484 U.S. 365 (1988), 86-1602, United Savings Association of Texas v. Timbers of

Docket Nº:No. 86-1602
Citation:484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740, 56 U.S.L.W. 4107
Party Name:United Savings Association of Texas v. Timbers of
Case Date:January 20, 1988
Court:United States Supreme Court

Page 365

484 U.S. 365 (1988)

108 S.Ct. 626, 98 L.Ed.2d 740, 56 U.S.L.W. 4107

United Savings Association of Texas


Timbers of

No. 86-1602

United States Supreme Court

Jan. 20, 1988

Inwood Forest Associates, Ltd.

Argued December 1, 1987




When a bankruptcy petition is filed, § 362(a) of the Bankruptcy Code provides an automatic stay of actions taken to realize the value of collateral given by the debtor. Section 362(d) authorizes the bankruptcy court to grant relief from the stay "(1) for cause, including the lack of adequate protection of an interest in property of . . . [a] party in interest," or "(2) with respect to a stay of an act against property," if the debtor does not have an equity in such property (i.e., the creditor is undersecured) and the property is "not necessary to an effective reorganization." Section 361 provides that adequate protection of an entity's interest in property may be provided by granting such relief "as will result in the realization by such entity of the indubitable equivalent of its interest." After respondent filed a petition for reorganization under Chapter 11 of the Code, petitioner, an undersecured creditor, moved the Bankruptcy Court for relief from the § 362(a) stay on the ground that there was a lack of "adequate protection" of its interest within the meaning of § 362(d)(1). The court granted relief, conditioning continuance of the stay on monthly payments by respondent on the estimated amount realizable on the foreclosure that the stay prevented. The District Court affirmed, but the Court of Appeals reversed.

Held: Undersecured creditors are not entitled to compensation under § 362(d)(1) for the delay caused by the automatic stay in foreclosing on their collateral. Pp. 370-380.

(a) The language of other Code provisions that deal with the rights of secured creditors, and the substantive dispositions that those provisions effect, establish that the "interest in property" protected by § 362(d)(1) does not include a secured party's right to immediate foreclosure. First, petitioner's contrary interpretation contradicts the carefully drawn substantive disposition effected by § 506(b), which codifies the pre-Code rule denying undersecured creditors post-petition interest on their claims. Had Congress nevertheless meant to give undersecured creditors interest on the value of their collateral, it would have said so plainly in § 506(b). Moreover, the meaning of § 362(d)(1)'s "interest in property" phrase is clarified by the use of similar terminology in § 506(a), where it must be interpreted to mean only the creditor's security interest

Page 366

in the property without regard to his right to immediate possession on default. Second, § 552(b), which makes possession of a perfected security interest in post-petition rents or profits from collateral a condition of having them applied to satisfy the secured creditor's claim ahead of the claims of unsecured creditors, is inconsistent with petitioner's interpretation of § 362(d)(1), under which the undersecured creditor who lacks such a perfected security interest in effect could achieve the same result by demanding the "use value" of his collateral. Third, petitioner's interpretation of § 362(d)(1) makes a practical nullity of § 362(d)(2), which, on petitioner's theory, would be of use only to a secured creditor who was fully protected both as to [108 S.Ct. 628] the value of, and interest on, its collateral, but nonetheless wanted to foreclose. Petitioner's contention that undersecured creditors will face inordinate and extortionate delay if they are denied compensation under § 362(d)(1) is also belied by § 362(d)(2), which requires relief from the stay unless the debtor establishes a reasonable possibility of a successful reorganization within a reasonable time, and under which numerous cases have provided relief within less than a year from the filing of the bankruptcy petition. Pp. 370-376.

(b) Denying petitioner compensation under § 362(d)(1) is not inconsistent with § 361(3)'s use of the phrase "indubitable equivalent." Although the same phrase appears in § 1129(b), under which section, as a condition for confirmation of a reorganization plan, a secured claimant has a right to receive the present value of his collateral (including interest if the claim is to be paid over time), the source of the right in § 1129 is not the "indubitable equivalent" language, but the provision guaranteeing payments of a value, "as of the effective date of the plan," equal to the value of the collateral. Similarly, petitioner's contention that, since general administrative expenses do not have priority over secured claims, see §§ 506(c), 507(a), the Code embodies a principle prohibiting secured creditors from bearing any of the costs of reorganization, is without merit. Congress could not have intended that its readoption of the pre-Code administrative expenses rule would work a change in the also readopted pre-Code rule denying undersecured creditors post-petition interest. Finally, although failure to interpret § 362(d)(1) to require compensation for undersecured creditors appears inconsistent with § 726(a)(5), which allows post-petition interest on unsecured claims when the debtor proves solvent, this anomaly pertains to such a rare occurrence that it is likely the product of congressional inadvertence, and, in any case, its inequitable effects are entirely avoidable. Pp. 377-379.

