RANDALL, Circuit Judge:
The court granted rehearing en banc of this appeal to consider whether the adequate protection provisions of the Bankruptcy Code of 1978, 11 U.S.C. §§ 362(d)(1) and 361, can be construed to require a Chapter 11 debtor to provide an undersecured creditor with payments during the pendency of the automatic stay representing interest on the value of the secured creditor's collateral or compensation for the lost opportunity of reinvesting the proceeds of such collateral. The panel opinion, 793 F.2d 1380 (5th Cir.1986), which held that the adequate protection provisions cannot be so construed, was vacated when the court decided to hear the appeal en banc.
We hold today that the adequate protection provisions of the Bankruptcy Code,
We review briefly the legislative proceedings relevant to adequate protection that have taken place since the enactment of the Bankruptcy Code in 1978.
The Bankruptcy Code has been amended twice since its enactment. The Bankruptcy Amendments and Federal Judgeship Act of 1984 was enacted primarily to deal with the Supreme Court's 1982 decision in Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). Congressional action on the 1984 amendments was completed on June 29, 1984, and the amendments were signed into law by the President on July 10, 1984. See Pub.L. No. 98-353, 98 Stat. 333, 392 (1984). The 1984 legislation effected no changes in the adequate protection provisions of the Bankruptcy Code. Significantly, American Mariner was not decided until June 4, 1984; the vast majority of bankruptcy court decisions prior to that time, as well as the bankruptcy appellate panel decision in American Mariner — those being the decisions on the books during most of the time that Congress was considering the 1984 amendments — refused to construe the adequate protection provisions to require the payment of interest or lost opportunity costs.
Commencing in 1985, several bills concerned with the family farm bankruptcy problem were filed in Congress. Proceedings on these bills culminated in the enactment of the Bankruptcy Judges, United States Trustees, and Family Farmers Bankruptcy Act of 1986, Pub.L. No. 99-554, 100 Stat. 3088 (1986) (H.R. 5316) [hereinafter cited as Family Farmers Bankruptcy Act of 1986], which was signed by the President on October 27, 1986. In the course of the hearings on family farm bankruptcies, numerous witnesses testified about the impact of the American Mariner decision on the reorganizability of farm debtors. American Mariner was resoundingly criticized by virtually all who testified. The pervasive sentiment expressed by those who addressed the various family farm bankruptcy proposals before Congress was that the American Mariner requirement of payment of interest or lost opportunity costs as a form of adequate protection to secured creditors was almost invariably fatal to the family farmer's prospects for reorganization; it is the rare family farm debtor who can make the lost opportunity
Several of those who addressed the family farm bankruptcy problem described the result of American Mariner as not being faithful to the legislative intent embodied
132 Cong.Rec. S15090 n. 187 (daily ed. Oct. 3, 1986) (article by John C. Anderson) (emphasis in original).
Farm Family Hearings, supra, at 289.
The 1986 legislation that resulted from the congressional hearings amended the Bankruptcy Code by adding a new Chapter 12 to deal with family farm bankruptcies. In most respects, the new Chapter 12 is modeled on Chapter 13. The principal relief which it affords family farmers, who had previously been forced to seek relief under Chapter 11, is to eliminate the impact of the absolute priority rule on the family farm debtor. In many farm bankruptcies, the absolute priority rule gave the unsecured creditors the power to prevent confirmation of a plan if the debtor continued to have any equity interest in his farm. See 11 U.S.C. § 1129(b)(2)(B). Under the new Chapter 12, as under Chapter 13, the vote of unsecured creditors is not required for the confirmation of a plan of reorganization. Additionally, under the new Chapter 12, the family farmer can overcome an unsecured creditor's objection to confirmation by demonstrating that "the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim." Family Farmer Bankruptcy Act of 1986, § 1225(b)(1)(A) (to be codified at 11 U.S.C. § 1225(b)(1)(A)). Alternatively, the unsecured creditor's objection can be overcome if "the plan provides that all of the debtor's projected disposable income to be received in the three-year period, or such longer period as the court may approve under section 1222(c), beginning on the date that the first payment is due under the plan will be applied to make payments under the plan." Family Farmer Bankruptcy Act of 1986, § 1225(b)(1)(B) (to be codified at 11 U.S.C. § 1225(b)(1)(B)).
The new Chapter 12 also amends the adequate protection provisions as they apply
H.R.Conf.Rep. No. 958, 99th Cong., 2d Sess. 49-50, reprinted in 1986 U.S.Code Cong. & Ad.News 5227, 5246, 5250-5251.
