In re Bear Creek Ministorage, Inc., Bankruptcy No. 84-06388-H3-5
| Decision Date | 07 May 1985 |
| Docket Number | 84-06389-H2-5 and 85-01453-H3-5.,Bankruptcy No. 84-06388-H3-5 |
| Citation | 49 BR 454 |
| Parties | In re BEAR CREEK MINISTORAGE, INC. and Loch Katrine Center, Inc., Debtors, REPUBLIC BANK HOUSTON, N.A., Movant, v. BEAR CREEK MINISTORAGE, INC. and Loch Katrine Center, Inc., Respondents, In re TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Debtor, UNITED SAVINGS ASSOCIATION OF TEXAS, Movant, v. TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Respondent. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Robert Collins, Houston, Tex., for Bear Creek Ministorage and Loch Katrine.
James Babcock, Houston, Tex., for RepublicBank Houston, N.A.
Leonard H. Simon, Houston, Tex., for Timbers of Inwood Forest.
H. Miles Cohn, Houston, Tex., for United Savings Ass'n of Texas.
These three cases present the same legal issue. They were heard separately on April 17, 1985. This opinion assigns the reasons for the separate orders for adequate protection entered in each case. A preliminary draft of this opinion was provided counsel on April 19; this opinion is an editorial revision not possible on April 19 because of time constraints.
The facts in each case are very similar. Each Debtor owns real estate that secures an indebtedness; when each case was filed, the sum due on the indebtedness exceeded the value of the security. Each secured Creditor filed a motion for relief from the § 362 stay. The value of the collateral is stable, perhaps slightly (but very slightly) appreciating. There was no evidence that the value of the collateral was depreciating.
Section 362(d) requires the Court to grant relief from the automatic stay effected by § 362(a) for cause, including the lack of adequate protection. Section 361 provides that adequate protection can consist of cash payment(s), additional and replacement liens, or "other relief . . . as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property."
There is no doubt that the Creditors' pre-petition liens are protected during the course of these proceedings. The Creditors assert, however, that they have another interest that should be protected: that is the right to foreclose and to reinvest (or relend) the foreclosure proceeds. Because the value of the collateral does not exceed the indebtedness, each day that the case proceeds the Creditors allegedly are losing a sum of money.1 The asserted lost value is the "time use value" of the proceeds that the Creditors would receive if they were allowed to foreclose. The Creditors seek adequate protection of that interest in the security.
The issue of entitlement to protection of the value of the right to reinvest foreclosure proceeds has been squarely considered and decided: In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir., 1984). In that case the Ninth Circuit interpreted the applicable parts of the Bankruptcy Code as follows: (i) the interest entitled to protection under §§ 361 and 362(d) is "the secured creditor's interest and not merely the value of the collateral";2 (ii) when the creditor is deprived of the specifically agreed benefit of its bargain,3 the statute requires as a quid pro quo that the "value" of its bargain must be adequately protected; (iii) the test of adequate protection is twofold: first, the protection must adequately safeguard principal, and second, the protection must ". . . effectively . . . compensate the secured creditor for loss of value";4 this latter element requires a calculation of the present value of the secured creditor's interest; and (iv) Congress intended in the Bankruptcy Code to increase the protection provided to creditors against potential injury from the interim stay against collection efforts;5 therefore, the cases ". . . decided before enactment of the Bankruptcy Reform Act of 1978, are of little relevance in construing sections 361 and 362".6
In short, the Ninth Circuit concluded that the secured creditor's right to foreclose on the collateral and to reinvest the proceeds ". . . has substantial, measurable value . . ."7 that is entitled to protection. The American Mariner analysis is clearly correct. In addition to being a sensible interpretation of the statute, the decision achieves a rational financial result. For example, if the value of collateral is a stable $500,000 and interest is 10%, a one year stay of foreclosure enforcement costs the creditor $50,000. The Ninth Circuit held that this right is entitled to protection.8
Having determined that the creditor's interest is entitled to protection, the Court must then decide what protection will suffice; § 361 is the determinant. The debtor must provide cash payment(s), substitute lien(s), or other "indubitable equivalents." The only protection that the Debtors can supply in these cases is cash payments because they have no other property or method with which to provide substitute liens or indubitable equivalents.
