Opinion ID: 695624
Heading Depth: 2
Heading Rank: 3

Heading: Adequate Protection

Text: 23 The question before us is not whether an oversecured creditor whose collateral is worth more than the amount of its debt in a Chapter 11 bankruptcy case may obtain postpetition interest as part of its claim. Indeed, it seems beyond peradventure that a creditor's right to recover postpetition interest on its oversecured claim pursuant to 11 U.S.C. Sec. 506(b) 5 is virtually unqualified. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290, 298 (1989). Equitable Life Assurance Soc'y v. Sublett (In re Sublett), 895 F.2d 1381 (11th Cir.1990). Cf. Rake v. Wade, --- U.S. ----, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) (oversecured claimant entitled to preconfirmation and postconfirmation interest on arrearages in Chapter 13 cases). Rather, the narrow legal issue presented for decision is whether Orix, purportedly an oversecured creditor, was entitled to receive periodic cash payments for accruing postpetition interest as part of adequate protection, pursuant to 11 U.S.C. Sec. 362(d)(1), in order to preserve the value of its equity cushion. Appellant Delta does not dispute that an oversecured creditor is entitled to postpetition interest on its claim, although, Delta does dispute whether Orix was, in fact, an oversecured creditor. 24 Here, the bankruptcy court did not make a factual finding as to Orix's status, but simply assumed that Orix was an oversecured creditor for purposes of determining the amount of adequate protection necessary to protect the creditor's interest. 6 The district court, relying upon the Supreme Court's opinion in Timbers, reversed the bankruptcy court reasoning that 25 [a]s an oversecured creditor, Credit Alliance is entitled to post-petition interest under 11 U.S.C. Sec. 506(b). This section states that to the extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which the claim arose. As this interest accrues, it also becomes secured by the security interest held by the creditor in the property. Thus, the security cushion represented by the value of the property above the creditor's security interest in the property is depleted daily as the interest accrues. As used in the applicable bankruptcy provisions, the value of the creditor's interest means the value of the collateral. The security or collateral cushion is an inherent part of the value of the collateral. Accordingly, the oversecured creditor has a valid property interest in this security cushion and has a right to adequate protection of this interest. United Savings Association v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). 26 (Emphasis added). And, not surprisingly, on appeal both parties rely on the Supreme Court's opinion in Timbers as support for their position. 27 The Supreme Court has determined that [t]he phrase 'value of such creditor's interest' in Sec. 506(a) means 'the value of the collateral.' .... We think the phrase 'value of such entity's interest' in Sec. 361(1) and (2), when applied to secured creditors, means the same. Timbers, 484 U.S. at 372, 108 S.Ct. at 631, 98 L.Ed.2d at 749. The enquiry before us turns on whether the interest in property to be protected by 11 U.S.C. Sec. 362(d)(1) entitles an oversecured creditor to receive periodic postpetition interest payments to ensure against the diminution in value of its equity cushion as a part of adequate protection or whether it is designed only to protect against diminution in the value of the collateral, i.e.--depreciation. 28 Appellee Orix asserts that as interest accrues on its claim the interest by the terms of its contract also becomes secured by its security interest in Delta's assets. Therefore, Orix contends, an oversecured creditor's position erodes by the accrual of postpetition interest and ultimately the adequate protection becomes inadequate. That is, unless the interest is paid, Orix's debt becomes less and less oversecured and eventually becomes undersecured. While Orix is correct that the size of the equity cushion decreases as postpetition interest accrues, the increase in the size of its secured claim resulting from the accrual of that interest is entitled to adequate protection only to the extent that the value of the collateral at the time of filing exceeded the value of Orix's original secured claim. 29 To begin, [u]pon the filing of a bankruptcy petition, Sec. 362 of the Code imposes an automatic stay on actions by creditors to collect their claims from a debtor. United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 793 F.2d 1380, 1387 (5th Cir.1986), on reh'g, 808 F.2d 363 (1987) (en banc court reinstates panel opinion), aff'd, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Yet a creditor is not without recourse to protect its interests. Under Sec. 362(d), a creditor may obtain relief from the [automatic] stay (1) 'for cause, including the lack of adequate protection' of the creditor's interest in the collateral. Timbers, 793 F.2d at 1387-88. 7 30 Ordinarily, creditors are not allowed a claim for interest accruing on their debts during bankruptcy proceedings. Timbers, 793 F.2d at 1385. Yet, as an exception to that rule, an oversecured creditor, but not an undersecured creditor having the same risk (indeed, it is possible for the undersecured creditor's risks to be much larger quantitatively), is entitled to receive postpetition interest as part of its claim at the time of confirmation of a plan or reorganization, that is, at or near the conclusion of the bankruptcy case. 11 U.S.C. Sec. 506(b). Judge Randall of the Fifth Circuit explained the rationale for this exception. 31 [T]he interest provisions of the Code and its predecessors, as interpreted by the Supreme Court for almost a century, are premised on the equitable principle that the unencumbered assets of a debtor's estate will not be used to benefit one class of creditors at the expense of another. .... [Thus,] [a]llowing a claim for postpetition interest by an oversecured creditor, ... is not inconsistent with that equitable principle, because only assets encumbered by the creditor's lien will be used to fund the payment of postpetition accrued interest. 