John R. Clancy

After hearing all of the evidence, William C. Miller, Esquire, the standing1
chapter 13 trustee, had no opposition to granting E*TRADE relief from the automatic stay.
In its post-hearing memorandum, E*TRADE refers to information that the debtor2
allegedly provided at a meeting of creditors held after the hearing on the instant motion. Such
alleged information is not part of the evidentiary record and cannot be considered. See generally
In re Millman, 2003 WL 716289, at *3 n.12 (Bankr. E.D. Pa. 2003); In re MacDonald, 222 B.R.
69, 72 (Bankr. E.D. Pa. 1998); In re Midway Airlines, Inc., 221 B.R. 411, 462-63 (Bankr. N.D.
Ill. 1998).
Furthermore, during the hearing, the secured creditor sought to offer in evidence a
declaration made by one of its employees. The debtor’s objection to the admission of this
document was sustained, pursuant to Fed. R. Bankr. P. 9014(d). Subsection (d) was added to the
procedural rule in 2002 to make clear that one party in a contested matter cannot present
evidence of disputed factual issues without affording the other party with the opportunity for
cross-examination of witnesses, unless there is no objection. See Advisory Committee Note
(2002); see generally In re Engage, Inc., 315 B.R. 217, 224 (Bankr. D. Mass. 2004).
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 13
JOHN R. CLANCY :
Debtor : Bankruptcy No. 05-12805F
.................................................
MEMORANDUM
.................................................
E*TRADE Consumer Finance Corporation has filed a motion seeking to
terminate the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (d)(2). The motion is
opposed by the debtor, John R. Clancy. At issue is possession and disposition of a1
luxury recreational vessel known as the “Tool Box.” An evidentiary hearing was held,
and the following facts were proven.2
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The movant did not offer in evidence the underlying note, and the mortgage itself3
is silent as to the number and amount of monthly payments.
2
I.
On or about May 10, 2001, the debtor became the owner of a 2001, 34-foot
Luhrs Convertible powerboat called the “Tool Box.” In connection with his ownership of
this vessel, the debtor granted a first preferred ship mortgage to Ganis Credit Corporation
in the amount of $139,700. Ex. M-1. E*TRADE is the successor in interest to Ganis.
The debtor testified that the mortgage was to be repaid in 240 monthly installments of
$1,178.3
The debtor is self-employed and operates the John Clancy Construction
Company. The Tool Box is used by him for recreational purposes only. Although title to
the vessel is only in the name of the debtor, Mr. Alan Mancill also uses the powerboat and
assisted in its maintenance and with certain expenses.
Around October 2004, the debtor became delinquent in loan repayments to
E*TRADE, and the latter sent him a delinquency notice in January 2005. In addition,
insurance on the vessel had lapsed and the debtor was in arrears in his marina storage
fees. The debtor, seeking to rectify his loan delinquency, sent a business check to
E*TRADE dated January 30, 2005. Ex. D-1. For reasons not explained, the check was
not negotiated and the vessel was repossessed on or about February 15, 2005.
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The mortgage, at 2 ¶ 8, restricts the permissible location of the vessel, referring to4
a document called the “Borrower’s Acceptance of Vessel.” That document was not offered in
evidence. However, the creditor did not complain that the vessel was improperly docked at the
marina in Maryland, and the mortgage contains an acknowledgment signed by a notary public in
the State of Maryland. Moreover, the temporary insurance binder, Ex. D-3, identifies the
“certificate holder” as the Sunset Marina in Ocean City, Maryland. Thus, I conclude that
Maryland law, along with federal law, governs the debtor’s and creditor’s rights regarding the
repossession and disposition of the Tool Box. See Key Bank of Maine v. Dunbar, 1995 WL
541778 (E.D. Pa. 1995).
Although an owner of property is competent to testify as to its value, a court need5
not accept that valuation over expert testimony offered by the opposing party. See United States
v. 7.92 Acres of Land, 769 F.2d 4, 12 (1st Cir. 1985). Here, the secured creditor offered no such
testimony.
3
At the time of its repossession, the vessel was located at a marina in
Maryland. E*TRADE had the powerboat taken to Connecticut, where it is presently4
located.
