Opinion ID: 472139
Heading Depth: 2
Heading Rank: 3

Heading: History of Bankruptcy Reform Act.

Text: 57
58 In response to numerous calls for reform of the bankruptcy laws, Congress established the Commission on Bankruptcy Laws of the United States in 1970. After two years of research and public and private meetings, the Commission submitted a report on the bankruptcy laws and draft legislation to correct perceived inadequacies in the Act, particularly in the area of administration. The draft legislation accompanying the Report proposed to codify the common law standards for adequately protecting secured creditors during the pendency of the automatic stay. Report of the Commission on the Bankruptcy Laws of the United States, H.R.Doc. No. 137, pt. II, 93d Cong., 1st Sess. 236-37 (1973) [hereinafter cited as Commission Report ]. 21 The official comments accompanying the proposed legislation explained the purpose of the section: 59 1. This section is new. It is essentially a codification of such cases as In re Yale Express System, Inc., 384 F.2d 990 (2d Cir.1967) and In re Bermec, 445 F.2d 367 (2d Cir.1971). See generally Festersen, Equitable Powers in Bankruptcy Rehabilitation: Protection of the Debtor and the Doomsday Principle, 46 Am.Bankr.L.J. 311, 324-33 (1972).... 60 3.... No attempt has been made to codify the case law as to when the use of collateral must cease or as to the adequacy of protection in any given situation. This is left to case-by-case development by the courts. A benchmark in determining the adequacy of protection is the liquidation value of the collateral at the date of the petition. This is analgous [sic] to the cram down provision of Sec. 7-303(7). Conditions which may be imposed by the court, when appropriate, include (1) requiring other security of an equivalent value; (2) if there is no equity or the equity is marginal, requiring additional security to the extent of the anticipated decrease in the value of collateral as a result of use; and (3) giving a priority if it is clear that the proceeds of the liquidation of the property of the estate available to pay the claim will be sufficient. 61 Id. at 236-37 (emphasis added). The objective of the Commission's proposal was to permit use of the property subject to payments or other transfers that would compensate the secured creditor for the decline in recoverable value. Nimmer, Secured Creditors and the Automatic Stay, 68 Minn.L.Rev. 1, 8 (1983). The Commission's suggested standard for relief from the automatic stay clearly would not have allowed periodic interest payments for the delay in enforcing foreclosure rights. 62
63 The Commission's draft legislation and alternative legislation drafted by the National Conference of Bankruptcy Judges were introduced in 1973 and 1974 and reintroduced in 1975. 22 Congress held extensive hearings on the draft legislation throughout 1975 and 1976. See Bankruptcy Act Revision: Hearings on H.R. 31 and H.R. 32 before the Subcomm. on Civil and Constitutional Rights, House Comm. on the Judiciary, 94th Cong., 2d Sess. (1976) [hereinafter cited as House Hearings ]; Hearings on S. 235 and S. 236 before the Subcomm. on Improvements in Judicial Machinery, Senate Comm. on the Judiciary, 94th Cong., 1st Sess. (1975) [hereinafter cited as Senate Hearings ]. 64 Numerous witnesses for secured creditors testified on the proposed legislation. 23 Insofar as the automatic stay provision was concerned, nearly all witnesses, including those representing secured creditors, favored retention of the Commission's provision in substance. 24 Numerous witnesses did suggest certain changes to address two concerns: (1) delay in reorganization proceedings, and (2) the danger of consumption of collateral, particularly soft collateral. For example, several witnesses advocated speed and flexibility in the reorganization process so that the proceedings could be concluded in a matter of months rather than years. House Hearings, supra, at 437. 25 Further, several contended that the Commission proposal did not adequately protect creditors against a decline in value of the collateral, particularly soft or self-liquidating collateral such as cash, accounts receivable, chattel paper, contract rights, and inventory. 26 Several witnesses supported the Commission's general proposal to codify the common law standard protecting against depreciation during the stay, but suggested that various examples of how to provide protection to the secured creditor, which the Commission had set forth in its Comments, be codified. 27 65 The simple fact is that in thirty-five days of in-depth hearings before the House subcommittee resulting in over 2700 pages of testimony from more than 100 witnesses, as well as in Senate hearings that were nearly as extensive, the subject of periodic postpetition interest payments for undersecured creditors was not raised in the testimony or prepared statement of a single witness. 28 Not one of the many witnesses for secured creditors even mentioned the award of postpetition interest payments or sought compensation for the delay required by the stay. Viewed in this context, it seems unlikely that Congress intended the adequate protection provisions to require periodic payment of postpetition interest to an undersecured creditor. 66
