Opinion ID: 435858
Heading Depth: 2
Heading Rank: 2

Heading: Adequate Protection, Compensation, and Indubitable Equivalent

Text: 38 The bankruptcy appellate panel concluded that adequate protection is intended to provide a measure of protection against, rather than compensate for, risk. 27 B.R. at 1012. We disagree. Whether protection is adequate depends directly on how effectively it compensates the secured creditor for loss of value. Sections 361(1) and (2) by their own terms compensate for a decrease in the value of the secured creditor's interest. The compensatory nature of adequate protection is even more apparent from the catch-all alternative of section 361(3) authorizing such other relief ... as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property. 39 The history of 361(3) with the phrase indubitable equivalent lends significant support to the contention that section 361 protects the present value of the secured creditor's interest. Subsection (3) was the product of a compromise between the more restrictive Senate version of 361 and the expansive House version. See 124 Cong.Rec.H. 11092 (daily ed. Sept. 28, 1978) (statement of Representative Edwards of California). The Senate bill had specified two exclusive methods for providing adequate protection, S.Rep. No. 989, 95th Cong. 2d Sess. 54, 1978 U.S.Code Cong. & Ad.News 5787, 5840, while the House bill contained four methods including a provision for an administrative expense priority and a general provision similar to the present subsection (3), but without the indubitable equivalent language. The compromise removed the administrative expense priority 7 and added the novel requirement of indubitable equivalence. 40 Since the original House language provided for such other relief as will result in the realization by such entity of the value of such entity's interest in such property, we must determine whether Congress intended to change the meaning of the subsection by adding the phrase indubitable equivalent. After examining the origins of the phrase and its use elsewhere in the Bankruptcy Code, we conclude that it at least encourages if not requires a present value analysis under section 361. 41 As the bankruptcy court recognized, Congress derived the term indubitable equivalent from Judge Learned Hand's opinion in In re Murel Holding Corp., 75 F.2d 941 (2d Cir.1935). In Murel, Metropolitan Life Insurance Co. held a mortgage on an apartment house. When the apartment house owners defaulted on the mortgage, Metropolitan attempted to foreclose, but the owners obtained an ex parte stay after filing a petition for reorganization under section 77B of the Bankruptcy Act of 1898 (former 11 U.S.C. Sec. 207). The owners then proposed a plan of reorganization that required Metropolitan to forego amortization payments and extend the due date of the mortgage while the apartment house was renovated. Metropolitan would have received interest in the meantime. Metropolitan rejected the plan and moved to vacate the stay, but its motion was denied. 42 On appeal Metropolitan argued that its interest was not adequately protected. Judge Hand, for the court, noted that the plan had little hope of success and the ability of the apartment house to satisfy Metropolitan's accruing claims was declining. 75 F.2d at 942. Judge Hand admitted, however, that the court had the power to confirm a plan over the objection of creditors if the plan provided adequate protection for the realization by them of the full value of their interest, claims, or liens. Id. He then explained the concept of adequate protection: 43 In construing so vague a grant, we are to remember not only the underlying purposes of the section, but the constitutional limitations to which it must conform. It is plain that adequate protection must be completely compensatory; and that payment ten years hence is not generally the equivalent of payment now. Interest is indeed the common measure of the difference, but a creditor who fears the safety of his principal will scarcely be content with that; he wishes to get his money or at least the property. We see no reason to suppose that the statute was intended to deprive him of that in the interest of junior holders, unless by a substitute of the most indubitable equivalence. 44 Id. (emphasis added). The court concluded that the protection offered was inadequate and ordered the stay dissolved. 45 In its context, Judge Hand's interpretation of adequate protection emphasizes two factors. First, it suggests that to be completely compensatory adequate protection must compensate for present value, that payment ten years hence is not generally the equivalent of payment now. This protection the owners of the apartment house provided in the form of interest. Second, adequate protection must insure the safety of the principal. This the owners failed to do. Judge Hand concluded that the creditor's right to get his money or at least the property may be denied under a plan for reorganization only if the debtor provides a substitute of the most indubitable equivalence. Such a substitute clearly must both compensate for present value and insure the safety of the principal. Significantly, however, Judge Hand added that [n]o doubt less will be required to hold up the suit for a short time until the debtor shall have a chance to prepare. Id. at 943. This qualification, of course, reflects the absence under the former Bankruptcy Code of a statutory requirement for adequate protection during the stay, not to mention the absence of a requirement for an automatic stay. 46 In the Bankruptcy Reform Act of 1978, indubitable equivalent first appeared in the Senate's version of section 1129(b), as part of the so-called cram down provisions similar to those encountered by Judge Hand. But for the use of indubitable equivalent, it was not clear whether the section required present value compensation. In its final form, however, 11 U.S.C. Sec. 1129(b)(2)(A)(i)(II) clearly requires deferred cash payments under a reorganization plan to equal the present value of the allowed claim. The indubitable equivalent requirement appears in section 1129(b)(2)(A)(iii) as an alternative to deferred payments and carries with it, from its original context in Murel, the requirement of compensation for present value. See 124 Cong.Rec.H. 1104 (daily ed. Sept. 28, 1978) (statement of Representative Edwards approving present value analysis at H.R.Rep. No. 595 at 414-15, 1978 U.S.Code Cong. & Ad.News at 6370-71); S.Rep. No. 989 at 127, 1978 U.S.Code Cong. & Ad.News at 5913 (The indubitable equivalent language is intended to follow the strict approach taken by Judge Learned Hand in In re Murel Holding Corp., 75 F.2d 941 (2d Cir.1935)). 47 Against the foregoing background, we conclude that the use of the term indubitable equivalent in section 361 is significant of congressional intent. When the term was first employed by Judge Hand, the Bankruptcy Code did not require adequate protection during a temporary stay. Congress understood the term to represent a strict approach to adequate protection in the context of the cram down provisions. Use of the term in section 1129 plainly illustrates that Congress well understood the meaning of the term in its original context and intended to adopt the strict approach that the term represents. That Congress in 1978 should require adequate protection during the automatic stay and then add to that requirement language representing a strict approach to adequate protection convinces us that Congress intended to adopt or at least encourage the same approach to adequate protection in sections 361 and 362.