In re Stembridge

• Decision Date: 09 December 2002
• Docket Number: No. 01-46032-DML-13.,01-46032-DML-13.
• Citation: 287 B.R. 658
• Parties: In re Dawn STEMBRIDGE, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Texas

287 B.R. 658

In re Dawn STEMBRIDGE, Debtor.

No. 01-46032-DML-13.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

December 9, 2002.

COPYRIGHT MATERIAL OMITTED

Behrooz P. Vida, Venable & Vida, Bedford, TX, for Debtor.

J. Ward Holliday, Veronica Pillay, Rudri Bhatt-Patel, J. Ward Holliday & Assoc., P.C., Dallas, TX, for Plaintiff.

REVISED MEMORANDUM OPINION AND ORDER

DENNIS MICHAEL LYNN, Bankruptcy Judge.

Before the court is the Objection to Confirmation (the "Objection") filed by Chase Manhattan Bank, USA, N.A. ("Chase") with respect to the Final Chapter 13 Plan and Motion for Valuation (the "Plan") dated May 19, 2002, filed by Dawn Stembridge ("Debtor" or "Stembridge") in her chapter 13 case. The court heard evidence and argument in connection with the Objection¹ on August 22, 2002. At the invitation of the court, Chase and Debtor thereafter filed briefs in support of their respective positions. On November 18, 2002, the court, having issued its decision in In re Gray,² and having concluded that questions presented by this case are of importance, sent a letter to counsel for Chase and Debtor reopening the confirmation hearing and requesting that the parties provide additional evidence as well as further argument on certain specific issues at a hearing on November 22, 2002.³ At that hearing the parties stipulated to additional evidence and argued to the court.

This matter is a core proceeding over which this court exercises jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(b)(2)(L). This Memorandum Opinion and Order embodies the court's findings of fact and conclusions of law.⁴

I. Background

On August 13, 1999, Stembridge entered into a retail installment contract (the "Contract") with King Charlie Hillard Ford for the purchase of a 1999 Ford F-150 truck (the "Truck") for $25,966.39. Together with a license fee, a title charge, an inspection fee and finance charges, the Contract provided that Stembridge pay a total of $33,244.03, $1,000.00 down and the balance in monthly payments of $414.69 beginning September 12, 1999. Chase underwrote the financing of the Truck and subsequently became the owner and holder of the Contract. The Contract is secured by a properly perfected lien on the Truck.

Approximately two years later, on August 22, 2001, Stembridge filed her chapter 13 petition commencing this case. At that time the remaining debt owed Chase pursuant to the Contract was $22,946.57. On September 10, 2001, Debtor filed her preliminary plan in which she valued the Truck at $9,540.00.⁵ On the same day, pursuant to ¶ 4a of General Order 98-4⁶ of the Bankruptcy Court for the Northern District of Texas ("General Order 98-4"), Debtor filed an Authorization for Pre-Confirmation Disbursement (the "APD"), by which Debtor proposed to pay Chase $119.25 per month as adequate protection.⁷ A copy of the APD was served by mail on Chase on September 17, 2001.

On October 29, 2001, Chase filed the Objection, asserting that the value of the Truck was substantially greater than $9,540.00. Between the filing of the APD and the present, Debtor has paid, and Chase has received, a total of $1,311.75 in adequate protection payments.

II. Issues

The court is now presented with two issues:

1. Considering the adequate protection paid by Debtor, the collateral value as to which Chase was entitled to adequate protection and the replacement cost of the Truck, what treatment under the Plan must Chase receive to satisfy the confirmation requirement of section 1325(a)(5)(B)?

2. What claim, if any, may Chase assert against Debtor pursuant to sections 507 and 503(b)?

III. Discussion

A. Required Payment Pursuant to Section 1325(a)(5)(B).

The problem posed by the first issue is that the court is required to reconcile two values for the Truck which are determined for different purposes as of different times. The Bankruptcy Code in section 506(a) provides that an undersecured creditor's claim will be divided into a secured claim and an unsecured claim based on "the value of such creditor's interest" in the estate's interest in the property securing the claim. The last sentence of section 506(a) requires that the "value ... be determined in light of the purpose of the valuation and of the proposed disposition or use of the property...."

