Timbers of Inwood Forest Associates, Ltd., In re

• Decision Date: 09 January 1987
• Docket Number: No. 85-2678,85-2678
• Parties: , 16 Collier Bankr.Cas.2d 1, 15 Bankr.Ct.Dec. 494, Bankr. L. Rep. P 71,584 In re TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Debtor. UNITED SAVINGS ASSOCIATION OF TEXAS, Movant-Appellee Cross-Appellant, v. TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Respondent-Appellant Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 363

808 F.2d 363

55 USLW 2425, 16 Collier Bankr.Cas.2d 1,

15 Bankr.Ct.Dec. 494,

Bankr. L. Rep. P 71,584

In re TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Debtor.

UNITED SAVINGS ASSOCIATION OF TEXAS, Movant-Appellee Cross-Appellant, v. TIMBERS OF INWOOD FOREST ASSOCIATES, LTD.,

Respondent-Appellant Cross-Appellee.

No. 85-2678.

United States Court of Appeals, Fifth Circuit.

Jan. 9, 1987.

Leonard H. Simon, Daphne L. Levey, Timothy J. Henderson, Houston, Tex., for respondent-appellant cross-appellee.

Thomas H. Jackson, Cambridge, Mass., amicus curiae.

H. Miles Cohn, Houston, Tex., for movant-appellee cross-appellant.

Appeals from the United States District Court for the Southern District of Texas.

Before CLARK, Chief Judge, GOLDBERG, GEE, RUBIN, REAVLEY, POLITZ, RANDALL, JOHNSON, WILLIAMS, GARWOOD, JOLLY, HIGGINBOTHAM, DAVIS, HILL, and JONES, Circuit Judges.

RANDALL, Circuit Judge:

The court granted rehearing en banc of this appeal to consider whether the adequate protection provisions of the Bankruptcy Code of 1978, 11 U.S.C. Secs. 362(d)(1) and 361, can be construed to require a Chapter 11 debtor to provide an undersecured creditor with payments during the pendency of the automatic stay representing interest on the value of the secured creditor's collateral or compensation for the lost opportunity of reinvesting the proceeds of such collateral. The panel opinion, 793 F.2d 1380 (5th Cir.1986), which held that the adequate protection provisions cannot be so construed, was vacated when the court decided to hear the appeal en banc.

I.

We hold today that the adequate protection provisions of the Bankruptcy Code, ¹ Secs. 362(d)(1) and 361, do not require periodic postpetition payments for interest or lost opportunity cost to an undersecured creditor to compensate it for the delay of the Chapter 11 reorganization proceeding during the pendency of the automatic stay. The panel opinion is reinstated.

Legislative Postscript

We review briefly the legislative proceedings relevant to adequate protection that have taken place since the enactment of the Bankruptcy Code in 1978.

The Bankruptcy Code has been amended twice since its enactment. The Bankruptcy Amendments and Federal Judgeship Act of 1984 was enacted primarily to deal with the Supreme Court's 1982 decision in Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). Congressional action on the 1984 amendments was completed on June 29, 1984, and the amendments were signed into law by the President on July 10, 1984. See Pub.L. No. 98-353, 98 Stat. 333, 392 (1984). The 1984 legislation effected no changes in the adequate protection provisions of the Bankruptcy Code. Significantly, American Mariner was not decided until June 4, 1984; the vast majority of bankruptcy court decisions prior to that time, as well as the bankruptcy appellate panel decision in American Mariner--those being the decisions on the books during most of the time that Congress was considering the 1984 amendments--refused to construe the adequate protection provisions to require the payment of interest or lost opportunity costs. ²

Commencing in 1985, several bills concerned with the family farm bankruptcy problem were filed in Congress. Proceedings on these bills culminated in the enactment of the Bankruptcy Judges, United States Trustees, and Family Farmers Bankruptcy Act of 1986, Pub.L. No. 99-554, 100 Stat. 3088 (1986) (H.R. 5316) [hereinafter cited as Family Farmers Bankruptcy Act of 1986], which was signed by the President on October 27, 1986. In the course of the hearings on family farm bankruptcies, numerous witnesses testified about the impact of the American Mariner decision on the reorganizability of farm debtors. American Mariner was resoundingly criticized by virtually all who testified. The pervasive sentiment expressed by those who addressed the various family farm bankruptcy proposals before Congress was that the American Mariner requirement of payment of interest or lost opportunity costs as a form of adequate protection to secured creditors was almost invariably fatal to the family farmer's prospects for reorganization; it is the rare family farm debtor who can make the lost opportunity cost payments required under American Mariner. ³ Additionally, the American Mariner result was criticized for diverting the debtor's resources and attention away from the important task of plan formulation; the debtor is forced to spend his time and money in battling motions to lift the automatic stay. ⁴