The debtor and Mr. Mancill maintain that the boat was purchased at a price
lower than its market value, because Mr. Mancill offset some of the purchase price with a
warranty claim he had against the manufacturer, involving another vessel. (The debtor
also paid $25,000 as a deposit at the time of purchase.) They contend that the present
value of the powerboat is $230,000. See United States v. 68.94 Acres of Land, 918 F.2d
389, 397 (3d Cir. 1990) (owner of property is competent to testify as to its value).
E*TRADE asserts that the vessel is worth approximately $140,000. Ex. M-6. E*TRADE
further alleges that it is still owed about $140,634.76. Motion, ¶ 8.
The debtor disputes that E*TRADE’s valuation of the powerboat is
accurate, because the NADA appraisal guide—upon which the creditor relies
exclusively —refers to a 310 HP gasoline engine. The Tool Box has a more powerful5
twin diesel engine, an engine that both Mr. Mancill and the debtor maintain adds
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4
considerably to its value. In corroboration thereof, the debtor offered in evidence
(without objection) copies of web pages from YachtWorld.com. These pages list twin
diesel engine 34-foot Luhrs Convertible boats for sale. The prices range from $199,900
for a model year 2000 vessel, to $229,000 for a model year 2002 vessel. Ex. D-5.
Based upon the testimony offered and the documents presented, I conclude
that, for purposes of this contested matter, the fair market value of the vessel is
approximately $220,000; or about $80,000 more than E*TRADE is owed.
In this chapter 13 case, the debtor has proposed a reorganization plan under
which the debtor will tender $750 per month to the trustee for three years. Ex. D-4. He
further proposes to tender all postpetition monthly payments due to E*TRADE and cure
the pre-bankruptcy delinquency as a portion of these plan payments. The plan expressly
provides that allowed claims of unsecured creditors will be paid in full. Ex. D-4.
Finally, the debtor offered evidence of a temporary insurance binder for the
vessel issued by Travelers Insurance Company, inter alia, in the amount of $235,000 for
“Hull Coverage” (with a $2,350 deductible) with E*TRADE as the loss payee. Ex. D-3.
The debtor testified that he paid the annual premium for this insurance coverage, and
offered a copy of the premium check in evidence. Ex. D-6. Thus, the vessel was likely
covered by insurance at the time of the hearing.
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5
II.
A.
As I noted at the outset, E*TRADE holds a security interest on the debtor’s
vessel and is now seeking relief from the automatic stay pursuant to 11 U.S.C. §
362(d)(1) and (d)(2) in order to sell the powerboat in a commercially reasonable manner,
as permitted by state law. Motion, ¶ 11.
Subsection 362(d)(1) provides that relief from the automatic stay can be
granted for “cause” shown, including a lack of adequate protection for a creditor. As a
general principle, whether to modify, condition or annul the bankruptcy stay under section
362(d)(1) is committed to bankruptcy court discretion, see generally Matter of Holtkamp,
669 F.2d 505 (7th Cir. 1982); In re Shariyf, 68 B.R. 604 (E.D. Pa. 1986), and is to be
determined by examining the totality of the circumstances. See Matter of Baptist Medical
Center of New York, Inc., 52 B.R. 417, 425 (E.D.N.Y. 1985), aff’d, 781 F.2d 973 (2d
Cir. 1986).
Alternatively, relief from the bankruptcy stay under section 362(d)(2)
requires a two-part analysis. Subparagraph(A) of section 362(d)(2) requires a showing
that there is no equity in the collateral; that is, a showing that the value of the collateral is
less than the sum total of all of its liens. See, e.g., In re Indian Palms Associates, Ltd., 61
F.3d 197, 206 (3d Cir. 1995) (“The classic test for determining equity under section
362(d)(2) focuses on a comparison between the total liens against the property and the
property’s current value”); In re Liona Corp., N.V., 68 B.R. 761, 766 (Bankr. E.D. Pa.
1987); In re Jug End in the Berkshires, Inc., 46 B.R. 892, 901 (Bankr. D. Mass. 1985).
