#2528        signed 7-6-00

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

MEMORANDUM OF DECISION

These matters are before the Court for resolution of a creditor's application for an

administrative expense in each case. The creditor, Rubber Workers Local 307 Federal Credit Union

(“Credit Union”), appears by counsel Thomas A. Valentine. Debtor Jennifer Marie Bechtel appears by

counsel Danton C. Hejtmanek. Debtor Thomas John Botter appears by counsel Mark W. Neis. After

due consideration of the relevant pleadings, the Court concludes it must deny the Credit Union's

motions.

FACTS

1. Thomas John Botter

Mr. Botter filed his chapter 13 petition and proposed plan of reorganization in August 1995.

He checked a box on Schedule G to indicate that he had no executory contracts or unexpired leases.

His plan provided for the Credit Union's claim of $5,650 to be paid in full because a divorce decree

required him to pay the debt. Apparently, a car that secured the debt was awarded to his former

spouse in the divorce. As a result of the divorce decree, even though no property of the estate secures

it, the Credit Union's claim was to be paid interest at the contract rate as a special class, rather than at

the ordinary discount rate provided to secured creditors. Since Mr. Botter believed he had no

executory contracts, his plan stated that no executory contracts were “accepted or rejected” under the

plan.

The Credit Union filed a proof of claim for $5,735.61, asserting that the claim was secured.

The parties then submitted an agreed order adopting the amount stated in the proof of claim as the

amount to be paid to the Credit Union, plus interest at the contract rate, under the plan. The order

noted that the claim was secured by Mr. Botter's ex-wife's vehicle. Neither the Credit Union's proof

of claim nor the agreed order indicated that the Credit Union had a claim against Mr. Botter for credit

disability insurance premiums. The combined promissory note and security agreement that Mr. Botter

gave to the Credit Union, however, a copy of which was attached to the proof of claim, clearly shows

that Mr. Botter chose to purchase credit disability insurance for the loan when he obtained it. The

contract states that Mr. Botter could “stop” the insurance at any time. Nothing in the contract indicates

that the Credit Union could or would pay for the insurance if Mr. Botter did not. The Credit Union was

authorized to pay for property insurance on its collateral if Mr. Botter failed to do so and add that cost

to his debt, but not the credit disability insurance.

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In the portion of the contract dealing with the disability insurance, in an area labeled “Premium

Schedule,” the figure $1210.23 was entered. This appears to be the amount being charged for the

insurance. In the “Truth in Lending Disclosure” portion of the contract, the amount entered in the

insurance area must be added to the finance charge and amount financed figures to arrive at the “Total

of Payments” figure; the number of payments times the amount of the payments equals the “Total of

Payments” figure. Thus, the Court can infer that Mr. Botter's monthly payments included an amount for

the credit disability insurance. As the Court understands credit disability insurance, it would do nothing

more than pay Mr. Botter's obligation to the Credit Union if he became disabled; no additional benefits

would be paid directly to him.

An order confirming Mr. Botter's chapter 13 plan was filed in June 1996.

In October 1999, the Credit Union filed its motion for allowance of an administrative claim,

asserting for the first time that Mr. Botter had had credit disability insurance since filing for bankruptcy

but had not paid for it, and therefore owed the Credit Union $517.78 in unpaid premiums as an

administrative expense. Apparently, rather than paying the full charge for the insurance initially, the

Credit Union paid for it in monthly installments, which it continued to pay after Mr. Botter filed for

bankruptcy. Mr. Botter responded that he had canceled the disability insurance, had not agreed to pay

the premiums, and could recall no postpetition contacts from the Credit Union about the insurance. He

pointed out that his plan did not call for the Credit Union to be paid anything other than the value of the

vehicle that secured its claim. A report filed by the chapter 13 trustee indicates the Credit Union had

been paid in full under the plan by the end of June 1999. At a hearing in December 1999, the Court

orally denied the Credit Union's administrative expense request. A short time later, the Credit Union

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filed a motion to reconsider. That motion was then combined for decision with the Credit Union's

similar claim for an administrative expense in Ms. Bechtel's case.