67 Following the committee hearings, the Commission's proposals were redrafted and reintroduced in the House and Senate. Thereafter, the legislation that became the Bankruptcy Reform Act of 1978 went through further revisions before its final enactment by Congress. Accordingly, statements in the legislative history must be carefully compared to the version of the bill to which they referred. As in most analyses of legislative history, [t]he best method ... is to begin with the most recent statement of authority and delve backward through the legislative process. Klee, Legislative History, supra, 28 DePaul L.Rev. at 957. However, we will begin by reviewing post-hearing amendments and the House and Senate Judiciary Committee reports although they are not the most recent statements of authority, because the final version of the bill may be more readily understood if the chronological development of its components is known. 68 Proposed Sec. 362(d) of the House bill favorably reported by the Judiciary Committee on September 8, 1977, H.R. 8200, provided that the automatic stay could be lifted for cause, including the lack of adequate protection of an interest in property of a creditor. The House Report stated that [t]he interests of which the court may provide protection ... include equitable as well as legal interests, citing as an example a right to recover property under a consignment. House Report, supra, at 338, U.S.Code Cong. & Admin.News 1978, p. 6294. Section 361 was designed to illustrate means by which [adequate protection] may be provided and to define the contours of the concept. Id. The Report summarized the concept of adequate protection: 69 The concept is derived from the fifth amendment protection of property interests. See Wright v. Union Central Life Ins. Co., 311 U.S. 273 [61 S.Ct. 196, 85 L.Ed. 184] (1940); Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 [55 S.Ct. 854, 79 L.Ed. 1593] (1935). It is not intended to be confined strictly to the constitutional protection required, however. The section, and the concept of adequate protection, is based as much on policy grounds as on constitutional grounds. Secured creditors should not be deprived of the benefit of their bargain. There may be situations in bankruptcy where giving a secured creditor an absolute right to his bargain may be impossible or seriously detrimental to the bankruptcy laws. Thus, this section recognizes the availability of alternate means of protecting a secured creditor's interest. Though the creditor might not receive his bargain in kind, the purpose of the section is to insure that the secured creditor receives in value essentially what he bargained for. 70 Id. at 339, U.S.Code Cong. & Admin.News 1978, p. 6295. 71 The Report discussed four neither exclusive nor exhaustive examples or means of providing adequate protection set forth in the House's proposed Sec. 361. Codification of the examples was apparently in response to the suggestions of numerous witnesses for secured creditors that the section drafted by the Commission gave too much discretion to the bankruptcy judge. Proposed Sec. 361(1), assertedly patterned on the protection devised in In re Yale Express, but actually closer to that set forth in In re Bermec, would permit periodic cash payments by the estate, to the extent of a decrease in value of the opposing entity's interest in the property involved. House Report, supra, at 339, U.S.Code Cong. & Admin.News 1978, p. 6295. [W]here, for example, the property in question is depreciating at a relatively fixed rate, periodic payments would compensate for the depreciation. Id. Proposed Sec. 361(2) provided for an additional or replacement lien on other property to the extent of the decrease in value of the property involved. Id. That would provide the protected entity with a means of realizing the value of the original property, if it should decline during the case.... Id. at 339-40, U.S.Code Cong. & Admin.News 1978, p. 6296. 