In re Philadelphia Consumer Discount Co.

• Decision Date: 14 February 1984
• Docket Number: Civ. A. No. 83-4554.
• Citation: 37 BR 946
• Parties: In re PHILADELPHIA CONSUMER DISCOUNT COMPANY and Philadelphia Acceptance Corporation, Debtors. PHILADELPHIA CONSUMER DISCOUNT COMPANY and Philadelphia Acceptance Corporation, Appellants, v. COMMERCIAL CREDIT BUSINESS LOANS, INC., Appellee.
• Court: U.S. District Court — Eastern District of Pennsylvania

37 B.R. 946 (1984)

In re PHILADELPHIA CONSUMER DISCOUNT COMPANY and Philadelphia Acceptance Corporation, Debtors PHILADELPHIA CONSUMER DISCOUNT COMPANY and Philadelphia Acceptance Corporation, Appellants, v. COMMERCIAL CREDIT BUSINESS LOANS, INC., Appellee.

Civ. A. No. 83-4554.

United States District Court, E.D. Pennsylvania.

February 14, 1984.

Joseph S.U. Bodoff, Philadelphia, Pa., for appellants.

E. David Chanin, Philadelphia, Pa., for appellee.

OPINION

CAHN, District Judge.

I. PRELIMINARY STATEMENT

This is an appeal from an order of the Bankruptcy Court that denied the application of the debtors for authority to use cash collateral, and in addition granted the secured lender relief from the automatic stay provision of the Bankruptcy Code. I have jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and will affirm the order of the Bankruptcy Court for the reasons set forth below.

II. PROCEDURAL BACKGROUND

On May 2, 1983, debtors, Philadelphia Consumer Discount Co. and its wholly owned subsidiary, Philadelphia Acceptance Corp., filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq.¹ On May 6, 1983, an order of joint administration in the two cases was entered.

On June 13, 1983, the debtors filed an application for authority to use cash collateral and to determine secured status. In their petition, debtors requested authority to use loan receivables² to renew loans and make new loans. These receivables are collateral for a line of credit extended to debtors since 1976 by Commercial Credit Business Loans, Inc. (hereinafter "CCBL"). In their June 13th application, debtors also requested that the Bankruptcy Court set the value of the collateral, and thus determine CCBL's allowed secured claim, under 11 U.S.C. § 506(a).³

On June 16, 1983, CCBL filed a complaint for relief from the automatic stay under §§ 362(a) and (e) of the Bankruptcy Code. The Bankruptcy Judge held hearings on the debtors' application on June 20 and 24, 1983, and on July 11, 1983 conducted a hearing on CCBL's complaint for relief from the automatic stay. On August 16, 1983, the Bankruptcy Judge denied the debtors' application to use cash collateral and granted CCBL's request for relief from the stay, 32 B.R. 322. This appeal followed.

III. FACTS

CCBL, a commercial lender, extended a line of credit to the debtor-lenders under a loan agreement dated June 18, 1976, and renewed yearly thereafter. CCBL has been debtors' primary source of capital since 1976. As collateral for loans extended under this line of credit, the debtors granted CCBL a security interest in all notes receivable and proceeds generated by debtors' consumer and commercial loan-making business. Until January, 1982, CCBL permitted debtors to service this loan by making interest payments only, and no principal payments were made to that date.

Debtors had difficulty meeting their interest payments due to unfavorable lending conditions in Pennsylvania in 1981 (a prime lending rate of over twenty percent and a statutory maximum interest rate on consumer loans of 23.73 percent⁴), and, according to testimony by an officer of the debtors, were in default on their obligation. CCBL notified debtors in January of 1982 that it was freezing the line of credit and requiring debtors to make principal payments. Debtors continued making interest payments to CCBL and in addition began to liquidate the company through daily collection of accounts and sale of accounts. On June 23, 1982, CCBL notified debtors that in August the lending arrangement would not be renewed. On August 31, 1982, the agreement was terminated and the debtors were prevented from renewing loans or making new loans. CCBL did not immediately foreclose on its collateral, but instead permitted debtors to continue with an orderly liquidation of their accounts. Debtors did so, and in the process sold off most of their "good" loans, leaving 112 loans of which 13 to 15 percent were more than 60 days delinquent as of the date of the bankruptcy petition. Out of total receivables of $1,203,000.00 outstanding on June 10, 1983, accounts worth $130,000.00 were over 60 days delinquent and accounts worth $400,000.00 to $450,000.00 were more than 30 days delinquent. In June of 1983 the number of delinquencies was increasing.

By May 2, 1983, the date of the Chapter 11 petition, debtors had reduced their obligation to CCBL from $1,700,000.00 to approximately $1,000,000.00.⁵ The value of the remaining collateral was approximately $700,000.00, leaving CCBL undercollateralized by $300,000.00. Debtors filed for protection under Chapter 11 based on the belief that continuing to sell accounts and liquidate the business pursuant to CCBL's plan would result in no recovery for subordinated debenture holders who hold $200,000.00 in debt instruments of the company. In addition, present and former officers of debtors had guaranteed the CCBL loan, and the liquidation of the business as it was proceeding would leave those officers personally liable in the amount of $300,000.00.