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6
The party seeking relief from the stay has the evidentiary burden of
demonstrating lack of equity. 11 U.S.C. § 362(g)(1); In re Liona Corp., N.V., 68 B.R. at
766. If the moving party proves a lack of equity, then the party opposing the termination of
the stay has the burden of demonstrating that the collateral is necessary for a plan of
reorganization “that is in prospect” within a reasonable time. 11 U.S.C. § 362(d)(2)(B),
(g)(2); United Savings Associates of Texas v. Timbers of Inwood Forest Associates, Ltd.,
484 U.S. 365 (1988).
Accordingly, unless the secured creditor demonstrates a lack of equity, a
court does not reach the reorganization issue posed by subparagraph (d)(2)(B). See, e.g., In
re Kaplan, 94 B.R. 620, 621 (Bankr. W.D. Mo. 1989); Matter of Cardell, 88 B.R. 627, 631-
32 (Bankr. D.N.J. 1988); In re Skipworth, 69 B.R. 526, 527 (Bankr. E.D. Pa. 1987). This
follows because, to a certain extent, Congress implicitly assumed in section 362(d)(2) that
if the collateral has measurable value to the estate in excess of lien claims, it can be
liquidated and the proceeds used as part of a liquidating plan of reorganization to pay
secured and unsecured creditors. Measurable equity, therefore, means that the secured
property is likely to be needed in a plan of reorganization, and such reorganization is
possible.
Here, E*TRADE has not met its burden of demonstrating a lack of equity in
the Tool Box under subparagraph (A) of section 362(d)(2). The vessel’s approximate fair
market value is about $220,000 and the sole lien claim held by the creditor is about
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I will accept, for purposes of this contested matter, that the failure of the debtor to6
tender all fees due to the marina could result in a lien against the vessel, though not necessarily a
lien that would prime a first preferred ship mortgage. See Midlantic National Bank v. Sheldon,
751 F. Supp. 26 (E.D.N.Y. 1990). Not only did the evidence reflect that the unpaid marina fee
was modest in comparison to the amount due on the mortgage—$3,137.60, Ex. M-4—but the
creditor paid that fee when it repossessed the vessel. Ex. M-4. Furthermore, E*TRADE has
included that sum in computing its present total claim. Motion, ¶ 8. Thus, the evidence reflects
that the sole lien against the vessel at the time of the hearing was held by E*TRADE in the
amount stated above.
In that regard, E*TRADE argues that a recreational boat, per se, cannot be7
needed for an effective reorganization, citing In re Walters, 188 B.R. 582, 585 (Bankr. E.D. Ark.
1995). I need not now decide that issue as section 362(d)(2)(B) is not germane to this contested
matter.
7
$140,600. Therefore, I cannot grant relief from the stay pursuant to section 362(d)(2) and6
need not consider whether the debtor met his burden concerning his ability to reorganize
under section 362(d)(2)(B). See, e.g., In re Walden Ridge Development, LLC, 292 B.R.7
58, 64-65 (Bankr. D.N.J. 2003); In re American Sweeteners, Inc., 1999 WL 1068446, at *7
(Bankr. E.D. Pa. 1999); see generally In re Ward, 837 F.2d 124, 128 (3d Cir. 1988).
As a result, I shall focus on the creditor’s assertion that it is entitled to relief
in this contested matter by virtue of section 362(d)(1).
B.
E*TRADE contends that cause exists to terminate the automatic stay because
this chapter 13 case was filed in bad faith, because the debtor’s proposed chapter 13 plan
does not offer adequate protection, and because the vessel, upon repossession, ceased to be
property of the bankruptcy estate.
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8
Distinct from the requirement found in section 1325(a)(3)—that a chapter 13
plan be proposed in good faith—is the requirement implicitly found in section 1307(c) that
every chapter 13 case be filed in good faith. See, e.g., Matter of Smith, 848 F.2d 813, 816
n.3 (7th Cir. 1988); In re March, 83 B.R. 270, 275 (Bankr. E.D. Pa. 1988). As the Third
Circuit has instructed:
It is clear that Chapter 13 contains no explicit good faith
requirement. Section 1307(c) provides, however, that Chapter
13 petitions may be dismissed “for cause.” 11 U.S.C. §
1307(c). The Seventh, Ninth and Tenth Circuits have held that
lack of good faith in filing is sufficient cause for dismissal
under section 1307(c). . . . We agree.
