In re Alyucan Interstate Corp., Bankruptcy No. 81-00089

• Citation: 12 BR 803
• Decision Date: 16 July 1981
• Docket Number: Civ. No. 81-0383.,Bankruptcy No. 81-00089
• Parties: In re ALYUCAN INTERSTATE CORP., Debtor. BANKERS LIFE INSURANCE COMPANY OF NEBRASKA, Plaintiff, v. ALYUCAN INTERSTATE CORP. and Stewart L. Grow, Jr., Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

12 B.R. 803 (1981)

In re ALYUCAN INTERSTATE CORP., Debtor BANKERS LIFE INSURANCE COMPANY OF NEBRASKA, Plaintiff, v. ALYUCAN INTERSTATE CORP. and Stewart L. Grow, Jr., Defendants.

Bankruptcy No. 81-00089, Civ. No. 81-0383.

United States Bankruptcy Court, D. Utah.

July 16, 1981.

COPYRIGHT MATERIAL OMITTED

Anna W. Drake, Roe & Fowler, Salt Lake City, Utah, for debtor.

William Thomas Thurman, McKay, Burton, Thurman & Condie, Salt Lake City, Utah, for trustee.

Kim R. Wilson and A. Dennis Norton, Snow, Christensen & Martineau, Salt Lake City, Utah, for Bankers Life Ins. Co. of Nebraska.

INTRODUCTION AND BACKGROUND

RALPH R. MABEY, Bankruptcy Judge.

This case raises the question whether an "equity cushion" is necessary to provide adequate protection under 11 U.S.C. Section 362(d)(1).¹ This Court concludes that it is not.

On January 14, 1981, Alyucan Interstate Corporation (debtor), a construction and real estate development firm, filed a petition under Chapter 11 of the Code. On May 4, Bankers Life Insurance Company of Nebraska (Bankers Life), holder of a trust deed on realty owned by debtor, brought this action for relief from the automatic stay under Section 362(d). The complaint alleges that the realty secures a debt in the principal amount of $1,220,000 and that Bankers Life is not adequately protected. On May 20, the preliminary hearing contemplated by Section 362(e) was held. After receiving evidence, the Court fixed the value of the realty on the date of the petition at $1,425,000 and found that there had been no erosion in that value as of the hearing. The debt owing was $1,297,226 as of the petition, and with interest accruing at roughly $8,000 per month, had increased to $1,330,761 as of the hearing. Thus, there was an "equity cushion" of $127,774 or approximately nine percent of the value of the collateral, as of the petition, which had decreased to $94,239, or approximately six and one half percent of the value of the collateral, as of the hearing. As interest accumulates, and if no payments are made, this cushion will dissipate within a year.

THE MEANING OF ADEQUATE PROTECTION

Section 362(d)(1) mandates relief, in some form, from the stay "for cause, including the lack of adequate protection of an interest in property." The only cause asserted in this proceeding is a lack of adequate protection.

Adequate protection is not defined in the Code. This omission was probably deliberate. Congress was aware of the turbulent rivalry of interests in reorganization. It needed a concept which would mediate polarities. But a carefully calibrated concept, subject to a brittle construction, could not accommodate the "infinite number of variations possible in dealings between debtors and creditors." H.R.Rep.No.95-595, 95th Cong., 1st Sess. 339 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787, 6295. This problem required, not a formula, but a calculus, open-textured, pliant, and versatile, adaptable to "new ideas" which are "continually being implemented in this field" and to "varying circumstances and changing modes of financing." Id. Adequate protection was requisitioned to meet these needs. Its meaning, therefore, is born afresh out of the "reflective equilibrium"² of each decision,³ understood through analysis of the reorganization context and the language of Section 362(d).

A. The Reorganization Context

Relief from the stay cannot be viewed in isolation from the reorganization process. Bankruptcy in general and Chapter 11 in particular are "procedural devices" for the rehabilitation of financially embarrassed enterprises. H.R.Rep.No.95-595, 95th Cong., 1st Sess. 10 (1977). The process presupposes dynamic rather than static uses of property and denouement in a plan which accommodates the many, not just the few.

The automatic stay, within this framework, is designed "to prevent a chaotic and uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in different courts." Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47, 55 (2d Cir. 1976). It grants a "breathing spell" for debtors to regroup. It shields creditors from one another by replacing "race" and other preferential systems of debt collection with a more equitable and orderly distribution of assets. It encourages rehabilitation: debtors may seek its asylum while recovery is possible rather than coasting to the point of no return; creditors, realizing that foreclosure is useless, may rechannel energies toward more therapeutic ends. See, e.g., Hearings on H.R. 31 and H.R. 32 Before The Subcomm. on Civil and Constitutional Rights of the House Comm. on the Judiciary, 94th Cong., 1st Sess., Ser. 27, Pt. 1, at 321-322, 490-491 (1975).