This language clearly contemplates that a lender's collateral may be assigned a different value depending on when and why the valuation is performed. In fact, case law, including controlling precedent, instructs that a different value be used in determining a creditor's entitlement to adequate protection than should be used in establishing what a creditor must receive to satisfy section 1325(a)(5)(B).⁸

With regard to the provision of adequate protection, the secured creditor is entitled to have its interest protected against diminution by reason of the estate's ongoing possession and use of the creditor's collateral.⁹ The interest of the secured creditor is properly valued from the secured creditor's perspective. In other words, the secured creditor must be protected such that the total value realizable from its collateral through foreclosure does not decrease as a result of the delay imposed by the bankruptcy case on enforcement of its rights.¹⁰

On the other hand, the amount the debtor must pay to the creditor to satisfy section 1325(a)(5)(B) is to be calculated from the debtor's perspective. As the Supreme Court held in Associates Commercial Corp. v. Rash, for purposes of section 1325(a)(5)(B), the value of the secured creditor's collateral is equal to the replacement cost the debtor would incur in acquiring like property.¹¹ At any given point in time, this value obviously will be greater than the value a secured creditor would receive upon realizing on its collateral. Replacement value of collateral such as the Truck, however, falls steadily over time. Since the value to be adequately protected may be determined as of an early date in a case and replacement value is fixed as of the effective date of the plan,¹² the latter may be less than the amount for which the debtor was obligated to provide protection.

In Gray, this court recently ruled that, respecting a vehicle like the Truck, replacement value should be calculated starting from the retail value provided in the N.A.D.A. Official Used Car Guide (the "NADA Value").¹³ In the absence of specific evidence of the value of benefits not received by a debtor but included in the NADA Value,¹⁴ the NADA Value may be averaged with the contemporaneous Kelley Blue Book Private Party Value (the "KBB Value")¹⁵ to produce a replacement value (the "Replacement Value").

Neither the NADA Value nor the KBB Value, however, accurately reflects what a secured creditor would likely realize from a pledged vehicle upon foreclosure of its lien.¹⁶ Moreover, as noted above, the time when a court determines a lender's realizable value for adequate protection purposes will not be the same time as when Replacement Value must be calculated to determine whether section 1325(a)(5)(B) is satisfied.

Though it may be an imperfect measure of the value a secured creditor could expect to realize from a vehicle upon foreclosure, in the absence of better evidence, the court concludes that the N.A.D.A. Official Used Car Guide Trade Value¹⁷ (the "Trade Value") approximates what a lender might recover from a vehicle through foreclosure.¹⁸ Like Replacement Value, Trade Value will vary with time. The Trade Value for the point in time the lender is first entitled to adequate protection is hereafter referred to as the "Adequate Protection Value."

The situation is complicated by the payment of adequate protection. The undersecured creditor is not entitled to receive more than the value of its collateral. It may not be compensated for lost opportunity costs nor may it be paid interest on the secured portion of its claim.¹⁹ In arriving at the amount Debtor is required to pay Chase to satisfy section 1325(a)(5)(B), the court must account for sums already received by Chase.

Thus, the court is required to consider Debtor's payments to Chase during the case and both the Adequate Protection Value and the Replacement Value of the Truck in deciding what Debtor must provide to Chase in the Plan to satisfy section 1325(a)(5)(B). In performing its analysis, the court is guided by two principles. First, an undersecured creditor may not receive a total return that is less than the value of its collateral as it was determined for adequate protection purposes. Second, neither should the lender receive more, including adequate protection payments, than it would have either (1) received pursuant to section 1325(a)(5)(B) on the effective date of the plan absent any adequate protection payments; or (2) recovered through foreclosure at the time it became entitled to adequate protection, whichever is greater.

The formula that effects these principles may be stated as follows: in order for a plan to comply with section 1325(a)(5)(B), an undersecured creditor must receive money or property having a value as of the effective date of the plan that, when added to any adequate protection payments received by the creditor, equals the greater of the Adequate Protection Value or the Replacement Value. Applying this formula to the case at bar, the respective values will depend on the dates as of which the Adequate Protection Value, the NADA Value and the KBB Value should be established.

The NADA Value and the KBB Value are to be determined as of the effective date of the Plan.²⁰ Since the date of the reopened confirmation hearing approximates the effective date of the Plan, the court will use a KBB Value and a NADA Value as of November 2002. These values are, respectively, $11,740 and $13,475. These amounts in turn yield a Replacement Value of $12,607.50.

In the context of their dispute over the applicability of section 507(b) of the Bankruptcy Code, the parties have taken different positions...