32 Timbers, 793 F.2d at 1387 (emphasis added). 33 Nevertheless, the Supreme Court has indicated that an oversecured creditor's allowed secured claim for postpetition interest, which is determined near the conclusion of the bankruptcy case, must be denied to the extent that, together with the principal amount of the claim, it exceeds the value of the collateral. Or put another way, the oversecured creditor's allowed secured claim for postpetition interest is limited to the amount that a creditor was oversecured at the time of filing. 34 Even more important for our purposes than Sec. 506's use of terminology is its substantive effect of denying undersecured creditors postpetition interest on their claims--just as it denies oversecured creditors postpetition interest to the extent that such interest, when added to the principal amount of the claim, will exceed the value of the collateral. Section 506(b) provides that [t]o the extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim. (Emphasis added.) Since this provision permits postpetition interest to be paid only out of the security cushion, the undersecured creditor, who has no such cushion, falls within the general rule disallowing postpetition interest. See 11 U.S.C. Sec. 502(b)(2). If the Code had meant to give the undersecured creditor, who is thus denied interest on his claim, interest on the value of his collateral, surely this is where that disposition would have been set forth, and not obscured within the adequate protection provision of Sec. 362(d)(1). Instead of the intricate phraseology set forth above, Sec. 506(b) would simply have said that the secured creditor is entitled to interest on his allowed claim, or on the value of the property securing his allowed claim, whichever is lesser. 35 Timbers, 484 U.S. at 372-73, 108 S.Ct. at 631, 98 L.Ed.2d at 749. 36 The Supreme Court has recognized that an undersecured creditor may be entitled to adequate protection to ensure against the decline in the value of its collateral. However, an undersecured creditor is not entitled to receive postpetition interest on its collateral during the stay to assure adequate protection under 11 U.S.C. Sec. 362(d)(1). Timbers, 484 U.S. at 382, 108 S.Ct. at 636, 98 L.Ed.2d at 755 (emphasis added). 37 Ordinarily, the matter of adequate protection is determined at or near the inception of a bankruptcy case. By contrast, the determination of a creditor's secured status, pursuant to 11 U.S.C. Sec. 506, comes at or near the conclusion of a bankruptcy case. 38 Under [11 U.S.C.] Sec. 506(c), the debtor may recover from property securing a creditor's allowed secured claim the reasonable and necessary costs and expenses of preserving or disposing of the property, to the extent of any benefit to the creditor. If, after reducing the amount of the allowed secured claim by the amount of that recovery, the creditor is oversecured, it is entitled to interest at the contract rate on its net allowed secured claim. Sec. 506(b). The timing of the payment of accrued interest to an oversecured creditor (at the conclusion of the proceeding) is doubtless based on the fact that it is not possible to compute the amount of the Sec. 506(c) recovery (and, accordingly, the amount of the net allowed secured claim on which interest is computed) until the termination of the proceeding. 39 Timbers, 793 F.2d at 1407 (emphasis added). 40 Similarly, we conclude that 11 U.S.C. Sec. 506(b), providing for postpetition interest on oversecured claims, read in pari materia with 11 U.S.C. Sec. 362(d)(1), concerning conditioning the automatic stay on adequate protection, and 11 U.S.C. Sec. 502, regarding the allowance of claims, requires that the payment of accrued postpetition interest to an oversecured creditor await the completion of reorganization or confirmation of the bankruptcy case. The ratio decidendi enunciated by the Supreme Court in Timbers that an undersecured creditor is not entitled to receive postpetition interest on its collateral during the stay to assure adequate protection under 11 U.S.C. Sec. 362(d)(1) applies equally well to an oversecured creditor. Such an interpretation of the Bankruptcy Code is consistent whether the secured creditor is undersecured or oversecured, otherwise Sec. 506(b) would simply have said that the secured creditor [whether oversecured or undersecured] is entitled to interest 'on his allowed claim, or on the value of the property securing his allowed claim, whichever is lesser.'  Timbers, 484 U.S. at 372-73, 108 S.Ct. at 631, 98 L.Ed.2d at 749 (emphasis added). Accordingly, viewing the allowance of postpetition interest to oversecured creditors as a limited exception only, 8 we hold that an oversecured creditor's interest in property which must be adequately protected encompasses the decline in the value of the collateral only, rather than perpetuating the ratio of the collateral to the debt. The bankruptcy court accomplished that by allowing adequate protection in the amount of accruing depreciation. See In re Westchase I Assoc., 126 B.R. 692 (W.D.N.C.1991); David G. Epstein et al., Bankruptcy Sec. 3-27, at 142-43 (1993). 41 We think this rule results in the appropriate balance between the conflicting interests of the oversecured creditor on the one hand and the estate, as well as other creditors, secured and unsecured, on the other hand. As one commentator points out: 42 [t]here is certainly no reason intrinsic to the phenomenon of credit that entitles over-secured creditors to interest out of their collateral before junior creditors, whether secured [perhaps by the identical collateral] or unsecured, receive any of their principal. 43 Niall L. O'Toole, Adequate Protection and Postpetition Interest in Chapter 11 Proceedings, 56 Am.Bank.L.J. 251, 253 (1982). 44 Here, even accepting the bankruptcy court's assumption that Orix was an oversecured creditor, although it never made such a factual finding, for the reasons stated above, Orix, as a matter of law, was not entitled to receive periodic payments for accruing postpetition interest as part of adequate protection for any period of time. 9