A few significant conclusions can be drawn from the action of Congress in 1986. The first is that virtually all witnesses testifying at the hearings, and Congress itself, recognized the disastrous impact of American Mariner on the family farmer's reorganization prospects. The second is that Congress, although believing that some form of adequate protection of the interest of certain secured creditors (those with a security interest in farmland) was in order, chose to effectuate that adequate protection by means of an amendment to the statute that tied the protection to the use of the farmland and to comparable rental values and the net income of the debtor.
The enactment of § 1205, making § 361 inapplicable to family farm reorganization cases and providing for rental payments as adequate protection, is an example of the legislative process at work. Congress held hearings during which witnesses representing various interest groups testified. With few exceptions, those witnesses excoriated the American Mariner result. After considering the testimony, Congress made the decision legislatively to overrule American Mariner in the context before it — that of family farm bankruptcies. What resulted reflects a compromise based on the consideration of the often competing interests of the debtor, the secured creditors, and the unsecured creditors.
This history of § 1205 stands in stark contrast to the legislative history of the Bankruptcy Code. In the course of the extensive hearings leading up to the 1978 enactment, there is no evidence of the legislative process at work with respect to the problem of compensation for delay. Adequate protection payments for lost opportunity or interest were never discussed.
Doubtless the argument will be made that the enactment of § 1205, with the avowed congressional purpose of relieving the family farmer of the impact of the American Mariner decision, represents an endorsement of the American Mariner result with respect to all other debtors. For several reasons, this argument must be rejected.
To begin, § 1205 was introduced to overcome the impact on family farm debtors of the American Mariner court's construction of the adequate protection provisions of the Bankruptcy Code. The introduction of the family farm bill hardly suggests that its sponsors viewed American Mariner as a correct interpretation of the adequate protection provisions. Cf. Russello v. United States, 464 U.S. 16, 25-26, 104 S.Ct. 296, 301-02, 78 L.Ed.2d 17 (1983) ("[T]he bills ... were introduced in order to overcome the decisions in [United States v.] Marubeni [America Corp., 611 F.2d 763], [United States v.] Meyers [432 F.Supp. 456], and [United States v.] Thevis [474 F.Supp. 134].... The introduction of these bills hardly suggests that their sponsors viewed those decisions as correct interpretations of [18 U.S.C.] § 1963(a)(1)."); United States v. Gordon, 638 F.2d 886, 888 n. 5 (5th Cir.), cert. denied, 452 U.S. 909, 101 S.Ct. 3038, 69 L.Ed.2d 411 (1981).
Additionally, the fact that Congress chose legislatively to overrule American Mariner only with respect to family farmers cannot support a construction of § 1205 as a congressional endorsement of American Mariner in other contexts. Cf. United States v. Price, 361 U.S. 304, 310, 80 S.Ct. 326, 330, 4 L.Ed.2d 334 (1960).
The enactment of the family farm bankruptcy legislation clearly illustrates the fact that Congress is uniquely suited to address the question of compensation for delay by Chapter 11 debtors generally. All creditors, unsecured as well as secured, are stayed from seizing the debtor's property to satisfy their claims and are adversely affected by the delay of the reorganization process. If some or all of these creditors are to be compensated for the debtor's use of property to which they are looking for payment or for delay, that decision (and the related decision regarding whose assets would fund that compensation) should emerge from the legislative process in which competing interests can be evaluated and compromises reached. In the meantime, it is the role of the courts to effectuate those provisions of the Bankruptcy Code that Congress has already enacted to protect creditors and to reduce delay. To those we now turn.
United contends that our interpretation of the adequate protection provisions of the Bankruptcy Code effectively precludes an undersecured creditor whose collateral is not depreciating from ever obtaining relief from the automatic stay to enable it to enforce its rights in the collateral. This assertion ignores important provisions of the Bankruptcy Code which are designed to protect the secured creditor.
A fundamental purpose of the automatic stay is to "give[ ] the business a breathing spell and time to work constructively with its creditors" to propose a plan of reorganization. H.R.Rep. No. 595, 95th Cong., 2d Sess. 174, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6135 [hereinafter cited as House Report]. The continuance of the automatic stay contemplates a debtor that is reorganizable and that is actively pursuing that goal. Where there is no reasonable likelihood of reorganization or where the debtor unreasonably delays in its efforts to reorganize, the Bankruptcy Code affords several avenues for relief to all creditors, secured as well as unsecured.
