2.  Order of the Bankruptcy Judge giving a party (usually a secured creditor – “SP”) permission to go ahead with some action (usually foreclosing collateral) that would otherwise be stayed under 362(a) & not excepted under 362(b)  i.e., stay is not an absolute bar against action – it’s a bar against unilateral action– you just have to ask the Judge for permission

3.  Stay is temporary – during pendency of case ◦ Will terminate automatically under 362(c) when case is over or property passes out of estate ◦ But SP doesn’t want to wait that long  By far most important aspect of stay relief is as core procedural way to implement the rights of SP while case is going on  Ties in integrally with adequate protection (361), which links to usage of property (363), turnover (542)

4.  SP : ◦ get paid on its collateral, as soon as possible and with as much certainty as possible  Estate : ◦ Use or sell collateral to further bankruptcy goals  Use – in chapter 11, facilitate reorganization  Sell – in chapter 7, capture equity for general crs

5. Two fundamental principles:  1 st - 362(d)(1): “cause”, including the lack of adequate protection  2 nd - 362(d)(2): no equity, and property not necessary for effective reorg

6. Special cases:  362(d)(3): combines above 2 principles in SARE –if Dr not file feasible plan in 90 days (~ (d)(2), must pay interest to SP for delay (~ (d)(1))  362(d)(4): added 2005, in rem stay relief in fraudulent schemes

7.  1 st, estate must show a bankruptcy-specific reason why it needs to interfere with SP’s non-bk rights (e.g., (d)(2)) ◦ Either needs to use the collateral to reorganize (e.g., (d)(2)(B)) ◦ Or can capture some equity by selling (e.g., (d)(2)(A))  2 nd, even if estate shows need, have to compensate SP against harm (e.g., “adequate protection” under (d)(1))  Thus if policies 1 and 2 collide, SP wins

8.  Can only interfere with non-bankruptcy rights of SP if goal of making estate’s residual stakeholders (e.g., unsecured crs if insolvent) better off does not make another party (the affected SP, whose collateral the estate wants to use) worse off

9.  As we will see when discuss time value problems (e.g., Timbers, Alyucan), this aspirational Pareto efficiency may instead lapse into less favorable (for SP) Kaldor-Hicks efficiency (where overall value of collective enterprise is increased, but some parties might be made worse off – here, the SP, by being denied time value compensation)

10.  Movant (e.g., SP): ◦ Dr no equity (under 362(d)(2)(A))  Trustee or DIP: ◦ SP is adequately protected (under 362(d)(1)) ◦ Property is necessary to an effective reorg (under 362(d)(2)(B)

11. Code itself has expedited time periods within which the Court MUST act or SP gets relief  1 st : 362(e): 30 days – ◦ Ct must either rule, or find “reasonable likelihood” Trustee will win if continue to final hearing ◦ Then if carry over to final hearing must enter final decision within another 30 days  2 nd : emergency ex parte relief may be available, 362(f) – “irreparable damage” test

12.  “shall”  If SP proves ground for relief under 362(d), the Bankruptcy Court is required to order relief from stay  But doesn’t necessarily have to LIFT stay – might condition stay – e.g., on DIP making adequate protection payments

13.  Bankruptcy court’s denial of stay relief is NOT res judicata  SP can, and should, try again later in case ◦ Bankruptcy court might give DR a chance to reorganize ◦ But after a few months patience can wear thin

14.  Note that “cause” under 362(d)(1) can be used to give stay relief to parties other than SP  Usually would come up when an action is stayed under 362(a)(1), as an action against the DR ◦ Could be an action that has virtually nothing to do with bk’s financial & collective goals  Ex. – licensing hearing; probate case (DR executor), etc

15.  The fundamental substantive right of SP in bankruptcy is to receive the value of its collateral  As saw in Whiting Pools and other cases, however, the SP’s non-bk remedies are not necessarily honored in bankruptcy  Adequate protection replaces those remedies ◦ Provides the bridge for implementing a Pareto trade