Although self-help and other unilateral recourse against debtors are forbidden, creditors are not left remediless. They may act through committees with professional assistance, often at the expense of the estate, or by seeking appointment of a trustee or examiner. Conversion to Chapter 7 and dismissal are options. Within certain time constraints, they may file a plan.

In short, the adequate protection vouchsafed creditors in Chapter 11 is interim protection, designed not as a purgative of all creditor ailments, but as a palliative of the worst: re-organization, dismissal, or liquidation will provide the final relief. During this interim, the policies favoring rehabilitation and the benefits derived from the stay should not be lightly discarded. Alternative remedies are available to creditors. Indeed, even relief from the stay need not mean termination of the stay. Section 362(d) provides for relief, such as⁴ "terminating, annulling, modifying, or conditioning" the stay. Thus, relief may be fashioned to suit the exigencies of the case.

B. The Language of Section 362(d)

Turning from Chapter 11 at large to Section 362(d) in specific, several issues must be addressed. First, what is the "interest in property" being protected? Second, what aspects of the "interest in property" require protection? Third, from what is the "interest in property" being protected? Fourth, what is the method of protection?

(1) What is the "interest in property" being protected? The legislative history mentions only "the interest of a secured creditor or co-owner of property with the debtor" in connection with adequate protection. H.R.Rep.No.95-595, 95th Cong., 1st Sess. 338 (1977). Within these classes of creditors, however, "the interests of which the court may provide protection . . . include equitable as well as legal interests. For example, a right to redeem under a pledge or a right to recover property under a consignment are both interests that are entitled to protection." Id. This classification is important because adequate protection depends upon the interest and property involved. Protection afforded a lessor, for example, may be different from that afforded a secured creditor.⁵ Treatment of a secured creditor who faces turnover may be different from treatment of a secured creditor who has not repossessed.⁶ Treatment of a senior lienholder may be different from treatment of a junior lienholder. Similarly, protection may vary if the property is real or personal, tangible or intangible, perdurable or perishable, or if its value is constant, depreciating, or subject to sudden or extreme fluctuations.⁷ Also relevant is the proposed use or idleness of the property.⁸

(2) What aspects of the "interest in property" require protection? Adequate protection is concerned with the value of the interest in property. The legislative commentary to Section 361 underscores this point: "Though the creditor might not receive his bargain in kind, the purpose of the section is to insure that the secured creditor receives in value essentially what he bargained for." Id. at 339. (Emphasis supplied.) The legislative history reemphasizes this point by noting that adequate protection is "derived from the fifth amendment protection of property interests," id., citing Wright v. Union Central Insurance Co., 311 U.S. 273, 61 S.Ct. 196, 85 L.Ed. 184 (1940) and Louisville Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935).⁹ In Wright, Justice Douglas held that the bank received "the value of the interest in property" and that "there is no constitutional claim of a creditor to more than that." Id. 311 U.S. at 278, 61 S.Ct. at 199. Debtors were allowed to redeem the property at its appraised price, despite an obligation which exceeded the value of the collateral by $10,000. Thus, the "interest in property" entitled to protection is not measured by the amount of the debt but by the value of the lien.¹⁰ A mushrooming debt, through accrual of interest or otherwise, may be immaterial, if the amount of the lien is not thereby increased, while vicissitudes in the market, loss of insurance or other factors affecting the value of the lien are relevant to adequate protection. The purpose of adequate protection is to assure the recoverability of this value during the hiatus between petition and plan, or in the event the reorganization is stillborn, between petition and dismissal.¹¹

(3) From what is the "interest in property" being protected? The short answer is from any impairment in value attributable to the stay.^11a The stay does not cause, but it may forestall a creditor from preventing or mitigating, a decline in value. Some harm to collateral, however, may be unavoidable with or without the stay. Likewise, creditors may acquiesce in some harm to collateral for business or other reasons notwithstanding the stay. In these situations, and others which may arise, any impairment in value may not be attributable to the stay. Hence, not every decline in value must be recompensed, only those which, but for the stay, could be and probably would be prevented or mitigated.

(4) What is the method of protection? The method of affording adequate protection, as noted above, will vary with the interest in property to...