In re Marks

• Decision Date: 25 September 2008
• Docket Number: No. 08 B 06743.,08 B 06743.
• Citation: 394 B.R. 198
• Parties: In re Kimberly MARKS, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 198

394 B.R. 198

In re Kimberly MARKS, Debtor.

No. 08 B 06743.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

September 25, 2008.

COPYRIGHT MATERIAL OMITTED

Brian R. Zeft of Robert J. Semrad & Associates, for Debtor.

James M. Philbrick of Law Offices of James M. Philbrick, P.C., for Creditor Marquette Consumer Finance LLC.

MEMORANDUM OPINION

JACQUELINE P. COX, Bankruptcy Judge.

In this matter, a secured creditor, Marquette Consumer Finance LLC ("Marquette") objects to confirmation of the chapter 13 plan proposed by the debtor, Kimberly Marks ("Debtor"). For the reasons set forth below, the objection is sustained in part and overruled in part.

I. JURISDICTION

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A),(B), and (0).

II. BACKGROUND

On May 6, 2006, the Debtor purchased a motor vehicle, a 2005 Hyundai Accent, and entered into a retail installment contract with Marquette to finance the purchase. Under the contract, the Debtor was to make sixty-six monthly payments of $257.12 beginning June 5, 2006. On January 5, 2008, the Debtor defaulted on the contract.

The Debtor subsequently sought relief under chapter 13 of the United States Bankruptcy Code when she filed her petition on March 21, 2008. Simultaneous with filing her petition, she filed a plan. Pursuant to the plan, Marquette was allowed a secured claim of $8,745.00 plus interest at 6.25% annum to be paid monthly at $125.00 per month post-confirmation. The plan also provided pre-confirmation adequate protection payments to Marquette of $100.00 per month.

III. DISCUSSION

Marquette filed an objection to the plan on May 27, 2008 claiming that the amount of adequate protection payments it was to receive prior to confirmation of the plan was insufficient, that the plan did not provide equal monthly payments, that it was entitled to attorney's fees, and that the interest rate provided by the plan was insufficient. In response to the objection, the Debtor filed an amended plan on June 3, 2008 providing equal monthly payments of $600.00 to the trustee throughout the duration of the thirty-six month plan. The amended plan also increased the adequate protection payments to $200.00 per month. Payments to Marquette would begin April 2009 with Marquette receiving $530.00 per month and remaining constant until paid off, providing full payment of Marquette's claim. Marquette was to receive adequate protection payments until the periodic payments are due to begin in April 2009 under the plan. The plan was amended again on August 4, 2008 to provide Marquette with adequate protection payments of $225.00. The equal monthly payments remain at $600.00 per month to the trustee. The Debtor argues that this plan adequately protects Marquette both pre-confirmation and post-confirmation, that the equal monthly payments under the plan comply with 11 U.S.C. § 1325(a)(5)(B)(iii), that Marquette is not entitled to reimbursement of its attorney's fees and the interest rate is adequate under Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004).

Also during this time, the insurance on the collateral lapsed prompting Marquette to seek relief from the automatic stay on June 2, 2008. Relief was entered for Marquette effective June 4, 2008. However, the Debtor reinstated the insurance on June 3 and the stay was reinstated. Marquette points to this as an additional basis for its position that the collateral is not adequately protected.

A. Adequate Protection Payments

Marquette's first objection to the Debtor's plan is that its interest in its collateral is not adequately protected under the plan. Under the Debtor's original plan, the Debtor proposed to make monthly adequate protection payments pre-confirmation of $100.00, which is greater than 1 % of the value of the collateral at the time of filing. The Debtor relies upon several bankruptcy court decisions from other jurisdictions setting a fixed rate for adequate protection payment at 1% of the value of the collateral. See, e.g., In re Hill, 2007 WL 499622, at *4 (Bankr.M.D.N.C.2007). In contrast, Marquette urges that the proper method of determining monthly adequate protection payments is different regarding motor vehicles. According to Marquette, the payments are calculated by determining the monthly rate of depreciation by examining the value of the collateral during the month the petition is filed and the month immediately after filing using the N.A.D.A. Guide.¹ According to this method, the monthly adequate protection payments to Marquette should be $225.00. The Debtor has since amended her plan to provide Marquette with adequate protection payments of $225.00 monthly in what she deems as an effort to avoid further litigation of this issue.