2. Jennifer Marie Bechtel

   Ms. Bechtel filed her chapter 13 petition and plan of reorganization in June 1997. On Schedule

G, she put “None” in the space for identifying executory contracts and unexpired leases. Her plan

provided that the Credit Union's claim of $13,550, although secured only by a vehicle worth somewhat

less than the debt, would be paid in full at the contract rate of interest because it was a co-signed debt.

See 11 U.S.C.A. §1322(b)(1) (unsecured consumer debt may be treated differently than other

unsecured claims if an individual is liable on the debt with the debtor). A statement in the plan indicated

that executory contracts being rejected were “None”; no mention at all was made of any executory

contracts being assumed.

The Credit Union filed a proof of claim for $13,135.27, alleging it to be fully secured. The

parties then submitted an agreed order indicating that the Credit Union would be paid the full amount of

its claim through the plan, plus interest at its contract rate. The order noted that the claim was secured

by Ms. Bechtel's vehicle and that another individual was liable with her on the debt. Neither the Credit

Union's proof of claim nor the agreed order indicated that the Credit Union had a claim against Ms.

Bechtel for credit disability insurance premiums. The combined promissory note and security

agreement that Ms. Bechtel gave to the Credit Union, however, a copy of which was attached to the

proof of claim, clearly shows that Ms. Bechtel chose to purchase credit disability insurance for the loan

when she obtained it. The contract states that Ms. Bechtel could “terminate” the insurance at any time.

Nothing in the contract indicates that the Credit Union could or would pay for the insurance if Ms.

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Bechtel did not. The Credit Union was authorized to pay for property insurance on its collateral if Ms.

Bechtel did not and add that cost to her debt, but not the credit disability insurance.

In the portion of the contract dealing with the disability insurance, in the area containing the

“Yes” box that was checked to request the insurance, the words “Credit Disability: Total Cost” are

printed and under them the figure “$1,666.45” was entered. This appears to be the amount being

charged for the insurance. This amount must be added to the finance charge and the amount financed

to arrive at the “Total of Payments” figure stated in the document; in addition, the number of payments

times the amount of the payments equals the “Total of Payments” figure. Thus, as in Mr. Botter's case,

the Court can infer that Ms. Bechtel's monthly payments included an amount for the insurance. As

indicated above, as the Court understands credit disability insurance, it would do nothing more than pay

Ms. Bechtel's obligation to the Credit Union if she became disabled; no additional benefits would be

paid directly to her.

An order confirming Ms. Bechtel's chapter 13 plan was filed in October 1997.

In December 1999, the Credit Union filed its motion for allowance of an administrative claim,

asserting for the first time that Ms. Bechtel had had continuing credit disability insurance premiums that

she had not paid, that she had not rejected this executory contract, and that the Credit Union therefore

had an administrative expense claim for $1,094.09. As in Mr. Botter's case, rather than paying the full

charge for the insurance initially, the Credit Union apparently paid for the insurance in monthly

installments, which it continued to pay after Ms. Bechtel filed for bankruptcy. Ms. Bechtel responded

that the Credit Union's proof of claim did not indicate it had an executory contract for ongoing disability

insurance, and that she would have rejected such a contract if it had been included in the proof of claim.

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According to the chapter 13 trustee's office, as of December 1999, the Credit Union had been paid

$6,287.86 in principal and interest under Ms. Bechtel's plan.

DISCUSSION AND CONCLUSIONS

The Credit Union seeks to be reimbursed for credit disability insurance premiums it apparently

paid on behalf of the debtors after they filed for bankruptcy, arguing reimbursement would constitute an

appropriate administrative expense in each case. The Credit Union has not cited any authority for these

requests, but the Court assumes it seeks allowance pursuant to §503(a) and (b)(1)(A), which state:

1.   An entity may timely file a request for payment of an administrative expense, or

may tardily file such a request if permitted by the court for cause.

2.   After notice and a hearing, there shall be allowed administrative expenses, other

than claims allowed under section 502(f) of this title, including—

(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.

No other subsections of that statute could apply to this creditor in these cases. The Credit Union does

not explain why it considers these insurance premiums to have been necessary costs and expenses of

preserving these bankruptcy estates. Although §503(a) refers to such requests as being timely or

tardily made, the parties have not briefed the timeliness of the Credit Union's motions nor has the

Credit Union sought permission to file its requests tardily for cause. The Court concludes, however,

that it need not address the timeliness of the motions.

