FRANKIE PEREZ SERRANO and DAMARIS ROMERO MALDONADO

1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
FRANK PEREZ SERRANO, : Case No. 04-04897 (GAC)
DAMARIS ROMERO MALDONADO, :
:
Debtor : Chapter 13
___________________________________:
DECISION AND ORDER
The debtors filed a petition under Chapter 13 on May 10, 2004.
The debtors filed a plan which proposes payments of $1,790.00 for
five months, $1,890.00 for fifty-five months and a lump sum payment
of $4,000.00 for a total base of $116,900.00 (dkt. #9). Payments
to Doral/HF Financial Corp. for secured arrears and mortgage
payments will total $103,962.24. The remaining claims filed amount
to $8,526.62, between five claimants, and $1,059.00 in attorneys’
fees for debtors’ counsel. The debtors plan also provided for lift
of stay for Capital Leasing Source Corp. (“Capital”) to recover its
collateral. The trustee favorably recommends the debtors’ plan.
The debtors scheduled Capital as having two disputed secured
claims, one in the amount of $3,195.00 based on a lease agreement
and a second claim of $959.00 for legal fees related to the lease.
Capital filed a proof of secured claim in the amount of $4154.50,
which it amended twice, but not as to the amount.
Capital filed a motion objecting to the debtors’ proposed
plan, indicating that during the § 341 examination, the debtors
declared under oath that they had sold the leased equipment and
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 1 of 8

2
paid other creditors (dkt. #14). Capital also alleged that the
Chapter 13 trustee would disburse the total amount owed to
creditors and attorneys, excluding it. Capital claimed that the
proposed plan did not comply with 11 U.S.C. § 1325(a). The debtors
filed a reply indicating that Capital would be paid as determined
by the Court and that it was the debtors’ position that Capital is
an unsecured creditor (dkt. #17).
The debtors filed an objection to Capital’s claim, arguing
that the contract and documents attached to the claim are not
evidence of secured status (dkt. #19). The debtors also argue that
there is no evidence of registration of a lien over property of the
estate. Capital replied contending that it filed a financing
statement with the Department of State on November 9, 2000, which
has the same effect as a security agreement (dkt. #25). Capital
also indicates that it obtained judgment against the debtors on
November 12, 2003.
At the hearing on confirmation, the Court took the matters
between the debtors and Capital under advisement and granted them
time to file memorandums of law. Capital and the debtors filed
briefs in support of their positions (dkts. #44 and #45,
respectively). In its brief, Capital argues that debtors committed
an illegal act, in selling its collateral prepetition, to unknown
persons through a newspaper ad. Capital did not have knowledge of
the sale and did not consent. Capital alleges that the debtors’
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 2 of 8

3
plan was not filed in good faith and that the debt is
nondischargeable as a debt for willful and malicious injury by the
debtors to another entity or to the property of another entity.
Capital also alleges that the debtors’ behavior is fraudulent and
requests referral to the U.S. Attorney’s Office.
The debtors argue that their debt to Capital arises from a
lease contract and that at all times the property remained titled
to Capital. Thus, the debtors allege that because the property
belonged to Capital, it could not be property of the estate. The
debtors conclude that Capital is an unsecured creditor.
DISCUSSION
Classification of Capital’s claim
Capital obtained a judgment against the debtors approximately
six months prior to the filing of this bankruptcy petition.
Capital has alleged, and the debtors have not disputed, that after
Capital obtained its judgment, the debtors sold the equipment that
it had leased from Capital and used the funds for purposes other
than the payment of Capital’s claim. While the parties dispute
whether the lease agreement and its registration granted Capital a
security interest in the equipment, it is unnecessary to resolve
this point. Capital errs in equating an alleged security interest
in the equipment with allowance of a secured claim in the
bankruptcy proceeding. Because the equipment was sold prepetition,
it is well settled law, that the creditor has only an unsecured
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 3 of 8

4
claim even if it continues to have a security interest in the
collateral pursuant to state law. See In re Walton, 243 B.R. 793
(Bankr.M.D.Ala. 1999); In re Alexander, 225 B.R. 665
(Bankr.E.D.Ark. 1998); Magna Bank v. Gilsinn, 224 B.R. 710
(Bankr.E.D.Mo. 1997); In re Gabor, 155 B.R. 391 (Bankr.N.D.W.Va.
1993); In re Elliot, 64 B.R 429 (Bankr.W.D.Mo. 1986).
The rationale for treating a secured creditor with no
collateral as an unsecured creditor in bankruptcy is two-fold.
First, because the existence of a secured claim requires the
availability of collateral to secure the creditor’s right to
payment. See In re Elliot, 64 B.R. at 430. Second, even if a
secured creditor with no collateral were classified as a secured
creditor, valuation of the claim would require that its claim be
treated as unsecured. The Bankruptcy Code provides that a claim is
secured “to the extent of the value of such creditor’s interest in
the estate’s interest in such property” and is unsecured “to the
extent that the value of such creditor’s interest . . . is less
than the amount of such allowed claim.”
11 U.S.C. § 506(a)
In the present case, it is undisputed that the equipment was
sold and neither the debtors nor Capital have access to it.
Accordingly, the Court concludes that the estate’s interest in the
equipment is of no value. Because the estate’s interest in the
equipment is zero, the secured portion of Capital’s claim is zero
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 4 of 8

