Chapter 13 Plan Must Pay Adequate Protection Payments Prior to Attorneys Fees

By: Brian Lacoff

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a decision of importance to Chapter 13 debtors’ attorneys, the Bankruptcy Court for the District of New Jersey ruled that an undersecured creditor, Ford Motor Credit Co., was entitled not only to adequate protection payments, but that the section 507(b)

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“super-priority” status of the inadequate adequate protection provided during the case meant that the Chapter 13 plan had to pay those amounts before paying any of the debtor’s attorneys fees.

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Ford Motor Credit objected to the debtor’s Chapter 13 plan for failure to provide adequate protection payments, violating 11 U.S.C. §§ 361, 1325 and 1326.

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  The debtor modified the plan to include adequate protection payments, but objected to the creditor’s contention that those payments had super-priority over debtor’s attorney fees.

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  The court agreed with Ford Motor Credit, reasoning that the creditor, having a lien on the debtor’s property, must be afforded protection against the daily depreciation of its property.

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The court relied on Judge Isgur’s opinion in In re DeSardi

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for the position that adequate protection payments may be treated as an administrative expense if they related to the actual use of the creditor’s property and conferred a concrete benefit upon the debtor’s estate.

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  While DeSardi had involved a vehicle the debtor used to commute to work to generate the income necessary for plan payments, Dispirito argued that there was no benefit to the estate since his vehicle was used only for personal purposes.  The court rejected that position, holding that by seeking to confirm a plan that provides for payments owing on a vehicle, the debtor “implicitly acknowledges that such expenses are both reasonable and necessary for the maintenance and support of the debtor.”

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  Further, the adequate protection payments have super-priority over other administrative expenses, such as attorney fees, under section 507(b) of the Bankruptcy Code.

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 The Dispirito court analogized the situation to that of DeSardi and concluded, “if attorney’s fees are paid ahead of the adequate protection payments, then adequate protection fails; the funds . . . would be paid to someone besides the protected lender.”

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The Dispirito opinion is consistent with several other decisions holding that the language of § 507(b) is controlling and gives super-priority to a secured creditor’s inadequate adequate protection claim over administrative expenses.  Dispirito cites two main decisions for the super-priority proposition, In re DeSardi

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and In re Cook.

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The Cook court reasoned that because the creditor’s property was declining in value due to the continued use by the debtor, adequate protection payments were required pre-confirmation.

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  The debtor wished to pay attorney fees in full after confirmation before any payments to creditors.  This was viewed as problematic by the court, however, because the Bankruptcy Code requires administrative expenses to be paid “before or contemporaneously with payments to creditors.”

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 Further, the court held that the creditor’s adequate protection claim had priority over other administrative expenses like the attorney’s fees, and the attorney should bear the risk of non-payment.

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  The court concluded, “[i]f the risk of non-payment of the debtor’s attorney fees . . . is too great to justify taking the case . . . [it] should say something about the case.”

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The DeSardi court ruled similarly, stating that payments to attorneys are subordinate to a creditor’s right to adequate protection payments.

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  As noted above, the court found that the adequate protection qualified as an administrative expense because it conferred a concrete benefit upon the estate.

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It ruled that under section 507(b) of the Bankruptcy Code, creditors with depreciating property being used by the debtor have super-priority over attorneys’ fees.

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This line of reasoning has been criticized. In In re Moses

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, the debtor’s plan delayed payments to the creditor for one month while attorney fees were paid.

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  The court held that this delay was insignificant and rejected the holding of Cook as a general rule.

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The Dispirito ruling can be criticized for undermining the Chapter 13 process.  First, as the debtors argued in Cook, the purpose of Chapter 13 is to encourage its use.

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  The Cook court warns attorneys to be wary of what cases they take as they bear the risk of non-payment,

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thus chilling access to the process.  Further, the court’s interpretation of the necessity prong for administrative expense status renders it a nullity since that test will be met in every case involving a Chapter 13 plan.  Finally, even if the adequate protection payments are entitled to super-priority status in an ultimate liquidation, that does not necessarily mean they must be given temporal priority by being paid out of the first plan installments.