In re Nichols, 04-2107.

• Decision Date: 16 March 2006
• Docket Number: No. 04-2107.,04-2107.
• Parties: In re: Dwight Nichols and Peggy NICHOLS, Debtors. Americredit Financial Services, Inc., Creditor-Appellant, v. Dwight Nichols and Peggy Nichols, Debtors-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

440 F.3d 850

In re: Dwight Nichols and Peggy NICHOLS, Debtors Americredit Financial Services, Inc., Creditor-Appellant, v. Dwight Nichols and Peggy Nichols, Debtors-Appellees.

No. 04-2107.

United States Court of Appeals, Sixth Circuit.

Argued: November 9, 2005.

Decided and Filed: March 16, 2006.

COPYRIGHT MATERIAL OMITTED

ARGUED: S. Thomas Padgett, DeBrincat & Padgett, Farmington Hills, Michigan, for Appellant. Charles J. Schneider, Charles J. Schneider P.C., Livonia, Michigan, for Appellees. ON BRIEF: S. Thomas Padgett, DeBrincat & Padgett, Farmington Hills, Michigan, for Appellant. Charles J. Schneider, Charles J. Schneider P.C., Livonia, Michigan, for Appellees.

Before: MERRITT, MOORE, and SUTTON, Circuit Judges.

MERRITT, Circuit Judge.

The instant appeal raises a problem that arises frequently in bankruptcy proceedings. The question before us is whether the Court should permit the modification of a Chapter 13 plan after confirmation pursuant to § 1329 of the Bankruptcy Code, or instead allow the secured creditor to repossess its security, a 1995 Ford truck, because under the modified plan the value of the security will fall faster than the creditor receives payments. In resolving this dispute, we look to the procedure outlined in our Court's previous case of Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982)(dividing a secured claim in Chapter 13 proceedings into the "allowed secured claim" and "allowed unsecured claim" and requiring the payment in Chapter 13 of the "allowed secured claim" and a reasonable interest rate on that amount as the "allowed unsecured claim"). As discussed below, applying the procedure and standard set out in Memphis Bank, we affirm the decision of the courts below denying the motion to lift the stay and permitting the modification of the Chapter 13 plan.

I. Background

The payment schedule under the modification in the instant case does not seem to require the rate of payment by the debtor to keep pace with the depreciation of the truck, thereby allowing the value of the "retained lien" in the truck to fall below the amount owed by the Chapter 13 debtors. Section 1329 provides in relevant part:

§ 1329. Modification of Plan After Confirmation

(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to—

(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;

(2) extend or reduce the time for such payments; or

(3) alter the amount of the distribution to a creditor. . . .

(b) (1) Sections 1322(a), 1322(b), and 1323(c) ... and the requirements of section 1325(a) ... apply to any modification under subsection (a) of this section.

In turn, § 1325(a)¹ — using general language —limits the circumstances under which a modification may be approved by the bankruptcy court to situations in which the secured creditor is allowed "to retain the lien securing such a claim." Judge Keith Lundin in his treatise on Chapter 13 bankruptcy cases explains in a general way how these provisions must be interpreted to insure the value of the secured creditor's "retained lien:"

Lien retention in § 1325(a)(5)(B)(i) has been interpreted to require that payments through the plan must at least equal depreciation in the value of collateral during the repayment period. Not to be confused with adequate protection before confirmation or with the payment of present value (interest) after confirmation, lien retention avoids constitutional problems only if periodic payments under the plan equal or exceed the value lost through depreciation and use of collateral by the debtor after confirmation. Put another way, even if the plan recites that secured claim holders retain liens, if the payments proposed by the plan are insufficient to stay ahead of depreciation, the retained liens will erode faster than the allowed secured claim is paid, contrary to the intent of § 1325(a)(5)(B)(i).

. . .

The power to modify a secured claim is limited to the extent that the debtor must propose payments that equal or exceed the depreciation in value of the collateral that secures the claim. Otherwise, the delay in payments through the plan would take value from the lien without compensating the creditors for its loss.

[L]ien retention is implicated when the order of payments to creditors under the plan delays or interrupts the payment of a secured claim such that the value of the collateral falls more quickly than the lienholder receives payments.

Keith Lundin, Chapter 13 Bankruptcy 104-4 to 104-5 (3d ed.2000) (emphasis added).