Significant among those avenues for relief for the secured creditor is § 362(d)(2) which entitles a secured creditor to obtain relief from the automatic stay in order to foreclose on its collateral when "the debtor does not have an equity in such [collateral]," 11 U.S.C. § 362(d)(2)(A), and "such [collateral] is not necessary to an effective reorganization." 11 U.S.C. § 362(d)(2)(B). Courts have consistently construed § 362(d)(2)(B) to require a showing by the debtor
We recognize that relief from stay hearings are usually held early in the case and that they are expedited, limited in scope, and held on limited notice. Therefore, the bankruptcy court applies the "reasonable possibility of successful reorganization" standard with somewhat more indulgence than would be appropriate if the motion were made at a later stage in the proceedings or if a similar issue were raised in the context of the full-blown hearing that attends a motion to dismiss or convert the case brought under § 1112. Nonetheless, the "effective reorganization" standard must be given meaning by the bankruptcy court. To prevail against the secured creditor who has moved to lift the stay under § 362(d)(2), the debtor must do more than evince high hopes; he must be able to show a reasonable prospect for a successful reorganization within a reasonable time.
Perhaps the prime avenue for relief, for both the secured and unsecured creditors of a debtor who is not reorganizable or who is unreasonably delaying, is the motion for conversion or dismissal. Section 1112(b) of the Code provides, in relevant part, that:
11 U.S.C. § 1112(b). Section 1112 clearly provides the bankruptcy court with the requisite authority to terminate a Chapter 11 case based on a showing of unreasonable delay, or continuing losses coupled with the absence of a reasonable likelihood of rehabilitation, or inability to effectuate a plan of reorganization. The inquiry under
Finally, we note that Congress, in 1978, expressly recognized the problems faced by creditors of a debtor who unreasonably delays in proposing a plan of reorganization. In § 1121 of the Bankruptcy Code, Congress gave the debtor a period of 120 days, after the commencement of the Chapter 11 case, during which the debtor has the exclusive right to file a plan of reorganization. Thereafter, if the debtor has not filed a plan, any party in interest, including any creditor, may file a plan. The 120-day period may be reduced or increased for cause, on request of a party in interest, after notice and a hearing.
The limited exclusivity period which is a feature of Chapter 11 proceedings under the Bankruptcy Code contrasts with the procedure under Chapter XI of the Bankruptcy Act which gave the debtor the exclusive right, throughout the Chapter XI proceedings, to propose a plan. The House Report accompanying H.R. 8200 noted that "[t]he exclusive right [under old Chapter XI] gives the debtor undue bargaining leverage, because by delay he can force a settlement out of otherwise unwilling creditors." House Report, supra, at 231, U.S.Code Cong. & Admin.News 1978, p. 6191. Additionally, § 1121 represents a congressional acknowledgement that creditors, whose money is invested in the enterprise no less than the debtor's, have a right to a say in the future of that enterprise.
While we are not called upon here to decide what factors constitute "cause" for the extension of the exclusivity period, we think that any bankruptcy court involved in an assessment of whether "cause" exists should be mindful of the legislative goal behind § 1121. The bankruptcy court must avoid reinstituting the imbalance between the debtor and its creditors that characterized proceedings under the old Chapter XI. Section 1121 was designed, and should be faithfully interpreted, to limit the delay that makes creditors the hostages of Chapter 11 debtors.
Our brief review of the important creditor-protection provisions of the Bankruptcy Code demonstrates the inaccuracy of United's assertion that our construction of the adequate protection provisions leaves the secured creditor unable to enforce its rights. Congress clearly intended to provide a wide range of remedies for the secured creditors of a debtor that does not have a reasonable possibility of reorganizing or that unreasonably delays in its efforts to reorganize. It remains for the courts to effectuate those remedies.
The creditor-protection provisions of the Bankruptcy Code reviewed in Part II of this opinion can be made meaningful only by bankruptcy judges who are equally sensitive to the need for creditor protection as to the need for protecting the debtor's right to reorganize.
A principal goal of the reorganization provisions of the Bankruptcy Code is to benefit the creditors of the Chapter 11 debtor by preserving going-concern values and thereby enhancing the amounts recovered by all creditors. The secured creditor benefits from a successful reorganization because its secured claim is valued on a going-concern basis in connection with a plan of reorganization, and the secured creditor is not compelled to liquidate its collateral at forced-sale prices. However, when there is no reasonable likelihood that the statutory objective of reorganization can be realized or when the debtor unreasonably delays, then the automatic stay and other statutory provisions designed to accomplish the reorganization objective become destructive of the legitimate rights and interests of creditors, the intended beneficiaries. In that situation it is incumbent upon the bankruptcy judge to effectuate the provisions of the Bankruptcy Code for the protection of creditors lest the judge keep the Code's word of promise to the ear of creditors and break it to their hope. The bankruptcy judge must meet head-on his obligation to decide, fairly and impartially, the hard questions.
