In Re Robson
MEMORANDUM OPINION ON MOTION TO MODIFY AUTOMATIC STAY
This proceeding relates to the Chapter 13 bankruptcy case filed by Gregory and Narvel Robson (“Debtors”). Ford Motor Credit Company (“Ford”) moved to modify stay with respect to a debt secured by a lien on a 2001 Ford Windstar motor vehicle and a 2002 Ford Escape motor vehicle (the “Vehicles”). It asserted that Debtors were not providing Ford with adequate protection for its collateral. Amendments to the Bankruptcy Code, enacted pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPC-PA”) apply to this bankruptcy case.
Section § 1326 of the Bankruptcy Code, as amended by BAPCPA, requires a debtor to make adequate protection payments to a creditor holding an allowed claim secured by personal property, and to do so within 30 days after filing of the bankruptcy petition, 11 U.S.C. § 1326(a)(1)(C). At the evidentiary hearing on this Motion, one issue was as to the appropriate method of calculating adequate protection payments on the Vehicles. For reasons set forth below, it is held that a debtor must make monthly adequate protection payments under 11 U.S.C. § 1326(a)(1)(C) in the amount of each vehicle’s depreciation, and that depreciation is to be measured over the first month after a debtor files a bankruptcy petition.
JURISDICTION AND VENUE
Jurisdiction lies under 28 U.S.C. § 1334. The case has been referred to this Court under 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) and (G). Venue is proper under 28 U.S.C. § 1409(a).
UNDISPUTED FACTS
1. On October 31, 2001, Debtors purchased a 2001 Ford Windstar (“Windstar”) and obtained a loan from Ford secured by the vehicle to complete the purchase. (Ford Ex. 3.) On July 30, 2002, Debtors purchased a 2002 Ford Escape (“Escape”) and obtained a loan from Ford secured by the vehicle to complete the purchase. (Ford Ex. 1.)
2. On March 2, 2007, the Debtors filed that petition for Chapter 13 relief (“Petition Date”). As of the Petition Date, Debtors owed Ford $11,559.54 on the Windstar and $9,833.00 on the Escape, (Motion to Modify Automatic Stay ¶ 2-3.) Prior to the Petition Date, Debtors were paying $502.71. per month on the Escape and $611.60 per month on the Windstar under their Retail Installment Contracts with Ford. (Ford Ex. 1, 3.)
3. Debtor Gregory Robson testified that he operates a painting business for which he uses one of the vehicles. Debtor Narvel Robson testified she uses the other vehicle to drum up business for her husband. Therefore, the Vehicles are necessary to Debtors’ reorganization.
4. Debtors’ original proposed plan provided for monthly payments to Ford of $50 on the Windstar and $75 on the Escape until November 2007 when the payments
5. On April 4, 2007, Ford brought this Motion asserting lack of adequate protection of its interests in the Vehicles.
6. On April 17, 2007, Debtors filed a modified plan proposing to pay Ford $200 per month on the Escape and $150 per month on the Windstar. (Debtors’ Ex. J.)
7. At the evidentiary hearing on the Motion, Debtors and Ford presented evidence on the depreciation of the Vehicles based on the N.A.D.A. Official Used Car Guide (“N.A.D.A.Guide”). Neither party presented other expert testimony on the depreciation of the Vehicles, nor evidence giving details as to the condition of the Vehicles. Based on evidence presented, the Vehicles depreciated as follows during the first month after bankruptcy was filed: Windstar at $150 and the Escape at $200.
8. Any facts contained in the discussion below shall constitute additional undisputed facts.
DISCUSSION
The issue presented is how to calculate what a debtor must pay a creditor under 11 U.S.C. § 1326(a)(1)(C) in order to provide the creditor with adequate protection for a vehicle that serves as collateral.
Section § 1326 of the Bankruptcy Code provides:
(a)(1) Unless the court orders otherwise, the debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, in the amount—
(A) proposed by the plan to the trustee;
(C) 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.
This provision requires a debtor to provide adequate protection payments to a creditor when three elements are present. First, a portion of the creditor’s claim must become due after the order for relief, which in most cases is the filing of the bankruptcy petition. Id.; 8-1326 Collier on Bankruptcy ¶ 1326.02(l)(a) (15th ed. rev.2006). Second, the creditor’s claim must arise out of an obligation that debtor undertook to purchase the property. Third, the debtor himself must have purchased the property securing the claim. Henry J. Sommer, Trying to Make Sense Out of Nonsense: Representing Consumers Under the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”, 79 Am. Bankr. L.J. 191, 228 (2005). The parties do not dispute that all three elements are present here. Thus, Debtors must provide Ford with adequate protection.
Congress amended § 1326 under BAPC-PA to provide for pre-confirmation adequate protection payments in order to prevent a frequent problem in bankruptcy cases.
In re DeSardi,
However, first, it must be determined what is adequate protection for purposes of § 1326. The Bankruptcy Code does not define adequate protection, but § 361 of the Code provides:
When adequate protection is required under Section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity’s interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.
