1. Class 11 Bankruptcy, Spring, 2009 Adequate Protection Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

2. October 31, 2015Copyright © 2005-09 Randal C. Picker2 Starting Points n Hypo u Debtor has machine with FMV of $1000 u Machine depreciates through use at rate of $100 per month u Secured creditor is owed $1000 u Debtor wants to keep and use property during case n What happens?

3. October 31, 2015Copyright © 2005-09 Randal C. Picker3 361: Adequate Protection n Adequate protection u When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by - w (1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity’s interest in such property;

4. October 31, 2015Copyright © 2005-09 Randal C. Picker4 361 (Cont.) n Adequate Protection w (2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property;

5. October 31, 2015Copyright © 2005-09 Randal C. Picker5 361 (Cont.) n Adequate Protection w (3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.

6. October 31, 2015Copyright © 2005-09 Randal C. Picker6 Starting Points n Hypo u Debtor has camp site with FMV of $1,000 u Monthly rentals are $100 u Secured creditor is owed $1,000 u Debtor wants to keep and use property during case n What happens?

7. October 31, 2015Copyright © 2005-09 Randal C. Picker7 552 n Postpetition effect of security interest u (a) Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.

8. October 31, 2015Copyright © 2005-09 Randal C. Picker8 552 (cont.) n Postpetition effect of security interest (cont.) u (b)(1) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, or profits of such property, then such security interest extends to such proceeds, product, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.

9. 552 (cont.) n Postpetition effect of security interest (cont.) u (2) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, and notwithstanding section 546(b) of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to amounts paid as rents of such property or the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties, October 31, 2015Copyright © 2005-09 Randal C. Picker9

10. 552 (cont.) u then such security interest extends to such rents and such fees, charges, accounts, or other payments acquired by the estate after the commencement of the case to the extent provided in such security agreement, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise. October 31, 2015Copyright © 2005-09 Randal C. Picker10

11. October 31, 2015Copyright © 2005-09 Randal C. Picker11 Starting Points n Hypo u Debtor has machine with FMV of $10,000 u Current market rate of interest is 1% per month u That equals interest of $100 per month u Secured creditor is owed $10,000 u Debtor wants to keep and use property during case n What happens?

12. October 31, 2015Copyright © 2005-09 Randal C. Picker12 362(d): Relief from Stay n Automatic Stay u (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay - w (1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

13. October 31, 2015Copyright © 2005-09 Randal C. Picker13 362(d): Relief from Stay n Automatic Stay w (2) with respect to a stay of an act against property under subsection (a) of this section, if - (A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization; or

14. October 31, 2015Copyright © 2005-09 Randal C. Picker14 Pre-2005 362(d)(3): Single Asset Real Estate n Automatic Stay u (d)(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period)— w (A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or w (B) the debtor has commenced monthly payments to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien), which payments are in an amount equal to interest at a current fair market rate on the value of the creditor’s interest in the real estate.

15. 101(51B): Single Asset Real Estate n Means u real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental. October 31, 2015Copyright © 2005-09 Randal C. Picker15

16. October 31, 2015Copyright © 2005-09 Randal C. Picker16 Post-2005 362(d)(3) n Automatic Stay u (d)(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later— w (A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or w (B) the debtor has commenced monthly payments that— (i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and (ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor’s interest in the real estate; or

17. October 31, 2015Copyright © 2005-09 Randal C. Picker17 507(b) n Fixing Bad Adequate Protection u (b) If the trustee, under section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(1) of this section arising from the stay of action against such property under section 362 of this title, from the use, sale, or lease of such property under section 363 of this title, or from the granting of a lien under section 364(d) of this title, then such creditor’s claim under such subsection shall have priority over every other claim allowable under such subsection.

18. October 31, 2015Copyright © 2005-09 Randal C. Picker18 Timbers n Core Facts u Debt Amount: $4.36 million u Building Value: $2.65 million to $4.25 million and appreciating slightly u Debtor files and is paying over net rentals u Bankruptcy court orders additional payments starting six months after filing at 12% market rate based on $4.25 million

19. October 31, 2015Copyright © 2005-09 Randal C. Picker19 Timbers u Postpetition rents could be applied to those payments n What happens?

20. October 31, 2015Copyright © 2005-09 Randal C. Picker20 506 n Determination of secured status u (a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.

21. October 31, 2015Copyright © 2005-09 Randal C. Picker21 506 (Cont.) u Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.

22. October 31, 2015Copyright © 2005-09 Randal C. Picker22 506 (Cont.) n Determination of secured status (cont.) u (b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.

23. October 31, 2015Copyright © 2005-09 Randal C. Picker23 506 (Cont.) n Determination of secured status (cont.) u (c) The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to such property.