72 Proposed Sec. 361(3), which was apparently based on Yale Express, would have granted an administrative expense priority to the protected entity to the extent of his loss. House Report, supra, at 340, U.S.Code Cong. & Admin.News 1978, p. 6296. Because the method would be risky, it was only to be used when there is relative certainty that administrative expenses will be able to be paid in full in the event of liquidation. Id. 73 Proposed Sec. 361(4), a catch-all provision, would have allowed the court to grant such other relief as will result in the realization by the protected entity of the value of its interest in the property involved. Id. 29 The report offered as an example a guarantee by a third party outside the judicial process of compensation for any loss incurred in the case. Id. 74 The Report noted that all four methods rely ... on the value of the protected entity's interest in the property involved. Id. However, [t]he section does not specify how value is to be determined, nor does it specify when it is to be determined. These matters are left to case-by-case interpretation and development. Id. 30 75 The House Report was somewhat cryptic in its general discussion of the contours of the concept of adequate protection. The paragraph of the report that has provided the most support for the American Mariner line of cases is contained within this discussion, the statements that [s]ecured creditors should not be deprived of the benefit of their bargain, House Report, supra, at 339, U.S.Code Cong. & Admin.News 1978, p. 6295, and that adequate protection is intended to result in realization by the secured creditor of the value of its interest in the property involved, id. at 340, U.S.Code Cong. & Admin.News 1978, p. 6296. The report does not explain the benefit of their bargain of which secured creditors should not be deprived. In the context of the entire report, however, it seems likely that the bargain referred to is the bargain to receive the collateral or its value upon default. Although the stay temporarily prevents that aspect of the bargain from being fulfilled, a creditor should not be prejudiced by a debtor's continued use of collateral during the proceeding. That bargain must be protected by compensating for a decline in the value of the collateral through its use during the pendency of the stay. 76 Meanwhile, the Senate was considering companion legislation, in which the language of proposed Secs. 361 and 362(d) differed somewhat. Section 362(d) in the Senate proposal stated in part, as did the House version, that a party could obtain relief from the automatic stay for cause, including the lack of adequate protection of an interest in property of such party in interest. The version of Sec. 361 contained in the Senate proposal, S.2266, differed substantially from that in the House version, H.R. 8200, in that it did not incorporate the third and fourth subsections in the House's Sec. 361; it specified only two ways of providing adequate protection. First, the Senate Committee report explained that Sec. 361(1) would authorize periodic cash payments to compensate for depreciation, in accordance with the principles set forth in In re Bermec. Second, under Sec. 361(2) the secured creditor might be protected against a decline during the case by an additional or replacement lien on other property of the debtor to the extent of the decrease in value or actual consumption of the property involved. Senate Report, supra, at 54, U.S.Code Cong. & Admin.News 1978, p. 5840. The Senate Report stated that Sec. 361 would be consistent with the view expressed in Wright v. Union Central Life Ins. Co., 311 U.S. 273, 61 S.Ct. 196, 85 L.Ed. 184 (1940), where the Court suggested that it was the value of the secured creditor's collateral, and not necessarily his rights in specific collateral, that was entitled to protection. Senate Report, supra, at 54, U.S.Code Cong. & Admin.News 1978, p. 5840. The Senate proposal contained no catch-all provision. Accordingly, it seems clear that the Senate version of Sec. 361 would have protected only against a decline in value. 77 The Senate's version of Sec. 361 openly favored secured creditors in one regard: the panel rejected the granting of an administrative priority as a method of providing adequate protection to an entity as was suggested in In re Yale Express and the House's Sec. 361(3) because such protection is too uncertain to be meaningful. Senate Report at 54, U.S.Code Cong. & Admin.News 1978, p. 5840. 31 The secured creditor was faced with too large a risk in the event of a decline in value of its collateral because the estate might be insufficient to pay all its administrative expenses. Further, the Senate's proposed Sec. 362(d) favored secured creditors by placing a thirty-day limit for court action on motions for relief from the stay. 78 The Senate passed its bill as a substitute to the House's version on September 7, 1978. Because of the substantial differences in the House and Senate proposals, largely concerning the status of the bankruptcy courts, the leaders and staff members of the House and Senate Judiciary Committees met, negotiated and agreed on many changes in an effort to reconcile the two versions. 