Several of those who addressed the family farm bankruptcy problem described the result of American Mariner as not being faithful to the legislative intent embodied in the adequate protection provisions of the 1978 Bankruptcy Code. For example, an article critical of the American Mariner decision was included by Senator Grassley in the Congressional Record for October 3, 1986, the day the Senate considered the conference report on H.R. 5316. The author of that article concluded:

[T]his writer believes that American Mariner was incorrectly decided.... [T]he Court held that the undersecured creditor must receive the "indubitable equivalent" of its entire bargain under section 361(3), which was erroneously construed by the Court of Appeals for the Ninth Circuit to include the present value of the creditor's state law rights to foreclose its collateral (and liquidate it) and reinvest the proceeds....

The Committee on Stays, Executory Contracts, and Property of the Estate for the National Bankruptcy Conference took issue initially with the American Mariner decision, arguing that the decision: (1) ignores the language of section 361 in general and section 361(3) in particular, which speaks of "adequate protection" of and the "indubitable equivalent" of the secured creditor's interest in its collateral; (2) misreads the House and Senate Reports, which make no reference (as admitted by the Court) to the "secured creditor's legal right to take possession of and sell the collateral" or its "equitable right to reinvest the proceeds of the sale," 734 F.2d at 430-1, which were written before the indubitable equivalent language was incorporated in section 361(3).... This committee's recommendations are subject to further analysis before the National Bankruptcy Conference takes an official position for or against the committee's recommendations and arguments. However, this writer believes that the arguments of the committee are correct and highlight the errors in the rationale of the American Mariner decision. ⁵

132 Cong.Rec. S15090 n. 187 (daily ed. Oct. 3, 1986) (article by John C. Anderson) (emphasis in original). ⁶ Amendment of the adequate protection provisions to alleviate the impact of the American Mariner decision and its construction of the adequate protection provisions was seen by most who testified as critical if family farm reorganizations were to have any chance of success. ⁷ As Senator Grassley, in concluding the hearings on the family farm bankruptcy problem, stated:

I envision changes to those terms in the code such as "adequate protection" that have been applied in a restrictive manner, making farmer reorganizations unreasonably difficult.

I believe we need to correct restrictive court interpretations in a way that frees up the use of cash collateral and helps to stave off attempts to lift the automatic stay.

Farm Family Hearings, supra, at 289.

The 1986 legislation that resulted from the congressional hearings amended the Bankruptcy Code by adding a new Chapter 12 to deal with family farm bankruptcies. In most respects, the new Chapter 12 is modeled on Chapter 13. The principal relief which it affords family farmers, who had previously been forced to seek relief under Chapter 11, is to eliminate the impact of the absolute priority rule on the family farm debtor. In many farm bankruptcies, the absolute priority rule gave the unsecured creditors the power to prevent confirmation of a plan if the debtor continued to have any equity interest in his farm. See 11 U.S.C. Sec. 1129(b)(2)(B). Under the new Chapter 12, as under Chapter 13, the vote of unsecured creditors is not required for the confirmation of a plan of reorganization. Additionally, under the new Chapter 12, the family farmer can overcome an unsecured creditor's objection to confirmation by demonstrating that "the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim." Family Farmer Bankruptcy Act of 1986, Sec. 1225(b)(1)(A) (to be codified at 11 U.S.C. Sec. 1225(b)(1)(A)). Alternatively, the unsecured creditor's objection can be overcome if "the plan provides that all of the debtor's projected disposable income to be received in the three-year period, or such longer period as the court may approve under section 1222(c), beginning on the date that the first payment is due under the plan will be applied to make payments under the plan." Family Farmer Bankruptcy Act of 1986, Sec. 1225(b)(1)(B) (to be codified at 11 U.S.C. Sec. 1225(b)(1)(B)).

The new Chapter 12 also amends the adequate protection provisions as they apply to family farmers by making Sec. 361 inapplicable in family farm reorganization cases brought under Chapter 12, and by setting forth, in Sec. 1205, the forms that adequate protection can take in family farm reorganizations. Family Farmer Bankruptcy Act of 1986, Sec. 1205 (to be codified at 11 U.S.C. Sec. 1205). ⁸ Significantly, Sec. 1205 sanctions, as a form of adequate protection, payment by the debtor for the use of farmland of "the reasonable rent customary in the community where the property is located, based upon the rental value, net income, and earning capacity of the property." Family Farmer Bankruptcy Act of 1986, Sec. 1205 (to be codified at 11 U.S.C. Sec. 1205). The expectation is that this will result in payments by the debtor to secured creditors that are significantly...