The next question, then, is the amount of those payments. Unfortunately, American Mariner does not provide a formula. Because the statute protects the creditor's right to investment return on foreclosure proceeds, the protective payments should be a function of the price that could be realized on foreclosure times the rate of return the creditor could expect on reinvestment of the foreclosure proceeds. Thus the Court must determine the amount that would be realized on foreclosure, the rate of return on the proceeds, and the date when foreclosure would occur and investment return would begin. Obviously, none of these facts is susceptible of determination with mathematical precision.
The amount realized on foreclosure is difficult to determine both because it is difficult to determine the market in which the property will sell and because the evidence of prices available in each market consists of estimates and appraisals. Should the Court use the price that the property would bring at an auction or should the Court also consider the secured creditor's right to "buy in" the property at foreclosure and ultimately to realize a greater benefit through prudent delayed marketing of the property utilizing a more efficient market plan? In most cases, the former would bring a lesser price more quickly while the latter would bring a greater price somewhat later. The evidence in different cases might result in different determinations of what plan a prudent creditor might adopt.
The ratio decidendi of American Mariner is that the creditor has a right to protection of the present value of its right to foreclose and to reinvest the sale proceeds. To compute that present value, this Court assumes that the creditor would act as a prudent businessman and would follow reasonable, established marketing techniques, including purchasing the security itself at foreclosure in partial or full satisfaction of the indebtedness, followed by a reasonable and prudent effort to market the property. Since the creditor's right to foreclose would give it no financial benefit until the final sale to a third party of the property acquired at foreclosure, the payments by the debtor need not begin until that date in order to preserve the present value of the creditor's right to foreclose and to reinvest the proceeds. That is a serendipitous result for the debtor: the earlier that payments must begin, normally the smaller they will be.9 In the cases at bar, the evidence indicated that a prudent creditor would itself purchase the property at foreclosure and would then market the property in the organized real estate market.
The applicable interest rate is difficult to determine because interest rates are normally a function both of the risk and of the term of the debt. Because American Mariner requires protection of the present value of the creditor's right to reinvest foreclosure proceeds, it would appear that the correct interest rate to apply is the rate that would be realized by the creditor when the proceeds are reinvested; in the cases at bar, that would be the creditor's lending rate. Because interest rates vary, the applicable rate would be the prevailing rate at the time that the creditor could expect to receive the foreclosure proceeds for reinvestment. Absent contrary evidence, the Court will assume stable interest rates in the cases at bar.
Finally, the Court must establish the applicable hypothetical foreclosure date and reinvestment date in order to compute the date for valuation of the property and for determination of the interest rate; that date, of course, would also be the date on which payments must begin.10 Returning to American Mariner, the objective is to compensate for the denial of the right to foreclose; absent unusual circumstances, that denial arises upon entry of the order for relief, which is coincident with the filing of the case. The applicable date for valuation of the property and for estimation of the interest rate would be computed by adding the foreclosure delays to the date that the bankruptcy petition was filed.11 The date thus computed would be the first date on which the creditor could expect a return on its interest in the property. Payments should begin on the same date. The evidence in the case at bar indicated the foreclosure period to be six months. The evidence in the cases at bar did not indicate any substantial changes in the prices or interest rates during the periods involved.
In summary, the evidence in the cases at bar is that the Creditors' bargains were altered by the bankruptcy law on the date that the petitions in bankruptcy were filed. The Debtors must provide the Creditors with adequate protection for the Creditors' interests in the property by one of the methods specified in § 361. To compute the present value of the impingement, one computes the expected...
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