Early and ongoing judicial management of Chapter 11 cases is essential if the Chapter 11 process is to survive and if the goals of reorganizability on the one hand, and creditor protection, on the other, are to be achieved. In almost all cases the key to avoiding excessive administrative costs, which are borne by the unsecured creditors, as well as excessive interest expense, which is borne by all creditors,
The district court's order is reversed to the extent that it ordered Timbers to pay $42,500 monthly for "adequate protection of foreclosure rights." This matter is remanded to the district court for further proceedings not inconsistent with this opinion.
REVERSED AND REMANDED.
CLARK, Chief Judge, concurring:
I regret that I feel compelled to add even this bit to the tens of thousands of words published in panel opinion and majority and dissenting opinions of the en banc court. So much has been written, I fear the elemental principles which should govern this case may be lost without a separate summary.
In this one-asset bankruptcy reorganization, the bankruptcy judge and the district court adopted the position that § 361 required that United Savings Association of Texas be paid periodic cash amounts representing lost opportunity cost because United could not foreclose its lien on the debtor's only asset.
I agree with the en banc majority that applying this mandatory construction could be error here, even though I do not agree that an award of such costs is always prohibited. I further agree that the bankruptcy judge should be reminded to adjudicate the rights of the parties before him in each case.
Finally, I would give this bankruptcy court a few straightforward directions. First, look to see whether any controversy has endured the lengthy delay of the appellate process. Second, if so, then follow these basic principles in making your decision:
EDITH H. JONES, Circuit Judge, with whom GEE, JOLLY, HIGGINBOTHAM, and DAVIS, Circuit Judges join, dissenting:
The issue the majority addresses is, in their view, "simply one of statutory construction." Yet this "simple" inquiry produces a monumental elaboration whose end result is to reject the reasonable construction of 11 U.S.C. § 361 reached by the Ninth Circuit, two other courts of appeals and numerous lower courts. The elaboration tends to obscure the fact that the majority have significantly modified, rather than interpreted, the adequate protection provision of the Bankruptcy Code. Like the Ninth Circuit, I find that a proper reading of § 361 requires adequate protection of a secured creditor for the bankruptcy-created delay in enforcing his lien against collateral. The conclusion reached by the majority favors extended delay in the bankruptcy process, affirmatively harms secured creditors while benefitting only debtors, and will create a rush of forum-shopping by debtors into the already beleaguered bankruptcy courts of the Fifth Circuit. Because the majority have erred and the consequences of its error are profound, I respectfully dissent.
Recapitulating the legal posture of this case, Timbers' resort to relief under Chapter 11 of the Bankruptcy Code activated the automatic stay, 11 U.S.C. § 362(a), the cornerstone of bankruptcy, and prevented action by creditors to collect Timbers' outstanding debt.
Section 361 of the Bankruptcy Code does not expressly state that a secured creditor, as an entity with an interest in the debtor's property, must receive compensation on account of its damages for delay in foreclosing. It provides as follows:
This Court's responsibility is to effectuate the "plain meaning" of the statutory language. Watt v. Alaska, 451 U.S. 259, 265-66, 101 S.Ct. 1673, 1677-78, 68 L.Ed.2d 80 (1981); American Mariner, 734 F.2d at 430. Unlike the majority, I find considerable support within § 361 for a requirement that adequate protection compensate a secured creditor for the delay occasioned by bankruptcy.
According to §§ 361(1) and (2), adequate protection must recompense the decrease in "value of [an] entity's interest in [the debtor's] property" where that decrease is caused by the automatic stay. Adequate protection must permit the creditor to realize the "indubitable equivalent" of his "interest in the debtor's property." § 361(3). These emphasized phrases are critical to proper interpretation of Section 361.
The majority argue that the "value of an entity's interest in the debtor's property" means the "value of the collateral" and nothing more.
One must consider the essential nature of a secured transaction according to state law in order to evaluate the impact of bankruptcy upon the "value" of the secured creditor's interest. In a bankruptcy case involving the rights of a secured creditor, the Supreme Court has observed that "[p]roperty interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136, 141-42 (1979).
A creditor ordinarily takes security because it has loaned money to a debtor in the expectation of being repaid at a later date. The security device is not the limit of its "interest" in the transaction, however.
The automatic stay in bankruptcy distorts the secured creditor's state-law rights in the collateral, not merely by denying him the "value" of the collateral as the majority contends, but also by delaying foreclosure. The cost of the delay additionally entails the income lost by the secured creditor
The majority do not deny that lost opportunity cost is a real, measurable damage inflicted on a secured creditor by the delay inherent in bankruptcy proceedings. Nonetheless, their lengthy exegesis of pre-Bankruptcy Code law and legislative history concludes that a secured creditor can not be "adequately protected" for delay damage.