IV. DISCUSSION

The issue to be determined on this appeal is whether the protection plan offered by debtors in opposing CCBL's petition for relief from the automatic stay is adequate assurance that the value of CCBL's collateral will not depreciate. The Bankruptcy Judge held that it is not adequate and I agree.

A. Adequate Protection

CCBL filed a petition for relief from the automatic stay under 11 U.S.C. § 362(d)(1).⁶ Under that section it is clear that once the petition is filed, the burden is upon debtors to prove the absence of cause for relief, and in addition to show that their plan for use of the collateral will "adequately protect"⁷ CCBL's interest in that collateral. Debtors may not merely theorize that such protection might materialize. Gauvin v. Wagner (In re Gauvin), 24 B.R. 578, 580 (Bkrtcy. 9th Cir.1982) (per curiam). See also La Jolla Mortgage Fund v. Rancho El Cajon Assoc., 18 B.R. 283, 288 (Bkrtcy.S. D.Cal.1982) (citing 124 Cong.Rec. 32,396 1978).

The question of the sufficiency of protection offered as adequate is a matter of law, In re Schaller, 27 B.R. 959, 962 n. 2 (D.C.W.D.Wis.1983), and therefore this court must undertake an independent evaluation of that legal question, Pierce-Phelps, Inc. v. Hollock (In re Hollock), 1 B.R. 212, 215 (D.C.M.D.Pa.1979).⁸ The court must weigh the competing interest of the creditor's property interest, which may not be diminished, against the values promoted by the automatic stay, i.e., a public policy to prevent the piecemeal dismantling of a business through unilateral creditor action. Chemical Bank v. American Kitchen Foods, Inc., 2 B.C.D. 715, 718 (Bkrtcy.N.D.Me. 1976).

In this type of case, in which the creditor is undercollateralized by a large amount, "the court must be more particular concerning the adequacy of the offered protection," La Jolla Mortgage Fund v. Rancho El Cajon Assoc., 18 B.R. 283, 288 (Bkrtcy.S. D.Cal.1982).⁹ The focus for the court in determining adequacy must be the projected stability of the value of the collateral, First Federal Sav. & Loan Ass'n of Lima v. Shriver (In re Shriver), 33 B.R. 176, 182, 185 (Bkrtcy.N.D.Ohio 1983); Chase Manhattan Bank v. Ramco Well Service (In re Ramco Well Service), 32 B.R. 525, 531 (Bkrtcy.W.D. Okl.1983).

B. "Interest" Entitled to Protection

The initial question that this court must ask is the extent of the "interest" of the secured creditor entitled to protection under the Bankruptcy Code. Although Congress, through use of the bankruptcy laws, may not circumvent the Fifth Amendment guarantees against the taking of private property without just compensation, Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 589, 55 S.Ct. 854, 863, 79 L.Ed. 1593 (1935), the creditor is entitled to protection only of his "allowed secured claim" under § 506 of the Code. When a creditor is oversecured, his allowed secured claim is the amount of the debt plus interest and expenses, 11 U.S.C. § 506(b);¹⁰ but when the creditor is undersecured, as here, his allowed secured claim is equivalent only to the value of the collateral at the time the petition is filed, 11 U.S.C. § 506(a).¹¹ Thus, the "interest in property" of CCBL that must be protected by the debtor is the value of CCBL's collateral at the time of the petition, i.e., $700,000.00.

The bankruptcy courts have held that, since § 506(b) makes no provision for interest to be added to the secured claim of an undersecured claimant, undersecured creditors are not entitled to protection of the "opportunity cost" or the "use value" of their collateral between the time the petition is filed and the time of the filing of the reorganization plan or liquidation of the estate.¹² These courts would limit the remedy to be afforded secured claim holders for undue delay in realizing their claims to either a motion to dismiss the Chapter 11 petition, or to a motion to convert that petition to a Chapter 7 case under § 1112(b) of the Code. In re Pine Lake Village Apt. Co., 19 B.R. 819, 828 (Bkrtcy.S.D.N.Y. 1982).¹³ A different rule has been formulated by the two district courts to consider the issue, Metropolitan Life Ins. Co. v. Monroe Park (In re Monroe Park), 17 B.R. 934, 940 (D.C.D.Del.1982); In re Virginia Foundry Co., 9 B.R. 493, 497-8 (D.C.W.D.Va.1981). The Court in Monroe Park concluded that adequate protection for an undersecured creditor requires some compensation for the loss of use of its money during the interim period between the filing of the petition and confirmation or liquidation. The court found that without such compensation, the value of the creditor's "interest in property" that must be adequately protected by the debtor would necessarily erode during the pendency of the stay. In re Monroe Park, 17 B.R. at 940 & n. 3. See also In re Virginia Foundry Co., 9 B.R. at 498.

I need not choose between these two approaches, because debtors here...