Opinion ID: 472220
Heading Depth: 2
Heading Rank: 1

Heading: The district court erred in defining the elements of adequate protection.

Text: 19 The filing of a Chapter 11 bankruptcy petition results in an automatic stay of all acts by creditors to enforce their liens against the debtor's property. 11 U.S.C. § 362(a). The purpose is twofold: first, to give the debtor a breathing spell from his creditors; 3 and second, to prevent one creditor from rushing to enforce its lien to the detriment of the other creditors. 4 The impact of the automatic stay is tempered by certain creditor safeguards, one of which is the secured creditor's right to adequate protection of its interest during the bankruptcy proceedings. 11 U.S.C. § 362(d). 20 Although adequate protection is not specifically defined in the Bankruptcy Code, Congress intended that a debtor's offer of adequate protection should, as nearly as possible under the circumstances of the case, provide the creditor with its bargained-for rights. In re Briggs Transportation Co., 780 F.2d 1339 (8th Cir.1985); In re Martin, 761 F.2d 472, 476 (8th Cir.1985); see also H.R.Rep. No. 595, 95th Cong., 1st Sess. 339, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6295 (the purpose of [adequate protection] is to ensure that the secured creditor receives in value essentially what he bargained for). However, Congress expressly did not state how these bargained for rights were to be valued, nor when this valuation was to occur. 21 The 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. It is expected that the courts will apply the concept in light of facts of each case and general equitable principles. It is not intended that the courts will develop a hard and fast rule that will apply in every case. The time and method of valuation is not specified precisely, in order to avoid that result.    The flexibility is important to permit the courts to adapt to varying circumstances and changing modes of financing. 22 H.R.Rep. No. 595 at 339, 1978 U.S.Code Cong. & Ad.News at 6295. 23 Thus, while it is agreed that a secured creditor should receive adequate protection of its interest during an automatic stay, any adequate protection determination must necessarily turn on the unique facts presented in each individual case. See, e.g., In re Briggs, 780 F.2d at 1348. These factual findings are subject to the clearly erroneous standard of review, In re Martin, 761 F.2d at 474; Bankr.R. 7052, and to this Court's right to correct errors of law. Martin, 761 F.2d at 475 (quoting Bose Corp. v. Consumer Union of United States, Inc., 466 U.S. 485, 501, 104 S.Ct. 1949, 1960, 80 L.Ed.2d 502 (1984)). 5 24
25 The bankruptcy court held that the Federal Land Bank and Norwest were entitled to adequate protection payments in the form of interest on the value of the collateral securing their loans. This conclusion was based upon the premise that due to the automatic stay, the Federal Land Bank and Norwest were unable to immediately foreclose, liquidate the collateral, and reinvest the liquidation proceeds. See In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir.1984). It held that the Federal Land Bank was entitled to monthly adequate protection interest payments as of January 1, 1985 (date of the Ahlers' post-petition default on the Federal Land Bank loans), and that Norwest was entitled to monthly adequate protection interest payments as of February 27, 1985 (date of the evidentiary hearing). It found that the Ahlers did not have sufficient funds to make these monthly payments, and that a lien on the following year's crops could not constitute adequate protection. Accordingly, it granted the Federal Land Bank's and Norwest's motions for relief from the automatic stay. 26 A secured creditor is entitled to adequate protection of its security interest. That protection may include compensation to a creditor, in the form of post-petition interest payments, for the delay in enforcing the creditor's foreclosure rights. In re Briggs Transp. Co., 780 F.2d 1339, 1350 (8th Cir.1985). Thus, we cannot say as a matter of law that the bankruptcy court erred in requiring post-petition interest payments. The question, then, is the timing and amount of these payments. 27 The concept of providing a secured creditor with adequate protection in the form of interest on the value of the collateral is premised on the theory that a secured creditor bargains for the right to take possession of the collateral and sell it in the event that the debtor defaults. American Mariner, 734 F.2d at 435 (this right constitutes an interest in property that is created and defined by state law). To the extent that a debtor can, by filing a bankruptcy petition, preclude or delay a secured creditor from exercising this right and reinvesting the liquidation proceeds, the creditor has been deprived of this benefit of its bargain. Thus, adequate protection payments in the form of interest are designed to insure that the secured creditor receives the benefit of its bargain by placing it in essentially the position it would have been in absent the filing of a bankruptcy petition. See H.R.Rep. No. 595 at 339, 1978 U.S.Code Cong. & Ad.News at 6295. Accordingly, in fashioning adequate protection payments, the bankruptcy court must determine the date when the creditor, absent the filing of a bankruptcy petition, could have taken possession of the collateral under state law and could have sold it to a third party, the amount that the creditor would have realized at this sale, and the creditor's expected return upon reinvestment. 28 Payments to protect the creditor's right to reinvestment return on foreclosure proceeds should not begin until, under state law, the creditor could have taken possession of the collateral, sold it to a third party, and reinvested the proceeds. American Mariner, 734 F.2d at 435 n. 12 (to avoid overcompensating the secured creditor, the timing of adequate protection should take account of the usual time and expense involved in repossession and sale of collateral.); see also In re Bear Creek Ministorage, Inc., 49 B.R. 454, 458-59 (Bankr.S.D.Tex.1985); In re South Village, Inc., 25 B.R. 987, 996 n. 14 (Bankr.Utah 1982). 