Timbers of Inwood Forest Associates, Ltd., In re

Decision Date09 July 1986
Docket NumberNo. 85-2678,85-2678
Citation793 F.2d 1380
Parties15 Collier Bankr.Cas.2d 509, 14 Bankr.Ct.Dec. 1029, Bankr. L. Rep. P 71,238 In re TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Debtor. UNITED SAVINGS ASSOCIATION OF TEXAS, Movant-Appellee Cross-Appellant, v. TIMBERS OF INWOOD FOREST ASSOCIATES, LTD., Respondent-Appellant Cross-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Leonard H. Simon, Daphne L. Levey, Tim Henderson, Houston, Tex., for respondent-appellant cross-appellee.

H. Miles Cohn, Houston, Tex., for movant-appellee cross-appellant.

Appeals from the United States District Court for the Southern District of Texas.

Before GOLDBERG, RANDALL and JOHNSON, Circuit Judges.

RANDALL, Circuit Judge:

In a proceeding under the federal bankruptcy laws, an oversecured creditor (a secured creditor whose collateral is worth more than the amount of its debt) is entitled to receive at the conclusion of the proceeding interest on the debt accrued during the proceeding as a part of its allowed claim. By contrast, neither an undersecured creditor (one whose collateral is worth less than the amount of its debt) nor an unsecured creditor is entitled to receive such interest as part of its allowed claim. This case presents the question whether Congress in 1978, in codifying the principles which had developed under the common law to ensure that a secured creditor's interest in the value of its collateral would be adequately protected during the pendency of a reorganization proceeding, intended that an undersecured creditor would be entitled to receive during the proceeding periodic cash interest payments on the value of the collateral, even though a claim for interest on the debt would not be allowed at the conclusion of the proceeding. The Ninth and Fourth Circuits hold that an undersecured creditor is entitled as a matter of law to periodic interest payments during the proceeding. In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir.1984); Grundy National Bank v. Tandem Mining Corp., 754 F.2d 1436 (4th Cir.1985). The Eighth Circuit holds that an undersecured creditor is not entitled to such payments as a matter of law, but may be so entitled depending on the circumstances. In re Briggs Transportation Co., 780 F.2d 1339 (8th Cir.1985).

While recognizing the cogent arguments that have been adduced in support of both such positions, we are not persuaded that Congress intended in 1978 to make fundamental changes in the adequate protection rules as they had developed before 1978, or to alter, through adequate protection provisions, the settled rules regarding the accrual and payment of interest during the pendency of a bankruptcy proceeding. Further, a rule requiring periodic postpetition interest payments to undersecured creditors would often have a substantial adverse impact on the orderly procedures for the distribution of a debtor's estate upon liquidation or reorganization; would frequently result in a premature reallocation of the unencumbered assets of an estate from unsecured to undersecured creditors; and would materially alter the rule that all creditors generally share some of the risk in a reorganization proceeding that a successful reorganization will not be feasible. We think it unlikely that Congress would have adopted such a rule--entailing, as it does, major changes in the way in which a reorganization proceeding is conducted--without clear, unequivocal statements to that effect in the bankruptcy statute or, at the least, in its legislative history. No such statements appear. To the contrary, the statute and its legislative history strongly suggest, and we hold, that Congress did not intend to provide undersecured creditors with periodic postpetition interest payments on the value of their collateral as an element of adequate protection.


Debtor Timbers of Inwood Forest Associates, Ltd. ("Timbers") appeals from an order of the United States District Court for the Southern District of Texas affirming the decision of the Bankruptcy Court ordering payment to United Savings Association of Texas ("United") of cash amounts representing lost "opportunity costs" on the amount of United's secured claim. "Opportunity costs," according to United, are the funds it would earn if it were allowed to foreclose its lien, sell the collateral and reinvest the proceeds. 1 United cross-appeals asserting that the formula adopted by the Bankruptcy Court for determining the amount of payments is incorrect.