As a preliminary matter, the Court questions whether the Credit Union's contracts authorized it

to pay for the credit disability insurance and then seek reimbursement from the debtors. While the

debtors might more properly have stopped or terminated the insurance by affirmatively reporting their

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intent to do so, they strongly indicated such an intent by no longer paying for the insurance. By paying

for the insurance without contacting the debtors, the Credit Union at least arguably interfered with their

right to cancel the insurance and acted as a gratuitous volunteer. Without deciding whether the Credit

Union's actions were permitted under the contracts, the Court concludes the requests for administrative

expenses must be denied in any event for a number of reasons.

The parties appear to agree that the credit disability insurance provisions in the Credit Union's

contracts with the debtors are separate executory contracts. The Court is not certain this is correct. In

the legislative history of §365, Congress indicated that for bankruptcy purposes, an executory contract

is one “on which performance remains due to some extent on both sides.” H.R. Rep. No. 595, 95th

Cong. 1st sess. 347 (1977); S. Rep. No. 989, 95th Cong., 2d sess. 58 (1978). Courts typically rely

on Professor Countryman's more detailed definition: “A contract under which the obligation of both the

bankrupt and the other party to the contract are so far unperformed that the failure of either to complete

performance would constitute a material breach excusing performance of the other.” Countryman,

Executory Contracts in Bankruptcy, 57 Minn. L. Rev. 439, 446 (1973); see also 3 Collier on

Bankruptcy, ¶365.02[1] (Lawrence P. King, ed., 15th ed. rev. 2000). Generally, insurance contracts

covering future periods are considered to be executory contracts because the debtor has to pay

premiums and the insurance company has to provide coverage and process claims. See, e.g., In re

American Medical Imaging Corp., 133 B.R. 45, 54-56 (Bankr. E.D. Pa. 1991).

Here, though, the insurance provisions were a part of the overall loan agreements the debtors

had with the Credit Union, not independent contracts they had directly with insurance companies. The

Credit Union was not the company supplying the insurance coverage or processing any claims.

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Instead, its only obligation would appear to have been to accept the debtors' payments and forward the

premiums to the insurance company or companies. The debtors' failure to pay the insurance premium

portions of their monthly payments to the Credit Union would certainly have justified terminating the

insurance coverage, but possibly would not have justified the Credit Union declaring the entire contract

in default and repossessing its collateral. Despite the uncertainty of the executory nature of these

contracts, the Court will assume that the provisions at issue are in fact executory contracts and

therefore governed by §365 of the Bankruptcy Code. Section 365(a), in relevant part, provides that

“[T]he trustee, subject to the court's approval, may assume or reject any executory contract or

unexpired lease of the debtor.” In chapter 13 cases, courts generally take the view that the debtor has

the power to assume or reject under §365. See, e.g., In re Yasin, 179 B.R. 43, 48 (Bankr. S.D.N.Y.

1995).

A chapter 13 debtor has until confirmation to assume or reject an executory contract unless, on

request of any party to the contract, the court fixes an earlier time. §362(d)(2). While §365(d)(1)

provides that, in a chapter 7 case, an executory contract is deemed rejected unless the trustee assumes

or rejects it within a specified time, the Bankruptcy Code contains no similar provision for deemed

rejection (or assumption, for that matter) that applies in chapter 13 cases or those under the other

reorganization chapters, 9, 11, and 12. Bankruptcy Rule 6006 is also silent about the effect of all the

parties' failure to take affirmative action with respect to an executory contract. This leaves an apparent

hole in chapter 13 procedure that the Credit Union is trying to exploit in these cases. In effect, the

Credit Union is arguing that the debtors' obligations to reimburse it for credit disability insurance

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premiums automatically continued even though the Court never approved the assumption of the

contracts.

The Court has found no chapter 13 decisions dealing with this situation. At least one court has

declared, however, that certain leases had not been assumed in the chapter 11 phase of a case,

because the court never authorized the assumption or had the opportunity to determine whether

assumption would benefit the estate. See In re Cole, 189 B.R. 40, 46-47 (Bankr. S.D.N.Y. 1995).

