Court Opinion

ID: 9649615
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:03:37.474497+00
Date Added: 2024-06-11T18:12:13.164339
License: Public Domain

HUGHES, Bankruptcy Judge,
dissenting.
The majority opinion concludes that the trial court did not abuse its discretion in *1015refusing to permit any part of debtor’s monthly payments to the bank to be applied as proposed by the debtor, namely as interest on the value of the collateral. Believing that the trial court used an erroneous legal standard, I respectfully dissent.
I
The essential question raised by this appeal is whether undersecured creditors who are stayed from repossessing their collateral are entitled, under the concept of adequate protection, to compensation for the delay. Appellant contends that compensation is payable and advances the theory that adequate protection was intended by Congress to protect interests in collateral against decreases in present value.
To better understand what is before us, it may be helpful to state what is not.
Means of providing adequate protection. This question is not before us because the debtor is paying $1770 a month to the creditor. Periodic payment is expressly contemplated by the statute as a means of providing adequate protection 11 U.S.C. § 361(1).
Present value of the creditor’s interest in collateral that is worth more than the debt (oversecured creditor). In such instances, the present value is protected to the extent of contract interest. 11 U.S.C. § 506(b). (Thus a claim of $50,000 secured by collateral worth $200,000 earns interest monthly until the debt is satisfied, and the interest earned also is secured by the collateral). In this appeal, the bank is undersecured, not oversecured.
Stay of Foreclosure or Repossession. The bank does not question the statutory or constitutional power of the court to protect the debtor’s possession and use of the collateral, nor does it question the court’s exercise of discretion in this regard.
Adequate protection of the bank’s claim. Only protection of the bank’s interest in the collateral is before us. Claims are not entitled to adequate protection. 11 U.S.C. § 361.
For this reason, 11 U.S.C. § 506(b) which, by negative implication, denies post-bankruptcy interest on undersecured claims is not dispositive.
Market Rate of interest. The bank stated a^ oraj argument that it did not insist on this measure of compensation.
II
A
The concept of adequate protection defies easy definition. Indeed, the Congress pointedly declined to define it. More importantly, the term invites ambiquity because it embraces both substance and process.
Adequate protection is discussed in 11 U.S.C. § 361 primarily in terms of process. Thus, it “may be provided by ... periodic cash payments ... additional or replacement lien ... or such other relief...” The only limitation is that it may not be provid- ' ed by “compensation allowable ... as an administrative expense...” 11 U.S.C. § 361(3). But the statute also alludes to the substance of adequate protection, i.e., what is entitled to such protection.
In this regard, the statute expressly protects a party’s interest in property, i.e., “an interest of an entity in property”, as distinguished from an interest in a claim for money. Further, it expressly protects that interest against a decrease in value, 11 U.S.C. § 361(1), (2), and insures “the realization by such entity of the indubitable equivalent” of that interest. 11 U.S.C. § 361(3).
The question posed by this appeal does not concern process. If an interest is entitled to protection against a decrease in value, that protection may be provided by periodic cash payments, additional liens or other relief. In fact, the process of adequate protection has been supplied in this case by voluntary periodic payments.
The question posed by this appeal concerns substance: is present value entitled to protection?
*1016B
While adequate protection is not statutorily defined, examples are provided in section 361 and discussion of adequate protection is found in the legislative notes:
Secured creditors should not be deprived of the benefit of their bargain. There may be situations in bankruptcy where giving a secured creditor an absolute right to his bargain may be impossible or seriously detrimental to the bankruptcy laws. Thus, the section recognizes the availability of alternative means of protecting a secured creditor’s interest. Though the creditor might not receive his bargain in kind, the purpose of the section is to insure that the secured creditor receives in value essentially what he bargained for. (Emphasis added.)
House Report No. 95-595, 95th Cong. 1st Sess., 338-40 (1977), Senate Report No. 95-989, 95th Cong. 2nd Sess., 49, 53-54 (1978), U.S.Code Cong. & Admin.News, pp. 6294-96.
Based on that statement of congressional purpose, one court has said that adequate protection requires that a secured party be afforded “the economic equivalent of the benefit of its bargain.” In re Virginia Foundry Co., Inc., 9 B.R. 493, 497 (Dist.Ct.W.D.Va.1981).
The same court also pointed out that adequate protection is not new to bankruptcy statutory law:
The term is found in the Bankruptcy Act of 1898, as amended . .. under the so called “cram-down” provisions of § 216(7) of Chapter X ... and of § 461(11) of Chapter XII... It was likewise found in subsection (b)(5) of section 77B, the predecessor to Chapter X.
Id., at 497.
