Lost Opportunity Costs: an Analysis of Timbers of Inwood Forest
| Publication year | 1988 |
| Pages | 2367 |
| Citation | Vol. 17 No. 12 Pg. 2367 |
1988, December, Pg. 2367. Lost Opportunity Costs: An Analysis of Timbers of Inwood Forest
The U.S. Supreme Court, in United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd.(fn1) held that undersecured creditors are not entitled to compensation under § 362(d)(1) of the Bankruptcy Code ("Code")(fn2) for the delay caused by the automatic stay in foreclosing on their collateral. In so ruling, the Court effectively overruled In re American Mariner Industries,(fn3) which held that undersecured creditors were entitled to adequate protection, in the form of interest payments, to compensate them for the time value of their money, i.e., their "lost opportunity costs." The Timbers decision resolved a conflict among the circuit courts,(fn4) as well as within the District of Colorado. This article analyzes the case as it relates to the concept of adequate protection in the context of relief from stay.
In Timbers, the lender (U.S. Assoc. of Texas) held a note in the principal amount of $4.1 million which was secured by a first deed of trust on the debtor's (Timbers of Inwood Forest) Houston apartment project.(fn5) The debtor filed Chapter 11 and, shortly thereafter, the lender moved for relief from stay, alleging that it lacked adequate protection of its interest in the property under Code § 362(d)(1).(fn6) At the hearing on the motion for relief from stay, the evidence established that the debtor owed the lender $4.36 million, and that the value of the collateral was "somewhere between $2.65 million and $4.25 million."(fn7) Therefore, it was undisputed that the lender was an undersecured creditor.
The debtor offered to pay the lender the post-petition rents minus operating expenses as adequate protection; however, the lender claimed it was entitled to additional compensation.(fn8) The Bankruptcy Court agreed with the lender and ruled that the stay would continue in effect as long as the debtor made monthly payments to the lender at a market rate of 12 percent per annum on the estimated amount realizable by the lender on foreclosure ($4.25 million). The payments were to commence six months after the bankruptcy petition was filed to reflect the normal foreclosure delays.(fn9)
The debtor appealed to the district court, which affirmed the Bankruptcy Court's ruling; however, the Fifth Circuit reversed the district court's ruling in an en banc opinion.(fn10) The U.S. Supreme Court granted certiorari to determine whether undersecured creditors are entitled to compensation under Bankrupcty Code § 362(d)(1) for the delay caused by the automatic stay in foreclosing on their collateral.(fn11)
The U.S. Supreme Court first concentrated on the interest to be protected, stating that "the crux of the present dispute is whether the phrase 'interest in property' also includes the secured party's right, suspended by the stay, to take immediate possession of the defaulted security, and apply it in payment of the debt."(fn12) The Court determined that the "interest in property" to be protected could not be examined in a vacuum, but must be considered in the context of the Bankruptcy Code provisions dealing with the rights of secured creditors.(fn13)
The Court discussed the application of Code § 506,(fn14) which defines the amount of secured creditors' allowed claims. The Court noted that the phrase in § 506(a), "value of such creditor's interest," meant the "value of the collateral."(fn15) Even more important to the Court than its terminology was the substantive effect of § 506(a) in denying undersecured creditors post-petition interest on their claims.(fn16) The Court noted that it would be "incomprehensible" why Congress would allow undersecured creditors' interest payments if they move for it under Code § 362(d)(1) at the inception of the case when interest payments are not allowed at the completion of the case.(fn17)
The Court rejected the lender's argument that it was entitled to the adequate protection because the Bankruptcy
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