1289,
Bankr. L. Rep. P 70,897
In re BRIGGS TRANSPORTATION COMPANY, Debtor.
LEND LEASE, a DIVISION OF NATIONAL CAR RENTAL SYSTEMS, INC., Appellee,
v.
BRIGGS TRANSPORTATION COMPANY, Appellant.
In re BRIGGS TRANSPORTATION COMPANY, Debtor.
GENERAL MOTORS ACCEPTANCE CORPORATION, Appellee,
v.
BRIGGS TRANSPORTATION COMPANY, Appellant.
Nos. 84-5196, 84-5197.
United States Court of Appeals,
Eighth Circuit.
Submitted Sept. 9, 1985.
Decided Dec. 26, 1985.
Rehearing and Rehearing En Banc Denied Feb. 7, 1986.
Sheridan J. Buckley, St. Paul, Minn., for appellant.
David T. Bennett & Stephen F. Grinnell, Minneapolis, Minn., for appellee.
Before LAY, Chief Judge, HEANEY and JOHN R. GIBSON, Circuit Judges.
LAY, Chief Judge.
Briggs Transportation Company (Briggs), the debtor in this bankruptcy action, appeals from an order of the district court1 reversing the bankruptcy court.2 The issue before us is whether the concept of "adequate protection" found in 11 U.S.C. Secs. 361 and 362 (West Supp.1985) entitles undersecured creditors as a matter of law to interest payments from a debtor to compensate the creditors for lost opportunity costs due to the delay in reinvesting the collateral's liquidated value caused by an automatic stay. We reverse, holding that such interest payments are permissible but not required to provide adequate protection, and remand to the bankruptcy court for additional findings.
Background
In January 1983, Briggs filed a voluntary petition under Chapter 11 of the Bankruptcy Code. At that time General Motors Acceptance Corporation (GMAC) held a valid perfected security interest in fifty tandem-axle tractors purchased by Briggs. Lend Lease, a division of National Car Rental System, Inc. (Lend Lease), held a valid perfected security interest in 100 trailers under a secured lease/purchase agreement with Briggs. Both GMAC and Lend Lease were undersecured, and Briggs claimed no equity in the collateral. GMAC and Lend Lease were prevented from foreclosing on their collateral by 11 U.S.C. Sec. 362(a)'s3 automatic stay.
GMAC and Lend Lease petitioned the bankruptcy court under 11 U.S.C. Sec. 362(d)(1)4 for relief from the stay and permission to foreclose. The parties subsequently stipulated that Briggs could retain the collateral in exchange, inter alia, for monthly cash payments to compensate the creditors for the equipment's depreciation as a component of adequate protection. GMAC and Lend Lease also sought adequate protection in the form of interest payments to compensate for their "lost opportunity costs." The creditors' claims for lost opportunity costs are premised on their inability under the automatic stay to immediately foreclose, liquidate the collateral, and reinvest the liquidation proceeds. Briggs opposed the creditors' claims for interest and the issue was submitted to the bankruptcy court. The bankruptcy court found as a matter of law that adequate protection precludes a debtor from being required to pay opportunity costs caused by the automatic stay. See In re Briggs Transportation Co.,
Discussion
As we noted recently in In re Martin,
The focus of GMAC's and Lend Lease's argument on appeal, similar to the creditor's position before the Ninth Circuit in American Mariner, is not how to provide adequate protection here but what aggregation of creditor interests are entitled to protection when a bankruptcy court has determined that an automatic stay should be retained rather than lifted. The creditors argue that although periodic cash payments by Briggs may protect them against decline in the collateral's recoverable value due to the debtor's continued use and possession of that collateral, those payments do not compensate the creditors for the "benefit of their bargain" and do not leave the creditors adequately protected as required by 11 U.S.C. Sec. 362. Briggs contends that adequate protection focuses on the value of the collateral itself, not the whole economic bargain of the credit agreement.