16. Adequate protection is used:  Stay relief, 362(d)(1)  Estate wants to use, sell, or lease estate property on which SP has a lien, 363(e)  Turnover, 542(a)  Estate wants to borrow money and put up SP’s collateral as collateral for new loan, 364(d)

17.  Constitution – ◦ SP’s lien is a protected property right under 5 th amendment  Bankruptcy policy – ◦ SP not deprived of “benefit of their bargain”

18.  “Interest of an entity in property”, 361  Means the SP’s lien on estate property, e.g., the collateral  Specifically, the VALUE of that collateral interest

19.  Protect the SP’s interest (in the value of its collateral) from a decrease during the pendency of the case  Thus TEMPORARY maintenance of status quo  FINAL rights of SP – ◦ fixed by reorg plan (e.g., cram down) ◦ Or by treatment in liquidation (sold, abandoned to SP, etc)

20.  Pay SP $ to compensate for decline in value of its collateral – 361(1)  Give SP a lien on other collateral to make up for same decline – 361(2)  “indubitable equivalent” – 361(3) ◦ E.g., Bill Gates gives you a personal guarantee

21.  Nope.  Cannot give an admin priority as “A/P”  Make sense – priority claims are behind secured claims in line  Exception – super priority” under 507(b) if A/P was given but failed

22.  Facts: ◦ Debt = $500K ◦ Cr security interest in Zambonis to secure debt ◦ Dr uses Zambonis in business ◦ Dr files ch 11, will try to reorganize ◦ Needs to keep using Zambonis ◦ Value Zambonis btwn. $425K and $500K ◦ Depreciation = $5K month ◦ Monthly payments = $5,600 ($3k = interest) ◦ Also real estate worth $800K, secured by $600K mortgage

23.  SP’s entitlement: ◦ Compensate for depreciation, $5K month ◦ Collateral insured, maintenance required, etc ◦ Maintain lien  How effected? ◦ Cash payments of $5k month (361(1)) ◦ Additional lien – on real estate –  has $200K in equity (800-600), can cover depreciation for awhile, even with 600K debt increasing (via 506(b)) and even if the $800K value might drop some

24.  What if Zambonis were valued at $600,000?  Now the value of the Zambonis alone – the “equity cushion” of $100K over and above the $500K debt – provides Cr with A/P  Each month cushion shrinks by $8K (depreciation $5K, interest accrues $3K – allow under 506(b)) ◦ So for at least a year * CR is protected * Note possible need to preserve cushion re 506(b) – Q 5 p 335)

25.  Facts: ◦ Same facts as 7.1 (500K debt) ◦ Assume Court finds Zambonis had petition-date value = $500K ◦ Ct orders $5k month adequate protection payments ◦ Ten months later the Zambonis are sold for $410K ◦ Thus CR suffered unexpected $40K loss – was paid $50K in A/P, but collateral declined by $90K  CR will have super priority under 507(b) for the $0K loss –  i.e., pay ahead of all other 2 nd priority admin expenses

26.  Facts: ◦ Chapter 11 ◦ SP had trust deed on real estate ◦ Collateral value = $1,425,000, not declining ◦ Debt = $1,297,000 ($1,331,000 by time of hearing) ◦ “Equity cushion” = $128K ($94K by hearing) ◦ Interest accruing at $8K per month ◦ Thus “cushion” will be gone in 8 more months

27.  Is SP entitled to relief from the stay under 362(d)(1) unless it receives AP payments to preserve the amount of its equity cushion?

28.  That was the SP’s bargain! ◦ SP’s deal with DR was to build in a cushion to ensure that would actually be made whole if had to foreclose – not risk collateral shortfall ◦ E.g., might require a 1.2:1 collateral/debt ratio ◦ Same reason you can’t get 100% financing  Legislative history says SP should get “benefit of its bargain”

29.  Judge Mabey DENIED equity cushion protection

30.  Basic reason: A/P is about protecting the value of the collateral (“such entity’s interest in property”) during the pendency of the case, not worry about amount of debt  As long as collateral is safe, and not depreciating, SP is not suffering any harm by reason of imposition of the stay for which A/P is answerable

