Richard A. Smith

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Baltimore
In re: 	:
Richard A. Smith 	: 	CASE NO. 06-10497-DK
CHAPTER 13
Debtor. 	:
---------------------------------------------------- :
Finance Maryland, LLC, 	:
Movant, 	:
v. 	:
Richard A. Smith, 	:
Respondent. 	:
_____________________________________________________________________________
Memorandum of Decision
The matter before the court is the Motion to Dismiss Case filed by Finance Maryland, LLC
(“Movant”) and the Debtor’s opposition thereto. The court held a hearing on the Motion to Dismiss
on July 11, 2006, and has reviewed the supplemental memoranda filed by each of the parties. The
court finds that a further hearing would not aid in the decisional process. For the reasons set forth
herein, the Motion to Dismiss will be denied.
Date signed November 02, 2006
Entered: November 02, 2006 Case 06-10497 Doc 51 Filed 11/02/06 Page 1 of 10

1 Debtor also filed a chapter 13 bankruptcy case (Case No. 05-90204) on November 2,
2005. The court dismissed that case on December 1, 2005 because Debtor had not completed the
credit counseling requirements of 11 U.S.C. § 109(h).
2 A copy of the Contract is attached as Exhibit 1 to the Amended Proof of Claim filed by
Movant on July 6, 2006.
3 According to the parties, the first lien is held by CarMax Auto Finance.
4 A ruling upon confirmation has been held under advisement pending this decision upon
Movant’s Motion to Dismiss.
2
Factual Background
The relevant facts are not in dispute. On July 26, 2004, approximately 18 months prior to
the filing of this instant bankruptcy case,1 Debtor borrowed $11,605.00 from Movant with
repayment terms requiring 48 monthly payments of $341.19. The Credit Sale Contract (“Contract”)
granted a lien on a 1999 Dodge vehicle as a purchase money security interest.2 In addition, as part
of that transaction, Debtor granted Movant a second lien on Debtor’s 1999 Chrysler vehicle.3 After
debtor defaulted on the loan, Movant obtained a judgment for the Contract debt on January 31, 2006.
On February 1, 2006, Debtor commenced this chapter 13 bankruptcy case by the filing of
a voluntary petition. Debtor filed his chapter 13 plan on February 24, 2006. On March 30, 2006,
after hearing thereupon, the court denied confirmation of Debtor’s plan with leave to file an
amended plan.
Debtor filed his amended plan on April 25, 2006, which inter alia, identifies Movant’s
secured claim in the amount of $10,000.00 and provides payment over the life of the plan at 10%
interest. Debtor has not made any post petition payments to Movant. 4
Movant has filed two proofs of claim in the case, the latter amending and supplementing the
initial proof of claim. The initial proof of claim was filed on March 16, 2006. In that proof of claim,
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3
Movant asserts that the debt was incurred on July 26, 2004 and that a judgment was obtained on
January 31, 2006. The amount of claim as of petition date is stated to be $9,400.00 and is stated to
be secured. Furthermore, Movant has “checked” a box and filled in an amount in the section of the
form that provides: “Amount of arrearage and other charges at time case filed included in this
secured claim, if any $9,400.00.” (Emphasis in original). The only documentation accompanying
the proof of claim was a copy of the security interest Maryland Vehicle Administration papers.
The amended proof of claim was filed July 6, 2006, after Movant filed the instant motion to
dismiss and five days prior to the hearing thereupon. The amended proof of claim supplements the
documentation in support of the proof of claim with the account records and the Contract. The
amended claim states that the secured claim amount is $9,765.49, and provides: “Amount of
arrearage and other charges at time case filed included in this secured claim, if any $1,390.36".
Debtor has not filed an objection to claim.
On April 20, 2006, Movant filed its Motion to Dismiss, asserting that Debtor has failed to
commence making the payments required pursuant to Section 1326(a)(1)(C), and therefore the case
should be dismissed pursuant to Section 1307(c)(4). Debtor responded that Section 1326(a)(1)(C)
does not apply to his obligation to Movant because Movant obtained a pre-petition judgment on its
Contract.
Analysis
The issue to be decided is whether Movant is entitled to payment pursuant to Section
1326(a)(1)(C) in light of the fact that pre-petition Movant had reduced to judgment its rights to
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5 Because the court is finding that Debtor was not obligated to initiate payments pursuant
to Section 1326(a)(1)(C), it is not necessary to decide whether such failure would constitute
sufficient cause for dismissal or conversion under the facts and circumstances of this case.
4
payment under the Contract.5 To decide this question, the court must examine the parties’ positions
under both federal bankruptcy law and state commercial law.
Section 1326(a)(1)(C) of the Bankruptcy Code is an amendment introduced by the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "BAPCPA"), Pub. L. No.