4 W. Norton, Bankruptcy Law and Practice ix n. 1 (1985). No conference committee was appointed. Id. 32 There is no formal or informal summary or transcript of these meetings in the published legislative history of the Code. 79 On September 28, 1978, the House took up the negotiated compromise that would become the new Code. Rep. Edwards' explanation of the agreed-upon changes on the floor of the House, as a consensus of these committee leaders, carr[ies] a weight in the legislative history equal to a conference report. Id.; see also 124 Cong.Rec. 32,391 (1978) (remarks of Rep. Rousselot) (statement by Rep. Edwards has the effect of being a conference report). 33 The committee leaders agreed to amend proposed Sec. 362(d) to its current language, and also substantially altered Sec. 361. The compromise version of Sec. 361 deleted the House's method of providing adequate protection of a decline in value with an administrative priority. Further, the compromise inserted the words indubitable equivalent for the word value, which had appeared in Sec. 361(4) of the House version of H.R. 8200: relief other than periodic cash payments or a replacement lien, but not an administrative priority, might be granted to result in the realization by [a secured creditor] of the indubitable equivalent of such entity's interest in such property. Rep. Edwards explained the compromise on the floor of the House immediately before the vote on it: 80 Section 361 of the House amendment represents a compromise between H.R. 8200 as passed by the House and the Senate amendment regarding the issue of adequate protection of a secured party. The House amendment deletes the provision found in section 361(3) of H.R. 8200 as passed by the House. It would have permitted adequate protection to be provided by giving the secured party an administrative expense regarding any decrease in the value of such party's collateral. In every case there is the uncertainty that the estate will have sufficient property to pay administrative expenses in full. 81 Section 361(4) of H.R. 8200 as passed by the House is modified in section 361(3) of the House amendment to indicate that the court may grant other forms of adequate protection, other than an administrative expense, which will result in the realization by the secured creditor of the indubitable equivalent of the creditor's interest in property.... Adequate protection of an interest of an entity in property is intended to protect a creditor's allowed secured claim. To the extent the protection proves to be inadequate after the fact, the creditor is entitled to a first priority administrative expense under section 507(b). 82 In the special case of a creditor making an election under section 1111(b)(2), that creditor is entitled to adequate protection of the creditor's interest in property to the extent of the value of the collateral not to the extent of the creditor's allowed secured claim, which is inflated to cover a deficiency as a result of such election. 83 124 Cong.Rec. 32,395 (1978) (emphasis added). Sen. DeConcini made an identical explanation of the bill before the Senate vote. Further, Rep. Butler, who was actively involved in drafting the bill and in negotiating the compromise between the House and Senate versions, stated on the floor of the House just before the vote on the compromise version that under the bill [c]reditors are provided adequate protection of their interest during the course of a case and limitations are placed on the use of collateral. 124 Cong.Rec. 32,418 (1978). Rep. Butler explained when adequate protection would be required under the version of Sec. 361 actually enacted: If a creditor is concerned that property is being misused or depreciating, the creditor can demand adequate protection or relief from the automatic stay. Id. at 32,41 9 (emphasis added). 84 These are the clearest and most probative expressions of congressional intent concerning Secs. 361-362(d). The clear implication of Rep. Butler's statement is that if property is not being misused or depreciating, then a secured creditor is not entitled to adequate protection payments. As for Rep. Edwards' explanation, if we recall what constitutes an allowed secured claim, we define the interest in property that Secs. 361-362 are designed to protect. First, an allowed claim may not include unmatured interest, Sec. 502(b)(2). See Fortgang & King, The 1978 Bankruptcy Code: Some Wrong Policy Decisions, 56 N.Y.U.L.Rev. 1148, 1150 (1981) (Postpetition interest under the Code, as distinguished from the Bankruptcy Act, explicitly is made a nonallowable part of a creditor's claim.). 