Chapter 9 - § 9.6 • IMMEDIATE EFFECT OF BANKRUPTCY FILING — THE AUTOMATIC STAY

• Jurisdiction: Colorado

§ 9.6 • IMMEDIATE EFFECT OF BANKRUPTCY FILING — THE AUTOMATIC STAY

§ 9.6.1—The Automatic Stay

The filing of a bankruptcy petition automatically creates a stay against efforts to collect pre-petition debts or to exercise control over or take possession of bankruptcy estate property. The automatic stay thus provides a debtor a "breathing spell," which is one of the central protections to a debtor in bankruptcy.

§ 9.6.2—Scope Of Stay

Pursuant to 11 U.S.C. § 362(a), the following actions are prohibited:

• 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 bankruptcy case, or to recover a claim against the debtor that arose before the bankruptcy filing.
• The enforcement against the debtor or against property of the estate of a judgment obtained before the commencement of the bankruptcy case.
• 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.
• Any act to create, perfect, or enforce any lien against property of the estate.
• Any act to create, perfect, or enforce against property of the debtor any lien to the extent such lien secures a claim against the debtor that arose before the commencement of the bankruptcy case.
• Any act to collect, assess, or recover a claim against the debtor that arose before commencement of the case under Title 11.
• The setoff of any debt owing to debtor that arose before the commencement of the case against any claim.

Because the automatic stay applies to all attempts to collect a debt, the automatic stay bars collection calls, demand letters, and similar collection actions.

§ 9.6.3—Relief From Stay

11 U.S.C. § 362(d) sets forth the grounds upon which a creditor may obtain relief from the automatic stay from the bankruptcy court after notice and a hearing.

For Cause

11 U.S.C. § 362(d)(1) provides that relief from stay may be granted "for cause, including lack of adequate protection." The "for cause" standard is designed to give a bankruptcy court broad discretion whether to grant relief from stay on any equitable grounds.

Lack of Adequate Protection

The most common ground for relief from stay under the "for cause" provision is lack of adequate protection. The general purpose of adequate protection is to ensure that a secured creditor's collateral is not unfairly jeopardized or diminished during the course of the bankruptcy case. United Savings Ass'n of Texas v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988). Examples of adequate protection are set forth in 11 U.S.C. § 361. In re Blehm Land & Cattle Co., 859 F.2d 137 (10th Cir. 1988) (11 U.S.C. § 361 methods are nonexclusive). "Adequate protection" includes:

• Cash payments to compensate for any decline in the value of the collateral. 11 U.S.C. § 361(1).
• If the debtor has unencumbered assets, the secured creditor may be granted an additional lien or a replacement lien, with the value of such lien subject to agreement of the parties or determination by the bankruptcy court. 11 U.S.C. § 361(2).
• Granting such other relief that will result in the "indubitable equivalent" of the interest in property. 11 U.S.C. § 361(3).

The "indubitable equivalent" provision gives a court broad discretion to consider adequate protection packages under the circumstances of the case. In re O'Connor, 808 F.2d 1393 (10th Cir. 1987). Although courts grant a debtor great flexibility in determining adequate protection, the mere grant of an administrative expense claim is not sufficient to meet the requirements of 11 U.S.C. § 361.

Valuation is typically the key issue in adequate protection disputes. The purpose of adequate protection is to protect the value of the secured creditor's collateral. United Savings Ass'n of Texas v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988). Other interests are not accorded the same priority or protection. For instance, a debtor need not "protect" an equity cushion from further post-petition interest accruals under 11 U.S.C. § 506(b). Regarding under-secured creditors, prior to the Timbers decision, case law had been split regarding whether an under-secured creditor was entitled to lost "opportunity cost." Timbers resolved that question in the negative.

Determination of the value of collateral is key in a number of contexts, including relief from the automatic stay motions, adequate protection motions, proofs of claim, and plan treatment. Thus, when asserting a value of the collateral, a creditor must consider how a particular value might affect not only the issue immediately before the court, but later in the case as well, particularly in cases in which real estate is the primary asset and valuation issues are central to the case.

What happens if the court-ordered adequate protection turns out to be inadequate? As an initial matter, a secured creditor may ask the court to modify or reconsider the order to mitigate future prejudice. Otherwise, the secured creditor's fall-back right is a so-called "superpriority" claim under 11 U.S.C. § 507(b). A secured creditor may be entitled to a claim in the amount the value of its collateral was diminished notwithstanding an adequate protection order, and 11 U.S.C. § 507(b) provides that the claim will be entitled to priority over all other administrative expense claims. In re Carpet Ctr. Leasing Co., 991 F.2d 682 (11th Cir. 1993).

Although potential decline in the value of the real estate securing a loan will be the primary factor in determining adequate protection, it will not be the only one. A debtor must also keep the property maintained and insured, and typically take such other actions as are...