As the Seventh Circuit has noted, however, “good faith is a
term incapable of precise definition.” In re Love, 957 F.2d at
1355. As a result, we believe that “the good faith inquiry is a
fact intensive determination better left to the discretion of the
bankruptcy court.” Id. We therefore join the Seventh, Ninth
and Tenth Circuits in holding that the good faith of Chapter 13
filings must be assessed on a case-by-case basis in light of the
totality of the circumstances. . . . Factors relevant to the totality
of the circumstances inquiry may include, among others, the
following:
the nature of the debt . . . ; the timing of the
petition; how the debt arose; the debtor's motive
in filing the petition; how the debtor's actions
affected creditors; the debtor's treatment of
creditors both before and after the petition was
filed; and whether the debtor has been
forthcoming with the bankruptcy court and the
creditors.
In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996) (citations and footnote omitted).
In determining whether bad faith exists, the bankruptcy court has the
discretion to reach the appropriate result in a particular case based upon the totality of the
circumstances. See In re Lilley, 91 F.3d at 496; Matter of Love, 957 F.2d 1350, 1354 (7th
Cir. 1992); In re Mazzocone, 180 B.R. 782 (E.D. Pa. 1995).
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9
“Misuse of the bankruptcy laws for an improper purpose may constitute
grounds for granting relief from the stay.” In re Augustus Court Associates, 43 B.R. 352,
354 (Bankr. E.D. Pa. 1984). Thus, if a chapter 13 case is filed in “bad faith,” cause exists
to grant relief from the automatic stay under section 362(d)(1). See, e.g., In re Can-Alta
Properties, Ltd., 87 B.R. 89, 91 (B.A.P. 9th Cir. 1988) (and cases cited); In re Harris, 192
B.R. 334, 337 (Bankr. W.D.N.Y. 1996); Matter of Nelson, 66 B.R. 231 (Bankr. D.N.J.
1986), aff'd without op., 838 F.2d 1207 (3d Cir. 1988).
In this contested matter, E*TRADE maintains that the debtor filed the
underlying chapter 13 petition in bad faith because he was solvent at the time of his
bankruptcy filing, and because he sought bankruptcy relief solely to prevent the forced sale
of his luxury powerboat.
The existence of solvency does not, by itself, demonstrate a bad faith
bankruptcy filing. See, e.g., In re Integrated Telecom Express, Inc., 384 F.3d 108, 121 (3d
Cir. 2004) (“To be sure, a debtor need not be insolvent before filing for bankruptcy
protection.”); In re SGL Carbon Corp., 200 F.3d 154, 163 (3d Cir. 1999) (“It is well
established that a debtor need not be insolvent before filing for bankruptcy protection.”).
Nor does the filing of a bankruptcy petition that is designed to prevent the forced sale of
property in which the debtor has substantial equity constitute bad faith. See In re Heath,
188 B.R. 17 (Bankr. D.S.C. 1995); In re Goulding Place Developers, Inc., 99 B.R. 493
(Bankr. N.D. Ga. 1989).
Of course, were a debtor to file a chapter 13 petition with an intent to retain
ownership of property, but without the right or ability to propose a reorganization plan that
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The secured creditor relies heavily upon In re Lippolis, 228 B.R. 106 (E.D. Pa.8
1998) for the proposition that an individual acts in bad faith when filing a bankruptcy petition to
stop an involuntary sale of property. Lippolis is distinguishable, however, as that decision
addressed an attempt by a terre tenant to use chapter 13 to assume a mortgage and cure the
mortgage default, even though the debtor was not the mortgagor and the mortgage was non-
asssumable. In essence, the debtor in Lippolis could not reorganize under chapter 13 and provide
for the mortgagee’s claim.
Thus, Lippolis stands for the sensible position that an individual who files a
chapter 13 petition without any ability to reorganize does so in bad faith. See, e.g., In re Huerta,
137 B.R. 356, 367 (Bankr. C.D. Cal. 1992). Here, as will be discussed, the debtor may possibly
reorganize.
10
could yield such a result, then bad faith may be present. Upon consideration of the8
evidence presented and relevant state and federal law, and for the following reasons, I
conclude that there is a realistic possibility that the debtor could reorganize and retain
ownership of his vessel. Thus, I do not find on this evidence that the debtor filed this
bankruptcy petition in bad faith.