Contrary to the majority opinion, the Ninth Circuit has held that the expansive phrase "the value of an entity's interest in such property" demonstrates a "general intention to protect a broad range of secured creditors' interests." American Mariner, 734 F.2d at 430. The secured creditor's right to take possession of and sell the collateral and his right to reinvest the proceeds of sale are valuable rights included in this phrase. 734 F.2d 430-31. Indeed, the House Report accompanying passage of the Bankruptcy Code emphasized the breadth of adequate protection:
H.R.Rep. No. 595 at 339, 1978 U.S.Code Cong. & Ad.News at 5787, 6295.
Further support for interpreting the value of a secured creditor's interest to include the cost of delay in realizing upon its collateral derives from the term "indubitable equivalent" in § 361(3). This is a term of art, understood since Judge Learned Hand's opinion in In Re: Murel Holding Corp., 75 F.2d 941 (2d Cir.1935), to require compensation of the secured creditor for the time-value of its rights in collateral. Judge Hand explained adequate protection as follows:
The majority do not deny Judge Hand's meaning when he used the phrase, or the significance that his meaning may hold for construing § 361(3). The majority acknowledge the plausibility of the statutory construction reached in American Mariner and numerous cases following it. See In re Deeter, 53 B.R. 623, 626 (Bankr.N.D.Ind.1985). Despite these concessions, the majority overcome the "plain meaning" of the statute by concluding that they "do not place significant weight on the action of the conferees when they added the phrase `indubitable equivalent' to § 361." One may agree with the majority that the legislative history does not explain why "indubitable equivalent" was introduced into § 361(3). But see majority opinion fn. 28, acknowledging that Congress had the idea of compensation for time-delay before it. After considerable speculation concerning what may or may not have happened in Congress, the majority arrives at its ultimate proposition: that Congress was unaware of the origin and meaning of "indubitable equivalent." In light of the specific Congressional approval of Judge Hand's concept of adequate protection in § 1129(b)(2)(A) this seems most unlikely; and curious effect of the majority's legislative analysis is to religate the effect of "indubitable equivalent" to that of a mere precatory expression in § 361(3), while according it full scope in § 1129(b)(2)(A). A sounder and more logical view would be to interpret the phrase to require recognition of compensation for delay in both sections of the statute. Consistency in the meaning of language in a statute — and most certainly that of words of art — is not only a virtue, it is a hallmark of faithful statutory construction.
The majority, in sum, have construed the plain meaning of the statute by ignoring significant portions of its express language and by relying instead on what was not said in Congressional hearings.
The majority's method of statutory construction by omission reappears in the en banc supplement to the majority opinion concerning the Family Farmer Act.
The Family Farmer Act itself proves that Congress did not reject a secured creditor's right to receive adequate protection of lost opportunity cost.
As an adjunct to rejecting the meaning of § 361 endorsed by American Mariner and two other circuit courts, the majority cite the alleged inconsistency between payments of "interest" as American Mariner adequate protection and allowance of "interest" on claims pursuant to §§ 502(b)(2) and 506(b). This dichotomy is fundamentally flawed and diverts attention from the broad scheme of the Bankruptcy Code, which is fully consistent with providing compensation for lost opportunity costs as an administrative expense. The "interest provisions" set forth two general principles. First, no claim by a secured or unsecured creditor against the debtor's estate is ordinarily allowed for interest "unmatured" at the date of the bankruptcy filing. 11 U.S.C. § 502(b)(2). Accounting for the claims owed by the debtor at the date of bankruptcy thus avoids the complexity of frequent and uneven calculations of post-petition interest. Second, § 506(a) divides the secured claim into a secured portion, based on the value of the creditor's collateral, and an unsecured portion which is treated like any other general unsecured claim. Section 506(b), itself an exception to § 502(b)(2), allows claims by oversecured creditors to include accrued interest at the contract rate, as well as attorneys' fees and other costs provided by the agreement with the debtor.
