15.32 B. Entitlement To Protection

• Jurisdiction: New York

b. Entitlement to Protection

Adequate protection usually depends upon a valuation of the property.

EXAMPLE

Assume a debtor financed the purchase of a $100,000 parcel of real estate by borrowing $80,000 secured by a first lien on the property. ²⁶³⁴ If the property is worth $120,000 at the time of the commencement of the case and is continuing to appreciate, the value of the secured lender’s interest in the property is not adversely affected by the administration of the case, and additional adequate protection may be unnecessary. ²⁶³⁵

If, however, the property is worth $75,000 when the case is commenced and is continuing to depreciate, periodic payments or a replacement or additional lien to the extent of the depreciation may be appropriate.

It is not clear from the language of the Bankruptcy Code or the legislative history exactly what is the interest that must be adequately protected. The possibilities include the value of the property at the time of the commencement of the case, outstanding principal, interest, a negotiated equity cushion or going concern value.²⁶³⁶

In United Savings Ass’n v. Timbers of Inwood Forest Associates, Ltd.,²⁶³⁷ the U.S. Supreme Court resolved some of these issues with respect to secured creditors. Based on Timbers, a secured creditor may not be entitled to adequate protection insofar as the value of its collateral exceeds the amount of its claim since the creditor is entitled to enforce its rights against its collateral only to the extent of the amount of its claim.²⁶³⁸

In Timbers, the Supreme Court also finally resolved the disagreement among several of the U.S. courts of appeals as to whether an undersecured creditor (i.e., a creditor whose collateral is worth less than the amount of its debt) is entitled as a matter of law to adequate protection in the form of compensation for the delay in realization of proceeds from the collateral caused by the imposition of the automatic stay. The costs of such delay are often referred to as opportunity costs.

The Fourth and Ninth Circuits held that an undersecured creditor was entitled to periodic compensation for its opportunity costs during a reorganization case under Chapter 11.²⁶³⁹ The Eighth Circuit held that an undersecured creditor was not automatically entitled to, but might, under the circumstances of the particular case, be permitted to receive, compensation for opportunity costs.²⁶⁴⁰ The Fifth Circuit declined to follow either American Mariner or Briggs and held that, although Bankruptcy Code § 361 permits courts to grant adequate protection in the form of “other relief,” that section and its legislative history do not require or direct adequate protection payments to an undersecured creditor to compensate it for the delay caused by the automatic stay.²⁶⁴¹

The U.S. Supreme Court resolved the split among the circuits when it unanimously affirmed the judgment of the Fifth Circuit in...