Similarly, in these cases, the Court has never approved assumption of the insurance contracts or been

asked to determine whether assumption would benefit the bankruptcy estate. In the Court's

experience, debtors usually do not want to continue to pay for such insurance after they file for

bankruptcy, and nothing presented indicates these debtors had any reason to want to maintain it or ran

a greater than normal risk of becoming disabled. Furthermore, since the insurance provisions of the

contracts clearly allowed the debtors to cancel the insurance at any time, rejection of the insurance

would not have harmed the estates because the Credit Union could claim no damages for breach of

contract as a result of rejection.

Assuming that their attorneys would have viewed the credit disability insurance as an executory

contract when these bankruptcy cases were filed, it seems clear that Mr. Botter and Ms. Bechtel forgot

they had purchased the insurance. It also appears that the Credit Union forgot about the insurance

when it filed its proofs of claim in these cases, and included in its claims only the amounts still owed on

the portions of the loans that were used to pay for vehicles, not the portions used to pay for the

disability insurance. For purposes of bankruptcy cases, “claim” is defined in 11 U.S.C.A. §101(5)(A),

in pertinent part, to mean “right to payment, whether or not such right is reduced to judgment,

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liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, legal, equitable, secured, or

unsecured.” The portion of the insurance that the Credit Union apparently paid for after each case was

filed would have been unmatured on the date of filing, but certainly constituted a “right to payment” at

that time. Under Bankruptcy Rule 3002(c), the usual time for filing prepetition claims is ninety days

after the first date set for the meeting of creditors under §341(a). That time expired long ago in both

these cases. Since both debtors objected to the Credit Union's insurance claims, the claims would be

disallowable under §502(b)(9) if they are prepetition claims. The Court believes they are prepetition

claims because they arise from the Credit Union's prepetition contracts with the debtors.

Neither of the debtors appears to have done anything that could have caused the Credit Union

to think that they wanted to continue paying for the credit disability insurance. They did agree to pay

the amounts the Credit Union claimed they owed it, but those amounts did not include anything for the

insurance. Under the contracts, the debtors' nonpayment of the insurance premiums could at least have

raised a question whether they intended to exercise their right to cancel the coverage. Furthermore,

since the Credit Union was aware of these contracts that it believed were executory but the debtors

obviously were not, the Credit Union would have acted more prudently if it had asked the Court to fix a

time for the debtors to assume or reject the insurance contracts, instead of remaining silent and paying

the premiums for several years before seeking to be reimbursed for them. Because it failed to inform

the debtors, the chapter 13 trustee, and the Court early in these cases that it was paying for this

insurance, the Credit Union waived any right to seek reimbursement from the debtors. Indeed, the

Credit Union not only remained silent about the disability insurance, it even affirmatively agreed with the

debtors what amount they owed it and had to pay under their plans, and failed to include any insurance

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premiums in its claims. As stated in §1327(a): “The provisions of a confirmed plan bind the debtor and

each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not

such creditor has objected to, has accepted, or has rejected the plan.” The Credit Union's claims

against these debtors are therefore limited to the amounts called for by the confirmed plans.

The Court is not convinced that the Credit Union's paying for the credit disability insurance was

an “actual, necessary” cost or expense of preserving these bankruptcy estates as required for it to be

allowed as an administrative expense under §503(b)(1)(A). The Credit Union has not attempted to

explain how its payments might have benefitted the estates. Nothing presented indicates either Mr.

Botter or Ms. Bechtel had any desire to maintain this coverage after they filed for bankruptcy, or any

reason to think they ran an unusual risk of becoming disabled before they paid their debts to the Credit

Union.

The Credit Union's administrative expense claims would fare no better if they could be

considered to be postpetition rather than prepetition obligations (the Court does not believe they can

be). In effect, the Credit Union extended credit to the debtors. Postpetition credit may be obtained

under §364(b), (c), or (d) only with the Court's approval after notice and a hearing, none of which

happened in these cases. The Credit Union's claims would also not be allowable as postpetition claims

under §1305(a)(2) and (c) because the insurance was not necessary for the debtors' performance

under their plans and prior approval of the trustee could have been obtained but was not.

For all these reasons, the Court concludes the Credit Union's application for an administrative

expense in each of these cases must be denied.

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The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the

Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A

judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and

FRCP 58.

Dated at Topeka, Kansas, this ____ day of July, 2000.

_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

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