We turn first to the creditors' constitutional challenge. Lend Lease argues that section 362(a)'s impairment of the right to foreclose constitutes a "taking" and that the Fifth Amendment requires fair compensation, relying on Louisville Joint Stock Land Bank v. Radford,
In the bankruptcy context, adequate protection is a safeguard which is provided to protect the rights of secured creditors, throughout the proceedings, to the extent of the value of their property, and there is no constitutional claim of the creditor to more than that. Wright v. Union Central Life Insurance Co.,
We turn now to the undersecured creditors' characterization of section 362's automatic stay as an "extraordinary remedy." Rather, as the report of the Senate Judiciary Committee states, "[t]he automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws." S.Rep. No. 989 at 54, 1978 U.S.Code Cong. & Ad.News at 5840. It is automatic upon a petition's filing and may last at least thirty days without affording creditors any protection. 11 U.S.C. section 362(e). Further, a secured creditor may avoid incurring substantial economic penalties due to undue delay in access to its assets by requesting relief from an automatic stay for cause, including the lack of adequate protection of the creditor's interest in the property. 11 U.S.C. Sec. 362(d).
Essential to any analysis of the meaning of and policy behind any section of the bankruptcy code is the recognition that a bankruptcy court is a court of equity. Bankruptcy courts do not read statutory words with a computer's ease, but operate under the overriding consideration that equitable principles govern the exercise of bankruptcy jurisdiction. In re Williams,
Under Chapter 11, the purposes of business reorganization are to "relieve the debtor of its prepetition debts, to free cash flow to meet current operating expenses, and ultimately to permit the debtor 'to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders.' " American Mariner,
Martin,
In Yamaha Motor Corp. U.S.A. v. Shadco, Inc.,
Since adequate protection is nowhere explicitly defined in the Bankruptcy Code, inferences drawn from the legislative history become important in sorting out exactly what Congress intended should constitute adequate protection in the context of an automatic stay. Many courts before us have developed cogent arguments and marshalled ample supporting evidence in favor of both granting and denying post-petition interest to secured creditors as a component of adequate protection. Compare, e.g., American Mariner,
Despite the disagreement among courts as to the propriety of post-petition interest in the adequate protection context, it is generally acknowledged that, as demonstrated by the non-exclusive examples of section 361,7 adequate protection is the protection of a secured creditor's "interest in property" from any decrease in "value" atrributable to the stay. See, e.g., In re South Village,
At the heart of this search for a way to adequately protect the creditors' interest in the collateral is the question of what factors constitute the value of that interest. GMAC and Lend Lease argue here that "value" refers to "cash value," that they are entitled to the "benefit of their bargain," and that resort to the collateral is an essential component of that bargain struck between borrowers and lenders. A narrowly calibrated conception of adequate protection, however, subject to brittle construction, cannot accommodate the "infinite number of variations possible in dealings between debtors and creditors." In re Alyucan,
is not intended to be confined strictly to the constitutional protection required, however. The section, and the concept of adequate protection, is based as much on policy grounds as on constitutional grounds. 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, this section recognizes the availability of alternate means of protecting a secured creditor's interests. 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.
American Mariner,
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.
Id. (emphasis added). The legislative history also notes that the use in section 361(1) of periodic cash payments to compensate for expected decreases in the value of the creditors' interest in property may be especially appropriate for adequate protection purposes where, as here, the property in question is depreciating at a relatively fixed rate. S.Rep. No. 989 at 54, 1978 U.S.Code Cong. & Ad.News at 5840 (construing In re Bermec Corp.,
We are conscious of the deep concern of the manufacturing secured creditors lest their security depreciate beyond adequate salvage, but we must balance that with the Congressional mandate to encourage attempts at corporate reorganization where there is a reasonable possibility of success.
Bermec,
GMAC and Lend Lease invoke section 361(3) as entitling them to compensation for opportunity costs as the "indubitable equivalent" of their foreclosure interest and cite legislative history stating that "[s]ecured creditors should not be deprived of the benefit of their bargain." H.R.Rep. No. 595 at 339, 1978 U.S.Code Cong. & Ad.News at 6295. However, "indubitable equivalent" simply describes what would constitute adequate protection. It does not define the interest to be protected. As the creditors have noted, the phrase was coined by Judge Learned Hand in In re Murel Holding Corp.,
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 equivalance.