These "interest" provisions must be viewed in the context of the purpose of § 502 as a whole. Section 502, as qualified by §§ 506(a) and (b), defines on a balance-sheet basis the claims against the debtor for purposes of making payments to creditors whenever a plan or liquidation is accomplished, if there is any dividend. Section 502 also constitutes a balance-sheet for other purposes, purposes such as classifying creditors [§ 1123(a)(1)], determining the amount of claims for voting purposes [§ 1126(c)], disclosing particular payments made pursuant to a plan [§ 1129(a)(4)], and enabling a determination of the feasibility of a plan [§ 1129(a)(11)]. The § 502(b) "interest" provision, like the other balance-sheet
Moreover, Section 506(b) should be viewed not as an inferential limit on the treatment afforded secured creditors, but as a baseline guarantee of the rights of the oversecured creditor. By this reckoning, the oversecured creditor maintains a safe harbor in § 506(b) and need not even seek adequate protection in court. Allowance of his full contract claim against the debtor is assured. Of course, if the bankruptcy, by delay or otherwise, threatens the security of this creditor, he may seek relief under § 361. To say that the undersecured creditor lacks the definitive safe harbor is not to conclude that he receives no protection at all. The extent of the undersecured creditor's right to adequate protection must be decided by the court, however; and it differs from his contract rights with the debtor. Section 506(b) therefore constitutes an alternative to, rather than a limitation upon, the secured creditor's right to adequate protection. See Amicus Brief of Prof. Thomas H. Jackson at 26-28.
To suggest that adequate protection for lost opportunity cost conflicts with the "interest" provisions proves too much; so, in theory, do adequate protection payments to secured creditors under § 361 for depreciation, for maintaining the taxes and insurance payments on property, and for paying senior debt in order to protect a junior lienholder. In each case, payments are being made on behalf of the secured creditor during bankruptcy apart from and in addition to his right to file a claim for principal and accrued interest at the date of bankruptcy. Yet the majority do not quarrel with these other extra-contractual payments. The "interest provisions" are not themselves fully consistent with the majority's position. Under § 506(a), a secured creditor's claim may be valued at different times during the bankruptcy for different purposes under the Code [e.g., § 502 allowance of claim, § 364 borrowing, §§ 362 or 363 adequate protection, § 1129(b) cram-down]. A secured creditor could obtain a valuation early in the case that would entitle him to receive adequate protection for depreciation of the collateral and later, under § 506(b), be found "oversecured" so as to demand full contract interest. This may present an unusual case, but it is clearly allowed by the Bankruptcy Code and is no more incongruous than reconciling opportunity-cost adequate protection with the "interest provisions."
The fact is that adequate protection payments of any sort are different from the restrictions created by the "interest provisions." The Bankruptcy Appellate Panel, which ruled against American Mariner's secured creditor before that case reached the Ninth Circuit, stated, "we do not agree with the court below that there is a negative implication to be derived from § 506(b) which is applicable to § 361." 27 B.R. 1004, 1009 (1983). First, "unmatured interest" proscribed by § 502 or allowed under § 506(b) accrues at the contract rate on the entire amount owed by the debtor. Adequate protection, however, is based on a § 506(a) valuation of the collateral only, whether for depreciation or for lost opportunity cost purposes. Second, the market rate of interest rather than the contract rate governs adequate protection payments made pursuant to American Mariner. See Fortgang and Mayer, Valuation in Bankruptcy, 32 UCLA L.Rev. 1061, 1088
Fourth, in contradistinction to contract interest, adequate protection for lost opportunity cost need not comprise cash payments at all. American Mariner emphasized that payments to the secured creditor are "by no means the only method" of providing adequate protection, 734 F.2d 435, as § 361 explicitly states. For instance, if the debtor owned an office building or real estate development in the process of completion at the date of bankruptcy, and if he offered to complete construction or to embark on an ambitious sales or leasing program as adequate protection for the secured creditor, these activities might suffice and supplant the need for any adequate protection payments for lost opportunity cost. The majority focus on cash payments to exaggerate the perceived conflict between American Mariner and the "interest provisions."
Compensating the secured creditor for its lost opportunity cost due to bankruptcy delay is consistent with the treatment of all other "administrative" costs of the bankruptcy proceeding. The costs of doing business as a debtor are paid currently and in full during the proceeding, and, whether they are incurred for attorneys and accountants, for the purchase of goods, or for payment of a post-petition tort claim, are borne by the debtor and its unsecured creditors. 11 U.S.C. §§ 328, 330, 503(b), 507(a)(1), 726. The majority has mistakenly suggested that "all creditors generally share some of the risk": section 506(c), however, allows the estate to recover from a secured creditor only the necessary costs and expenses of preserving or disposing of the collateral. Additionally, the Bankruptcy Code is permeated by requirements of special administrative payments during a case to special varieties of creditors. A lessor is entitled to have all prepetition defaults cured within a short period after bankruptcy before he need suffer the continued tenancy of a bankrupt. 11 U.S.C. § 365(b). Any party to an "executory contract," such as a long-term supply contract or an oil and gas operating agreement, may similarly obtain from the debtor full performance plus additional "assurance" as the quid pro quo for continued dealings. Id. Section 1110 allows repossession of aircraft or vessels subject to certain financing arrangements if, within 60 days of the filing, all defaults are not cured. The obligations covered by these provisions are funded by the debtor and its unsecured creditors.