29 Before the bankruptcy court considers the usual foreclosure delays associated with the particular collateral involved, it must first determine the date to which these delays will be added. If the secured creditor has commenced foreclosure proceedings prior to the filing of the bankruptcy petition, the starting date should be the date foreclosure proceedings were commenced. If, however, the secured creditor has not commenced foreclosure proceedings prior to the filing of the bankruptcy petition, the starting date should be the date that the creditor moves for adequate protection in the bankruptcy court. 6 To the appropriate date, the bankruptcy court should add the usual foreclosure delays associated with the particular collateral involved. 30 With respect to the farmland, Minnesota law provides that six-weeks published notice must be given before a foreclosure sale. Minn.Stat.Ann. § 580.03 (West 1947). In addition, the mortgagor has the exclusive right to redeem the realty for twelve months following the foreclosure sale. 7 Minn.Stat.Ann. §§ 580.23, subd. 2, and 580.24 (West Cum.Supp.1985). During this twelve-month redemption period, the mortgagor is entitled to possession, rents, and profits of the real estate. Johnson v. First National Bank of Montevideo, 719 F.2d 270, 276 (8th Cir.1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984). Because the purchaser at a mortgage foreclosure sale would not be entitled to possession and profits from the real estate until after the redemption period had expired, it is extremely unlikely that a third party would purchase the property at the foreclosure sale. Moreover, Minnesota law prohibits the inclusion in a mortgage instrument of any provision under which rents and profits arising from the mortgaged property after default are assigned to the mortgagee. Erickson-Hellekson-Vye Co. v. A. Wells Co., 217 Minn. 361, 15 N.W.2d 162 (1944). 8 Thus, assuming that Norwest and the Federal Land Bank follow reasonable and established marketing techniques, they will purchase the realty themselves at the foreclosure sale, and then attempt to resell the property after the redemption period has expired, if the Ahlers have not exercised their redemption rights. Since their right to foreclosure and to reinvest the liquidation proceeds would give them no financial benefit until the land could be resold to a third party, which at the earliest would be one year and six weeks from the date the foreclosure proceedings were commenced, the Ahlers' adequate protection payments to protect this right to reinvestment returns on foreclosure proceeds should not begin until that date. See, e.g., Bear Creek Ministorage, 49 B.R. at 457-58. If no foreclosure proceedings were commenced before the filing of the bankruptcy proceeding, the adequate protection payments would begin one year and six weeks after the adequate-protection motion was filed by the creditor. 31 Under Minnesota law, Norwest would be permitted to take possession of the farm machinery and equipment promptly unless the debtor is dependent on the use of the property to earn a living. In that event, the debtor is permitted to retain the property for a period of time if he insures it and makes payments essentially similar to what he would be required to make under the Bankruptcy Act. Minn.Stat.Ann. § 565.251 (West Supp.1986). It follows that adequate protection payments for farm machinery equipment should begin promptly on application therefor. Secured collateral such as livestock and grain in storage may be readily liquidated without any significant delay, and, hence, adequate protection payments on these items should also begin on application. 32
33 Congress specifically left open the question of the date of valuation. See p. ----, infra. The bankruptcy court determined that values for purposes of adequate protection were to be fixed as of the date the petition was filed. While this decision is appropriate with respect to the livestock and grain in storage, which, under state law, could have been sold immediately, it is inappropriate with respect to the collateral that could not have been sold immediately. That collateral should be valued at the time it could have been sold under state law as discussed in section II.A.1 of this opinion. Even if this timing error were ignored, the bankruptcy court's findings as to the values of the land and equipment were clearly erroneous. In making his decision, it failed to take into account the fact that land values had declined by at least twenty-four percent in the twelve-month period immediately preceding the filing of the petition in bankruptcy. 9 There is likewise no support in the record for the bankruptcy court's statement that the debtor based his opinion as to value on conjecture. 10 The bankruptcy court will redetermine these values on remand. 34
35 The bankruptcy court ruled that the Ahlers must make adequate-protection payments monthly to maintain the automatic stay. This ruling ignores the cyclical nature of agriculture. A grain farmer's income is not dependent upon a monthly paycheck, but rather upon the harvest of his crops at the end of the growing season. Likewise, a hog farmer's income is realized when the hogs are sold. Thus, adequate protection payments in the Ahlers' case should not be due until they have harvested their crops and sold their hogs. 11 36
37 We next address the bankruptcy court's ruling that the Ahlers' offer of a lien on the following year's crop could not constitute adequate protection. This issue was thoroughly addressed in In re Martin, 761 F.2d 472 (8th Cir.1985), in which we held that a lien on a future crop, to the extent that the crop was otherwise not encumbered, may serve in whole or in part as a basis for providing adequate protection. We also outlined a nonexclusive list of factors the bankruptcy court should consider in making this determination. Id. at 477. Thus, the bankruptcy court's ruling was contrary to the law of this circuit. 38