effect to
both.”). 	For purposes of fixing the allowed amount of a secured
claim based on the value of the collateral securing the claim,
there is no reason Rule 3007 and 3012 “cannot comfortably
coexist . . . .” 	Things Remembered, Inc. v. Petrarca, 516 U.S.
124, 129 (1995). 	Accordingly, Rule 3012 does not preclude the
determination of value of collateral incident to a Rule 3007
objection to claim.
B.
The failure of the creditor’s claim to include a statement
of the collateral’s value in accordance with the requirements of
the Official Form as required by Fed. R. Bankr. P. 3001(a) may
make Fed. R. Bankr. P. 3001(f) 5 inapplicable such that the proof
of claim is no longer prima facie evidence of the validity and
amount of the claim. 	In re Mazzoni, 318 B.R. 576, 577-78 (Bankr.
D. Kan. 2004). 	The failure to list the value of the collateral
on the proof of claim, however, does not by itself require
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6 	The proof of claim here implicitly represented that the
value of the collateral equaled or exceeded the amount of the
claim because HSBC did not list any amount as unsecured when
instructed to indicate the amount of any unsecured claim if “your
claim exceeds the value of the property securing it.”
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disallowance of the claim as an allowed secured claim. 6
Nevertheless, the trustee has pointed to sufficient evidence
to disallow part of the creditor's asserted secured claim. 	The
debtor’s original Schedule B listed the automobile as being worth
$15,478. 	Although the debtor amended Schedule B to list the
debtor’s Mercedes automobile as being worth $22,975, the debtor
has withdrawn that amendment, and the amendment will be
disregarded. 	At this juncture, the only evidence of value is the
$15,478 value placed on the car by the debtor. 	Accordingly, the
record contains sufficient evidence to demonstrate that under §
506(a), $15,478 of the claim would be an allowed secured claim,
but the balance would be an allowed unsecured claim in the amount
of $7,737.81.
IV
Regarding the issue of whether the “dangling” paragraph in
§ 1325(a) creates an exception to § 506(a) as to HSBC's claim,
assuming that the issue is properly before the court, two
distinct questions are presented. 	The proof of claim discloses
that the debt is secured by the debtor's car, and that the date
of the loan was February 28, 2005. 	The petition was filed on
July 27, 2006, fewer than 910 days after the debt was incurred on
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February 28, 2005. 	Accordingly, for the dangling paragraph of §
1325(a) to apply, (1) the car must have been “acquired for the
personal use of the debtor,” and (2) HSBC must have “a purchase
money security interest” in the car.
A.
Regarding the issue of whether the car was “acquired for the
personal use of the debtor,” the trustee contends not that the
car was not for the debtor’s personal use, only that the creditor
has not indicated on the proof of claim for what use the debtor
acquired the car. 	However, a creditor is not required to
indicate on a proof of claim the use for which its collateral was
acquired, and even if it were required to do so, that would not
be a basis for disallowing the claim (as opposed to making Rule
3001(f) inapplicable).
B.
With respect to the issue of whether HSBC has a “purchase
money security interest” in the car, the debtor testified at the
confirmation hearing that HSBC’s loan was obtained by her after
she had already purchased the car. 	However, there remains the
question whether the issue of the applicability of § 1325(a) has
been properly presented to the court.
V
An objection to claim is an inappropriate procedural vehicle
for determining whether the § 1325(a) dangle applies. 	The
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Official Form for a proof of claim requires the holder of the
claim to set forth the amount of the allowed secured claim based
on § 506(a) being applicable. 	If the § 1325(a) dangle is
applicable to a plan, that is a matter that goes not to the
validity of the proof of claim, but instead to the required
treatment of the claim under a chapter 13 plan (allowance in a
manner different from the allowed secured claim shown on the
proof of claim).
Because § 1325(a) sets forth requirements for confirmation
of a plan, it follows that determination of the applicability of
the dangle of § 1325(a) can be accomplished via an objection
under Fed. R. Bankr. P. 3015(f) to a plan that specifies whether
the dangle applies. 	As to each allowed secured claim that
entails an automobile as collateral and that is being provided
for by a plan, it is desirable that the debtor specify in the
plan whether the allowed secured claim is the amount constituting
an allowed secured claim under § 506(a) or is instead the allowed
secured claim resulting from § 506(a) being treated as
inapplicable (by virtue of the dangling language of § 1325(a)
being applicable). 	That frames the issue as one that can be
resolved via an objection to confirmation of the plan.
Unfortunately, in this case the debtor's third amended plan
only provides for full payment of HSBC's allowed secured claim
without specifying the amount of that allowed secured claim under
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7 	A debtor and a trustee may need a determination of that
issue in advance of confirmation of a plan in order to assess,
for example, whether the debtor's plan proposes sufficient
payments to be confirmable (the type of issue the trustee has
raised regarding the debtor's third amended plan).
Alternatively, a motion postconfirmation may be necessary, for
example, where the debtor's confirmed plan is silent regarding
whether the § 1325(a) dangle applies, and the trustee needs a
determination of whether the allowed secured claim is to be fixed
under § 506(a) or instead without § 506(a) being applicable.
13
the plan (that is, the amount determined in accordance with §
506(a) or instead the amount determined when § 506(a) is treated
as inapplicable). 	The issue is thus not susceptible of
resolution in this case via an objection to confirmation of the
plan, and must be resolved in some other fashion.
A party in interest may pursue a motion (the procedural
vehicle prescribed by Fed. R. Bankr. P. 9014(a) when no other
procedural vehicle is prescribed by the Rules) to declare whether
the dangle applies. 7 	The objection to claim here was neither
styled as a motion nor served as a motion (which requires service
under Fed. R. Bankr. P. 7004 by reason of Fed. R. Bankr. P.
9014(b)). 	In any event, the objection to claim did not fairly
put HSBC on notice that what was at stake was determination of
whether the § 1325(a) dangle would be applicable to its claim
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8 	The trustee’s response to the court’s order requesting
supplementation of her objection raised for the first time the
assertion that HSBC had received two postpetition payments from
the debtor, and requested that the claim be reduced by the amount
of those payments. 	Because that issue was not raised as part of
the objection to claim, HSBC has not been put on proper notice to
defend against that assertion.
14	O:\Judge Temp Docs\Drake (Regina) Trustee's Supplemented Objn to HSBC Automotive Secured Claim Decisionv3.wpd
under any plan in this chapter 13 case. 8
VI
For the foregoing reasons, the court will issue an order
determining the allowed amount of HSBC's secured claim under §
506(a) to the extent that its lien is not avoided and is not
entitled to treatment under the § 1325(a) dangle, and otherwise
dismissing the objection without prejudice to the extent it seeks
(1) a determination that the lien was not perfected, or (2) a
determination that the § 1325(a) dangle is inapplicable if the
lien is not avoided.
[Signed and dated above.]
Copies to:
Debtor
Debtor’s Attorney
Trustee
HSBC Auto Finance (f/k/a Household Auto Finance Corp)
P.O. Box 17906
San Diego, CA 92177
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