The underlying facts are not complicated. Timbers is a limited partnership that owns a 188-unit apartment complex in northwest Houston. United holds a ten-year note executed by Timbers in June 1982, in the original principal amount of $4,100,000, secured by a deed of trust on the apartment complex and an assignment of rents. Monthly payments for the first three years of the note were to be $45,842.06, including an interest rate of fourteen percent, plus $7,956 monthly escrow for taxes and insurance. No payment has been made on the note since August 1984. United noticed a foreclosure on the Timbers property at some point, but on March 4, 1985, Timbers filed a petition under Chapter 11 of the Bankruptcy Code of 1978 ("Code" or "Bankruptcy Code"), 11 U.S.C. Secs. 101-1330, automatically staying the foreclosure. United and Timbers entered into an agreed order that required Timbers to pay United the net income produced by the apartments.

On March 18, 1985, United moved in the Bankruptcy Court for relief from the automatic stay under Sec. 362(d)(1) 2 "for cause, including the failure [by Timbers] to provide adequate protection of [United's] security interest." The Bankruptcy Court held an evidentiary hearing on the motion. Evidence introduced at the hearing indicates that on April 16, 1984, the principal balance of the note was $3,929,319.28 and unpaid accrued interest amounted to $437,069.49, for a total of $4,366,388.77. Expert testimony introduced by Timbers fixed the "fair market value" of the property at $4,250,000, while United's expert placed its fair market value at $3,614,000 to $4,230,000. Timbers' expert also testified that the "liquidation value" of the property was $2,650,000. Both experts agreed that the property value would appreciate to a modest extent, but United was at the time of the hearing, and for the purpose of this appeal remains, an undersecured creditor. There was no evidence that future appreciation would be able to provide security for interest accruing postpetition under the terms of the note. Neither party presented evidence on the likelihood of successful reorganization.

United argued at the hearing that absent the automatic stay, it would foreclose on and sell the property and reinvest the proceeds at the market rate. It argued that because Timbers had not provided it with "adequate protection" of its "interest" in the present value of the proceeds, the stay should be dissolved. The Bankruptcy Court, in a detailed opinion, agreed in large part with United, and on April 24, 1985, ordered monthly payments of $50,456: $7,956 for the escrow, to commence immediately, and $42,500 for United's "lost opportunity cost" to commence on September 4, 1985, based on a value on foreclosure of $4,250,000 and a 12% interest rate. 49 B.R. 454 (Bankr.S.D.Tex.1985). The lost opportunity payments are in an amount only slightly less than the monthly principal and interest payment due under the note--$45,842.06. The court ordered that the lost opportunity payments "may be made from rental receipts otherwise subject to the agreed cash collateral order herein," but did not limit Timbers' obligation to the amount of the net rental income. The Bankruptcy Court relied in large part on the Ninth Circuit's decision in American Mariner. On appeal, the District Court affirmed.


Many commentators and courts view the issue before us as one of policy and economics. One side opines that the failure to award postpetition interest payments will restrict the availability of secured credit to the detriment of businesses that cannot obtain credit otherwise. The other concentrates on the deleterious effects that postpetition interest payments will have on the possibility of reorganizations. It seems that the debate has become not what the Bankruptcy Code requires, but what it should require. If we were Members of Congress, or if bankruptcy law were not controlled by a statute, we might find the economic debate of primary significance. However, as judges, we must be governed by congressional intent as set forth in the Bankruptcy Code. "The relevant question is not whether, as an abstract matter, the rule advocated ... accords with good policy. The question we must consider is whether the policy [advocated] is that which Congress effectuated by its enactment of" the statute at issue. Badaracco v. Commissioner, 464 U.S. 386, 398, 104 S.Ct. 756, 764, 78 L.Ed.2d 549 (1984). "Courts are not authorized to rewrite a statute because they might deem its effects susceptible of improvement." Id.

The issue we face is simply one of statutory interpretation: Does "adequate protection" under Sec. 362(d)(1) contemplate that an undersecured creditor will receive postpetition interest periodically in cash or some other form to compensate it for "lost opportunity" when its right to foreclose is temporarily suspended by the automatic stay? Our role in interpreting statutes is limited:

While the judicial function in construing legislation is not a mechanical process from which judgment is excluded, it is nevertheless very different from the legislative function. Construction is not legislation and must avoid "that retrospective expansion of meaning which properly deserves the stigma of judicial legislation." Kirschbaum v. Walling, 316 U.S. 517, 522 [62 S.Ct. 1116, 1119, 86 L.Ed. 1638]. To blur the distinctive functions of the legislative and the judicial processes is not conducive to responsible legislation.

Addison v....

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