Murel,
As this court noted in Martin, inclusion of the "indubitable equivalent" concept in the context of an interim automatic stay was the result of a legislative compromise. Martin,
Contrary to GMAC and Lend Lease's contention, creditors have no right to be placed in the same economic position as if there had been no bankruptcy filing. Congress has observed "[t]here may be situations in bankruptcy where giving a secured creditor an absolute right to his bargain may be impossible or seriously detrimental to the policy of the bankruptcy laws." S.Rep. No. 989 at 53, 1978 U.S.Code Cong. & Ad.News at 5839. Bankruptcy involves a balancing of interests between the debtor and creditors. The effect of the bankruptcy laws is to alter or eliminate a debtor's obligations to its creditors upon the advent of the debtor's inability to meet those obligations. These changes are imposed as a matter of law and leave creditors in a very different economic position than before the debtor filed for bankruptcy. A creditor's interest in the collateral is tied to possible default by the debtor and, like any contractual agreement, is always subject to existing federal law, including the automatic stay provisions under section 362(a). The essence of a creditor's interest in the collateral is not necessarily foreclosure and reinvestment, but may be the guarantee that, as a secured creditor, it will be paid in full up to the lien value of the collateral. Unsecured creditors often get back little or nothing of what is owed to them despite their original bargain with the debtor for full repayment.
Contrary to the bankruptcy judge's views, our analysis here is not affected by apparent conflicts with language in sections 502 and 506 of the Bankruptcy Code, which disallow secured claims for unmatured post-petition interest. Oversecured creditors are allowed under section 506(b) of the Bankruptcy Code to claim interest, but only to the extent that they are oversecured. This provision constitutes an exception to section 502(b)(2), which specifically disallows claims for unmatured interest. We adopt the view advanced in the bankruptcy court's American Mariner opinion, although later rejected by the Ninth Circuit, that section 502(b)(2) does not serve by negative implication to bar payment of interest to undersecured creditors.8 In re American Mariner Industries, Inc.,
that section 506(b) provides only for the allowance of postpetition interest, fees, costs and charges as part of a secured claim. It does not require the current payment of such amounts. Entitlement to current payment of such amounts must be grounded elsewhere, such as in the provision of adequate protection or in underlying agreements which are not affected by the subject bankruptcy case.
3 Collier on Bankruptcy p 506.05 at 506-40 (emphasis and footnotes omitted).
GMAC argues that bankruptcy courts were not intended to have broad discretion to determine what constitutes adequate protection in a given case, urging that such discretion will lead to "anomalous results" and increase the cost of secured credit. However, the legislative history indicates that Congress has repeatedly expressed its desire to give bankruptcy courts broad discretion. See S.Rep. No. 989 at 54, 1978 U.S.Code Cong. & Ad.News at 5840; H.R.Rep. No. 595 at 338-40, 1978 U.S.Code Cong. & Ad.News at 6295-97. By incorporating flexibility into the code, Congress plainly intended adequate protection issues to be resolved on a case-by-case basis and expected anomalous results. See Martin,
Influenced by the clearly articulated policy in the statutory language, legislative history and relevant case law, we believe bankruptcy courts should retain a high degree of flexibility in arriving at adequate protection findings. This court is convinced that the most reasonable approach accommodating the greatest number of interests is to refrain from shaping a rigid rule that compensation for post-petition interest either must or cannot be required as a component of adequate protection in the context of an automatic stay. We also believe that this approach is entirely consistent with the Ninth Circuit's conclusion in American Mariner that interest payments were proper there to afford the creditor in that case adequate protection of its interest in the collateral. As the Ninth Circuit noted:
In this case we are engaged in precisely the sort of case-by-case interpretation and development intended by Congress.
We recognize that a congressional directive for "case-by-case interpretation and development" must not be abused. Such judicial interpretation must not overlook the overriding purpose of the automatic stay, namely to give the debtor "a breathing spell from his creditors ... [to permit] the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy." H.R.Rep. No. 595 at 340, 1978 U.S.Code Cong. & Ad.News at 6296-97. Nor can we ignore the purposes of business reorganization under Chapter 11 to initially relieve the debtor of its prepetition debts, to free cash flow to meet current operating expenses, and ultimately to permit the debtor "to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders." Id. at 220, 1978 U.S.Code Cong. & Ad.News at 6179.