As used in prior law, adequate protection was interpreted by the courts. Thus, Judge Learned Hand said of the term in In re Murel Holding Corporation, 75 F.2d 941 (2d Cir.1935) at 942:
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.
Judge Hand’s “indubitable equivalence” was placed in Section 361(3) as a measure of adequate protection under the Code.
Thus, we know that the Code draftsmen intended adequate protection “to insure that the secured creditor receives in value essentially what he bargained for,” or as one court said, “the economic equivalent of the benefit of its bargain.” We also know that the term came to us from the former Act, where it was construed as requiring that protection of the secured party’s interest be “completely compensatory” or the “most indubitable equivalence.”
Nevertheless the trial court reasoned that Murel Holding Corporation “may be precedent for issues arising upon confirmation under § 1129(b)(2)(A)(i)(II), but not to require interest to be paid to an under-secured creditor for being temporarily deprived of possession or use of its collateral.”
It is true that adequate protection was used in Judge Hand’s day in reference to confirmation of plans. But it is also true that Congress has elected to expand the use and application of adequate protection to other contexts — such as in the automatic stay.
From the foregoing, I am persuaded that adequate protection contemplates not only protection against decrease in value, 11 U.S.C. § 361(1), (2), but assurance of the *1017economic equivalent of the bargain struck, 11 U.S.C. § 361(3).
Ill
A
The bank’s formal argument centered on the present value concept, which it drew from confirmation cram down provisions of Chapters 11 and 13. These in turn drew from Judge Hand’s construction of adequate protection in Murel Holding Corporation, supra, and that case addressed adequate protection as a standard for confirming a plan of reorganization. In a sense, then, the present value confirmation provisions of Chapters 11 and 13 codify Judge Hand’s construction of adequate protection. See generally, Gordanier, Adequate Protection, 54 Am.Bkr.LJ. 299, 316-17 (1980).
Present value as a term is not expressly employed in section 1129(b)(2)(A), but legislative notes explain that a secured creditor affected by cram down “... must receive present or deferred payments with a present value equal to the allowed secured claim...” 124 Cong.Rec. S17,421 (daily ed. Oct. 6, 1978).
Likewise, a Code draftsman refers to the present value test in stating that deferred payments to secured creditors under a plan “must have a present value, as of the effective date of the plan, generally equal to the present value of the collateral...” Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am.Bankr.L.J. 133 (1979), at p. 155.
The legislative notes emphasize the present value of deferred payment, whereas the bank’s analysis is concerned with the present value of its collateral. They are in agreement that the present value of the collateral should equal the present value of deferred payment. Either way, present value focuses attention on the time-value of money or other property. Thus in arguing that “protection of the present value” is “an essential must of ‘adequate protection’,” appellant is arguing that adequate protection entitles it to compensation for delayed enjoyment of its rights in the collateral.
B
The bank argues that “[djelay no less than depreciation results in, to use the language of § 361, a ‘decrease in the value of [the secured creditor’s] interest in [its collateral]’.” Implicit in the bank’s argument is the contention that it bargained not only for a security interest in the debtor’s property, but for the right to enforce that interest upon the debtor’s default. As a consequence, it argues, the debtor should be required to pay interest to compensate for its use (and the bank’s loss of use) of the property.
It is difficult to refute this argument when viewed against the legislative notes on adequate protection that speak of not depriving secured creditors of the benefit of their bargain and insuring that, if denied the bargain in kind, they receive in value essentially what they bargained for.
There can be no doubt that the right to foreclose upon default rather than at a subsequent date has economic value, or as Judge Hand put it, that “payment ten years hence is not generally the equivalent of payment now.” In re Murel Holding Corporation, supra. The economic value of that right is a function of the use of property. If the property is money or its equivalent the time-value is thought of as interest, if personal or real property as rent. Where foreclosure is delayed, the time-value is der nied to the creditor and enjoyed by the debtor. Thus the right to use property has economic value and the question is whether, as a condition for delaying a foreclosure that the creditor is otherwise entitled to by its bargain, the debtor is obliged to pay that value to the secured creditor.
Paraphrasing Judge Hand, I see no reason to suppose that Congress intended to deprive the bank of that right for the benefit of the bankruptcy estate unless the bank *1018is compensated. I thus conclude that adequate protection entitles the bank to “the economic equivalent” of the right to foreclose, which is one of the benefits it bargained for. In re Virginia Foundry Co., Inc., supra.
IV
For the foregoing reasons, I believe that the trial court erred in holding that no interest is due and that its refusal to permit any part of the periodic payments to be treated as interest was an abuse of discretion.
I would reverse and remand for purposes of determining the appropriate amount of compensation.