In re American Mariner Industries, Inc., Bankruptcy No. SA 80-03623 PE
Decision Date | 23 April 1981 |
Docket Number | Adv. No. SA 81-0163.,Bankruptcy No. SA 80-03623 PE |
Citation | 10 BR 711 |
Court | U.S. Bankruptcy Court — Central District of California |
Parties | In re AMERICAN MARINER INDUSTRIES, INC., Debtor. CROCKER NATIONAL BANK, a National Banking Association, Plaintiff, v. AMERICAN MARINER INDUSTRIES, INC., a California Corporation, Defendant. |
James E. Carter, Santa Ana, Cal., for debtor/defendant.
John A. Graham, Frandzel & Share, Beverly Hills, Cal., for plaintiff.
The first issue to be decided is, if the value of the collateral is not depreciating, whether an undersecured creditor is entitled to interest on the present value of the collateral as adequate protection. The second issue is whether the debtor will be unable to confirm a plan because the plaintiff has a right to elect, under § 1111(b) of the Code, to be treated as a secured creditor in the full amount of its claim.
For purposes of this decision only, I find the value of the bank's collateral to be $110,000, 11 U.S.C. § 506(a). The bank reasons that one of its rights as a secured creditor is the right, upon default, to take possession of its collateral, liquidate it and loan the $110,000 out at interest. At the bank's request, I take judicial notice that the current prime rate is 18% per annum. This theory would require the debtor to pay $1,770.00 per month (18%) as adequate protection.
The debtor filed its Chapter 11 case on December 12, 1980. A primary cause of its financial difficulty is the general decline of the market for recreational boats. At the present time, the debtor seems to be making a successful transition to the manufacture of commercial barges. The debtor has paid $7,300 to plaintiff bank for use of inventory and cash collateral pursuant to my preliminary order for adequate protection.
The debtor shows a small profit on current operations. I find that the machinery, equipment, tools, molds, etc., which are collateral for plaintiff's loan, are necessary for an effective reorganization and therefore the lack of equity is not relevant, § 362(d)(2).
I disagree with that part of the decision in Matter of Anchorage Boat Sales, Inc., (Bkrtcy.E.D.N.Y.) 4 B.R. 635 (1980) that holds an undersecured creditor was entitled to relief of stay because it would not be compensated for the loss of use of its money during the gap between the hearing and confirmation. The rationale is that the creditor would not receive the "indubitable equivalent" of the value of its collateral, citing In re Muriel Holding, Corp., 75 F.2d 941 (2 Cir.).
Anchorage Boat Sales, supra, recognizes that the undersecured creditor is not entitled to interest on its secured claim, § 506(b).
Although Muriel Holding, supra, is the source of the phrase "indubitable equivalent" as used in § 361(3), it should be remembered that the ruling in Muriel Holding involved inadequate protection of a secured creditor being "crammed down" under § 77(b) of the Bankruptcy Act. Therefore, indubitable equivalent in the context of the Muriel Holding facts may be precedent for issues arising upon confirmation under § 1129(b)(2)(A)(i)(II), but not to require interest to be paid to an undersecured creditor for being temporarily deprived of possession or use of its collateral.
Section 506(b), allowing interest on a secured claim to the extent that the collateral has a value greater than the amount of the claim codifies the law under the former Bankruptcy Act, House Report No. 95-595, 95th Congress, 1st. Session, (1977), U.S. Code Cong. & Admin. News 1978, p. 5787. The corollary is that interest is not allowed on undersecured claims. This principle applied to Chapters X and XI as well as straight liquidation bankruptcies, 6 Collier on Bankruptcy (14th Ed.) ¶ 9.08.
Section 506(b) is applicable in Chapter 11 cases, as well as in Chapter 7 and Chapter 13 cases, see § 103(a). The Bankruptcy Reform Act of 1978 is a carefully drafted piece of legislation. Where Congress intended a secured party to be compensated for delay in realization of their collateral or its value, Congress said so. See § 1129(b)(2)(A)(i)(II) and § 1325 (a)(5)(B)(ii).
In conclusion, it is clear to me that the right of an undersecured creditor to receive interest on the value of its collateral is not constitutionally protected under the Fifth Amendment or is it required as a matter of policy under § 361.
In addition, Anchorage Boats suggests the worst case, of confirmation not taking place for two or three years, or not at all. 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 bank argues that the stay should be lifted because it has the right under § 1111(b) to elect to prove its claim as fully secured for approximately $320,000, and that the debtor is required to, but is not capable of, paying $320,000 under a plan. This is a bootstrap argument. The bank has not made that election, and...
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