An undersecured creditor, no less than a lessor, has property at risk during the reorganization. He is "doing business" with the debtor by virtue of a forced loan of his collateral. American Mariner recognizes, as do the majority, that the true cost of the secured creditor's forced loan includes the time-value of delay in foreclosing. American Mariner draws an implicit and reasonable analogy between the rights of a secured creditor under §§ 361(1) and (3) and post-petition "administrative rent," which the debtor must continue to pay currently after seeking protection in bankruptcy. 11 U.S.C. § 503(b). "Administrative rent"
Under the foregoing analysis, the only "inconsistency" between administrative payments of any kind during bankruptcy and the § 502 scheme for allowance of claims lies in Congress's decision to require the debtor, as his cost of taking advantage of bankruptcy's automatic stay and opportunity for discharge of debt, to pay his post-petition expenses and certain other obligations currently. Treating as an administrative expense the adequate protection of the secured creditor's "interest in the debtor's property," including lost opportunity cost, is a wholly different matter from the § 502(b)(2) balance-sheet disallowance of claims for unmatured interest on the contract.
The statutory and legislative history arguments of the majority have been analyzed. Their policy views must also be addressed. Pervasive in the original panel opinion, reinstated by the majority, was the notion that if American Mariner is correctly decided, a massive transfer of assets from unsecured creditors to undersecured creditors will result, aborting the reorganization process. This seems to be the basic concern that led the majority to traverse the holdings of three circuit courts and most of the bankruptcy courts in this circuit. The majority's fear is based on a misperception of the nature of most Chapter 11 filings under the Bankruptcy Code. It obscures the peril in which an undersecured creditor is placed by the filing of a Chapter 11 petition and ignores the benefit that his peril confers in the form of a forced loan of his collateral to the debtor. Finally, while conceding that American Mariner may provide a vehicle whereby the debtor can remain in reorganization with the cooperation of the secured lender for a period of time, the majority incredibly suggest that such an outcome could prejudice the unsecured creditors.
The majority have assumed that all or most Chapter 11 reorganizations have a right to life which is endangered by the prospect of payment of adequate protection for the secured creditor's lost opportunity cost. The sad fact is, on the contrary, that the vast bulk of reorganizations culminate in liquidation by a plan, conversion to Chapter 7, or withering away during the bankruptcy proceedings. Over the last five years, the Administrative Office of the United States Courts reports that 90% of Chapter 11 cases nationwide failed to terminate within the provisions of Chapter 11. Of those in which plans are confirmed, the experienced bankruptcy practitioner knows that many plans call for liquidation of the debtor's assets. Thus, the concern that American Mariner adequate protection frustrates the "reorganization policy" of bankruptcy law is irrelevant to the 90% of cases which ultimately liquidate. Compare Jackson, Of Liquidation, Continuation, and Delay: An Analysis of Bankruptcy Policy and Non-Bankruptcy Rules, 60 Am.Bankr.L.J. 399, 416 (1986).
The actual impact of American Mariner in unreorganizable cases should be favorable for secured and unsecured creditors
This case exemplifies the horde of hopeless bankruptcy cases in which the national reorganization policy is irrelevant. A one-asset limited partnership, Timbers has no full-time employees and no business except the rental of one unit of apartments. Its major unsecured debt is owed to the insider management company, while the rest of the unsecured debt totals $17,000. United Savings is the only secured creditor. Award of adequate protection based on lost opportunity cost does not thwart the debtor's right to reorganize if there was nothing to reorganize in the first place.
This Court unanimously endorses tighter supervision of bankruptcy cases such as this by both the lower courts and interested parties to limit patent abuses of Chapter 11. Consequently, the majority's extended discussion of creditor remedies available under the Bankruptcy Code is helpful, if somewhat pallid compared with the overriding concern for the debtor and "reorganization policy" expressed in the original panel opinion. The trouble with creditors' remedies (e.g., lifting the automatic stay because the property is not necessary to an effective reorganization [§ 362(d)(2)], seeking conversion to Chapter 7 or appointment of a trustee [§ 1112], and limiting the debtor's exclusivity period [§ 1121]) is that in practice, as shown by the case statistics, they have not been enforced. Thus, the majority's exhortation that bankruptcy courts be "sensitive" to creditors' rights under the Bankruptcy Code is an unsatisfactory substitute for enforcing the statutory requirement that adequate protection include compensation for a secured creditor's lost opportunity cost.