American Mariner,
Courts both before and after the Ninth Circuit's decision in American Mariner have adopted explicitly or implicitly a case-by-case approach even while extending the scope of adequate protection to compensate a secured creditor for post-petition interest. They repeatedly recognize that adequate protection is a flexible concept which requires a court to make decisions on a case-by-case basis, after full consideration of the particular characteristics of each proceeding to the extent that "compensation for unpaid accruing interest charges during the pendency of the bankruptcy proceedings is not necessary in all cases." In re Monroe Park,
Flexibility was legislated into the Bankruptcy Code by the very fact that the term "adequate protection" resists precise definition.10 This reflects congressional recognition that myriad factors are taken into account by the parties in entering into a security agreement and a wide spectrum of circumstances may exist at the time a debtor files a petition. Even in Murel, Judge Hand's indubitable equivalence language grew out of the court's cognizance of that case's particular facts, including its conclusion that the proposed plan had little chance of success and that the ability of the debtor's income-producing asset, an apartment building, to satisfy accruing claims against the debtor was declining. See Murel,
Such a balancing act may, but will not always, be resolved in favor of post-petition interest payments to the creditor. Whether a debtor's proposal does or does not include interest payments for the present value of the creditor's foreclosure rights will depend on such factors as the nature of the collateral and the proposed use of the collateral in the interim. See Martin,
We recognize that a rule which directs courts to approach adequate protection analyses on a case-by-case basis provides minimal guidance for future reconstruction by courts of a secured creditor's bargain for adequate protection purposes. However, the developing case law applying the provisions of the Bankruptcy Code of 1978 has already devised a broad variety of equitable considerations which provide a guide for future cases. Obviously, situations involving a greatly oversecured claim will be quite different from cases such as this involving undersecured claims, and a value determination for automatic stay purposes is not necessarily the same as value determined for another purpose, such as confirming a plan. See 11 U.S.C. Sec. 506(a); see also LaJolla Mortgage Fund v. Rancho el Cajon Associates,
Similarly, a court might look to whether taxes and other payments designed to keep the collateral free of statutory liens are being paid or will be paid by a debtor in determining whether a secured creditor is entitled to compensation for delay in foreclosure caused by the stay. See In re Aegean Fare, Inc.,
As noted above, adequate protection determinations made by a bankruptcy court are questions of fact subject to the clearly erroneous standard of review. See Martin,
an appellate court must review a finding of fact under the "clearly erroneous" standard of Rule 52(a) of the Federal Rules of Civil Procedure, even when the lower court's findings of fact "do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts."
Richmond Leasing Co. v. Capital Bank, N.A.,
We agree with the Ninth Circuit that the policies behind sections 361 and 362 permit maximum flexibility in structuring a debtor's proposal for adequate protection. See American Mariner,
After careful consideration of the Bankruptcy Code's language and legislative history and of underlying policy considerations, we cannot hold as a matter of law that a creditor is always entitled to compensation for the delay in enforcing its foreclosure rights during the interim period between filing of a petition and confirmation of a plan. Although the concept of adequate protection under sections 361 and 362 requires the court to protect the creditor's allowed secured claim by compensating for any loss of value of the collateral, what constitutes adequate protection in a particular case is a question whose resolution is best left to the knowledge and expertise of the bankruptcy court.
The order of the district court is reversed. It appears that the bankruptcy court below declined to include compensation for lost opportunity costs in the scope of the creditor interests to be protected because it considered itself precluded from such a result as a matter of law. We therefore remand to the bankruptcy court for determination of whether, in light of this opinion and under the facts of this case, the debtor's offer of periodic payments alone adequately protects the interests of the undersecured creditors.
JOHN R. GIBSON, Circuit Judge, dissenting.
I respectfully dissent.