5
and the balance, which is the entire claim, is unsecured under §
506(a).
The Court concludes that the fact that the debtors voluntarily
transferred or sold the collateral prepetition does not alter the
classification of Capital’s claim. See In re O’Conner, 280 B.R.
907 (Bankr.S.D.Ala. 2002); In re Garrison, 95 B.R. 461
(Bankr.E.D.Ky. 1988)(debt is unsecured even though debtor sold
collateral to a pawn shop prior to filing bankruptcy); In re Byrd,
92 B.R. 238 (Bankr.N.D.Ohio 1988)(debt is unsecured even though
debtor gave away some of creditor’s collateral); In re Elliott, 64
B.R. 429. See also Pitcock v. Firstbank of Muleshoe (In re
Pitcock), 208 B.R. 862, 866 (Bankr.N.D.Tx. 1997). Accordingly, the
debtors’ objection to Capital’s secured claim will be granted and
Capital’s claim will be allowed as a general unsecured claim.
Good Faith
Capital alleges that the debtors’ Chapter 13 plan was not
filed in good faith. The debtors must file their Chapter 13 plan
in good faith. 11 U.S.C. § 1325(a); see also In re Dicey, 312 B.R.
456, 458 (Bankr.D.N.H. 2004); In re Fluery, 294 B.R. 1, 5
(Bankr.D.Mass. 2003); and In re Virden, 279 B.R. 401, 407
(Bankr.D.Mass. 2002). The debtors have the burden of proving that
their plan was filed on good faith. Dicey, 312 B.R. at 458;
Virden, 279 B.R. at 407.
The term “good faith” is not defined by the Bankruptcy Code
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 5 of 8

6
and thus courts engage in a multi-faceted analysis on a case-by-
case basis. Virden, 279 B.R. at 407-09. What has a evolved is a
totality of the circumstances test through which courts determine
whether debtors are attempting to thwart their creditors, or making
an honest effort to repay them to the best of their ability. See
Sullivan v. Solimini, 326 B.R. 204 (B.A.P. 1st Cir. 2005). Among
the factors courts consider, are: (1) debtors’ accuracy in stating
their debts and expenses, (2) debtors’ honesty in the bankruptcy
process, (3) whether the Bankruptcy Code is being unfairly
manipulated,(4) the type of debt sought to be discharged, (5)
whether the debt would be dischargeable in a Chapter 7, and (6)
debtors’ motivation and sincerity in seeking Chapter 13 relief.
Sullivan, 326 B.R. at 212. Considered within these factors would
be debtors’ history of filings and dismissals and whether the
debtors only intended to defeat local court litigation. Id.
In the present case, the Court concludes that there is no
evidence to suggest that the debtors lacked good faith in proposing
their Chapter 13 plan. This is the debtors first petition in
bankruptcy. Their primary debts are for mortgage arrears and
current mortgage payments. The debtors owe less than $10,000.00 in
unsecured and priority debt. The Chapter 13 trustee determined
that their estate has no liquidation value and has favorably
recommended their plan.
Capital is the only party objecting to confirmation and on the
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 6 of 8

7
basis that the debtors propose to treat Capital’s claim as
unsecured, which it clearly is because the debtors and therefore
the estate, had no interest in the equipment which allegedly
secured Capital’s lien when the debtors filed this petition.
Moreover, Capital obtained its judgment six months prior to the
filing of the petition and thus there is no evidence that the
debtors filed the petition to defeat local court litigation. The
Court concludes that there is meager evidence from which to
conclude that the debtors proposed their plan in bad faith.
The Court concludes that Capital’s arguments as to the
nondischargeability of its debt are not properly before the Court.
In order to seek a determination that the debt is nondischargeable
under 11 U.S.C. § 523, Capital must file an adversary proceeding
pursuant to Fed. R. Bankr. P. 7001. Moreover, Capital claims that
the debtors committed a criminal act in selling the equipment. The
Court notes that criminal remedies may exist based on the
representations by the debtors that the property was never titled
in the debtors and that the equipment was titled to and thus owned
by Capital. However, this is not the proper forum to request these
remedies. Accordingly, Capital’s objection to confirmation will be
denied.
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 7 of 8

8
ORDER
WHEREFORE IT IS ORDERED that Capital’s objection to
confirmation is DENIED. A separate order confirming the debtors’
plan will be entered.
IT IS FURTHER ORDERED that the debtors’ objection to Capital’s
claim is GRANTED. Capital’s claim is allowed as a general
unsecured claim.
SO ORDERED.
San Juan, Puerto Rico, this 7th day of September, 2005.
/s/
__________________________
GERARDO A. CARLO
Chief, U.S. Bankruptcy Judge
Case:04-04897-BKT13 Doc#:47 Filed:09/09/05 Entered:09/09/05 16:49:02 Desc: Main
Document Page 8 of 8