31.  What if the cushion is being eaten up both by accrual of post-petition interest AND depreciation in value of collateral?  Does SP have right to at least maintain the value of the collateral as of the petition date? ◦ In effect, must we allow the SP to preserve the amount of the prospective post-petition interest? ◦ Could do through depreciation compensation  Courts are split

32.  Might wonder why Bankers Life did not seek relief from stay under 362(d)(2)  Failed both elements: ◦ 1. Dr did have equity ($1,425,000 vs $1,297,000), thus no under 362(d)(2)(A) ◦ 2. Dr – a real estate construction and development firm – needed to use property in its chapter 11 business operations, thus no under 362(d)(2)(B)

33.  Facts: ◦ Dr operated apartment project in Houston (only asset, e.g., classic SARE) ◦ Bank loaned $ to buy, had lien + assignment rents ◦ Dr filed chapter 11 March 1985 to stop foreclosure ◦ Bank moved for stay relief 2 weeks later, said not adequately protected ◦ Debt time of ch. 11 = $4.3 MM ◦ Collateral value = $4.25 MM (not declining) ◦ Market interest = 12% ◦ Dr paying Bank the accruing rents pursuant to 552(b) (note becomes part of Bank’s collateral)

34.  Bank moved for relief from stay under 362(d)(1) on ground it was not being adequately protected  Argument – being denied opportunity cost – delay in foreclosure costing Bank time value of the $ it could get on foreclosure  Issue is whether A/P entitles an undersecured creditor to compensation for delay in foreclosing caused by automatic stay

35.  Bankruptcy court agreed with Bank  Ordered Dr to make A/P payments calculated at market interest rate of 12% on estimated foreclosure value of $4,250,000, beginning in 6 months (to account for the same delay Bank would suffer if foreclosed under state law) ◦ Payments = $42,500 month (+ taxes & insurance) ◦ Postpetition rents could be applied against that amount

36.  Court denied Bank’s option for A/P  Held that undersecured CR is NOT entitled as part of A/P to compensation for delay in foreclosing on collateral caused by automatic stay  i.e., no “opportunity cost” payments for undersecured crs  Thus will only get the assigned rents ◦ Nothing in any ct opinions gives amount of those rents

37.  A/P protects “value of such entity’s interest in such property”, 361  That means the value of the collateral must be preserved during the pendency of the case ◦ And that value was not declining at all!  The Bank’s “interest in property” protected by A/P does NOT include the right to foreclose now and apply proceeds to pay off debt

38.  Was losing money, due solely to imposition of bankruptcy stay  But for bankruptcy: realize $4,250,000 on foreclosure in 6 months, at that point could start earning 12% -- $42,500 per month  With bankruptcy, and SCOTUS no-time-value ruling – get ZERO (except for whatever assigned rents were)

39.  Raises fundamental question: for whose benefit was the reorg case being run?  Answer: the residual stakeholders ◦ Unsecured crs ◦ Equity holders (partners) of Dr NOT for the Bank – has its collateral, would be content to “take the money and run”

40.  Winner: ◦ Residual stakeholders (unsecured crs or equity)– in effect get interest-free “loan” for duration of case  Loser: ◦ Bank (secured cr) – lose time value of money ◦ But for bankruptcy, was getting paid interest of $45,000 per month ◦ Since undersecured, get no interest during case, 502(b)(2) general rule, 506(b) exception n/a ◦ No time value ($42,500) as A/P

41.  To see why Bank upset, and general fairness of the result, consider this: if DR were to go to a new lender during the case, and borrow $4,250,000 and use loan proceeds to cash out Bank – do you think the Dr would have to pay interest to the new lender?  Answer: of course! That would be a necessary business expense, and no lender would make the Dr an interest-free loan ◦ But here, Bank is forced to take nothing

42.  Along the same lines … if instead of purchasing the real property and financing it through Bank, the Dr had been leasing the property – would it have to pay current rent?  Answer: again – of course! A standard administrative expense is for current rent

43.  The foregoing examples raise the question – is Timbers’ no-time-value rule (which has economic effect of giving Dr interest-free use of collateral for duration of case) consistent with the underlying premise of Reading Co. v. Brown, which requires a Dr to pay as admin expense the costs ordinarily incident to the operation of the business?