11 U.S.C § 361.
A United States Supreme Court opinion addressed the issue of adequate protection under § 361 in
United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd.
How should such depreciation be calculated? Various methods have been employed. In addressing depreciation, not only the value of a vehicle at a given time must be determined, but also which particular time periods to utilize in calculating depreciation. In Chapter 13 cases, opinions generally agree that they can determine the value of a vehicle at a given time using guides relied upon in the industry.
In Re Cook,
On the other hand, in determining which particular time periods to utilize in calculating the depreciation of a vehicle, opinions vary widely. Some simply look to the value listed in a guide on the date the debtor files the petition and order the debtor to pay a fixed percentage of that value each month as adequate protection.
In
re
Beaver,
Other opinions and commentators look to values of vehicles over some period preceding the bankruptcy fifing to calculate depreciation.
Cook,
We have found no opinions in this District addressing the appropriate method for calculating a vehicle’s depreciation.
Debtors argue for the method used in Broum, utilizing the vehicle’s depreciation during the period after fifing of the bankruptcy petition until the date of confirmation or dismissal. They offered evidence from the N.A.D.A. Guide which showed that the Escape depreciated by $200 and the Windstar depreciated by $150 in the month after the Petition Date. (Debtors’ Ex. A, B, C, D.) Debtors argue any depreciation before the Petition Date is irrelevant in determining future depreciation of the Vehicles. Moreover, a vehicle generally depreciates the most when it is new, then less and less as the vehicle ages. Debtors therefore argue that paying Ford for the depreciation that occurred in the first month after the Petition Date will provide adequate protection because depreciation in future months is likely to be less than the depreciation in the first month.
Ford raises a number of contrary arguments. First, its counsel argues under § 1326(a)(1)(C) of the Bankruptcy Code that a debtor must make the full payments required in the retail installment contract in order to provide a creditor with adequate protection (“... that portion of the obligation that becomes due after the order for relief ... ”). However, part (C) applies “unless the court order otherwise” as § 1326(a)(1) makes clear, so it is not mandatory and the court may order otherwise.
In the alternative, Ford argues that the amount of depreciation should be determined by expert testimony. Without an expert, Ford argues that all of the factors necessary to determine the depreciation of a particular vehicle, such as the condition of that vehicle, cannot be taken into account. Finally, Ford argues that if the
Considering evidence taken in this case as well as precedent on this issue, it is held that adequate protection under § 1326 should be calculated using the amount a vehicle depreciates in the first month following filing of the bankruptcy petition. Generally, vehicles depreciate the most when they are newest and the depreciation becomes less as the vehicle ages. William C. Whitford, Symposium: Consumer Bankruptcy and Credit in the Wake of the 2005 Act: A History of the Automobile Lender Provisions of BAPC-PA, 2007 U. III. L. Rev. 143, 178 (2007). As a result, calculation of depreciation over the period post bankruptcy protects a creditor because the amount of depreciation is likely to be less as time progresses. A debtor or creditor may provide more specific evidence or expert testimony on the depreciation of a particular vehicle. But in the absence of such evidence, the first month’s depreciation after bankruptcy will provide the best measure of adequate protection to the creditor under § 1326 of the Bankruptcy Code.
Certainly, a debtor need not make the payment required in the retail installment contract to provide adequate protection to a creditor; that was clear in
Timbers,
Chapter 13 debtors are not required to provide costly expert testimony concerning depreciation of their motor vehicles. Such testimony may be beyond the means of many Chapter 13 debtors and courts may rely on other admissible testimony even if it is less precise than testimony of a car expert. Indeed, this case, neither Debtors nor Ford offered expert testimony concerning value of the Vehicles or depreciation. Nor did the parties offer any evidence regarding the particular conditions of the Vehicles or other factors that may effect the rate at which the Vehicles are depreciating.
Decisions must be made based on the evidence received. The evidence from the N.A.D.A. Guide demonstrated that the depreciation in the month following the Petition Date was $200 for the Escape and $150 for the Windstar. (Debtors’ Ex. A, B, C, D.) Therefore, Debtors must pay Ford adequate protection payments of $200 per month for the Escape and $150 per month for the Windstar. Those amounts were offered in Debtors’ Amended Chapter 13 Plan. As earlier noted, § 1326 requires a debtor to make adequate protection payments directly to the secured creditor “[ujnless the court orders otherwise.” 11 U.S.C. § 1326(a)(1)(C). The Bankruptcy Judges in this district have a standing order directed to the
CONCLUSION
For the foregoing reasons, this Court concludes a debtor must provide a creditor with adequate protection payments under § 1326(a)(1)(C) of the Bankruptcy Code in the amount the collateral depreciates within the first month after the filing of the bankruptcy petition. In this case, therefore, the monthly payments required post petition are $200 for the Escape and $150 for the Windstar.