In re American Mariner Industries, Inc.
| Decision Date | 15 March 1983 |
| Docket Number | Bankruptcy No. SA-80-03623,Adv. No. 80-0163.,BAP No. CC-81-1114-VKH |
| Citation | 27 BR 1004 |
| Parties | In re AMERICAN MARINER INDUSTRIES, INC., Debtor. CROCKER NATIONAL BANK, Plaintiff-Appellant, v. AMERICAN MARINER INDUSTRIES, INC., Defendant-Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
J. Ronald Trost, P.C., Sidley & Austin, Los Angeles, Cal., for plaintiff-appellant.
James E. Carter, Atty. at Law, Santa Ana, Cal., for defendant-appellee.
Before VOLINN, KATZ and HUGHES, Bankruptcy Judges.
I. FACTS
American Mariner filed a petition for relief under Chapter 11 of the Bankruptcy Code on December 12, 1980. Crocker National Bank, a secured creditor, filed a complaint for relief from the automatic stay on February 23, 1981, alleging a debt in the principal sum of $277,500, with accrued and unpaid interest of approximately $90,000 for a total of $365,000. It further alleged that the collateral had an auction liquidation value of $130,500 and that it was entitled to adequate protection in the form of monthly cash payments equal to what it could obtain from reinvestment of the liquidated value of the collateral at a rate of prime interest plus 2 (21%) or the sum of $2,283.75. The debtor admitted the allegations of the complaint but contended that the collateral was worth substantially less than $130,000, and that if there was a liquidation, Crocker would receive considerably less than $2,200 monthly interest on the proceeds. It appears that at some point during the proceeding, the debtor offered to make monthly interest payments of $1,770 per month to Crocker. The matter was submitted to the court essentially on the foregoing basis.
II. ISSUES AND CONTENTIONS
Appellant states the issue on appeal as follows:
"There is but one issue on this appeal: Is an undercollateralized secured creditor entitled to post-petition interest upon the value of its collateral as a condition of denying relief from the automatic stay?" (Appellant\'s Brief, p. 2)
Appellee, at p. 2 of its brief, states:
Appellant argues that when the debtor relies on adequate protection, § 362(d)(1), as the basis for denying relief from the automatic stay, § 362(a), the present value of a secured party's interest in its collateral must be maintained. Apparently recognizing that § 362(d)(1) does not refer to present value, appellant argues by reference to the legislative history to a comparable provision of the Code (the cram down sections), § 1129(b)(2)(A)(i), (iii), that the section should be so interpreted. It adds that failure to interpret adequate protection as protecting the present value of the secured party's interest in its collateral would violate the Fifth Amendment.
After thus contending that "protection of the present value" is "an essential must of `adequate protection'," appellant argues that protection of this present value is achieved by the payment of interest. It concludes by asking this Panel to reverse the decision appealed and order the monthly payments to be "applied as interest on the value of Crocker's collateral . . ."
The appellee debtor argues that adequate protection was provided because the "value of the collateral was not decreasing," that an undersecured creditor is entitled only to protection of the value of the collateral, that the trial court has broad discretion to consider variables such as appreciation and that the provisional nature of the automatic stay eliminates the requirement of interest. In short, appellee disputes appellant's contentions as to the present value and therefore interest.
III. ACTION TAKEN BY THE TRIAL COURT
The court found the value of Crocker's collateral to be $110,000. Taking judicial notice of the fact that at the time the current prime rate was 18%, the court found that the position urged by the Bank would result in the debtor paying monthly interest at $1,770 (18%) as adequate protection (18% of $110,000 should be $1,980).
The court had previously ordered that the debtor pay $7,300 to the Bank for the use of inventory and cash collateral as adequate protection which was done. The debtor was showing a small profit on current operations. The court found that machinery, equipment, tools and molds used by the debtor in the manufacture of barges, which were collateral for the bank loan, were necessary to an effective reorganization, thereby rendering not relevant the issue of equity, or lack thereof, pursuant to 11 U.S.C. § 362(d)(2). The court concluded, as a corollary to 11 U.S.C. § 506(b) which implicitly denies interest to an undersecured creditor as to the deficiency, or unsecured aspect, of the claim, that interest should not be provided in these circumstances. In supporting this conclusion, the trial court alluded to the cram down provisions of the Code, 11 U.S.C. § 1129(b)(2)(A)(i)(II) and § 1325(a)(5)(B)(ii), stating that where Congress intended a secured party to be compensated for delay in realization of its collateral or its value, Congress so provided. The court held that the right of an undersecured creditor to receive interest on the value of its collateral is not constitutionally protected under 11 U.S.C. § 361. It further held that under the circumstances the debtor should be permitted a reasonable period of time to reorganize, stating:
I submit that the debtor should be permitted a reasonable period of time (not two or three years) to reorganize. If the debtor is not able to effectuate a plan, or if delay becomes unduly burdensome, the bank can move to dismiss the Chapter 11 case or convert it to a Chapter 7 case under § 1112(b).
The court concluded:
The debtor has offered to pay interest on the value of the collateral, $1,770 per month. Although I hold that no interest is due and although no evidence of economic depreciation has been presented, I find that $1,770 per month is adequate protection for any depreciation or depletion of the collateral that may occur. To the extent that amount exceeds depreciation or depletion, it shall be applied on the amount of the claim allowed as secured under § 506(a).
The court also discussed the creditor's argument relative to its right to elect to prove its claim as fully secured under 11 U.S.C. § 1111(b), but this has not been pursued on appeal and therefore need not be considered.
The judgment provided that:
. . . this order is without prejudice to plaintiff reapplying for relief from the automatic stay or moving to dismiss the proceedings, or moving to convert the proceedings to Chapter 7 if the debtor does not make progress toward reorganization within a reasonable period of time.
IV. DISCUSSION OF 11 U.S.C. § 361
Section 361 sets forth two specific methods by which such protection may be provided and one general provision which was intended to add a measure of flexibility. Under subsections (1) and (2) adequate protection may be provided either by requiring the trustee to make periodic cash payments to the creditor, or by granting the creditor an additional or replacement lien in other property of the debtor. Either method is designed to protect the secured creditor from a decrease in the value of such entity's interest in such property.
Subsection (3) which, in the early stages of its legislative development, was said to "define more clearly than the others, the general concept of adequate protection," suggests that the court may grant "such other relief . . . as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property." (Emphasis added). See Comments from the Report of the Committee of Judiciary, H.R. 8200, H.R. No. 95-595, 95th Cong. 1st Sess. (1977), U.S.Code Cong. & Admin.News 1978, p. 5787.
The legislative history of § 361 reveals that the House sought more flexibility than the Senate was willing to accept. The Senate eliminated two proposals which would have given greater latitude to the debtors in fashioning adequate protection and retained only two of the specific methods proposed by the House Bill (periodic cash payments or replacement liens). S.Rep. No. 95-989 95th Cong. 2d Sess. (1978).
Subsection (3) of § 361 was the product of compromise. Although it provides general language conducive to the flexibility sought in the House, the language may be read more restrictively in that this alternative to subsections (1) and (2), which...
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