C.
As noted earlier, the debtor granted the secured creditor a preferred ship
mortgage. Congress has enacted the Ship Mortgage Act, 46 U.S.C.A. §§ 31301-31343,
and this statute authorizes, inter alia, “preferred mortgages” on vessels. A preferred
mortgage is defined as “a lien on the mortgaged vessel in the amount of the outstanding
mortgage indebtedness secured by the vessel.” 46 U.S.C.A. § 31325(a). The Act also
enumerates various remedies that the mortgage holder may take upon default by the
mortgagor. However, some courts have held that “the Ship Mortgage Act does not
prohibit state self-help enforcement procedures when they are authorized by the
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The 15 day right of redemption in section 12-1021, referred to in Darovec,9
requires only that the borrower:
1) Tender the amount due under the agreement at the time of
redemption, without giving effect to any provision which allows
acceleration of any installment otherwise payable after that time;
(2) Tender performance of any other promise for the breach of
which the property was repossessed; and
(3) If the discretionary notice provided for in subsection (c) of this
section was given, pay the actual and reasonable expenses of
(continued...)
11
underlying contracts.” Dietrich v. Key Bank, N.A., 72 F.3d 1509, 1511 (11th Cir. 1996);
see First Federal Savings, F.S.B. v. M/Y Sweet Retreat, 844 F. Supp. 99 (D.R.I. 1994).
As E*TRADE observes, the preferred ship mortgage signed by the debtor
permitted the secured creditor to repossess the vessel upon default and sell it through a
non-judicial sale. Ex. M-1, ¶ 16 at 3. It argues from this provision that, upon
repossession, the debtor lost all interest in the powerboat. Maryland state law, which is
germane to this dispute for reasons discussed earlier, holds to the contrary.
In Maryland National Bank v. Darovec, 820 F. Supp. 1083 (N.D. Ill. 1993),
the district court rejected the mortgagor’s argument that the Ship Mortgage Act provided
the exclusive mechanisms for repossessing vessels. It found that Maryland law permitted
self-help repossession. It also concluded, however, that upon repossession the mortgagor
held a state law right of redemption. Id. at 1088-89. Furthermore, under Maryland law, a
borrower’s right of redemption for personalty continues until the secured creditor has
disposed of the collateral, see First National Bank of Maryland v. DiDomenico, 302 Md.
290, 295 (1985), or for 15 days from the date the borrower is informed of the right of
redemption. See Maryland Commercial Code, § 12-1021(g). Here, there was no9
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(...continued)9
retaking and storing the property.
Commercial Code, § 12-1021(h).
The right of redemption referred to in DiDomenico stems from Article 9 of the
Uniform Commercial Code and requires repayment of the obligation in full, plus expenses
associated with repossession.
The secured creditor suggests that the debtor’s right of redemption expired by10
virtue of section 108(b). Even if I accept that section 108(b) applies to redemption rights,
subsection (b) provides that the right to cure extends to the later of 60 days after the bankruptcy
petition or the deadline set by non-bankruptcy law. 11 U.S.C. § 108(b); see generally Matter of
Sabec, 137 B.R. 659, 669 n.20 (Bankr. W.D. Mich. 1992). E*TRADE does not consider the
debtor’s redemption right under Maryland state law.
12
evidence that the debtor was given notice of his right to redeem the property and the vessel
had not been sold at the time this bankruptcy case commenced. Accordingly, the debtor
held a property interest in Tool Box powerboat at the time of filing his bankruptcy
petition. See United States v. Whiting Pools, Inc., 462 U.S. 198 (1983); In re Canney, 284
F.3d 362 (2d Cir. 2002); In re Nejberger, 934 F.2d 1300, (3d Cir. 1991).10
Moreover, 11 U.S.C. § 1322(b)(5) permits a chapter 13 debtor to cure
defaults in long-term debts. Although debtors typically utilize this provision to cure
delinquencies in residential mortgage obligations, the language of the statutory provision is
not so restrictive. See 8 Collier on Bankruptcy, ¶ 1322.09[2], at 1322-31 (15th ed. rev.