44.  Major reason for SCOTUS holding: read the Bankruptcy Code as a whole – and numerous provisions read together indicate that an undersecured Cr should not be able to get the equivalent of post-petition interest through the back door of “adequate protection”

45.  Post-petition interest rules: ◦ General rule: NO CR gets post-petition interest, 502(b)(2) – i.e., everyone suffers cost of delay ◦ Exception: OVER-secured CR (506(b))  But if could get same thing for an under-secured Cr via A/P, 506(b) is largely superfluous  Post-petition rents ◦ 552(a) general rule denies SP security in post-petition rents, but 552(b) has exception if SP has an agreement to reach after- acquired rents, and is perfected ◦ Again, 552(b) would be superfluous if could get as A/P  Stay relief provisions: ◦ Interplay (d)(1) & (2), undersecured Cr would never have reason to resort to (d)(2)

46.  Scalia really bashes on SP in analyzing the (d)(1) / (d)(2) interplay – says (d)(2) would be a “practical nullity and theoretical absurdity” and “no reason why Congress would want to provide relief for such an obstreperous and thoroughly unharmed creditor” ◦ His point is that IF Bank got paid market interest under (d)(1), would only seek relief under (d)(2) if (i) collateral was not depreciating (or being compensated for it) AND (ii) was being paid market interest, but STILL wanted to foreclose

47.  So for Scalia, on bank’s reading (d)(2) is “nonsense”  WRONG – he misunderstands the distinct roles of (d)(1) and (d)(2). They focus on different interests ◦ (d)(1) asks – is SP (bank) protected? ◦ (d)(2) asks – does ESTATE need to interfere with SP’s rights? (d)(2) has nothing to do with protecting SP – it says, stay with non-bk rules (under which SP could foreclose) unless have contrary bankruptcy reason

48.  Scalia responded to the Bank’s core complaint that it is being harmed by uncompensated delay by saying that under (d)(2) the delay won’t be excessively long ◦ Talking about (d)(2)(B) – property “necessary to an effective reorganization”  Dictum: ◦ “effective reorganization that is in prospect” ◦ “ reasonable possibility of a successful reorganization within a reasonable time ”  Points out cases where bk cts held dr feet to fire, pushed case along, less than one year

49.  Bank argued that the A/P illustration in 361(3), which said that SP must get “indubitable equivalent,” dictated time value compensation  Said was a known term of art, used by Learned Hand in Murel Holding – require compensation of SP “of the most indubitable equivalence” – which there included time value

50.  SCOTUS rejected the “indubitable equivalent” argument b/c was used in the context of confirmation of a plan ◦ And at that point, when cram down SP, then of course DO have to pay time value (e.g., Till)  But that result is required by the separate phrase in cram down rules “as of the effective date of the plan”

51.  SCOTUS also buttressed its holding by looking at pre-Code practice and history  Had NEVER been the case before that undersecured SP got postpetition interest on the value of its collateral  And presume that if Congress had intended such a sea change in the basic compensation rules, would have done so more plainly

52.  Could Bank get relief under 362(d)(2)?  Could show “no equity” 362(d)(2)(A)  NO – b/c Dr needs the collateral to reorganize, so flunk 362(d)(2)(B) ◦ Indeed is Dr’s only asset! ◦ Only exception would be if Dr couldn’t propose feasible plan – then no “effective reorg in prospect”

53.  Not at time, of course, b/c (d)(3) had not yet been enacted ◦ Was enacted in 1994  Applies to “single asset real estate” ◦ Timbers was, see 101(51B)  NO relief if: ◦ (A) Dr files feasible plan (“reasonable possibility of being confirmed within a reasonable time”) within 90 days after petition  Follows Timbers dictum  Not clear if Dr filed plan ◦ Or, (B) if DR not file feasible plan 90 days, start paying monthly interest, computed on value of collateral  This part WOULD overrule Timbers no-time-value rule in special SARE context