In re South Village, Inc., Bankruptcy No. 82-00040

• Citation: 25 BR 987
• Decision Date: 30 December 1982
• Docket Number: Bankruptcy No. 82-00040,Civ. No. 82P-0200.
• Parties: In re SOUTH VILLAGE, INC., Debtor. GENERAL ELECTRIC MORTGAGE CORPORATION, previously known as Amfac Mortgage Corporation, an Oregon corporation, Plaintiff, v. SOUTH VILLAGE, INC., a Utah corporation, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

25 B.R. 987 (1982)

In re SOUTH VILLAGE, INC., Debtor.

GENERAL ELECTRIC MORTGAGE CORPORATION, previously known as Amfac Mortgage Corporation, an Oregon corporation, Plaintiff, v. SOUTH VILLAGE, INC., a Utah corporation, Defendant.

Bankruptcy No. 82-00040, Civ. No. 82P-0200.

United States Bankruptcy Court, D. Utah.

December 30, 1982.

Irving Sulmeyer, John P. Eleazarian, Eldon L. Pesterfield, of Sulmeyer, Kupetz, Baumann & Rothman, Los Angeles, Cal., and Robert M. Anderson, Gregory K. Orme, of Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, Utah, for General Elec. Mortgage Corp.

William T. Thurman, Stephen W. Rupp, of McKay, Burton, Thurman & Condie, and Duane Smith, of Sessions, Moore & Smith, Salt Lake City, Utah, for debtor.

MEMORANDUM OPINION ON OPPORTUNITY COST AND ADEQUATE PROTECTION

RALPH R. MABEY, Bankruptcy Judge.

INTRODUCTION AND BACKGROUND

South Village, Inc. (debtor), the owner of a shopping mall, filed a petition under Chapter 11 on January 11, 1982. General Electric Mortgage Corporation (GEMC), a lienor on the mall, filed a complaint for relief from the stay on March 2. A preliminary evidentiary hearing was held March 24. The evidence showed that, as of March 24, the debt had matured and was due in the amount of $4,369,000. The value of the mall was $4,340,000. Hence, GEMC was undersecured. Before maturity, the debt bore interest at the rate of 14 percent per annum. After maturity, it bears interest at the rate of 17 percent per annum. Interest accrues at $1,633 per day or $596,110 per year. The mall is not appreciating in value sufficient to cover interest. GEMC maintains that, if allowed to foreclose and sell the mall, it could reinvest the proceeds and earn and be paid this interest and more. This is described as the "use value of its money." The suspension of this "value" is said to be the "opportunity cost" imposed by the stay. The question is whether GEMC must be recompensed for this "cost" in order to be adequately protected.¹

OPPORTUNITY COST AND ADEQUATE PROTECTION

Upon commencement of a case, the stay, found at 11 U.S.C. Section 362(a), bars foreclosure against property of the estate. Relief from the stay, provided in 11 U.S.C. Section 362(d)(1), may be had "for cause." One cause is "the lack of adequate protection of an interest in property." Adequate protection, illustrated in 11 U.S.C. Section 361, is protection of an "interest in property" from any decrease in "value" attributable to the stay. In re Alyucan Interstate Corp., 12 B.R. 803, 806-809 (Bkrtcy., D.Utah 1981).

The measure of any decrease, however, depends upon what is meant by the "value" of an "interest in property." If the interest in property is determined according to the worth of tangible assets, such as the "allowed secured claim,"² then the decrease in value may be any depreciation of this claim. But if the interest in property embraces not only tangible assets but also intangible rights, such as the right to foreclose, liquidate, and reinvest, then the decrease in value may include opportunity cost.

In Alyucan this court questioned an emphasis upon "contractual rights" rather than "economic values" in construing adequate protection. In re Alyucan Interstate Corp., supra at 808 n. 11.³ But this distinction may be thin where "rights" and "values" are closely intertwined. Indeed, when speaking of opportunity cost, the "value" of the "interest in property" may be inseparable from the "right" to foreclose, liquidate, and reinvest. Thus, the legislative mandate that, even where "the creditor might not receive his bargain in kind," he must receive "in value essentially what he bargained for," H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 339 (1977), U.S.Code Cong. & Admin.News, p. 6295, may require the "value" of the "interest in property" to be gauged in light of what the holder could have realized through enforcement of the contract.

Nevertheless, this "economic equivalent of the benefit of the bargain" may not be easily reconciled with the language and legislative history of Section 361, or with other provisions of the Code.

OPPORTUNITY COST AND SECTION 361

1. The Language of Section 361. Section 361 provides three nonexclusive illustrations of adequate protection. Adequate protection, according to the first two examples, may be supplied through "periodic cash payments" or "additional or replacement liens" to the extent that "the stay . . . results in a decrease in the value of the interest in property." This language probably refers to depreciation of the allowed secured claim, not opportunity cost.