(c) General statements in the legislative history of §§ 361 and 362(d)(1) that "[s]ecured creditors should not be deprived of the benefit of their bargain" are inadequate to overcome the plain textual indication in

Page 367

§§ 506 and 362(d)(2) of Congress' intent, as discussed above. It is most improbable that Congress would have made a major change entitling undersecured creditors to post-petition interest without specifically mentioning it in the legislative history. Petitioner's argument that pre-Code Chapter XI gave undersecured creditors the absolute right to foreclose, and that the silence of the Code's legislative history as to the withdrawal of that right indicates a congressional intent to provide interest on the collateral during the stay as a substitute, is flawed. The authorities are far from clear that there was a distinctive Chapter XI rule of absolute entitlement to foreclose, but, even assuming there was, § 362(d)(2) indicates that, in enacting Chapter 11 of the current Code, Congress adopted the approach of pre-Code Chapters X and XII, under which the undersecured creditor did not have such an absolute right. Pp. 379-382.

808 F.2d 363, affirmed.

SCALIA, J., delivered the opinion for a unanimous Court.

SCALIA, J., lead opinion

JUSTICE SCALIA delivered the opinion of the Court.

Petitioner United Savings Association of Texas seeks review of an en banc decision of the United States Court of Appeals for the Fifth Circuit holding that petitioner was not entitled to receive from respondent debtor, which is undergoing

Page 368

484 U.S. 368 reorganization in bankruptcy, monthly payments for the use value of the loan collateral which the bankruptcy stay prevented it from possessing. In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363 (1987). We [108 S.Ct. 629] granted certiorari, 481 U.S. 1068 (1987), to resolve a conflict in the Courts of Appeals regarding application of §§ 361 and 362(d)(1) of the Bankruptcy Code, 11 U.S.C. §§ 361 and 362(d)(1) (1982 ed. and Supp. IV). Compare Grundy Nat. Bank v. Tandem Mining Corp., 754 F.2d 1436, 1440-1441 (CA4 1985); In re American Mariner Industries, Inc., 734 F.2d 426, 432-435 (CA9 1984); see also In re Briggs Transp. Co., 780 F.2d 1339, 1348-1351 (CA8 1985).


On June 29, 1982, respondent Timbers of Inwood Forest Associates, Ltd., executed a note in the principal amount of $4,100,000. Petitioner is the holder of the note as well as of a security interest created the same day in an apartment project owned by respondent in Houston, Texas. The security interest included an assignment of rents from the project. On March 4, 1985, respondent filed a voluntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. (1982 ed. and Supp. IV), in the United States Bankruptcy Court for the Southern District of Texas.

On March 18, 1985, petitioner moved for relief from the automatic stay of enforcement of liens triggered by the petition, see 11 U.S.C. § 362(a), on the ground that there was lack of "adequate protection" of its interest within the meaning of 11 U.S.C. § 362(d)(1). At a hearing before the Bankruptcy Court, it was established that respondent owed petitioner $4,366,388.77, and evidence was presented that the value of the collateral was somewhere between $2,650,000 and $4,250,000. The collateral was appreciating in value, but only very slightly. It was therefore undisputed that petitioner was an undersecured creditor. Respondent had agreed to pay petitioner the post-petition rents from the

Page 369

apartment project (covered by the after-acquired property clause in the security agreement), minus operating expenses. Petitioner contended, however, that it was entitled to additional compensation. The Bankruptcy Court agreed, and on April 19, 1985, it conditioned continuance of the stay on monthly payments by respondent, at the market rate of 12% per annum, on the estimated amount realizable on foreclosure, $4,250,000 -- commencing six months after the filing of the bankruptcy petition, to reflect the normal foreclosure delays. In re Bear Creek Ministorage, Inc., 49 B.R. 454 (1985) (editorial revision of earlier decision). The court held that the post-petition rents could be applied to these payments. See id. at 460. Respondent appealed to the District Court, and petitioner cross-appealed on the amount of the adequate protection payments. The...

To continue reading