109-8, 11 Stat. 23, which became effective October 17, 2005. That section entitled “Payments”
provides that unless the court orders otherwise, within 30 days of the earlier of the filing of a plan
or the order for relief, whichever is earlier, a chapter 13 debtor must begin making 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, 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)(C). Failure to make such payments may constitute cause for conversion or
dismissal under Section 1307(c)(4). There has been little in the way of caselaw analyzing Section
1326(a)(1)(C) and nothing the court has read includes an analysis of the statute where the secured
creditor had reduced its installment receivable to judgment pre-petition.
In the instant case, Debtor does not dispute that Movant is a secured creditor and that the
allowed claim is secured by personal property. However, Debtor avers that because Movant reduced
the secured obligation to a judgment pre-petition, there is no portion of the obligation that became
due after the order for relief. 	Because the judgment has accelerated and replaced the original
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5
Contract, Debtor argues that Movant cannot assert that Debtor has a continuing obligation to make
monthly payments under the Contract. Furthermore, Debtor asserts that because the claim is based
on the state court judgment, it is no longer attributable to the purchase of the vehicle, as intended
by Section 1326(a)(1)(C).
In contrast, Movant argues that were the court to adopt the Debtor’s position, the court would
“undermine the importance of secured claims and improperly suggest that once a payment obligation
secured by collateral was reduced to judgment in a state court, the claims of creditors would be
based solely on the judgment entered and the security interest held would essentially be invalid.”
This court holds that the pre-petition entry of judgment for a debt that was secured by
personal property does not invalidate the security interest for the debt. Furthermore, if the debt was
incurred to purchase the collateral, the entry of the judgment does not cause the claim for the debt
to become not “attributable to the purchase of such property” for purposes of the application of
Section 1326(a)(1)(C). 	However, the court further holds that under the undisputed facts of this
matter, no portion of the debt which was the subject of the pre-petition judgment, becomes “due
after the order for relief” in this bankruptcy case, for purposes of the application of Section
1326(a)(1)(B).
In accordance with the Maryland Uniform Commercial Code, upon default under a contract
secured by personal property, a holder of a security interest has several available remedies. Those
options include that the secured party may “foreclose” upon the secured property and/or reduce the
claim to judgment. M D . CODE ANN . COMM LAW I § 9-601(a). The statute outlines the rights of a
secured party after default and specifically provides: “The rights under subsections (a) and (b) are
cumulative and may be exercised simultaneously.” MD . CODE ANN . COMM LAW I § 9-601(c). See
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6 Generally speaking, seeking a judgment is the less common method of collecting on a
secured vehicle note. As Professors James White and Robert Summers observe:
Why would a secured party ever go through all this judicial rigmarole to get its
money when it could repossess the collateral and sell it under 9-601? In the first
place, extra-judicial repossession may only be accomplished when it can be
carried out without breach of the peace. In addition, if the value of the collateral
has so diminished that the proceeds from resale would be clearly insufficient to
satisfy the debt, then it may be to the secured creditor’s advantage to proceed by
judgment and execution because in that way it can reach assets in addition to the
collateral. Also, by obtaining a judgment and levying against all the debtor’s
non-exempt property, the secured creditor can eliminate the two-step process of
first selling the collateral and then suing for a deficiency. Moreover, since
officers of the court administer the entire procedure of judgment and execution on
a debt, the creditor eliminates the risk of an improperly conducted repossession or
resale under 9-609 and 9-610. Finally, 9-601(f) allows the creditor to purchase
the collateral at the sheriff’s sale; something the creditor cannot usually do in a
private sale under 9-610(c). In spite of all these seeming advantages, it will still
be rare that a suit on the debt with its attendant court delay, search for non-exempt
assets, and sheriff’s sale will offer a more promising avenue than seizure and sale
of the collateral under 9-610.
White & Summers, Uniform Commercial Code, § 34-4, p.357-58 (5th ed. 2002)(footnotes
omitted).
7 Upon the filing of the bankruptcy petition, the automatic stay arose pursuant to Section
362 of the Bankruptcy Code and Movant was prevented from further proceeding with its state
law remedies.
6
In re Richman, 181 B.R. 260, 263 (Bankr. D. Md. 1995)(“[The secured creditor]’s attempt to obtain
a judicial lien did not vitiate its rights as the alleged holder of a consensual lien. Upon default, a
secured party may proceed to reduce its claim to judgment, foreclose, or otherwise enforce the
security interest by any available judicial procedure.”).
The Movant herein proceeded pre-petition to seek and obtain a judgment on the debt.6 After
the judgment was entered, Movant could have sought to collect the judgment from the Debtor’s
other sources of income or property (i.e., garnishment), or could have proceeded with a repossession
of the subject vehicle, as it was entitled to do even prior to the judgment having been entered. 7
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8 Chapter 13 debtors routinely filed motions to value collateral under Section 506(a) of
the Bankruptcy Code, thus “stripping down” the lien to the value of the collateral. This practice
is now curtailed under BAPCPA where the right to strip down a purchase money security
interest on a vehicle is limited to loans more than 910 days old. See 11 U.S.C. § 1325.
