Opinion ID: 472139
Heading Depth: 2
Heading Rank: 1

Heading: Pre-enactment History.

Text: 40 The rules Congress set forth in Sec. 361 and Sec. 362 regarding the automatic stay and the circumstances under which it might be lifted were not particularly innovative. Rather, even absent express statutory authority, the Supreme Court held as long ago as 1845 that the bankruptcy court had the equitable power to restrain creditors from enforcing liens after a bankruptcy petition was filed. Ex parte Christy, 44 U.S. (3 How.) 292, 11 L.Ed. 603 (1845); see also Mueller v. Nugent, 184 U.S. 1, 14, 22 S.Ct. 269, 274, 46 L.Ed. 405 (1902). And creditors' interests were not ignored before a lack of adequate protection was expressly codified as a reason for lifting the stay: Case law had made adequate protection of the secured creditor a major consideration long before the [draft predecessor of the Code] proposed to codify it as a requirement. Webster, Collateral Control Decisions in Chapter Cases: Clear Rules vs. Judicial Discretion, 51 Am.Bankr.L.J. 197, 237 (1977). 41 Protection of secured creditors' rights was frequently considered by the Supreme Court in connection with constitutional concerns raised by secured creditors. These cases primarily address creditors' rights at the time of confirmation of a plan, but the principles they enunciate are equally applicable to stays at the outset, and provide guidance on the limits of the equitable powers of the court that remain valid. 2 Collier on Bankruptcy p 362.01, at 362-11, 362-12 (15th ed. 1980). In general, the Fifth Amendment requires only that the value of the secured position of a creditor be maintained during the stay. 14 Within this constitutional limit, general rules evolved in the courts governing the exercise of their equitable power to grant 15 or lift a stay. The courts developed four factors to determine whether to vacate a stay: 42 (1) Would continuation of the stay result in an undue risk of material harm to the secured creditor? 43 (2) Was there a reasonable possibility of reorganization or rehabilitation? 44 (3) Was the property in question needed by the debtor or necessary to rehabilitation? 45 (4) Was there any equity in the property that might be realized for the benefit of the debtor or its creditors? 46 Id. at 362-22, 362-23. Although [a] positive answer on the first point ... was almost invariably fatal to the debtor, in determining whether to vacate the stay, courts tended to emphasize the need for judicial flexibility and the need to apply equitable considerations in determining the 'balance of the hurt.'  Id. at 362-23. The weight of the factors depended to some extent on the chapter of the Act governing the proceeding. 47 In a Chapter X proceeding, involving a corporate reorganization, the stay was usually vacated if its continuance would result in material harm to a secured creditor, but the other factors were frequently important. Id. A creditor was not materially harmed by the stay when the value of its lien was maintained during the pendency of the stay. In the case of depreciating collateral, this typically required periodic cash payments or other transfers of value equal to the depreciation to be provided to the creditor. 48 However, in In re Yale Express System, Inc., 384 F.2d 990 (2d Cir.1967), the court arguably softened that requirement. Yale Express involved collateral (truck trailers) depreciating through use by the debtor. The court held that to such extent as [the secured creditor] has been damaged by the use of its property pending the reorganization, it is entitled to equitable consideration in the reorganization plan. Id. at 992. In other words, the secured creditor apparently was entitled only to an administrative priority to compensate for depreciation; Yale Express seems to have adopted the dubious assumption that administrative expenses would be paid in full. 16 In In re Bermec Corp., 445 F.2d 367 (2d Cir.1971), the court retreated from Yale Express. To protect the creditor's interest in the collateral, the court ordered that the debtor periodically pay the secured creditors in cash for the economic depreciation of the collateral, id. at 369, 17 rather than force the creditor to accept a more risky administrative priority. 49 A Chapter XI petition proposed an arrangement, or any plan by a debtor for the settlement, satisfaction, or extension of the time of payment of his unsecured debts, upon any terms. 8 Collier on Bankruptcy p 4.01, at 343 (14th ed. 1976). Chapter XI's express stay provision, 11 U.S.C. Sec. 714 (1976) (repealed 1978), allowed the court to enter a stay for cause shown, 18 and under the rules, the stay could be lifted for cause shown, Rule 11-44(d). Because under Chapter XI a secured claim could not be affected by the arrangement, stronger grounds should be required to continue the stay against a lienor in a Chapter XI case than would be required in a proceeding ... under present Chapter X, and it should particularly be shown that continuation of the stay will cause no substantial injury to the lienor. 8 Collier on Bankruptcy p 3.22, at 256 (14th ed. 1976). See Lance, Inc. v. Dewco Services, Inc., 422 F.2d 778, 782 (9th Cir.1970). 19 50 Chapter XII of the Act governed cases involving real property arrangements by persons other than corporations. Chapter XII also had express stay provisions, and a creditor could obtain relief from the stay for cause shown. 51