The court today leaves entirely to the discretion of the bankruptcy court whether "adequate protection" as defined in 11 U.S.C. Secs. 361, 362 includes the payment of compensation to an undersecured creditor for lost opportunity costs resulting from an automatic stay imposed pursuant to 11 U.S.C. Sec. 362(d). It attempts to chart a course between those courts which have held as a matter of law that compensation may not be allowed, see, e.g., In Re Aegean Fare, Inc.,
The Ninth Circuit held in American Mariner that a secured creditor "is entitled to compensation for the delay in enforcing its rights during the interim between the petition and confirmation of the plan."
American Mariner holds that a court should utilize a case by case approach in determining adequate protection and the value of the creditor's interest in the property involved. Nevertheless, it makes clear that the creditor is entitled as a matter of law to compensation for the delay in enforcing its rights. It is only after making this legal determination that the court considers, on a case by case basis, the method of adequately protecting that to which the creditor is entitled. To the contrary, the court today leaves both the question of entitlement and the determination of the proper method of protection to the bankruptcy court. The weakness of the court's position is that it sets free the bankruptcy court without any guidance whatsoever on the entitlement issue.2
Nothing is gained by repeating in detail the analysis in American Mariner. The Ninth Circuit carefully considered the statutes before us and their legislative history. It recognized that the policy behind these statutes is to give the debtor a breathing spell and chance to restructure a business so that it may continue to operate. At the same time, the court emphasized that sections 361 and 362 "include exceptional provisions specifically intended by Congress to benefit secured creditors at the expense of the debtor."
We deal not with insignificant distinctions. The inevitable result of leaving the bankruptcy courts entirely free to determine the issue as they chose is likely to be uniform denial of these rights. The overwhelming response of the bankruptcy courts facing this issue bears strong evidence to this conclusion. The strength of the American Mariner approach is to direct that, as a matter of law, the creditor's entitlement to interest be considered and that the method of doing so be left to a case by case determination giving consideration to timing and applicable rate of interest.
Notes
The Honorable Donald D. Alsop, United States District Judge for the District of Minnesota
The Honorable Robert J. Kressel, United States Bankruptcy Judge for the District of Minnesota
11 U.S.C. Sec. 362(a) provides:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78eee(a)(3)), operates as a stay, applicable to all entities, of--
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.
11 U.S.C. Sec. 362(d) provides:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay--
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or
(2) with respect to a stay of an act against property under subsection (a) of this section, if--
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.
See, e.g., In re Smithfield Estates, Inc.,
In re Monroe Park,
Section 361 provides:
When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by--
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity's interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity's interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property.
See Note, Compensation for Time Value as Part of Adequate Protection During the Automatic Stay in Bankruptcy, 50 U.Chi.L.Rev. 305, 321-22 (1983). We also observe that disallowance of interest to undersecured creditors during the course of post-petition proceedings does not conflict with interest payments made pursuant to liquidation proceedings under section 726(a)(5)
See Note, supra note 8, at 322
As was noted by the court in In re Colrud,
One proposed model for examining adequate protection issues that focuses on a range of factors in adjusting the conflicting rights of creditors and debtors to the same property is set out in Nimmer, supra note 10. Nimmer also points out that at least one court has identified other code sections as providing "non-financial antidotes for delay" which may make it unnecessary for debtors to compensate a creditor's opportunity costs. See Nimmer, supra note 10, at 14 (quoting In re South Village,
The dissent reads American Mariner to hold that an undersecured creditor is adequately protected only if interest compensating for the delay in foreclosing and liquidating the collateral is granted in every case. The "case by case" language in American Mariner is narrowly construed by the dissent to refer only to how and when interest should be paid. We reject this analysis, not on the basis that we read American Mariner differently, which we do, but because, as American Mariner acknowledged, it was the directive of Congress that "value" under Sec. 361 must be subject to case by case interpretation and development. See American Mariner,
In In Re Martin,
See generally Note, Compensation for Time Value as Part of Adequate Protection During the Automatic Stay in Bankruptcy, 50 U.Chi.L.Rev. 305, 309, 315 (1983) (A review of the policies underlying the Code indicates that Congress intended to compensate secured creditors for the time value of their secured claim in keeping with the realities of a modern credit economy; denial of compensation increases cost and reduces the availability of credit)