Opinion ID: 546944
Heading Depth: 2
Heading Rank: 2

Heading: lifting the automatic stay

Text: 27 As soon as a petition in bankruptcy is filed, the automatic stay provisions of 11 U.S.C. Sec. 362 take effect. The automatic stay prevents all pre-petition creditors from taking any action to collect their debts. This is so even if the creditor has a mortgage or security interest in the property of the debtor, and even if the value of the collateral is less than the amount of the debt. In such a case, bankruptcy proceedings may only delay the inevitable result. There may be no reason to make the creditor wait until the final distribution of the estate to get what it bargained for, and indeed early release of the collateral may aid administration of the estate by allowing a quicker determination of the amount of the undersecured creditor's unsecured claim. Sec. 506(a). For this reason, Congress included a provision for relief from the automatic stay. Sec. 362(d). Under certain circumstances the bankruptcy court may lift the stay under that section, either for cause, including lack of adequate protection of a creditor's interest, or, more important to this case, the stay may be lifted if the debtor has no equity in the collateral and the collateral is not necessary to an effective reorganization of the debtor. Because this is a liquidation under Chapter 7, there will be no reorganization. The only question faced by the bankruptcy court, then, was whether the debtor had equity in the property. 28 Hearings to determine whether the stay should be lifted are meant to be summary in character. The statute requires that the bankruptcy court's action be quick. If no action is taken on a motion for relief from the stay within thirty days of its filing, the stay is considered lifted. Sec. 362(e). A preliminary hearing on the motion within the thirty days will prevent the automatic dissolution of the stay, but a final hearing must be commenced within thirty days after the conclusion of the preliminary hearing. Id. Unless the bankruptcy court denies the motion to lift the stay within thirty days after the commencement of a final hearing, or orders the stay continued pending conclusion of the hearing, the stay is considered lifted. Bankruptcy Rule 4001(a)(2). Many cases hold that the issues considered at a Sec. 362 hearing are limited strictly to adequacy of protection, equity, and necessity to an effective reorganization. See, e.g., Matter of Johnson, 756 F.2d 738, 740 (9th Cir.), cert. denied 474 U.S. 828, 106 S.Ct. 88, 88 L.Ed.2d 72 (1985); Matter of Ellis, 60 B.R. 432 (9th Cir. BAP 1985); Matter of Quality Electronics Centers, 57 B.R. 288 (Bankr.N.M.1986) (inquiry at Sec. 362 hearing is limited to whether creditor had a colorable claim to a perfected security interest). This conforms with the legislative history of Sec. 362. 29 At the expedited hearing under subsection (e), and at all hearings on relief from the stay, the only issue will be the claim of the creditor and the lack of adequate protection or existence of other cause for relief from the stay. This hearing will not be the appropriate time at which to bring in other issues, such as counterclaims against the creditor on largely unrelated matters. Those counterclaims are not to be handled in the summary fashion that the preliminary hearing under this provision will be. 30 H.R.Rep. No. 595, 95th Cong., 1st Sess. 344 (1977), U.S.Code Cong. & Admin.News, 1978, pp. 5787, 6300. 31 In this case, then, the only issue properly before the court on the motion to lift the automatic stay was whether Vitreous had any equity in the real estate. To answer that question, the court had to determine (1) the value of the real estate and (2) the amount of money owed the Bank. If the debt was greater than or equal to the value of the realty, then the stay was properly lifted. 32 The Trustee argues that the bankruptcy court erred in both of those determinations. She argues that it was error to use 20-day known distress forced liquidation value as the measure of the value of the property, and she also contests the amount of money owed the Bank. Initially we turn to the issue of the valuation of the real estate. Property valuations in bankruptcy are determined in light of the purpose of such valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use. Sec. 506(a). Valuation is a question of fact, and can be overturned on appeal only if clearly erroneous. Bank Hapoalim v. E.L.I. Ltd., 42 B.R. 376 (N.D.Ill.1984). The bankruptcy court found that in view of the decline of the smokestack industries, the long time similar businesses had remained on the market, and the large amounts of money Vitreous was losing, a fast sale was in the best interests of all concerned. Although a 20-day exposure to the market strikes us as a short time, the bankruptcy court's selection of that period as the best balance between the need for time to wait for the best offer and the need to stem losses from continued operations does not leave us with the definite and firm conviction that a mistake has been committed. Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). Neither was it clear error to find the $350,000 valuation for a 20-day sale to be credible. Therefore, the valuation of the real estate at $350,000 was not clearly erroneous. 33 We turn next to the Trustee's other challenge to the lifting of the stay. The Bank claimed a debt of $1,027,781.85 on November 1, 1986. This debt was said to be secured by a security interest in all of Vitreous' personal property and by a first mortgage on the real estate. After the surrender and sale of the personalty at a price of $677,781.85, the Bank claimed a debt of $350,000 secured by the mortgage. It was the Bank's burden to demonstrate that it was owed that amount. Matter of Johnson, 45 B.R. 618 (Bankr.Md.1985). The bankruptcy court was satisfied that the Bank had successfully fulfilled its burden. The Trustee argues that this decision was clearly erroneous. She makes a point of the fact that the financing statement filed with respect to the Bank's debt did not cover after-acquired equipment, and argues that because the Bank's security interest in that property was not perfected at the time the bank took possession, retention of that property constituted a conversion, at least in regard to the equipment acquired after the date of the financing statement. 34 If the Trustee were correct in her assertion, then the bankruptcy court's finding would indeed have been clearly erroneous. The remedy for a conversion is the payment to the injured party of the fair market value of the converted goods as of the time of the conversion. THQ Venture v. SW, Inc., 444 N.E.2d 335, 340 (Ind.App.1983). Because the bankruptcy court allowed only the liquidation value of all repossessed property to count against the Bank's debt, there could be some difference between the actual amount of the debt and the amount as calculated by the bankruptcy court. The bankruptcy court found that, after sale of all the personalty at liquidation value, the debt stood at $350,000, which was exactly equal to the liquidation value of the realty. It follows that the difference between the liquidation value of the after-acquired equipment and its fair market value could be somewhat in excess of the amount owed the Bank. This amount would be the estate's equity in the remaining asset, the real estate. 35 We disagree that there was a conversion. Even though the Bank's security interest was not perfected under the Indiana enactment of the Uniform Commercial Code, Ind.Code Sec. 26-1-9-303, as of the date of voluntary surrender, the security interest had attached under Ind.Code Sec. 26-1-9-203. As a result, at the time of the surrender, the security agreement was enforceable as between the parties (the Bank and Vitreous) but was unenforceable against third parties. An unperfected security interest is subordinate to the rights of a later lien creditor, Ind.Code Sec. 26-1-9-301, including the Trustee in her role as secured creditor, Sec. 544(a)(1), but is enforceable between the parties. Ind.Code Secs. 26-1-9-201, 26-1-9-203, 26-1-9-301. The act of taking possession of Vitreous' personal property not only served to enforce the security agreement between the Bank and Vitreous (which did cover the after-acquired personal property), but also served to perfect the Bank's security interest in all the voluntarily surrendered goods. Ind.Code Sec. 26-1-9-305 states that [a] security interest in ... goods ... may be perfected by the secured party's taking possession of the collateral. Because this form of perfection was completed prior to the filing of the involuntary petition commencing the case, and the Trustee stands in the shoes of a later creditor with a perfected security interest as of the date of the petition under Sec. 544(a)(1), the Trustee has no claim superior to that of the Bank in any of the goods covered by the security agreement and then in possession of the Bank. Ind.Code Sec. 26-1-9-301. It follows that the Bank could dispose of all the collateral, including the after-acquired equipment, in a commercially reasonable manner and apply the proceeds to the reduction of its debt. Ind.Code Sec. 26-1-9-504(1). Because there was no conversion, the Bank had a colorable claim that it was in fact owed $350,000, leaving no equity in the real property for the estate. The bankruptcy court acted properly in granting the Bank's motion to lift the automatic stay.