The Supreme Court has recognized, as did the common law, that the secured creditor has two types of rights: the contractual right to obtain repayment of its debt with a fair rate of return in the form of interest payments and the property right the creditor has in the collateral that secures the debt. These two types of rights together constitute the "bundle of rights" held by the secured creditor. Bankruptcy laws have long been construed to authorize the impairment of contractual obligations. United States v. Security Indus. Bank, 459 U.S. 70, 74, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982) (citing Hanover Nat'l Bank v. Moyses, 186 U.S. 181, 188, 22 S.Ct. 857, 46 L.Ed. 1113 (1902)). The power of the bankruptcy laws, however, is subject to the Fifth Amendment's prohibition against taking property without just compensation. This distinction creates the also long-recognized tension between permitting the impairment of contractual obligations while maintaining the integrity of the property rights. Security Indus. Bank, 459 U.S. at 75, 103 S.Ct. 407 (citing Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935)).

Courts constantly struggle with this balance in bankruptcy proceedings. For example, in Armstrong v. United States, 364 U.S. 40, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960), subcontractors delivered material to the prime contractor for use in constructing Navy vessels, obtaining liens in the vessels as required by state law. The prime contractor defaulted on its obligation to the Navy and the United States took possession of the uncompleted hulls and unused materials, making it impossible for the subcontractors to enforce their secured interest in the property in the form of liens. The Supreme Court held this action constituted a taking due to the "total destruction" by the United States of all value in the liens. The Court found the liens to be compensable personal property susceptible to a taking and not a "mere consequential incidence" of a valid regulatory measure.² Id. at 48, 80 S.Ct. 1563. While the bankruptcy laws allow interference with contractual arrangements and some diminution of property rights, if the interference goes so far as to constitute "total destruction" of the value in the property held by a creditor, it violates the Fifth Amendment and may not stand.

We note that in the instant case, Americredit has not directly made a Fifth Amendment takings argument. Because Americredit clearly has a property interest in the collateral, we must decide whether the modification to the plan so interferes with its economic rights in that property to result in an unconstitutional taking. We do not find such a harm because the modified plan approved by the bankruptcy court leaves Americredit in the position for which it bargained: a fixed amount for a fixed period. The only difference is the delay before Americredit will receive its final payment, and, under the circumstances here, we do not find that the delay unduly impairs the value of its lien or encroaches on its Fifth Amendment rights.

II. Motion to Lift the Automatic Stay

In this case, the debtors, Dwight and Peggy Nichols, purchased a used 1995 Ford truck in 1997 for $15,000, putting down $1,000 and taking out an installment loan of $14,000 from lender Americredit. As a term of the loan, Americredit had a first lien and security interest in the truck. The loan, with 22% interest, was to be paid back in monthly installments of $385 over five years, totaling $23,100. On June 8, 2001, debtors filed for bankruptcy under Chapter 13. Although the record is not clear on exactly how much had been paid on the installment loan at the time of the bankruptcy filing, debtors had made monthly payments for about 36 or 37 months totaling approximately $14,300.

A Chapter 13 plan was approved in August 2001 whereby Americredit became one of several secured creditors. The plan called for the debtors, over a five-year period, to pay the trustee, not Americredit, a certain amount each week and the trustee would then distribute the money to creditors based upon priorities set out in the plan. At the time of confirmation of the original plan in August 2001, Americredit agreed to a value on the truck of $7,000 and a lien amount of $5,700, leaving debtors with $1,300 in equity in the truck at that time. Under the original Chapter 13 Plan as approved by the bankruptcy court, the remainder of the truck loan would have been repaid over the five-year term of the plan.³

Dwight Nichols lost his job in 2003 and the debtors ceased making the required payments to the trustee in full as required under the plan. The Nichols missed payments to the trustee between August 17, 2003, and January 13, 2004. As a result, the trustee did not make regular payments to the creditors during this time, including Americredit. In response, Americredit filed, in December 2003 after about four months of missed payments, a Motion for Relief from the Automatic Stay pursuant to 11 U.S.C. § 362,⁴ with the intent to repossess the truck if the stay was lifted.

In order to lift the stay and repossess the truck, it is Americredit's burden to demonstrate that the value of the collateral has fallen below the amount owed. 11 U.S.C. § 362(g)....