2004) (“The right to cure defaults on long-term contracts applies to all long-term debt . . .
.”).
Since the debtor retained a property interest in the Tool Box at the time he
filed his chapter 13 petition, and as his loan obligation to E*TRADE matures many years
after the conclusion of his proposed plan, the debtor is permitted to propose a
reorganization plan that will cure his loan default within a “reasonable time.” Whether the
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E*TRADE questions the appropriateness of permitting a chapter 13 debtor to11
reorganize in order to preserve ownership of a luxury vehicle. Typically, however, that issue
arises in the context of the disposable income test under section 1325(b). See In re Gibson, 142
B.R. 879 (Bankr. E.D. Mo. 1992). Here, the debtor proposes paying all allowed unsecured
claims in full; thus, the disposable income issue would not arise. See generally In re Anes, 195
F.3d 177, 180-81 (3d Cir. 1999); In re Anderson, 21 F.3d 355, 357 (9th Cir. 1994).
The secured creditor unpersuasively attempts to demonstrate that the vessel is12
depreciating at an amount greater than the monthly payments, by subtracting its current value
from its original value and dividing by the number of months since the purchase. Not only does
E*TRADE utilize a current market value that is too low, but it assumes a straight-line or constant
rate of depreciation. Vehicles depreciate at a greater rate immediately after their purchase; over
time, the rate of depreciation decreases.
The debtor has filed an adversary proceeding seeking turnover of the powerboat.13
If turnover were to be ordered, the creditor would be entitled to adequate protection. See United
States v. Whiting Pools, Inc., 462 U.S. 198 (1983); see generally 11 U.S.C. §§ 363(e), 1303.
Whether the components of adequate protection for purposes of section 362(d), mentioned in the
text above, would also constitute adequate protection under section 363(e), were the debtor to
regain possession of the vessel, is an issue that will be addressed in the context of the adversary
(continued...)
13
plan proposed by the debtor meets the requirements of section 1322(b)(5) need not be
determined in this contested matter. A motion to terminate the bankruptcy stay is not the
equivalent of a confirmation hearing. I do conclude, however, that the evidence presented
at the hearing suggests that the debtor may be able to propose a viable plan.11
Finally, E*TRADE contends that the debtor’s plan does not adequately
protect its security interest in the Tool Box. I respectfully disagree. Monthly mortgage
payments, plus insurance (with the secured creditor as loss payee), plus a $79,400 equity
cushion (which cushion is more than 56% of the total claim) does constitute adequate
protection. See In re Mellor, 734 F.2d 1396, 1401 (9th Cir. 1984); see generally In re12
Drebitko, 1992 WL 75156, at *2 (E.D. Pa. 1992) (“An equity cushion, if sufficient in size
and unlikely to erode, can, standing alone, constitute adequate protection.”). Moreover, the
secured creditor also has possession of the vessel.13
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(...continued)13
proceeding.
14
Accordingly, E*TRADE has not demonstrated cause to terminate the
automatic stay and thus it is statutorily enjoined under 11 U.S.C. § 362(a) from disposing
of the vessel. See, e.g., In re Moffett, 356 F.3d 518 (4th Cir. 2004); In re Spears, 223 B.R.
159 (Bankr. N.D. Ill. 1998).
An appropriate order shall be entered.
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 13
JOHN R. CLANCY :
Debtor : Bankruptcy No. 05-12805F
.................................................
ORDER
.................................................
AND NOW, this 9th day of June 2005, for the reasons stated in the
accompanying memorandum, it is hereby ordered that the motion of E*TRADE Consumer
Finance Corporation for relief from the automatic stay is denied.
BRUCE FOX
United States Bankruptcy Judge
copies to:
Michael B. McCauley, Esquire
Palmer Biezup & Henderson, LLP
956 Public Ledger Building
620 Chestnut Street
Philadelphia, PA 19106
David A. Scholl, Esquire
Regional Bankruptcy Center of SE PA
Law Office of David A. Scholl
6 St. Albans Avenue
Newtown Square, PA 19073
William C. Miller, Esq.
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Chapter 13 Trustee
111 S. Independence Mall
Suite 583
Philadelphia, PA 19106
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