What will be the effect of adequate protection for lost opportunity cost in the few cases that have a realistic chance to reorganize? I believe that, contrary to the panel's opinion, American Mariner motivates all parties to the case to reach a prompt agreement to a plan. At the very least, it will galvanize the debtor, who is always the key figure in arriving at a successful plan. The objective candidate for a successful Chapter 11 reorganization is not hard to describe: it has some cash and a decent cash flow, encumbered or not; it has at least some lines of business that are profitable or nearly so; it has good management; and it is not facing a disastrous economic forecast in all of its markets. Given those conditions, if a court awards adequate protection recognizing the secured creditor's
Two other points should be made about American Mariner's impact on the reorganizable company. First, in such a case, the majority's fear that payments to secured creditors will swamp the ship within a few weeks or months of the bankruptcy filing is misplaced. Both American Mariner and Grundy, the Fourth Circuit case, delay imposing opportunity-cost adequate protection in accord with the time ordinarily needed to effect a foreclosure and sale under state law. The court below triggered payments in six months from its ruling. An automatic breathing-space results for the debtor. Second, the panel's concern that American Mariner subverts the reorganization process by transferring the cost from secured to unsecured creditors depends upon one's point of view. If the effect of American Mariner in the reorganizable case is to speed up the proceedings, this fact alone should benefit unsecured creditors by reducing the transaction costs of the bankruptcy. Also, to the extent that adequate protection for lost opportunity cost is taken into account in the formulation of a plan, reducing the principal on outstanding debt, encouraging the secured creditor to modify his security or to cooperate in stretching out payments after bankruptcy, the debtor's and unsecured creditors' prospects are ultimately improved.
Providing adequate protection to the secured creditor for his lost opportunity cost occasioned by bankruptcy is not the foe of the reorganization process. I can do no better to summarize the position of the dissent than to quote from American Mariner:
Hearings on The Bankruptcy Reform Act of 1978 Before the Subcomm. on Courts of the Senate Comm. on the Judiciary, 97th Cong., 1st Sess. 312 (1981). Another witness, Lloyd D. George, Bankruptcy Judge for the District of Nevada, stated that "[t]he standards for granting relief from the automatic stay provisions of 11 U.S.C. 362, the times for filing plans, and even the types of procedures available to particular creditors are much clearer under the new code." Id. at 206. He continued by observing that most of those whose interests lay on the side of the creditor "thought that the drafters of the code had struck a reasonable balance between the conflicting interests of debtors and their creditors." Id. at 207.
These statements were made in April 1981, at a time when no court had espoused, in a published opinion, the position adopted three years later by the Ninth Circuit in American Mariner. No proposed amendments to §§ 361 or 362(d) arose out of these hearings.
The Question of the Remedies Available to Debtors and Creditors under Bankruptcy, How they Relate to the Great Plight of the American Farm and the Farm Family: Hearings Before the Subcomms. on Admin. Practice and Procedure, and Courts of the Senate Comm. on the Judiciary, 99th Cong., 1st Sess. 51-52 (1985) [Hereinafter cited as Farm Family Hearings]. In his prepared statement to the subcommittees, Judge Thomas M. Moore, Bankruptcy Judge in the Eastern District of North Carolina, echoed this sentiment:
Id. at 177-78.
Bankruptcy attorney R. Fred Dumbaugh commented to the subcommittees that
Id. at 117. William L. Needler, another bankruptcy attorney, suggested that "Congress should specifically overrule the American Mariner case and Lend Lease v. Briggs Transportation Co., Civ. 3-84-224 (D.Minn. Sept. 26, 1984), both of which set impossible guidelines for adequate protection in reorganization proceedings." Id. at 267-68.
Farm Family Hearings, supra, at 116-17 (statement of R. Fred Dumbaugh).
132 Cong.Rec. S15090 n. 187 (daily ed. Oct. 3, 1986) (article by John C. Anderson) (emphasis in original).
During the hearings before the Subcommittees on Administrative Practice and Procedure, and Courts, Senate Committee on the Judiciary, one witness noted that:
Farm Family Hearings, supra, at 250-51 (statement of Terry M. Anderson).
As might be expected, a representative of the Independent Bankers Association of America stated:
Id. at 156 (statement of John C. Dean).
Family Farmer Bankruptcy Act of 1986, § 1205 (to be codified at 11 U.S.C. § 1205).
House Report, supra, at 231-32, U.S.Code Cong. & Admin.News 1978, pp. 6191, 6192 (footnotes omitted).