9 As noted above, direct and immediate payment of adequate protection payments have
been included in this jurisdiction’s Local Rules even prior to BAPCPA.
7
In this District, prior to BAPCPA, where a default upon an installment secured debt had
occurred pre-petition, the debtor who was in default upon an installment secured debt would often
propose in her plan to pay the pre-petition arrearage over the life of the plan through the chapter 13
trustee and would continue to make the regular, post-petition payments directly to the secured
creditor. This procedure was (and is) in accordance with Maryland Local Bankruptcy Rule 3070-1
which provides: “A debtor in a case under chapter 13 will be presumed to have provided adequate
protection of collateral by continuing to make payments as and when due and maintaining required
insurance for the collateral.” Local Bankruptcy Rule 3070-1(a). Another possible plan treatment
was to pay the secured claim (the value of the vehicle at the time the petition was filed) 8 through the
trustee over the duration of the chapter 13 plan, with any unsecured portion being paid pro rata as
a general unsecured claim. See 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5)(B)(I) and (ii). A secured
creditor, nevertheless, could seek relief from stay if the creditor believed its position was not
adequately protected.
The addition of Section 1326(a)(1)(C) does not materially alter the first above-described
scenario. It surely has enhanced the rights of a secured creditor who is entitled to receive payments
due post-petition, by requiring those payments coming due post-petition to be commenced.9
Furthermore, dismissal is specifically delineated now under Section 1307(c) as a possible sanction
for non-compliance.
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10 The Contract contains no provision permitting the borrower a right of reinstatement
and the parties provided no authority to this court nor made assertion that the Borrower held a
right to reinstate the installment provisions after the judgment was entered.
8
When Movant obtained the judgment upon its Contract, the judgment replaced the Contract
as the right to payment, but the lien of the original security interest continued. It is clear under
Maryland law that the judgment, like the Contract upon which it was obtained, continues to be
secured by the same property without need for further perfection. In fact, Section 9-601(e) provides
that
[i]f a secured party has reduced its claim to judgment, the lien of any levy that may
be made upon the collateral by virtue of an execution based upon the judgment
relates back to the earliest of: (1) The date of perfection of the security interest or
agricultural lien in the collateral; (2) The date of filing a financing statement
covering the collateral; or (3) Any date specified in a statute under which the
agricultural lien was created.
M D . CODE ANN . COMM LAW I § 9-601(e)(2005 Supp.). At the time of the filing of the bankruptcy
petition, Debtor had no right under state law to continue to pay the debt over time by the
installments set forth in the contract.10 Instead, before the filing of the petition in this bankruptcy
case, Movant exercised its right contained in the Contract to accelerate the full balance due and
obtained a judgment thereupon which entitled Movant to full collection of the entire judgment
amount. It cannot be credibly argued that any portion of the obligation arising from the Contract
did not become due before the order for relief, which was deemed entered pursuant to Section 301(b)
of the Bankruptcy Code by the filing of a voluntary petition in this case. It is therefore inescapable
that if all portions of the obligation became due before the order for relief, no portion of the
obligation became due after the order for relief.
The automatic right to receive adequate protection payments set forth in Section
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11 The court makes no ruling as to whether Debtor would be able to de-accelerate the
judgment under the cure provisions set forth in Section 1322(b)(2) and (3).
9
1326(a)(1)(C) is only for portions of obligations that become due after the order for relief.
Accordingly, the court finds that no such automatic duty was imposed upon the debtor to make
specific adequate protection payments as to Movant’s judgment claim. Having no duty to make such
payments, Section 1307(c)(4) which lists failure to commence making timely payments under
Section 1326 as a basis for dismissal, is inapplicable to the facts of this case.
The court further observes that this 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. Of course, this 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. See, e.g., United Sav. Association of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484
U.S. 365, 108 S. Ct. 626 (1988).
The court further observes that Debtor herein has not sought by his chapter 13 plan to de-
accelerate the judgment including resuming payment of installments due post petition under the
original Contract.11 Such a deceleration plan, if permissible where a judgment had been entered,
could possibly result in a portion of the obligation being due post petition, triggering Section
1326(a)(1)(C) application.
Instead, the secured claim is proposed to be dealt with in a manner permitted under Section
1325(a)(5)(B) and (C). These provisions allow a debtor to pay the entire secured claim by a plan
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funded in equal installments over the duration of the plan with periodic distribution by the trustee
to claimants. 	Where the claim is secured by personal property, the amount of such periodic
distribution must be sufficient to provide the holder of the claim adequate protection during the
period of the plan. 11 U.S.C. § 1325(a)(5)(B)(iii)(II). Thus, a creditor in the situation of the Movant
in this case, can also enforce adequate protection by objecting to a plan that does not provide a level
of payments which would constitute adequate protection.
For these reasons an Order shall be entered denying the motion to dismiss.
cc: 	Debtor
Debtor’s counsel
Counsel for Movant
Chapter 13 Trustee
Office of the United States Trustee
End of Order
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