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

Heading: The Automatic Stay and Adequate Protection Payments--Secs. 361 and 362.

Text: 29 Upon the filing of a bankruptcy petition, Sec. 362(a) of the Code imposes an automatic stay on actions by creditors to collect their claims from a debtor. Section 362(a) temporarily bars a creditor from, among other things, foreclosing on a debtor's property to enforce a security interest. The purpose of the automatic stay is to give[] the business a breathing spell and time to work constructively with its creditors to propose a plan of reorganization, as well as to prevent creditors from obtaining preferential treatment by quick action. House Report, supra, at 174. 10 30 Under Sec. 362(d), a creditor may obtain relief from the stay (1) for cause, including the lack of adequate protection of the creditor's interest in the collateral, or (2) when a debtor does not have an equity in the property and the property is not necessary to an effective reorganization. If a creditor files a complaint seeking relief from the stay under Sec. 362(d), the burden of proof, or the risk of non-persuasion, is on the debtor for all issues except the issue of the debtor's equity in the property, Sec. 362(g). Therefore, in a proceeding arising under Sec. 362(d)(1), the debtor must prove that the secured creditor's interest is adequately protected, or the automatic stay will lift. 31 The phrase adequate protection of an interest in property set forth in Sec. 362(d)(1) is not defined in the Code. However, Sec. 361 lists three ways that adequate protection may be provided. Under Sec. 361(1), a debtor may be required to make a cash payment or periodic cash payments to a creditor, to the extent that the stay results in a decrease in the value of the creditor's interest in the property. This method would seem to be particularly appropriate when collateral is depreciating at a steady rate. Under Sec. 361(2), a creditor may be given a lien on unencumbered property, again to the extent that the stay results in a decrease in the value of the creditor's interest in the property. This would appear to protect a secured creditor when a debtor proposes to use cash collateral or may consume other collateral at an uneven rate, such as inventory. 32 Under Sec. 361(3), a catch-all provision, the court may grant other relief ... as will result in the realization by [the creditor] of the indubitable equivalent of the creditor's interest in the property. A guarantee or bond by a third person not involved in the proceeding might provide such protection. Section 361(3) expressly states, however, that providing a creditor with an administrative priority claim as a form of adequate protection is precluded, although an administrative priority is automatically provided by Sec. 507(b) in the event that the form of adequate protection actually provided by the court ultimately proves to be insufficient. 33 Clearly neither subsection (1) nor (2) authorizes periodic payments to a creditor whose collateral is not decreasing in value. The issue presented in this case is whether subsection (3) was intended by Congress to permit the periodic payment to an undersecured creditor of postpetition interest on the value of its collateral when that creditor would not have a claim for postpetition interest at the conclusion of the proceeding, or whether Congress simply intended subsection (3) to permit a bankruptcy judge to fashion methods of protection against a decline in value of collateral alternative to those set forth in subsections (1) (cash payments) and (2) (replacement liens). 34 The origin of the phrase indubitable equivalent that appears in Sec. 361(3) arguably provides support for a conclusion that Sec. 361(3) goes beyond protection against a decline in value of the collateral and requires payment of postpetition interest. 11 The phrase first appeared in Judge Learned Hand's leading opinion in In re Murel Holding Co., 75 F.2d 941 (2d Cir.1935), which held in the context of the proposed confirmation of a plan proposed by a debtor over the dissent of a secured creditor (commonly called a cram-down) that the dissenting secured creditor was entitled to the present value of his secured claim in cash or a substitute of the most indubitable equivalence. Id. at 942. The court noted that the usual way the equivalent of a claim is provided following confirmation of a plan of reorganization is by paying the creditor post-confirmation interest on the amount of the claim. By using the indubitable equivalent phrase in Sec. 361, Congress conceivably imported the standard for the confirmation of a plan over the dissent of a class of secured creditors into the adequate protection provisions of the Code, requiring protection of the present value of a creditor's secured claim during the stay. 35 Reliance on the phrase to award postpetition interest payments as protection of a creditor's interest, however, begs the question: indubitable equivalent in Sec. 361(3) refers to a substitute for a particular interest; it does not define the interest. Subsections (1) and (2) state that the creditor is protected against a decline in the value of the collateral occasioned by the use, sale or lease of the collateral by the debtor during the stay. Subsection (3) does not state what interest is to be protected during the automatic stay. In the context of the entire section, it is certainly possible that subsection (3) simply gives the court means of providing adequate protection that are alternatives to those set forth in (1) and (2), periodic cash payments and replacement liens, to compensate a creditor for a decline in value of its collateral. 12 If that is the case, subsection (3) does not expand the range of substantive creditor interests protected. 36 Indeed, overreliance on Murel in this situation may be barred by the language of Murel itself. The court stated that the Act required post-plan interest payments to provide a secured creditor with complete compensation. However, the court plainly added that [n]o doubt less [than complete compensation] will be required to hold up the suit for a short time until the debtor shall have a chance to prepare; much depends upon how long he has had already, and upon how much more he demands. Id. at 943. 13 37 Our examination of the language of the adequate protection provisions suggests that they were intended to protect a secured creditor against a decrease in the value of its collateral due to the debtor's use, sale or lease of that collateral during the stay. There is little in the language of the statute to support a requirement that a debtor make periodic postpetition interest payments to an undersecured creditor, particularly when the Code makes it unmistakably clear that an undersecured creditor is not entitled to a claim for such interest at the conclusion of the proceeding. However, in using the indubitable equivalent language in Sec. 361(3), Congress conceivably intended to protect the present value of a secured creditor's collateral during the stay, rather than simply its value. Accordingly, we must conclude that Sec. 361 is not only ambiguous on its face but also when considered in light of the interest provisions of the Code. We have already considered briefly the legislative history of the interest provisions of the Code, see supra note 8, and we turn now to the legislative history of the adequate protection provisions for further enlightenment.