Supreme Court Rejects Lost Opportunity Costs: Timbers and Its Impact Upon Bankruptcy Practice in Utah
| Publication year | 1988 |
| Pages | 6 |
Ronald W. Goss, J.
Since enactment of the 1978 Bankruptcy Code, the issue of whether an undersecured creditor is entitled to receive lost opportunity costs from a Chapter 11 debtor as a measure of "adequate protection" has been the subject of extensive litigation and commentary. The term "lost opportunity costs" refers to the value which a secured creditor would realize if he had an amount equal to the value of his collateral and was able to reinvest those proceeds at current market rates. The term "adequate protection" refers to any of the various means (usually periodic cash payments) used to preserve the value of a secured creditor's collateral during the pendency of the debtor's bankruptcy case.
Between 1984 and 1987, the controversy had produced a conflict among the Courts of Appeal. The Ninth Circuit, in In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir. 1984), held that an undersecured creditor was entitled to compensation for the delay in enforcing its rights during the interim between filing the bankruptcy petition and confirmation of the plan of reorganization. The Fourth Circuit adopted the American Mariner rationale in 1985 in Grundy National Bank v. Tandem Mining Corp., 754 F.2d 1436(4thCir. 1985). Lower courts in other jurisdictions were divided between those which held as a matter of law that compensation was not authorized under the Bankruptcy Code and those which held that it must be allowed. The Eighth Circuit declined to follow American Mariner and, instead, looked for a middle ground. In In re Briggs Transportation Co., 780 F.2d 1339 (8th Cir. 1985), the court held that adequate protection was a flexible concept, and compensation for lost opportunity costs may be granted to an undersecured creditor depending on the circumstances of the case. The court offered little guidance as to what circumstances would be appropriate for al-lowing such payments. The Eighth Circuit refused to expressly hold that payments were required by the Bankruptcy Code.
In In re Timbers of Inwood Forest, 793 F.2d 1380 (5th Cir. 1986), panel opinion reinstated, 808 F.2d 363 (5th Cir. 1987), cert, granted, 107 S.Ct. 2459 (1987), a three-judge panel of the Fifth Circuit rejected the lost opportunity cost concept of American Mariner. After an en banc rehearing, the panel opinion was...
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