34 Second, a claim is an allowed secured claim to the extent of the value of the collateral.... Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am.Bankr.L.J. 133, 152 (1979) [hereinafter cited as Cram Down ]. Therefore, the remarks of Rep. Edwards strongly suggest that what was intended to be adequately protected by Sec. 361 is the creditor's allowed secured claim--the value of its collateral. 35 It seems unlikely that Sec. 361(3) was intended to require periodic postpetition interest payments when the very interest to be protected--the allowed secured claim--cannot itself include postpetition interest. 36 85 The evolution of Secs. 361-362 during the legislative process lends further support to this conclusion. The House-Senate meetings produced two compromises in Sec. 361. The House proposal that Sec. 361 include the provision regarding an administrative expense priority to compensate for a decline in the value of the collateral, as had been done in In re Yale Express, was deleted by the Senate, and the House-Senate conferees agreed on the deletion because of the uncertainty that the estate will have sufficient property to pay administrative expenses in full. 124 Cong.Rec. 32,395 (1978) (remarks of Rep. Edwards). Further, the conferees agreed to include a general catch-all provision in the compromise version, as had been set forth in the final House version of the bill but not in the Senate version. However, they modified its language to state that the indubitable equivalent of the creditor's interest in the collateral must be protected, rather than the value of the interest as the House had recommended. Rep. Edwards did not explain the modification of the House bill to include indubitable equivalent. 86 We are properly reluctant to place significant weight on the unexplained action of the conferees when they added the indubitable equivalent language, particularly when the mute change would alter settled law. 37 However, it seems likely that the following may have happened: the Senate refused to accept the House's codification of In re Yale Express, because that would have subjected creditors to too great a risk that they would not be protected against a diminution in value. 38 The House, on the other hand, prevailed as to the catch-all provision; the Senate version would have allowed only periodic cash payments or a replacement lien to compensate for depreciation, while the House version recognized other relief, such as a guarantee by a third person or a bond. The Senate may have been reluctant to subject creditors to the vagaries of that subsection, so the conferees added the indubitable equivalent language to ensure that, if a court did not order less risky periodic payments or a replacement lien to compensate for a decline in the value of the collateral occasioned by the use, sale, or lease of the collateral by the debtor during the stay, the other relief unquestionably, or indubitably, would provide the creditor with the equivalent of the value of the property lost. Although, as we have discussed, the indubitable equivalent language was taken from Murel Holding, a cram-down case, no aspect of the legislative history indicates that the Senate's clearly expressed view as to the interest to be protected, namely the amount of the creditor's secured claim, was to be affected by the inclusion of the indubitable equivalent phrase in the compromise version. The legislative history is devoid of any indication that Congress meant to import wholesale the standards for adequate protection of secured creditors in a cram-down into the adequate protection provisions applicable during the stay. 87 The provisions underwent substantial revision in the legislative process, but the fundamental concept of the draft legislation that only depreciation of collateral must be protected against was not explicitly criticized or rejected at any point in the proceedings. 39 Further, at no point in the proceedings did Congress evince a decision to alter the settled rules regarding adequate protection and postpetition interest which the Commission attempted to codify. It seems likely that Sec. 361 is merely a codification of the case law that [had] developed under the [pre-Code] automatic stay rules, Kennedy, Automatic Stay II, supra, at 43 n. 177, except the rule of In re Yale Express. 40 Those rules did not permit periodic postpetition interest payments to an undersecured creditor. If Congress had intended to change those rules, the intention would have been clearly expressed, not left to be inferred from isolated phrases in the legislative history. Midlantic National Bank, 106 S.Ct. at 760.