Adequate protection may take the form not only of cash payments, which might reduce the opportunity cost, but also of replacement liens, which might not. If adequate protection includes opportunity cost, it might have been defined, not illustrated, as cash payments. The argument for opportunity cost loses force in light of the alternate means of adequate protection.⁴

2. The Legislative History of Section 361.

Proponents of opportunity cost see "value," as that term is used in Section 361, as cash value. This follows from their emphasis on contractual rights — as distinct from tangible assets — including the rights of foreclosure, liquidation, and reinvestment. This value is fixed by a market for the use of money, without regard to the allowed secured claim. Value as cash value, however, may not square with the legislative history of Section 361.

The Commission proposal described "adequate protection," not as protection of the value of money, but as protection "to the extent of the anticipated decrease in the value of the collateral as a result of use." Report of the Commission on the Bankruptcy Laws of the United States, H.Doc. No. 93-137, pt. II, at 237 (1973). The Commission proposal was "essentially a codification of such cases as . . . In re Bermec, 445 F.2d 367 (2d Cir.1971)." Report of the Commission on the Bankruptcy Laws of the United States, supra at 236. Bermec permitted a debtor to use collateral subject to the payment of "the `economic depreciation' on the secured creditors' equipment so as approximately to preserve the status quo." In re Bermec, supra at 239. Jack Gross, the attorney who represented the creditors in Bermec, explained the phrase, "economic depreciation," by stating that the court had "set a hearing and detailed evidence was adduced with respect to the rates of depreciation of the hard security . . . and . . . the trustee was directed to make monthly payments equal to the rate of depreciation." 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., 2d Sess., Ser. 27, pt. 3, at 1763 (1976).⁵

The idea of adequate protection was taken from the Commission proposal and codified in subsequent drafts of the Reform Act. See, Section 361 of H.R. 8200, 95th Cong., 1st Sess. (1977); Section 361 of S. 2266, 95th Cong., 2d Sess. (1978). The legislative history of these bills, like the Commission Report, did not discuss the value of money; it emphasized "the decrease in value of the property involved," H.R.Rep. No. 95-595, supra at 339, U.S.Code Cong. & Admin.News, p. 6296, "any decrease in the value of such party's collateral," 124 Cong. Rec. H11,092 (daily ed., September 28, 1978), and "a means of realizing the value of the original property, if it should decline during the case." H.R.Rep. No. 95-595, supra at 339-340, U.S.Code Cong. & Admin. News, p. 6296.⁶ The Senate Report, like the Commission Report, noted the derivation of adequate protection, in part, from Bermec, and observed that "the use of periodic payments may be appropriate where, for example, the property in question is depreciating at a relatively fixed rate. The periodic payments would be to compensate for the depreciation and might, but need not necessarily, be in the same amount as payments due on the secured obligation." Sen. Rep. No. 95-989, 95th Cong., 2d Sess. 54 (1978), U.S.Code Cong. & Admin.News, p. 5840.⁷ And after differences between the House and Senate bills were resolved, floor leaders concluded that "adequate protection of an interest of an entity is intended to protect a creditor's allowed secured claim." 124 Cong.Rec. H11,092 (daily ed., September 28, 1978); 124 Cong.Rec. S17,409 (daily ed., October 6, 1978). (Emphasis supplied.)⁸

The authors of the Code thus explained that adequate protection was protection, not of the value of money, nor of any equity cushion,⁹ but against depreciation of the collateral when it erodes the allowed secured claim.¹⁰

Another part of the legislative record, dealing with the debate over "value," supports this interpretation, and equates the "interest in property," not with any contractual benefit, such as the right to foreclose, liquidate, and recoup opportunity cost, but with the allowed secured claim.

The Commission proposal noted that "a benchmark in determining the adequacy of protection is the liquidation value of the collateral at the date of the petition." Report of the Commission on the Bankruptcy Laws of the United States, supra at 237. Creditors objected to this proposal, arguing that since their collateral was being commandeered to further rehabilitation, it should be assigned a going concern value. See, e.g., Hearings on S. 235 and S. 236 Before the Subcomm. on Improvements in Judicial Machinery of the Senate Comm. on the Judiciary, 94th Cong., 1st Sess., pt. II, at 652 (1975); 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 495, 1607, and 1754 (1975). Moreover, given the elusiveness of values and the uncertainties of reorganization, they insisted that a valuation at one stage of the proceeding for one purpose should not be binding upon parties throughout the proceeding and for all purposes. See, e.g., Kennedy, "The Automatic Stay in Bankruptcy," 11...