Section 1326 of the Bankruptcy Code was amended in 2005 to provide adequate protection payments pre-confirmation to prevent potential abuse in bankruptcy cases. In re Robson, 369 B.R. 377, 379 (Bankr.N.D.Ill.2007); see also In re DeSardi, 340 B.R. 790, 809 (Bankr. S.D.Tex.2006) (analyzing statutory construction of §§ 1325 and 1326). A common example of abuse occurred where a chapter 13 debtor would file a plan that provided little or no payment to a motor vehicle lender at the beginning of the plan but provided a graduated payment increase or balloon payment toward the end of the plan. Robson, 369 B.R. at 379. The lender would wait months without receiving any payment while the debtor continued using the collateral for free while the collateral depreciated. Id. at 379-80. In the most extreme cases, the debtor would continue to use the collateral then convert the case to a chapter 7 case and surrender the vehicle, leaving the lender without compensation for the collateral's depreciation while the debtor was using it without payment to the lender for extended periods of time. Id. at 380.

Adequate protection required under § 1326, amended under the Bankruptcy Abuse and Consumer Protection Act (BAPCPA), now combats this type of abuse. Section 361 provides different means of adequate protection. Id. at 380; In re Thompson, 2008 WL 2157163, at *2 (Bankr.N.D.Ill.2008). One method is to provide "a cash payment or periodic cash payments" to the lender. Thompson, 2008 WL 2157163, at *2 (quoting 11 U.S.C. § 361(1)). There is a difference in opinion regarding how to calculate adequate protection payments. Some districts require that it be a nominal percentage amount around 1-2% of the collateral's worth at the time of filing. See, e.g., Hill, 2007 WL 499622, at *4 (using a 1% of the collateral's value as a fixed rate that may be rebutted by an objecting creditor); In re Beaver, 337 B.R. 281, 285 (Bankr.E.D.N.C.2006) (recognizing 1% of value of collateral as agreed by parties sufficient for adequate protection); DeSardi, 340 B.R. at 797 (employing 1.5% of value of collateral as provided by the district's local rule). Other districts, as well as this one, recognize adequate protection payments as equaling the amount by which the collateral is depreciating. Thompson, 2008 WL 2157163, at *2 (citing First Fed. Bank of Calif, v. Weinstein (In re Weinstein), 227 B.R. 284, 296 (9th Cir. BAP 1998)); see also Robson, 369 B.R. 377, 380 (holding that motor vehicle lender must be compensated for depreciation of collateral in order to be adequately protected.).

There are many different methods to calculate adequate protection payments. In this district, the calculation may be computed by looking at the N.A.D.A. Guide to compare the value of the collateral at the time of filing the petition with the value of the collateral in the month immediately after filing. Robson, 369 B.R. at 382; see also Thompson, 2008 WL 2157163, at *3 (applying calculation used in Robson to determine amount of monthly adequate protection payment). Therefore, the method urged by Marquette is the correct method of calculating the amount of adequate protection payments.

In this case, the N.A.D.A. Guide states the value of a 2005 Hyundai Accent is $7,825.00 for March 2008, the month when the Debtor filed her petition, and $7,600.00 for April 2008, the month immediately thereafter. The difference, representing the depreciation of the collateral, is $225.00. This amount represents the correct monthly adequate protection payment to Marquette. Therefore, Marquette's objection regarding the amount of adequate protection payments is sustained; the Court notes that the Debtor increased the plan's adequate protection payment to $225.00 after the objection was raised.

B. Equal Periodic Payments

Marquette next objects to payment of its claim under the Debtor's plan. The plan provides that Marquette will continue to receive monthly adequate protection payments of $225.00 until April 2009 when payments to Marquette will increase to $530.00 per month. Marquette argues that under the Bankruptcy Code, a confirmed plan must provide equal monthly payments beginning with the first payment under the plan. The Debtor disagrees, arguing that the plan complies with the Code because the Code does not specify when payments based on claim value under the plan must actually begin and that payments under the plan to a creditor can begin at any point so long as the creditor is receiving adequate protection payments until those payments on the claim begin.

The epicenter of this dispute is interpretation of 11 U.S.C. § 1325(a)(5)(B)(iii), which provides that the court shall confirm a plan if:

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such...